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Investment, firm-specific uncertainty, and market power in South Africa

G. Chortareas,Emmanouil Noikokyris,Fathima Roshan Rakeeb

Published 2020 in Economic Modelling

ABSTRACT

Abstract We examine the role of firms’ market power in affecting the link between firm-specific uncertainty and corporate investment decisions in a small open economy with a pronounced degree of concentration and mark-ups. Using firm-level data from South African-listed firms, we find that corporate investment of firms with low market power and market share responds positively to idiosyncratic uncertainty. A high degree of market power, however, moderates this positive relationship, allowing for delayed investment under conditions of uncertainty. The results are robust to alternative measures of firm-specific uncertainty and firms’ competitive position. The finding of an association between firms’ market power/market share and their capital budgeting decisions under uncertainty calls for effective competition policies.

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