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Incentives and firm productivity: Exploring multidimensional fiscal incentives in a developing country
World Development Perspectives 5 (2017) 56–59
Contents lists available at ScienceDirect
World Development Perspectives journal homepage: www.elsevier.com/locate/wdp
Case report
Incentives and firm productivity: Exploring multidimensional fiscal incentives in a developing country Efobi Uchenna Rapuluchukwu a,⇑, Tanankem Voufo Belmondo b, Beecroft Ibukun c a
College of Business and Social Sciences, Covenant University, Nigeria Ministry of Economy, Planning and Regional Development, Cameroon c Department of Economics, Covenant University, Nigeria b
a r t i c l e
i n f o
Article history: Received 17 January 2017 Revised 1 March 2017 Accepted 2 March 2017
JEL classification: F13 038 053
a b s t r a c t Using data from the World Bank Enterprise Survey for over 300 firms, this paper explores the impact of fiscal incentives on firms’ productivity using Cameroonian firms as a case. Three types of fiscal incentives were considered: import duty exemption, profit tax exemption and export financing. Our results show different beneficiary status of incentives and in the same vein, extent of productivity, across firms. The paper thus provides support for the argument that the government’s involvement in the firm should be targeted at rewarding outputs and not supporting processes. Ó 2017 Elsevier Ltd. All rights reserved.
1. Introduction Industrialisation includes the value addition on factor input and firms’ efficiency, culminating from the sustenance of the productivity of firms over a period. Job creation for sustained growth and economic diversification, improved balance of payment, enhanced household consumption (through product and price efficiency) and primary sector development through backward linkages, are some outcomes from industrialisation. There are basic factors that have been identified as necessary instruments for sustaining industrial development and structural transformation in Africa. They include appropriate and alternative sources of funding (Gui-Diby & Renard 2015), and improved institutional structure as well as infrastructural development (see authors like Escribano, Guasch, & Pena (2010)). Among the competing explanations for the sustenance of Africa’s industrialisation drive, those arguments that focus on public institutions are becoming popular, suggesting that the reasons why African countries have not been able to enjoy industrialisation, despite the presence of some catalysing factors like FDI, is that the government support for the private sector is slack (Gui-Diby & Renard, 2015). This conclusion points directly to the fact that government involvement in the private sector is a necessary precursor for firms’ productivity and sustained industrialisation process. ⇑ Corresponding author. E-mail addresses: [email protected] (U.R. Efobi), [email protected] (V.B. Tanankem), ibukun.beecroft@covenantuniversity. edu.ng (I. Beecroft). http://dx.doi.org/10.1016/j.wdp.2017.03.001 2452-2929/Ó 2017 Elsevier Ltd. All rights reserved.
Incentives (whether fiscal or non-fiscal) are an important aspect of government involvement. Focusing on fiscal incentives, there are arguments explicating their importance for improved firms’ productivity and other socio-economic benefits (see Bora (2002)). While the opponents believe that the cost of fiscal incentives (such as deteriorating governance and increasing corruption) outweighs their benefits (see Cleeve (2008)). This study is situated along the proponents, noting that fiscal incentives compensate for possible market failures, and can be easily implemented by African governments for achieving sustained industrialisation drive. In this spirit, we investigate the impact of fiscal incentives on firms’ productivity, considering Cameroonian firms as a case. The data used are from the 2007 to 2009 World Bank Enterprise Surveys, which consists of survey for over 300 manufacturing firms in Cameroon. We use information on firms’ inputs and outputs to calculate productivity. We consider three types of fiscal incentives: the benefits from exemptions from duties on imported inputs, profit tax exemptions, and export financing scheme. Our findings include, among others, that fiscal incentives are beneficial to manufacturing firms in Cameroon; however, the impact varies across the types of fiscal incentives being observed. We focus on Cameroon for three reasons: first, to our knowledge, there is a lack of econometric studies that analyse the impact of government incentives on firms’ productivity, with reference to African countries. Second, our study complements the growing theoretical and policy literature on the importance of developing countries’ government involvement with the private sector by providing multidimensional measures of incentives that offset the
57
U.R. Efobi et al. / World Development Perspectives 5 (2017) 56–59
