to engage in innovation (Gebreeyesus, 2009) and exports (Rijkers et. al., 2010).<sup>19</sup> They may also benefit from stronger bank ties and hence have better access to finance (Shiferaw, 2016).<sup>20</sup> Firm age is also critical for growth, with young formal Ethiopian firms growing faster than their older counterparts (Bigsten and Soderbom, 2007). Innovation also matters. A cross-country study using the World Bank’s Enterprise Survey data shows that product innovation matters for growth once factors such as firm’s ownership of transport and internet connectivity through their own website are controlled for (Goedhuys and Sleuwaegen, 2010).

External industry environment and geographical factors also affects firm growth. Among industry characteristics, Ethiopian firms operating in industries with high competition from imports observed stunted job growth (Shiferaw, 2016). Studies focusing on spatial characteristics in Ethiopia suggest that enterprise clustering, when measured by the total count of firms producing the same product, has a positive effect on physical productivity (Bigsten et al., 2012). However, this relationship is not significant when agglomeration is among firms producing different products or sectors. In the case of Ethiopia, it seems that concentration of activity is a result of lack of accessibility to markets in places beyond a few cities. For example, although towns with initially large number of firms continue to attract more firms, nonetheless, accessibility to better roads contributes to a convergence in the overall distribution of manufacturing firms and a decline in the degree of geographic concentration (Shiferaw et al., 2015). This result suggests that firms do not foresee remarkable benefits from agglomeration if they have access to markets.<sup>21,22</sup> The quality of infrastructure and transport costs are important factors explaining the elevated performance of urban manufacturing enterprises in Ethiopia vis-à-vis their rural counterparts (Rijkers et. al., 2010).<sup>23</sup> Exploiting geographical variations in greenfield foreign direct investment (FDI) in Ethiopian woredas (districts), Abebe et. al. (2018) find that the number of domestic plant openings increased significantly in the three-year window following the entry of a greenfield FDI plant in a district. Their study suggests that the benefits from knowledge spillovers outweigh the costs (competition effects) mainly due to labor flows from foreign to domestic plants. In addition, there could possibly be backward and forward linkages in the supply chain, and horizontal linkages that occur because of more casual interactions.

# **III. Data Description**

The data used for this paper comes from the Large and Medium Manufacturing Industries Survey (LMMIS) conducted by the Ethiopian Central Statistical Agency (CSA) on a yearly basis since 1976. LMMIS is a

> 19 Bigsten and Gebreeyesus (2009) find evidence on both self-selection and learning-by-exporting, whereby more productive firms enter exports and over time exporters have higher productivity vis-à-vis non-exporters.

> 20 Firms without initial bank ties exhibit significantly lower average investment rates and longer durations of investment inaction relative to firms with initial bank ties. For small enterprises in Ethiopia, access to credit is a binding constraint for their growth as they are ‘too big’ for microfinance institutions, but they are ‘too small’ for formal banks in terms of the size of loan, reflecting the ‘missing middle financial intermediaries’ that serve small enterprises.

> 21 This is not contradictory to the findings of Bigsten et al. (2012) because agglomeration puts a competitive pressure on firm products’ prices and hence could dissuade them from co-locating.

> 22 Lall et al. (2017) suggest that the depressed level of agglomeration externalities in African cities reflects the underlying distortions in the functioning of key factor and product markets, and lack of crucial infrastructure, housing, and commercial structures. Because a typical African city is crowded, costly and disconnected, firms remain scattered, thereby attesting to the failure of labor market pooling and other benefits associated with clustering. Even among clusters, knowledge diffusion remains limited.

> 23 Location and the investment climate affect firm performance through their impact on efficiency of production and costs, and through their impact on the entrepreneur’s operative decisions (e.g., involving input choices, technology adoption and enterprise size).

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