Is Technical Progress Labour or Capital Saving? The case of the Ethiopian Manufacturing sector

The nature of technical progress in the industrial sector of a country has implications on formulating its industrial policy, which should fine-tune the direction of its dynamic comparative advantage. In view of this, this paper examines, using econometric models whether the technical progress in the Ethiopian manufacturing sector is capital or labour saving. The outcome of the study shows that the production technology in the Ethiopian manufacturing sector is capital consuming and labour saving, contrary to the theory of initial factor endowments of the country. It also indicates that technological choice was inappropriate and technological capability acquisition was not built-in in the Ethiopian manufacturing enterprises. According to the findings of this paper, for Ethiopia to industrialize, manufacturing firms in the country have to build the necessary technological capabilities through experience in production and investment on education. They should also make deliberate efforts to adapt and improve technologies to fit the prevailing Ethiopian conditions. The government is also required to help firms develop their technological capabilities. Towards this end, it has to create an enabling environment, develop mechanisms to protect selected manufacturing enterprises and subsidies firm-level research and development.