The Determinants of Private Investment in Benin: A Panel Data Analysis

Abstract

Investment is one of the mainsprings of economic growth. In order to analyse the factors explaining the weakness of investment by private firms in Benin, this paper used a capital demand function. This function was estimated using data from a panel of 123 firms in Benin and covering the 1997-2003 period. The findings showed that demand uncertainty and, more importantly, the fluctuations in the imports of manufactured goods from Nigeria have a negative effect on investment by private firms in Benin. The investment behaviour of these firms strongly hinges on the cost of capital utilization: When this cost is high, it weighs negatively on the purchase and installation of new production infrastructure. The magnitude of the effect of this cost of capital utilization and of the demand uncertainty which investment firms face depends on the nature of their activities.