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date: 19 October 2019

Abstract and Keywords

African firms operate in an extremely challenging business environment. They face domestic markets that are shallow and their capacity to expand into export markets is limited. Their poor performance limits them from accessing credit. They are trapped in a vicious cycle of stagnation. This chapter argues that excessive under-utilization of capacity in African firms can be significantly reduced through improvements in the supply of indirect inputs by governments. Given the endogeneity of total factor productivity, this strategy would lower costs, improve profit margins, increase capacity to extend trade credit, and provide a sound platform to launch into the export market. Through this dynamic process, African firms can get out of the current low-level equilibrium trap, earn foreign exchange, and provide a natural hedge for themselves against currency fluctuations. However, governments should address the infrastructure problems that afflict the African continent.

Keywords: production efficiency, indirect production inputs, capacity utilization, financial constraints, physical and institutional infrastructure, export orientation, currency fluctuation

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