Firm Inventory Behavior in East Africa

Firms normally keep certain inventories,
including raw materials, work-in-progress, and finished
goods, to operate seamlessly and not to miss possible
business opportunities. But inventory is costly, and the
optimal firm inventory differs depending on various economic
conditions, including trade and transport costs. The paper
examines firm inventory behavior in East Africa, in which
transport connectivity, especially to the ports, is
considered as one of the major business constraints. Using
firm-level data from Burundi, Kenya, Rwanda, Tanzania, and
Uganda, it is shown that transport connectivity
significantly affects firm inventory behavior. In
particular, road density and transport costs to the port are
important to determine the optimal inventory level. With
more roads in a city and/or cheaper access to the port,
firms would hold smaller inventories.