Just-in-Case Inventories: A Cross-Country Analysis

We find that raw materials inventories in the manufacturing sector in the 1970s and 1980s were two to three times higher in developing countries than in the United States, despite the fact than in most developing countries real interest rates are at least twice as high. Those significantly high levels of inventories are a burden and an obstacle to country competitiveness and need to be addressed. Poor infrastructure and ineffective regulation as well as deficiencies in market development rather than the traditional factors used in inventory models such as interest rates and uncertainty are the main determinants and explain these differences. Cross-country estimations show that a one standard deviation worsening of infrastructure increases raw materials inventories by 11% to 37% and a one standard deviation worsening of markets increases raw materials inventories by 18% to 37%. These findings are robust across a number of different proxies and specifications, including an industrylevel specification that controls for fixed country effects.