shortcomings of the business environment (see Cleeve (2008)). Third, Cameroon is relevant and interesting considering that in 2013, the government had a radical shift by enacting the investment incentive law No. 2013/004, which establishes the government’s commitment towards creating an enabling investment climate. Furthermore, and in many respects, the country is representative of developing economies. 2. Data and variables Data are from the panel (2007 to 2009) firm-level survey of the World Bank’s Enterprise Survey for Cameroon. We focus on only manufacturing firms involved in some form of cross-border trading, for the following reasons: (i) firms of this nature are involved in the real sector and their productivity drives the industrialisation process of countries (Efobi, Tanankem, & Beecroft, 2016; Gui-Diby & Renard, 2015); (ii) our incentive measures are geared towards those that support import and export, as well as profit. We omit micro-enterprises and informal enterprises, and focus only on manufacturing firms with over 5 employees because they are most likely to be involved in international trade and improving their productivity will have a significant impact on the economy. Productivity of firms is measured as the natural logarithm of firms’ output (annual sales) to input (firms’ asset value). The values were converted to US Dollars using the prevailing exchange rate as at the period of the survey. Information on intermediate inputs are not available from our data source. Three incentive measures that were of interest include: exemptions from duties on imported inputs, profit tax exemption and export financing scheme. The individual effects of our measures of incentive on productivity were considered in order to enhance policy recommendations. Also, these are the popular forms of fiscal incentives that are prevalent among many African countries, especially our sample – Cameroon. For proper description of the firms, we also consider the firms’ productive capacity, size, the labour input, and the running cost of the business in generating electricity. Apart from the fact that some of these variables feature in a typical Cobb-Douglas production function, they are important variables for explaining the baseline characteristics of a typical manufacturing firm in our context. 3. Trends and results In Table 3.1, we report the firm characteristics, distributed across beneficiary status of the different categories of incentives
(import duty exemption for imported input, profit tax exemption and export financing). On average, the firms in the two categories are similar in many respects considering that their basic characteristics, such as the capital intensity, land available to the firm, labour cost and cost of operation – in terms of purchase of fuel for the provision of power supply, are similar. However, when closely observed, some slight differences are observed in these values. For instance, firms that benefit from the different categories of fiscal incentives, have higher overhead cost (in terms of labour cost and the cost of generating private power supply by purchasing fuel) than firms that do not enjoy these benefits. In contrast, the firms that enjoy these incentives tend to have a lower capital cost compared to their counterparts. The fiscal incentive in Cameroon is on course with the fact that for a sustainable industrialization process, policies must aim at reducing cost of production and encourage economies of scale. The effect of the incentives in Cameroon is seen in the difference in the firms’ productivity: firms that benefit from most of the incentives outperform the non-beneficiary firms. For example, from Table 3.1, firms that benefit from import duty exemption and export financing have a higher productivity than their nonbenefiting counterparts. Nonetheless, the contrary is observed for profit tax exemptions: firms that did not benefit from this form of incentives have a higher productivity.
3.1. Kernel density plot: Productivity and fiscal incentives Though the previous result is interesting and can foretell the trend of incentives on firms in Cameroon, we go further to present the kernel density plots of the different incentives and our productivity measure. The kernel density plot is preferred to further describe the data, since it estimates the probability density function of productivity based on our observed sample. More so, our inference is improved since the kernel density plot allows for a smooth distribution of productivity across the entire and subsamples of the firms – i.e. those that (and did not) benefit from any of the incentives. The plots are presented in Fig. 3.1, consisting of different plots for the three measures of incentives. From the Figure, the densities of the productivity of firms that have benefited from profit tax exemption and export financing tend to be rightward biased. The productivity density of this category of firms overlaps with the non-benefiting firms. This implies that firms enjoying any of these forms of incentive have higher productivity relative to nonbeneficiary firms. Considering import duty exemption, the Fig. 3.1 suggests that firms that benefit from this form of incentive
Table 3.1 Mean and standard deviation of the basic sample characteristics. Import duty exemption (303 firms)
Productivity (ratio) Productive capacity (machinery cost) in Million USD Size (value of land owned) in Million USD Labour cost (annual cost on labour) in Million USD Cost on power in Million USD
Profit tax exemption (143 firms)
Export financing (144 firms)
Benefited from import duty exemption (22 firms)
Did not benefit from import duty exemption (281 firms)
Benefited from profit tax exemption (22 firms)
Did not benefit from profit tax exemption (121 firms)
Benefited from export financing (17 firms)
Did not benefit from profit tax exemption (127 firms)
4.30 (5.03) 0.41 (0.73)
4.29 (21.36) 28.7 (395.0)
1.97 (1.28) 0.29 (0.56)
2.78 (4.06) 97.4 (759)
4.41 (4.75) 0.018 (0.029)
4.29 (21.46) 2.90 (3.97)
0.005 (0.022)
0.007 (0.018)
0.005 (0.010)
0.003 (0.012)
0.0054 (0.021)
0.0055 (0.015)
3.54 (8.55)
1.23 (6.74)
8.02 (25.3)
7.18 (30.5)
2.58 (7.62)
1.24 (6.77)
0.046 (0.085)
0.020 (0.072)
0.041 (1.09)
0.014 (0.041)
0.025 (0.073)
0.021 (0.073)
Note: Standard deviations are in parenthesis.
