Resource information
This paper compares and contrasts the
performance of rural and urban manufacturing firms in
Ethiopia to assess the impact of market integration and the
investment climate on firm performance. Rural firms are
shown to operate in isolated markets, have poor access to
infrastructure and a substantial degree of market power,
whereas urban firms operate in better integrated and more
competitive markets, where they have much better access to
inputs. Fragmentation may also help explain why urban firms
are much larger, much more capital intensive and why they
produce much more output per worker. Capital intensity and
labor productivity are strongly correlated with firm size.
Manufacturing technology choice does not vary strongly
across space and increasing returns to scale are modest at
best, suggesting that rural-urban differences in output per
worker are predominantly driven by differences in capital
intensity and Total Factor Productivity (TFP). The average
TFP of firms in rural towns is much higher than that of
rural firms in remote areas, but small firms in rural towns
are not significantly less productive than small firms in
other urban areas. A key finding of the paper is that market
fragmentation and investment climate constraints impair the
growth of the rural non-farm sector. Whereas urban firms
exhibit a healthy dynamism, rural firms are stagnant and
lack incentives to invest. Paradoxically, limited local
demand due to market fragmentation is the most pressing
constraint for rural firms, even though they face more
severe supply-side constraints than urban firms. Promoting
market towns in Ethiopia might be an effective means of
capitalizing on the gains from market integration.
