# **I. Introduction**

What makes high-growth firms (HGFs) attractive to policy makers? Can research aid public policy by shedding light on the characteristics of firms that become high-growth? While these questions have been explored in the context of advanced countries, Africa has received relatively less attention.<sup>1</sup> For example, studies suggest that in the United Kingdom and Sweden, HGFs comprised 6 percent of the firms and accounted for nearly 50 percent of all jobs during 2002-2008 (NESTA, 2009, Daunfeldt et al., 2015a). HGFs are the powerhouse of employment and output growth which make them an interesting subject for academics and an attractive target for policy makers.<sup>2</sup> This paper fills a critical gap in our understanding of HGFs in Africa by presenting evidence on the incidence and persistence of HGFs in Ethiopia.

It is imperative to understand the fundamental characteristics of firms that experience high-growth spurts, given that policy makers in both developed and developing countries are increasingly attempting to identify and support these firms. Bigsten and Gebreeyesus (2007) is one study that links firm growth to its size, however, their work focuses on the entire growth distribution.<sup>3</sup> Given that a median firm does not grow, there is little merit to exploring the determinants of growth rates for an “average firm” because the little variation in growth rates could largely be explained by the idiosyncratic component.<sup>4</sup> By studying growth of plants at the right tail of the distribution, this paper attempts to identify the correlates of exemplary performance. Given the growing recognition of the importance of productivity in affecting long term growth, a key contribution of this study is to establish a tight link of high-growth experience with initial plant productivity.<sup>5</sup> Ethiopian manufacturing makes an interesting laboratory for studying HGFs because of the phenomenal services-driven double-digit growth that the country experienced in the last decade or so. While Ethiopia’s real GDP grew at 10.9 percent per annum over 2004-14, the share of manufacturing stagnated at 4 percent of GDP (Moller, 2014).<sup>6</sup> Studying HGFs in Ethiopian manufacturing is thus likely to be informative on the possible challenges in boosting the growth of this sector in an environment that has rather been centrally planned, thereby undermining the performance of private firms. Evaluating the correlates of HGFs that relate not only to firm capabilities but also to external factors relating to spatial location and industry concentration offers interesting insights for improving the potential of private sector driven growth.

This paper makes the following key contributions: _First_ , it presents evidence on the incidence and persistence of HGFs in the context of a low-income country in Africa. About 7 percent of total establishments during 1999-2009 experienced high-growth, per the OECD definition, peaking at 15 percent

> 1 Diao et al. (2016) is perhaps one of the few studies that isolate the performance of informal high performing firms in an African country. Using Tanzania’s nationally representative survey of micro, small and medium sized enterprises the authors find that most of the labor productivity growth in the country is attributed to a relatively small subset of firms. Page and Söderbom (2015) use these detailed longitudinal data from Ethiopia to analyze firm entry and exit and patterns of net employment growth across firms of differing size. They find that exit rates were significantly higher for small, young firms. Half of the firms starting with 10 employees (or fewer) were gone after 3 years; and after 8 years two thirds of the firms starting small had disappeared. However smaller firms that survived often grew.

> 2 Some studies go a step further to provide guidance on the forms of targeting and policy support for such firms (e.g. Shane, 2009; Mason and Brown, 2013).

> 3 Their system GMM estimates suggest that small firms grow faster than larger firms, while young firms grow faster than older firms. Labor productivity is positively related to growth, that is, more productive forms grow faster and location within Addis and surrounding areas is also found to be a growth advantage.

> 4 See Stanley et al.,(1996), Bottazzi and Secchi, (2003)

> 5 Although research on enterprise dynamics in Ethiopia covers a range of issues relating to productivity, resource misallocation, learning by exporting and so on, little is known on the correlates of firm growth. See Bigsten et al (2009); Gebresilasse (2016); Bigsten and Gebreeyesus (2009)

> 6 Total value added in the manufacturing sector grew by 4.4 times during the study period 1996-2009, total employment grew by 3.4 times (Gebresilasse, 2016).

2