EDRI Working Paper 009: Ownership, Management Practices, Upgrading, and Productivity in the Metalworking sector: Evidence from Ethiopia

Abstract

In the economics literature, it is often hypothesized that foreign owned enterprises possess advanced technological knowhow and higher quality managerial capital. Several studies have systematically contrasted FDI enterprises and local producers to explore the presence (or lack) of observable differences in size, productivity and management, and upgrading practices in the context of developing countries. Of these studies, however, many are not able to separate the effects of ownership difference from difference in the management style as they consider management skills to be unobservable in their models. We rely on rich sets of longitudinal data from the metalworking sector in Ethiopia, Addis Ababa, to explore whether and why foreign operated enterprises perform better and whether the observed differences in enterprise performance is due to differences in ownership (being foreign operated as opposed to domestic) or whether they can be explained by other confounders. We then attempt to trace the sources of these differences to variations in the ways the firms are operated. We find that foreign owned enterprises are endowed with better quality managers; a result which seems to explain considerable variations in management practices and upgrading investments among enterprises. Our findings also suggest that the presence of such significant management quality difference appears to underlie the substantial heterogeneity (by ownership status) observed in productivity, sales revenue, and profitability.