Soderbom, MansRijkers, BobLoening, Josef2012-03-192012-03-192009-06-01https://hdl.handle.net/10986/4141This 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.CC BY 3.0 IGOACCESS TO CREDITACCESS TO FINANCEACCESS TO FINANCINGACCESS TO INFORMATIONACCESS TO MARKETSAGGLOMERATION EFFECTSAGRICULTURAL ECONOMICSAGRICULTUREBANK LOANBANK POLICYBANKSBIASESBORROWERBORROWINGBUSINESS ENVIRONMENTBUSINESS ENVIRONMENTSBUSINESS LOCATIONBUYERSCAPITAL STOCKCOLLATERALCOMMERCIAL FINANCECOMPETITIVE MARKETSCOMPETITORSCONSTANT RETURNS TO SCALECONSUMERSCORRUPTIONCREDIT CONSTRAINTSCUSTOMS CLEARANCEDEPRECIATIONDEVELOPING COUNTRIESDEVELOPMENT BANKDEVELOPMENT ECONOMICSDIVERSIFICATIONDUMMY VARIABLEECONOMETRICSECONOMIC ACTIVITYECONOMIC DEVELOPMENTECONOMIC GEOGRAPHYECONOMIC INTEGRATIONECONOMIC MANAGEMENTECONOMIC OUTCOMESECONOMIC PERFORMANCEECONOMIC POLICYECONOMIC REFORMECONOMIES OF SCALEEDUCATIONAL ATTAINMENTEMPLOYEEEMPLOYMENT GROWTHEMPLOYMENT OPPORTUNITIESENGEL CURVESENTERPRISE GROWTHENTERPRISE PERFORMANCEENTERPRISE REGISTRATIONENTREPRENEURSHIPEQUALITYEQUIPMENTEXPANSIONEXPENDITUREEXPORTEREXTERNALITIESFARM ENTERPRISEFARM ENTERPRISESFARM INCOMEFARMERSFINANCIAL CONSTRAINTSFINANCIAL INSTITUTIONSFINANCIAL SERVICESFINANCIAL SUPPORTFIRM PERFORMANCEFIRM SIZEFOREIGN COMPANIESFOREIGN INVESTMENTFORMAL CREDITFORMAL FINANCIAL INSTITUTIONSFORMAL LENDINGFULL-TIME EMPLOYEEFULL-TIME EMPLOYEESGENDERGOVERNMENT POLICYGOVERNMENT REGULATIONGROUP OF FIRMSGROWTH RATEINCOMEINCOME INEQUALITYINCREASING RETURNSINCREASING RETURNS TO SCALEINEQUALITYINFLATIONARY PRESSUREINFORMAL CREDITINFRASTRUCTURE DEVELOPMENTINPUT PRICESINTEREST RATEINTEREST RATESINTERNATIONAL BANKINTERNATIONAL TRADEINVESTMENT CLIMATEINVESTMENT CLIMATE ASSESSMENTINVESTMENT CLIMATE ASSESSMENTSJOB CREATIONKNOWLEDGE GAPLABOR FORCELACK OF COMPETITIONLAND MARKETSLAND REGISTRATIONLARGE ENTERPRISESLARGE FIRMSLEVIESLICENSINGLITERACYLITERACY PROGRAMLOANLOCAL MARKETLOCAL MARKETSLOW INCOMELOWER INTEREST RATESMACROECONOMIC INSTABILITYMACROECONOMICSMANUFACTURERSMANUFACTURING ENTERPRISESMARKET FRAGMENTATIONMARKET INTEGRATIONMARKET SHARESMARKET SIZEMEDIUM ENTERPRISESMEDIUM-SIZED ENTERPRISE DEVELOPMENTMFIMICROENTERPRISESOVERDRAFTOVERDRAFT FACILITYPERMANENT WORKERSPOLITICAL ECONOMYPOOR ACCESSPOOR GROWTH PERFORMANCEPRESENT VALUEPRICE LEVELSPROBABILITYPRODUCTION FUNCTIONPRODUCTION FUNCTIONSPRODUCTIVE ENTERPRISESPRODUCTIVITYPRODUCTIVITY GROWTHPUBLIC GOODSQUESTIONNAIREQUESTIONNAIRESRECENT LOANRENTSRURAL MARKETSSALESECONDARY SCHOOLSMALL ENTERPRISESMALL ENTERPRISESSMALL FIRMSSTART-UPSUPPLIERSTAXTAX RATESTAXATIONTELECOMMUNICATIONSTHIN MARKETSTOTAL FACTOR PRODUCTIVITYTRANSACTIONTRANSACTION COSTSUNEMPLOYMENTURBAN AREAURBAN AREASVALUE ADDEDWAGEWOMANWorld Bank10.1596/1813-9450-4946