The Effect of Electricity Shortages on Firm Investment: Evidence from Ghana

Abstract

Access to electricity has been widely acknowledged as playing an important role in economic growth. However, there has been relatively little research on how access to electricity affects the decisions of firms. Electrification rates in developing countries have increased but electricity access remains plagued by outages. This paper examines the impact of electricity shortages on firm investment. I identify this impact by studying an electricity rationing programme in Ghana, which placed significant constraints on electricity supply to firms. Using data on Ghanaian manufacturing firms, I find a decline in investment in plant and machinery during the electricity rationing period, with a more pronounced decline for firms in electricity-intensive sectors. This result suggests that at least part of the reduction in investment during the electricity rationing period was due to the constraints on the availability of electricity. These findings highlight the potentially negative impact of the inadequate provision of electricity that frequently plagues developing countries. These electricity constraints can hinder growth in these countries by curbing investment by firms.