# **1 Introduction**

According to the second Growth and Transformation Plan (GTP II), Ethiopia aims to become a middle-income country by 2040. In fact, industrialization is the main instrument at the disposal of the Government of Ethiopia to achieve its objectives – creating employment and growth.<sup>1</sup> This paper reviews city-based industrialization across Ethiopia to understand (a) its importance in driving net job creation, and (b) the factors that determine the success of high-growth industries and cities. The focus of the analysis is on firms, industries and cities in Ethiopia that **_create and sustain jobs_** . As firms and companies are the agents of job creation, the analysis is focused on firms. A growing body of evidence shows that firm dynamics vary dramatically across countries at different stages of development (Hsieh and Klenow, 2009, 2014), making it more difficult for policy makers to apply standard conclusions to their own contexts. Indeed, many local and national policy makers often invest in programs to promote small and medium enterprises (SMEs), even though empirical evidence for this proposition is limited (Beck et al 2005).

Owing to data constraints, only firms above a certain size threshold (10 employees and more) could be observed over time. Although there is widespread evidence that household and micro and small enterprises create the vast majority of jobs in developing countries, there is also growing evidence that these firms also exit the market in large numbers, destroying jobs, and that they tend to stay small, adding little to employment growth over time (see Rijkers et al 2014 for an excellent overview of the related literature on the ability of productive enterprises to increase employment).

This paper tests the conceptual framework developed by the Competitive Cities Report (World Bank 2015b), which postulates that the ability of firms is a function of their allocative efficiency to choose between capital and labor, which in turn is determined by a combination of factors within their local environment. Cities are well suited to solve development challenges since their geographical scale often matches the natural scale of economic development, particularly with regard to agglomeration economies and administrative outreach. Four major categories of policy levers (institutions and regulations; infrastructure and land; skills and innovation; enterprise support and finance) are integral. City leaders need to juggle those multiple complex areas of policy and investments to facilitate city competitiveness, i.e. facilitate firms and industries to grow jobs, raise productivity and increase incomes of citizens.

This paper is structured as follows. Section 2 below provides an overview of the spatial structure of the country, and describes the different sources of data used within the analysis. Section 3 describes job dynamics in Ethiopia – Who creates jobs? Where are they located? What variables are correlated with job growth? The econometric strategy is presented in Section 4. Two models (at the firm and at the city level) are utilized to identify the determinants of cities’ success in employment creation and growth. Section 5 concludes.

> 1 The GTP II identifies light manufacturing industries as the main drivers for sustained economic growth and job creation.

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