Determinants of Capacity Utilization of Food and Beverage Manufacturing Firms in Rwanda: Do Tax Incentives Matter?

Abstract

This paper has the specific objective of determining main factors of capacity utilization in the food and beverage manufacturing industry which are likely to be positively affected by fiscal incentives. Data used are from the manufacturing industry comprehensive survey carried out by the Rwandese Ministry of Trade and Industry (MINICOM) during 2013-2014. The model used was derived from an augmented Cobb Douglass production function and estimated using Ordinary Least Square regression technique. Key outcomes which resulted from this study are (i) in the food processing industry, main factors which undermine the capacity utilization of firms are shortage of raw materials, lack of specialized technology, tax administration and standards; no factor favors significantly the capacity utilization in this sub sector; (ii) in the beverage manufacturing industry, drivers of capacity utilization are the firm experience (age) and its material-intensive characteristic. Four factors harm the capacity utilization of beverage manufacturing firms, namely oversize in terms of fixed assets, lack of working capital, standards and insufficient demand. Consequently, in order to boost the capacity utilization of food and beverage manufacturing firms, only non-tax incentives are advisable: in the food processing industry, capacity utilisation can be improved by easing tax administration and tax compliance instruments; guaranteeing availability of agro raw materials during all the year and reducing their cost; assisting firms, particularly young ones, in order to help them to acquire appropriate technology and to raise production standards.