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U.R. Efobi et al. / World Development Perspectives 5 (2017) 56–59
Fig. 3.1. Productivity of firms by their benefiting from any of the incentives (i.e. import duty exemptions, profit tax exemption and export financing).
have a lower productivity density, compared to those that did not benefit. Hence, beneficiary firms tend to be relatively less productive than their counterparts. From the density plots, the results suggest that the involvement of the government in exempting firms from import duty will not account for a consistent significant increase in productivity. It is likely that import duty exemption drives inefficiency if the recipients are not carefully selected/monitored. For instance, it is possible that in situations where firms are granted import duty exemption, they may likely be wasteful in the purchase of resources from abroad considering that such purchases will not be taxed. This accounts for the less productivity density that was displayed in Fig. 3.1. OECD (2007) report on tax incentives for investment throws some light on this as they noted that import
duty exemption is prone to abuse and easy to divert exempt purchases to unintended recipients. The rightward productivity densities of firms that benefit from profit tax exemption and export financing suggest that these forms of incentive will enhance the productivity of Cameroonian firms. This implies that government incentive should be such that are introduced at later stages of the firm’s production process. As seen from the density plots, when considering profit tax exemption and export financing, there was a consistent outward shift of the productivity density of the firms. Thus, suggesting that these two forms of incentives can steer up firms’ ability for efficiency since firms have to be profitable and should be able to produce outputs that can be consumed beyond the Cameroonian market, in order to benefit from these forms of incentives.
U.R. Efobi et al. / World Development Perspectives 5 (2017) 56–59
4. Conclusion This study is not an overall assessment of the impact of fiscal incentives on manufacturing firms’ productivity in Cameroon. As it is well established, productivity of firms largely depends on intra-firm decision making of how to utilize resources, including incentives that are derived from the government. Hence, the results of this study should be viewed as informative on the trend and possible impact of incentives on firms and not a clear-cut picture on this relationship. References Bora, B. (2002). Investment distortions and the international policy architecture, world trade organisation, working paper, Geneva. Retrieved from https://core.
59
ac.uk/download/files/35/272221.pdfBureau of economic and business affairs (2013), 2013 investment climate statement – Cameroon. Retrieved from http:// www.state.gov/e/eb/rls/othr/ics/2013/204615.htm. Cleeve, E. (2008). How effective are fiscal incentives to attract FDI to sub-saharan Africa? The Journal of Developing Areas, 42(1), 135–153. Efobi, U. R., Tanankem, B., & Beecroft, I. (2016). Incentives and firms’ productivity: Exploring multidimensional fiscal incentives in a developing country. OCP policy center’s working paper series, http://www.ocppc.ma/publications/ incentives-and-firms%E2%80%99-productivity-exploring-multidimensionalfiscal-incentives#.WH3dqdKLTIV. Escribano, A., Guasch, J. L., & Pena, J. (2010). Assessing the impact of infrastructure quality on firm productivity in Africa: Cross-country comparisons based on investment climate surveys from 1999 to 2005. World Bank Policy Research Working Paper No. 5191. Gui-Diby, S., & Renard, M. (2015). Foreign direct investment inflows and the industrialization of African countries. World Development, 74, 43–57. OECD (2007). Tax Incentives for Investment – A Global Perspective: experiences in MENA and non-MENA countries, OECD.
