Electricity cost and firms productivity: Evidence from manufacturing firms in Africa

Abstract

Electricity is an important component for any process of industrialization. This is because no industry, whether manufacturing or service, can growwithoutreliableelectricitysupply.Electricity deficit has a huge implication in firms output and also in the development of human capital. One concern in Sub-Saharan Africa is unreliable power supply, low access to electricity infrastructure and poor electricity networks leading to high electricity prices. All these constraints makes manufacturing sector vulnerable to unreliable electricitysupplyTheprimaryobjectiveofthisstudy was to examine the impacts of electricity cost on manufacturing firms in selected countries in African economies. This study explored the relationship between electricity cost and firms productivity in manufacturing sectors in Africa countries from 2003 to 2016. In this paper we utilized data from WBES and apply econometric analysis to unbalanced panel of manufacturing firms consisting of approximately 7276 observations. Using regression analysis, the results from this study indicate that high electricity cost has a negative and significant effects on firms’ productivity. The analysis further explained that an increase in one unit of electricity cost reduces labour productivity and total factor productivity by 34.3% and 6.7% respectively when alltheothervariablesarecontrolled.Thisispartiallysupported by descriptive statistics that 66.06% of the firms view electricity outages as a major obstacle in a firm while 33.94% view as a minor obstacle .Other control variables such as firms controls and individual characteristics used in my study have significant impacts on my outcome variable. The analysis showed that with power outages, many firms self-produce electricity using generators. Continuous power blackout leadstoincreasedfirmselectricitycostduetogeneratoruse.Firmswill reduce their productivity to cope up with high electricity costs. We used power outages to instrument for potential endogeneity concerns in our estimations .The results from the analysis present a strong and significant positive correlation of instrument (power outages )withelectricity cost. The implication of these findings is to enhance creation of electricity infrastructure and suitable electricity price policies which will go a long way in eliminating power outages so as to promote performance of manufacturing firms’ in Africa.