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Industrial Clustering, Firm Performance and Employee Welfare

Evidence from the Shoe and Flower Cluster in Ethiopia

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Tigabu Degu Getahun

The author examines the productivity, profitability and welfare effects of industrial clustering and a public policy promoting industrial clusters in Ethiopia. He uses reliable counterfactuals as well as original enterprise and worker level data. By investigating the effect of firm, time, entrepreneur and site specific factors as well as endogenous location choice issues, the author finds strong evidence for the existence of significant agglomeration economies in the Ethiopia leather footwear cluster. Using primary survey data collected from firms which benefited from the cluster policy and those that did not, both before and after the implementation of the policy, the author shows the unintended negative impact of a cluster prompting policy in Ethiopia. The book is essential reading for those who are interested in the gender and welfare impact of female full time labor force participation in industrial jobs.
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Despite the number of empirical case studies on industrial clustering since the seminal work of Marshall (1920), only very few have made significant attempts to quantify its productivity, profitability and welfare effects. This study examines the productivity, profitability and welfare effects of industrial clustering and a public policy promoting industrial clusters in Ethiopia. To this end, firm-level survey data were collected from 196 leather shoe manufacturers that were part of the spontaneously emerged leather shoe cluster in Ethiopia, 86 firms that operated in a separate government created cluster, and 72 non-clustered firms located in other areas.

The study employs appropriate estimation strategies to disentangle the effect of industrial clustering from firm heterogeneities and other cofounders. The estimation results from both the random effect model and the Abadie and Imbens (2011) bias corrected nearest neighbor matching model reveal the productivity and profitability increasing effect of industrial clustering, after controlling for the effects of site-, enterprise-, entrepreneur-, and time- specific factors. The study also accounts for selection bias and endogenous location choice problem.

The results from the two way fixed effect impact evaluation model suggests that the implemented government cluster development program in Ethiopia has adversely impacted the productivity, profitability, growth, and innovation performance of the treated firms. Due to the short span of the program, however, these findings only reflect the short-term impacts of the program.

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