Contents lists available at ScienceDirect
World Development Perspectives journal homepage: www.elsevier.com/locate/wdp
Case report
Incentives and firm productivity: Exploring multidimensional fiscal incentives in a developing country Efobi Uchenna Rapuluchukwu a,⇑, Tanankem Voufo Belmondo b, Beecroft Ibukun c a
College of Business and Social Sciences, Covenant University, Nigeria Ministry of Economy, Planning and Regional Development, Cameroon c Department of Economics, Covenant University, Nigeria b
a r t i c l e
i n f o
Article history: Received 17 January 2017 Revised 1 March 2017 Accepted 2 March 2017
JEL classification: F13 038 053
a b s t r a c t Using data from the World Bank Enterprise Survey for over 300 firms, this paper explores the impact of fiscal incentives on firms’ productivity using Cameroonian firms as a case. Three types of fiscal incentives were considered: import duty exemption, profit tax exemption and export financing. Our results show different beneficiary status of incentives and in the same vein, extent of productivity, across firms. The paper thus provides support for the argument that the government’s involvement in the firm should be targeted at rewarding outputs and not supporting processes. Ó 2017 Elsevier Ltd. All rights reserved.
1. Introduction Industrialisation includes the value addition on factor input and firms’ efficiency, culminating from the sustenance of the productivity of firms over a period. Job creation for sustained growth and economic diversification, improved balance of payment, enhanced household consumption (through product and price efficiency) and primary sector development through backward linkages, are some outcomes from industrialisation. There are basic factors that have been identified as necessary instruments for sustaining industrial development and structural transformation in Africa. They include appropriate and alternative sources of funding (Gui-Diby & Renard 2015), and improved institutional structure as well as infrastructural development (see authors like Escribano, Guasch, & Pena (2010)). Among the competing explanations for the sustenance of Africa’s industrialisation drive, those arguments that focus on public institutions are becoming popular, suggesting that the reasons why African countries have not been able to enjoy industrialisation, despite the presence of some catalysing factors like FDI, is that the government support for the private sector is slack (Gui-Diby & Renard, 2015). This conclusion points directly to the fact that government involvement in the private sector is a necessary precursor for firms’ productivity and sustained industrialisation process. ⇑ Corresponding author. E-mail addresses: [email protected] (U.R. Efobi), [email protected] (V.B. Tanankem), ibukun.beecroft@covenantuniversity. edu.ng (I. Beecroft). http://dx.doi.org/10.1016/j.wdp.2017.03.001 2452-2929/Ó 2017 Elsevier Ltd. All rights reserved.
Incentives (whether fiscal or non-fiscal) are an important aspect of government involvement. Focusing on fiscal incentives, there are arguments explicating their importance for improved firms’ productivity and other socio-economic benefits (see Bora (2002)). While the opponents believe that the cost of fiscal incentives (such as deteriorating governance and increasing corruption) outweighs their benefits (see Cleeve (2008)). This study is situated along the proponents, noting that fiscal incentives compensate for possible market failures, and can be easily implemented by African governments for achieving sustained industrialisation drive. In this spirit, we investigate the impact of fiscal incentives on firms’ productivity, considering Cameroonian firms as a case. The data used are from the 2007 to 2009 World Bank Enterprise Surveys, which consists of survey for over 300 manufacturing firms in Cameroon. We use information on firms’ inputs and outputs to calculate productivity. We consider three types of fiscal incentives: the benefits from exemptions from duties on imported inputs, profit tax exemptions, and export financing scheme. Our findings include, among others, that fiscal incentives are beneficial to manufacturing firms in Cameroon; however, the impact varies across the types of fiscal incentives being observed. We focus on Cameroon for three reasons: first, to our knowledge, there is a lack of econometric studies that analyse the impact of government incentives on firms’ productivity, with reference to African countries. Second, our study complements the growing theoretical and policy literature on the importance of developing countries’ government involvement with the private sector by providing multidimensional measures of incentives that offset the
57
U.R. Efobi et al. / World Development Perspectives 5 (2017) 56–59
