The Effects of Informal Competition on Manufacturing Firm Productivity in Ethiopia

This study investigates the effect of informal competition on labor productivity measured by value added per total fulltime workers and capacity utilization rates of manufacturing firms in Ethiopia. A combination of cross-sectional and panel regression methods are employed to investigate the relationships using the 2011 and 2015 Ethiopian Enterprise Surveys data. Both methods show that informal competition is significantly associated with lower labor productivity and capacity utilization rates. The effects are bigger in larger firms than in smaller ones which is a disincentive to firm growth. However, firms facing informal competition tend to engage in innovation practices such as improving production and marketing methods to mitigate the challenge. The findings suggest that the responsible government institutions such as Competition and Consumers’ Protection Authority, Ministry of Trade, Ministry of Industry, and Police and Justice should exert more effort to reduce the malpractices of informal competitors. Efforts to formalize informal competitors by improving access to credit access, training, working and selling places, and tax exemptions could also help to overcome the challenge sustainably. Firms should also increase advertising to decrease the demand for counterfeit products by improving consumers’ knowledge about the firms’ original product characteristics.