Inventories and risk in African manufacturing

Using a panel data set for Zimbabwe which includes firm-specific measures o f contractual risk, we show that contractual risk has a major effect on the holding input stocks and, to a lesser extent, the constitution of cash res erves. This is consistent with inventories being a hedge against stockout r isk. By contrast, firms facing more inter-annual market risk hold less inve ntories. This suggests that African manufacturers prefer adapting to long-t erm market fluctuations as they materialise rather than building up invento ries. This interpretation is consistent with the finding that high market r isk firms also have a low capacity utilisation rate.