shortcomings of the business environment (see Cleeve (2008)). Third, Cameroon is relevant and interesting considering that in 2013, the government had a radical shift by enacting the investment incentive law No. 2013/004, which establishes the government’s commitment towards creating an enabling investment climate. Furthermore, and in many respects, the country is representative of developing economies. 2. Data and variables Data are from the panel (2007 to 2009) firm-level survey of the World Bank’s Enterprise Survey for Cameroon. We focus on only manufacturing firms involved in some form of cross-border trading, for the following reasons: (i) firms of this nature are involved in the real sector and their productivity drives the industrialisation process of countries (Efobi, Tanankem, & Beecroft, 2016; Gui-Diby & Renard, 2015); (ii) our incentive measures are geared towards those that support import and export, as well as profit. We omit micro-enterprises and informal enterprises, and focus only on manufacturing firms with over 5 employees because they are most likely to be involved in international trade and improving their productivity will have a significant impact on the economy. Productivity of firms is measured as the natural logarithm of firms’ output (annual sales) to input (firms’ asset value). The values were converted to US Dollars using the prevailing exchange rate as at the period of the survey. Information on intermediate inputs are not available from our data source. Three incentive measures that were of interest include: exemptions from duties on imported inputs, profit tax exemption and export financing scheme. The individual effects of our measures of incentive on productivity were considered in order to enhance policy recommendations. Also, these are the popular forms of fiscal incentives that are prevalent among many African countries, especially our sample – Cameroon. For proper description of the firms, we also consider the firms’ productive capacity, size, the labour input, and the running cost of the business in generating electricity. Apart from the fact that some of these variables feature in a typical Cobb-Douglas production function, they are important variables for explaining the baseline characteristics of a typical manufacturing firm in our context. 3. Trends and results In Table 3.1, we report the firm characteristics, distributed across beneficiary status of the different categories of incentives
(import duty exemption for imported input, profit tax exemption and export financing). On average, the firms in the two categories are similar in many respects considering that their basic characteristics, such as the capital intensity, land available to the firm, labour cost and cost of operation – in terms of purchase of fuel for the provision of power supply, are similar. However, when closely observed, some slight differences are observed in these values. For instance, firms that benefit from the different categories of fiscal incentives, have higher overhead cost (in terms of labour cost and the cost of generating private power supply by purchasing fuel) than firms that do not enjoy these benefits. In contrast, the firms that enjoy these incentives tend to have a lower capital cost compared to their counterparts. The fiscal incentive in Cameroon is on course with the fact that for a sustainable industrialization process, policies must aim at reducing cost of production and encourage economies of scale. The effect of the incentives in Cameroon is seen in the difference in the firms’ productivity: firms that benefit from most of the incentives outperform the non-beneficiary firms. For example, from Table 3.1, firms that benefit from import duty exemption and export financing have a higher productivity than their nonbenefiting counterparts. Nonetheless, the contrary is observed for profit tax exemptions: firms that did not benefit from this form of incentives have a higher productivity.
3.1. Kernel density plot: Productivity and fiscal incentives Though the previous result is interesting and can foretell the trend of incentives on firms in Cameroon, we go further to present the kernel density plots of the different incentives and our productivity measure. The kernel density plot is preferred to further describe the data, since it estimates the probability density function of productivity based on our observed sample. More so, our inference is improved since the kernel density plot allows for a smooth distribution of productivity across the entire and subsamples of the firms – i.e. those that (and did not) benefit from any of the incentives. The plots are presented in Fig. 3.1, consisting of different plots for the three measures of incentives. From the Figure, the densities of the productivity of firms that have benefited from profit tax exemption and export financing tend to be rightward biased. The productivity density of this category of firms overlaps with the non-benefiting firms. This implies that firms enjoying any of these forms of incentive have higher productivity relative to nonbeneficiary firms. Considering import duty exemption, the Fig. 3.1 suggests that firms that benefit from this form of incentive
Table 3.1 Mean and standard deviation of the basic sample characteristics. Import duty exemption (303 firms)
Productivity (ratio) Productive capacity (machinery cost) in Million USD Size (value of land owned) in Million USD Labour cost (annual cost on labour) in Million USD Cost on power in Million USD
Profit tax exemption (143 firms)
Export financing (144 firms)
Benefited from import duty exemption (22 firms)
Did not benefit from import duty exemption (281 firms)
Benefited from profit tax exemption (22 firms)
Did not benefit from profit tax exemption (121 firms)
Benefited from export financing (17 firms)
Did not benefit from profit tax exemption (127 firms)
4.30 (5.03) 0.41 (0.73)
4.29 (21.36) 28.7 (395.0)
1.97 (1.28) 0.29 (0.56)
2.78 (4.06) 97.4 (759)
4.41 (4.75) 0.018 (0.029)
4.29 (21.46) 2.90 (3.97)
0.005 (0.022)
0.007 (0.018)
0.005 (0.010)
0.003 (0.012)
0.0054 (0.021)
0.0055 (0.015)
3.54 (8.55)
1.23 (6.74)
8.02 (25.3)
7.18 (30.5)
2.58 (7.62)
1.24 (6.77)
0.046 (0.085)
0.020 (0.072)
0.041 (1.09)
0.014 (0.041)
0.025 (0.073)
0.021 (0.073)
Note: Standard deviations are in parenthesis.
