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.