Determinants of Total Factor Productivity of Large and Medium-scale Manufacturing Industries in Ethiopia: Time Series Analysis

Abstract

contribution of the manufacturing sector to overall GDP has not only been below the planned target, but it has also remained low relative to the mean performance of the Sub-Saharan Africa (SSA) countries. In the second growth and transformation plan (GTP-II) manufacturing industry is projected to grow by an average annual growth rate of 21.9% and its share in the overall GDP was projected to increase from less than 5% in 2014/15 to 8% by 2019/2020. But, still, the share of this sector in overall GDP in 20018 was poor, accounting for about 6 % (NBE, 2018). This figure is still lower than the sub-Saharan Africa average of nearly 10% (Signe, 2018). Further, the share of manufactured exports in total exports remained less than 13% (Arkebe, 2018). This seems unanticipated, given the emphasis placed by the Ethiopian government to achieve structural transformation through industrial policy.For many decades, economists have debated on the sources of total factor productivity (TFP) productivity in the manufacturing sector. The endogenous theorists such as Romer, 1990;Todaro & Smith, 2012 and other scholars identified many factors that determine the performance of the manufacturing sector productivity in developing countries (NPC, 2018). The theoretical and empirical literature clearly shows that the factors that affect the Total Factor Productivity and output of the manufacturing sector vary from country to country (Ilyas et.al, 2010). But in general, the common determinants of TFP examined in the empirical literature includes variables such as trade openness, macroeconomic stability (inflation rate), human capital, financial sector development (credit to the private sector), governance, economic growth, infrastructure, and research and development, FDI, lending rate, institutions among others (