Determinants of Firms’ Capacity Utilization in Ethiopia

doi:10.7176/jesd/13-3-02

Abstract

Under-utilization of firms in Ethiopia is an overriding problem which requires empirical evidence pertinent to capacity utilization policy formulation and implementation. Capacity utilization of firms in developed countries ranges from 85 to 100% while in developing countries it is about 65 to 84%. In spite of these, firms’ capacity utilization of less developed countries ranges from 50 to 64% while Ethiopian firm’s capacity utilization is only 36% which is by far the lowest compared to the other world. This under-utilization of firms is the quest for knowing triggering factors. This paper investigates determinants of capacity utilization of firms where the data was collected by the World Bank from 848 firms in 2015 in all regions of the country. Capacity utilization (%) and number of hours of operation per week were measured to capture the determinants of overall capacity maneuver. A seemingly unrelated regression (SUR) model result of multiple equation estimation of the two measures suggested that about 73.64% and 53.57% of the variation, respectively, in capacity utilization and number of hours operated per week were explained by SUR model. The determinant factors which are idiosyncratic to both measures were cost of input measured in monetary terms as a proxy variable for quantity of intermediate goods and raw material, the percentage share of domestic inputs for the establishment, annual fuel cost and access to credit were contributing positively and significantly. However, foreign exchange constraint and foreign input were attributed to affect significantly but have adverse effect for both of the outcome variables. Moreover, capacity utilization and number of hours of operation have positive interdependency. The major contribution of this paper is to employ econometric estimation of capacity utilization and number of hours of operation per week and measures their interaction as well as identifies its determinants at firm level. Keywords : capacity utilization, number of hours of operation per week, seemingly unrelated Regression (SUR), multiple equation models DOI: 10.7176/JESD/13-3-02 Publication date: February 28 th 2022

Highlights

Capacity utilization is a concept in economics which refers to the extent to which an enterprise or a nation uses its installed productive capacity
According to Okpaleye (1988), Capacity utilization in firms is described as “the level of utilization of a firm’s installed productive capacity”. It refers to the relationship between actual output produced and potential output that could be produced with installed equipment.”
Descriptive Result Analysis The overall performance of firms’ capacity utilization is on average at 26.54% despite the fact that there are significant differences among themselves ranging from 1% to 100% in its potential capacity and the standard deviation is 32.31 while in the case of number of hours of operation per week (NOHPWEEK), the average number of working hours of operation is about 36.58 hours

Summary

Introduction

Capacity utilization is a concept in economics which refers to the extent to which an enterprise or a nation uses its installed productive capacity. Satik (2017), define as capacity utilization is the extent that an enterprise or a country puts its installed production capacity to use. It refers to the relationship between the actual output produced and the maximum potential output. According to Okpaleye (1988), Capacity utilization in firms is described as “the level of utilization of a firm’s installed productive capacity”. It refers to the relationship between actual output produced and potential output that could be produced with installed equipment.”. An increase in capacity utilization means a reduction in the average cost of production (Afroz and Roy, 1976)

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