DETERMINANTS OF PROFITABILITY OF LARGE SCALE FOOD AND BEVERAGE MANUFACTURING COMPANIES IN ETHIOPIA: APPLICATION OF DYNAMIC PANEL MODEL

Abstract

Food and beverage manufacturing companies have consistently and positively performed in the food and beverage industry, beginning with their role in increasing productivity, investment, exports, and employment. In Ethiopia, consumption of food and beverages has increased in recent decades, consumers' demands for more products have become more refined. Thus, this study aimed to model determinants of food and beverage manufacturing companies’ profitability in Ethiopia’s via more realistic model application, dynamic panel model. 48 companies that manufactured large scale food and beverages in Ethiopia between 2014 and 2021 were the focus of the study. Since the designed model was formulated in a way that encompasses the dynamic aspect of profitability, the maximum likelihood_structural equation model estimator was applied. The application of dynamic panel model can reduce several econometric problems that faced researches before. A maximum likelihood_structural equation model method had a best model fit by root mean square error of approximation, standardized root mean residual and coefficients of determination. The results of the dynamic panel model show that the profitability was found to be positively influenced by lag profitability, firm age, firm size and economic growth and whereas ownership structure, liquidity and labour cost influenced food and beverage companies’ profitability negatively. The estimated model result revealed that 0.0324%, 0.0102% and 0.0299% decrease in ownership structure, liquidity and labour cost and lag-profit, firm age, firm size and economic growth was increased by 0.1086%, 0.0063%, 0.0015% and 0.0339% respectively. This study recommended that the government should maintain an adequate monetary policy in order to achieve its main goal and price stability may boost economic activity.