Mind the Gap? A Rural-Urban Comparison of Manufacturing Firms

This paper compares and contrasts the performance of rural and urban manufacturing firms in Ethiopia to assess the impact of market integration and the investment climate on firm performance. Rural firms are shown to operate in isolated markets, have poor access to infrastructure and a substantial degree of market power, whereas urban firms operate in better integrated and more competitive markets, where they have much better access to inputs. Fragmentation may also help explain why urban firms are much larger, much more capital intensive and why they produce much more output per worker. Capital intensity and labor productivity are strongly correlated with firm size. Manufacturing technology choice does not vary strongly across space and increasing returns to scale are modest at best, suggesting that rural-urban differences in output per worker are predominantly driven by differences in capital intensity and Total Factor Productivity (TFP). The average TFP of firms in rural towns is much higher than that of rural firms in remote areas, but small firms in rural towns are not significantly less productive than small firms in other urban areas. A key finding of the paper is that market fragmentation and investment climate constraints impair the growth of the rural non-farm sector. Whereas urban firms exhibit a healthy dynamism, rural firms are stagnant and lack incentives to invest. Paradoxically, limited local demand due to market fragmentation is the most pressing constraint for rural firms, even though they face more severe supply-side constraints than urban firms. Promoting market towns in Ethiopia might be an effective means of capitalizing on the gains from market integration.

Bibliographic Details

Main Authors:	Soderbom, Mans, Rijkers, Bob, Loening, Josef
Language:	English
Published:	2009-06-01
Subjects:	ACCESS TO CREDIT, ACCESS TO FINANCE, ACCESS TO FINANCING, ACCESS TO INFORMATION, ACCESS TO MARKETS, AGGLOMERATION EFFECTS, AGRICULTURAL ECONOMICS, AGRICULTURE, BANK LOAN, BANK POLICY, BANKS, BIASES, BORROWER, BORROWING, BUSINESS ENVIRONMENT, BUSINESS ENVIRONMENTS, BUSINESS LOCATION, BUYERS, CAPITAL STOCK, COLLATERAL, COMMERCIAL FINANCE, COMPETITIVE MARKETS, COMPETITORS, CONSTANT RETURNS TO SCALE, CONSUMERS, CORRUPTION, CREDIT CONSTRAINTS, CUSTOMS CLEARANCE, DEPRECIATION, DEVELOPING COUNTRIES, DEVELOPMENT BANK, DEVELOPMENT ECONOMICS, DIVERSIFICATION, DUMMY VARIABLE, ECONOMETRICS, ECONOMIC ACTIVITY, ECONOMIC DEVELOPMENT, ECONOMIC GEOGRAPHY, ECONOMIC INTEGRATION, ECONOMIC MANAGEMENT, ECONOMIC OUTCOMES, ECONOMIC PERFORMANCE, ECONOMIC POLICY, ECONOMIC REFORM, ECONOMIES OF SCALE, EDUCATIONAL ATTAINMENT, EMPLOYEE, EMPLOYMENT GROWTH, EMPLOYMENT OPPORTUNITIES, ENGEL CURVES, ENTERPRISE GROWTH, ENTERPRISE PERFORMANCE, ENTERPRISE REGISTRATION, ENTREPRENEURSHIP, EQUALITY, EQUIPMENT, EXPANSION, EXPENDITURE, EXPORTER, EXTERNALITIES, FARM ENTERPRISE, FARM ENTERPRISES, FARM INCOME, FARMERS, FINANCIAL CONSTRAINTS, FINANCIAL INSTITUTIONS, FINANCIAL SERVICES, FINANCIAL SUPPORT, FIRM PERFORMANCE, FIRM SIZE, FOREIGN COMPANIES, FOREIGN INVESTMENT, FORMAL CREDIT, FORMAL FINANCIAL INSTITUTIONS, FORMAL LENDING, FULL-TIME EMPLOYEE, FULL-TIME EMPLOYEES, GENDER, GOVERNMENT POLICY, GOVERNMENT REGULATION, GROUP OF FIRMS, GROWTH RATE, INCOME, INCOME INEQUALITY, INCREASING RETURNS, INCREASING RETURNS TO SCALE, INEQUALITY, INFLATIONARY PRESSURE, INFORMAL CREDIT, INFRASTRUCTURE DEVELOPMENT, INPUT PRICES, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL TRADE, INVESTMENT CLIMATE, INVESTMENT CLIMATE ASSESSMENT, INVESTMENT CLIMATE ASSESSMENTS, JOB CREATION, KNOWLEDGE GAP, LABOR FORCE, LACK OF COMPETITION, LAND MARKETS, LAND REGISTRATION, LARGE ENTERPRISES, LARGE FIRMS, LEVIES, LICENSING, LITERACY, LITERACY PROGRAM, LOAN, LOCAL MARKET, LOCAL MARKETS, LOW INCOME, LOWER INTEREST RATES, MACROECONOMIC INSTABILITY, MACROECONOMICS, MANUFACTURERS, MANUFACTURING ENTERPRISES, MARKET FRAGMENTATION, MARKET INTEGRATION, MARKET SHARES, MARKET SIZE, MEDIUM ENTERPRISES, MEDIUM-SIZED ENTERPRISE DEVELOPMENT, MFI, MICROENTERPRISES, OVERDRAFT, OVERDRAFT FACILITY, PERMANENT WORKERS, POLITICAL ECONOMY, POOR ACCESS, POOR GROWTH PERFORMANCE, PRESENT VALUE, PRICE LEVELS, PROBABILITY, PRODUCTION FUNCTION, PRODUCTION FUNCTIONS, PRODUCTIVE ENTERPRISES, PRODUCTIVITY, PRODUCTIVITY GROWTH, PUBLIC GOODS, QUESTIONNAIRE, QUESTIONNAIRES, RECENT LOAN, RENTS, RURAL MARKETS, SALE, SECONDARY SCHOOL, SMALL ENTERPRISE, SMALL ENTERPRISES, SMALL FIRMS, START-UP, SUPPLIERS, TAX, TAX RATES, TAXATION, TELECOMMUNICATIONS, THIN MARKETS, TOTAL FACTOR PRODUCTIVITY, TRANSACTION, TRANSACTION COSTS, UNEMPLOYMENT, URBAN AREA, URBAN AREAS, VALUE ADDED, WAGE, WOMAN,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090601131719 https://hdl.handle.net/10986/4141
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