Abstract

Abstract: Manufacturing enterprises in rural and urban Ethiopia are compared to examine how location and investment climate characteristics affect performance. Urban firms are larger, more capital intensive and have higher labor productivity than rural firms. The rural-urban gap in labor productivity is mainly due to differences in capital intensity and total factor productivity. The hypothesis that firms in rural towns are equally productive as urban firms is not rejected, however firms in remote rural areas are less productive. Rural firms grow less quickly than urban firms. These results can partly be attributed to differences in the quality of infrastructure, access to credit and transportation costs across rural and urban areas. Since rural firms operate in a business environment that is very different from its urban counterpart, lessons derived from urban investment climate surveys cannot immediately be transferred to rural areas.