Investment climate and manufacturing performance in Ethiopia

Abstract

The objectives of the study is to show the effects of investment climate variables on the operation of manufacturing firms with emphasis on small scale producers in Ethiopia. Investment Climate Survey dataset of World Bank (2006) is used. The findings are complemented from other recent survey based studies and annual reports of Central Statistical Authority to cross check the relevance of the data soruce and timing. The data is analyzed through descriptive and econometric techniques. The descriptive analysis shows that infrastructural costs share to the yearly sales account 52% in the small size firms. The quality of infrastructures are also not adequate. Access to formal sources of finance is not easy due to requirement of high value collaterals. Taxes and tax administrations are macropolicy related major constraints to the small size firms. Instituions services more specifically that of the municipal are not satisfactory. The institutional aspect doesn’t necessarily hold for the recent conditions due to BPR implementations. Education status of workers and manager, under capacity use and low involvment in R&D are observed especially in small size firms. The econometric result is also consistent with the descriptive evidence. A significant labor variable is one indicator of size advantage. Alternatively, firm size dummies are used and found with the expected signs. A negative significant for power interruption dummy unveils the effects of poor infrastructures. Value of collateral requirement and access to overdraft facility are finance related variables that affect the performance of firms. In sum one can say that the investment climate is at least not attractive and measures need to be taken to improve infrastructures cost and quality, revisiting collateral value in the formal credit markets to address financial constraints. Supports in the form of training opportunities and market search are advantageous especially to the smaller firms.