Determinants of Total Factor Productivity of Large and Medium-scale Manufacturing Industries in Ethiopia: Time Series Analysis

Abstract

Productive manufacturing industries are very important in accelerating the pace of long-term economic growth and hence living standards in a given country. Therefore, this paper aims to investigate the main determinants of total factor productivity (TFP) of large and medium scale manufacturing industries in Ethiopia for the period 1993‐2018. An econometric model (system GMM) was applied to analyze the determinants of TFP growth of large and medium manufacturing industries. The result from the econometric analysis confirmed that the intensity of imported raw materials, the loan provided to the manufacturing industries, foreign direct investment, human capital, and infrastructure growth (road coverage) had a significant positive effect on the TFP of Large and Medium Scale manufacturing industries. However, export intensity and macroeconomic instability(inflation) adversely affected TFP. The descriptive analysis showed that, in general, the number of firms, size of jobs created, and value-added per worker by large and medium scale manufacturing industries are continuously increasing from time to time and this sector is dominated by agro-processing industries (food & beverage subsectors) and non-metallic mineral industries. Regardless of the continuous rise in number, employment, and value-added per worker, there has been no similar progress in manufactured exports. Further, it is proved that the current operation of Large and Medium Scale Manufacturing Industries in Ethiopia is highly constrained by a shortage of supply of raw materials; absence of demand for products, and lack of working capital. Therefore, the government should focus on policies aimed at human capital formation, loan access, infrastructure development, attracting foreign direct investment, and creating a stable macroeconomic environment to intensify TFP of Large and Medium Scale manufacturing industries.