Macroeconomic Environment and Firm level Performance in Tanzania

Abstract

This paper examines the influence of macroeconomic environment on firm level performance. Specifically, it assesses the influence of macro variables of Taxation, corruption, availability of business support, cost of domestic raw materials, inflation, cost of imported raw materials, access to credit, interest rates and insufficient market demand on firm level productivity. The paper attains the empirical analysis via estimating a Cobb Douglas production function. The rich panel data set used enables control for unobserved time invariant firm specific attributes that might be influencing the estimations.  Paper findings are that macroeconomic environment has strong impact on observed firm performance.  The paper does not find any significant effect of inflation, interest rate and corruption on firm level performance.  The results are not statistically significant even after control for unobserved characteristics using panel data estimations techniques of Generalized Methods of Moments.  The results lead to a conclusion that to facilitate firm level performance efforts need to focus on reducing tax burden, increased business support, reduced cost of imported raw materials as well as access to credit.