DETERMINANTS OF MANUFACTURING INDUSTRIES PRODUCTIVITY: THE CASE OF FIRMS FINANCED BY DEVELOPMENT BANK OF ETHIOPIA

Abstract

Manufacturing sector is the heart and soul of any economy. However, the growth and contribution of the sector to the Ethiopian Economy is at its infant stage. Thus, in this study the determinant factors of manufacturing industries productivity is investigated by using panel data from manufacturing industries financed by Development Bank of Ethiopian (DBE). The study covers 388 operational manufacturing industries financed by DBE and categorized them in 14 sub sectors based on the manufacturing industries classification criteria of CSA. Based on performance data of the industries and related literature reviews, factors that can affect the performance on manufacturing sector were identified and their influence was analyzed using fixed effects regression model. The result of the data analysis indicated that there is overall improvement in the value added performance by 3.59% average annually growth. However, the performance trend is not similar for all industries and industries like footwear, luggage and handbags and tanning and dressing of leather has performing very well while the performance of some industries including textile, garment and wearing apparel which have resource based competitive advantage in our country are not promising. The fixed effect regression result prevailed that human capital and the ratio of imported to total consumed raw materials were the major determinants for productivity of the manufacturing industries. Moreover, the impact of capital intensity and capacity utilization level has limited effect on industries productivity even if it has positive relation. Therefore, in order to improve the performance of manufacturing industries, the industrial firms and the government should improve the educational and skill level of labor forces which has a multiple effect on industries productivity through intensive government efforts in addressing quality and skills of citizens on universities, technical and vocational educations. The firms should also improve the employee compensation trend since it is one factor for human capital development. In addition the government and the bank should initiate firms who engaged on manufacturing sector whose raw material can easily available at the local market.