total sales. The share of manufacturing in GDP was 5.5 percent in 1996. To address the low-level of export diversification in Ethiopia, a comprehensive industrial policy emphasizing active support for the exportoriented and labor-intensive sectors was formulated in 2002-03.<sup>15</sup> Certain sectors in Ethiopia were protected by the import-substitution policy instituted in 1996. These sectors include, agriculture, agro-industry, manufacturing activities in textiles, chemicals, metal and electrical electricity generation, education and health (Gebresilasse, 2016). Following the implementation of these policies, Ethiopia experienced double digit economic growth. While per capita income grew rapidly in Ethiopia between 1995 and 2008, the share of manufacturing in total value-added remained constant (about 5 percent), implying that manufacturing kept pace with the overall economic activity.

The second industrial policy, which supplanted the pre-existing policy in 2003, was an activist trade policy that targeted certain sectors for export promotion.<sup>16</sup> Policies that “picked winners” for targeting support have had significant negative effects on physical and revenue productivity among Ethiopian manufacturing plants (Gebresilasse, 2016). This is because priority sector support policies exacerbated the extent of the “within-industry” misallocation. By comparison, the amendment of the priority sector policy, that is, the transition from focus on import substitution to export promotion, contributed to the observed improvements in allocative efficiency. Liberalization of tariff regimes, that allowed competition in certain industries, had large positive effects on total factor productivity (TFP) suggesting that excessive tariff levels were particularly distortionary in Ethiopia. These productivity gains were primarily driven by reductions in tariffs on imported intermediate goods rather than tariffs on final goods (Bigsten et. al., 2016).

# **_Correlates of Firm Growth in Ethiopia_**

Research on Ethiopia has focused on both internal and external firm-level drivers of growth. Among these, firm size is critical. Evidence from Ethiopia does not support the view that growth is a stochastic process as implied by Gibrat’s law. Studies using formal manufacturing data, in fact suggest a negative association between firm size and growth (Bigsten and Soderbom, 2006).<sup>17</sup> By comparison, using the World Banks’s Enterprise Survey data on nine African countries (including Ethiopia) Van Biesebroeck (2005) finds that conditional on other covariates, large firms grow the fastest.<sup>18</sup> Using data from the Ethiopian Rural Investment Climate Survey (RICS) and the Ethiopian Enterprise Survey (EES) in 2007, Rijkers et. al. (2010) support the view that size is positively correlated with success. Larger firms have higher (i) likelihood of survival (ii) productivity (iii) wages for workers, and (iv) probability of breaking into export markets. The latter findings contradict the theory of a negative relationship between firm size and subsequent growth, as well as the view that small firms have suboptimal initial size and therefore, grow quickly to reach efficient size. Nonetheless, large firms could possibly grow more because of their ability

> 15 The industrial policy was more concretized into action by various sub-sector strategies and by the successive development plans such as Sustainable Development and Poverty Reduction Program (SDPRP) 2002/03-2004/05, the Plan of Action for Sustainable Development and Eradication of Poverty (PASDEP) 2005/06-2009/10, and the Growth and Transformation Plan (GTP) 2010/112014/15. The export promotion strategy was targeted at high value agricultural exports (e.g. horticulture products and meat) and labor-intensive manufacturing products such as clothing, textile, leather and leather products.

> 16 Gebreeyesus (2013) provides an extensive review of the Ethiopian reform process in the 1990s as well as industrial policy experiments in the 2000s.

> 17 Bigsten & Gebreeyesus (2007) find similar results using the same data source, while Tarfasa et. al. (2016), find a negative correlation between start-up size and growth of the MSEs.

> 18 These countries include: Kenya, Ghana, Zambia, Zimbabwe, Côte d’Ivoire, Ethiopia, Burundi, Tanzania, and Cameroon.

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