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Returns to Physical Capital in Ethiopia: Comparative Analysis of Formal and Informal Firms

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  • Siba, Eyerusalem

Abstract

This paper investigates returns to capital in the formal and informal sectors in Ethiopia using parametric and semi-parametric regression techniques. Results show that there is a higher annual median return to capital in the informal sector (52–140%) than the formal sector (15–21%). However, informal firms might benefit from working formally as their capital stock gets larger. Marginal returns in the informal sector increase with: firm size, access to reliable markets, market uncertainty, and owners’ labor supply. On the other hand, marginal returns to capital and overall profitability decrease with capital stock, contrary to the poverty trap hypothesis.

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  • Siba, Eyerusalem, 2015. "Returns to Physical Capital in Ethiopia: Comparative Analysis of Formal and Informal Firms," World Development, Elsevier, vol. 68(C), pages 215-229.
    • Handle: RePEc:eee:wdevel:v:68:y:2015:i:c:p:215-229
    DOI: 10.1016/j.worlddev.2014.11.016
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    3. Eberhard-Ruiz, Andreas & Calabrese, Linda, 2018. "Trade facilitation, transport costs and the price of trucking services in East Africa," MPRA Paper 87150, University Library of Munich, Germany.
    4. Godfrey Kamutando & Lawrence Edwards, 2024. "Allocative Efficiency between and within the Formal and Informal Manufacturing Sectors in Zimbabwe," The World Bank Economic Review, World Bank, vol. 38(2), pages 251-273.
    5. Rothenberg, Alexander D. & Gaduh, Arya & Burger, Nicholas E. & Chazali, Charina & Tjandraningsih, Indrasari & Radikun, Rini & Sutera, Cole & Weilant, Sarah, 2016. "Rethinking Indonesia’s Informal Sector," World Development, Elsevier, vol. 80(C), pages 96-113.
    6. Reardon, Thomas & Liverpool-Tasie, Saweda & Minten, Bart, "undated". "IFAD Research Series 78: The Small and Medium Enterprises’ quiet revolution in the hidden middle of food systems in developing regions," IFAD Research Series 321998, International Fund for Agricultural Development (IFAD).
    7. Perra, Elena & Sanfilippo, Marco & Sundaram, Asha, 2024. "Roads, competition, and the informal sector," Journal of Development Economics, Elsevier, vol. 171(C).
    8. Babbitt, Laura G. & Brown, Drusilla & Mazaheri, Nimah, 2015. "Gender, Entrepreneurship, and the Formal–Informal Dilemma: Evidence from Indonesia," World Development, Elsevier, vol. 72(C), pages 163-174.
    9. Negrete Garcia, Ana Karen, 2018. "Constrained Potential: A Characterisation of Mexican Microenterprises," GIGA Working Papers 309, GIGA German Institute of Global and Area Studies.
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    12. Lashitew, Addisu A., 2017. "The Uneven Effect of Financial Constraints: Size, Public Ownership, and Firm Investment in Ethiopia," World Development, Elsevier, vol. 97(C), pages 178-198.

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