58
U.R. Efobi et al. / World Development Perspectives 5 (2017) 56–59
Fig. 3.1. Productivity of firms by their benefiting from any of the incentives (i.e. import duty exemptions, profit tax exemption and export financing).
have a lower productivity density, compared to those that did not benefit. Hence, beneficiary firms tend to be relatively less productive than their counterparts. From the density plots, the results suggest that the involvement of the government in exempting firms from import duty will not account for a consistent significant increase in productivity. It is likely that import duty exemption drives inefficiency if the recipients are not carefully selected/monitored. For instance, it is possible that in situations where firms are granted import duty exemption, they may likely be wasteful in the purchase of resources from abroad considering that such purchases will not be taxed. This accounts for the less productivity density that was displayed in Fig. 3.1. OECD (2007) report on tax incentives for investment throws some light on this as they noted that import
duty exemption is prone to abuse and easy to divert exempt purchases to unintended recipients. The rightward productivity densities of firms that benefit from profit tax exemption and export financing suggest that these forms of incentive will enhance the productivity of Cameroonian firms. This implies that government incentive should be such that are introduced at later stages of the firm’s production process. As seen from the density plots, when considering profit tax exemption and export financing, there was a consistent outward shift of the productivity density of the firms. Thus, suggesting that these two forms of incentives can steer up firms’ ability for efficiency since firms have to be profitable and should be able to produce outputs that can be consumed beyond the Cameroonian market, in order to benefit from these forms of incentives.
U.R. Efobi et al. / World Development Perspectives 5 (2017) 56–59
4. Conclusion This study is not an overall assessment of the impact of fiscal incentives on manufacturing firms’ productivity in Cameroon. As it is well established, productivity of firms largely depends on intra-firm decision making of how to utilize resources, including incentives that are derived from the government. Hence, the results of this study should be viewed as informative on the trend and possible impact of incentives on firms and not a clear-cut picture on this relationship. References Bora, B. (2002). Investment distortions and the international policy architecture, world trade organisation, working paper, Geneva. Retrieved from https://core.
59
ac.uk/download/files/35/272221.pdfBureau of economic and business affairs (2013), 2013 investment climate statement – Cameroon. Retrieved from http:// www.state.gov/e/eb/rls/othr/ics/2013/204615.htm. Cleeve, E. (2008). How effective are fiscal incentives to attract FDI to sub-saharan Africa? The Journal of Developing Areas, 42(1), 135–153. Efobi, U. R., Tanankem, B., & Beecroft, I. (2016). Incentives and firms’ productivity: Exploring multidimensional fiscal incentives in a developing country. OCP policy center’s working paper series, http://www.ocppc.ma/publications/ incentives-and-firms%E2%80%99-productivity-exploring-multidimensionalfiscal-incentives#.WH3dqdKLTIV. Escribano, A., Guasch, J. L., & Pena, J. (2010). Assessing the impact of infrastructure quality on firm productivity in Africa: Cross-country comparisons based on investment climate surveys from 1999 to 2005. World Bank Policy Research Working Paper No. 5191. Gui-Diby, S., & Renard, M. (2015). Foreign direct investment inflows and the industrialization of African countries. World Development, 74, 43–57. OECD (2007). Tax Incentives for Investment – A Global Perspective: experiences in MENA and non-MENA countries, OECD.