Firm turnover and productivity differentials in Ethiopian manufacturing

Are the forces of market selection at work in Africa? How successful are markets in these economies in sorting out firms on an efficiency basis following the sequence of reforms to liberalize and particularly to transform some of the previous command economies to market oriented ones? What is the pattern of entry and exit in the manufacturing sector and how does it affect industry productivity growth? This study examines these issues using firm-level industrial census data from the Ethiopian manufacturing sector. It is the first attempt to analyze firm turnover and productivity differentials using industrial census data in sub-Saharan Africa. The Ethiopian manufacturing sector exhibits a high firm turnover rate that declines with size. Exit is particularly high among new entrants; 60% exit within the first 3 years in business. Our study consistently shows a significant difference in productivity across different groups of firms, which is reflected in a turnover pattern where the less productive exit while firms with better productivity survive. We also found higher aggregate productivity growth over the sample period, mainly driven by firm turnover.