Nonfarm Microenterprise Performance and the Investment Climate: Evidence from Rural Ethiopia

This paper uses matched household, enterprise and community data from rural Ethiopia to analyze the performance and constraints of non-farm enterprises in the country. The study examines the size and economic significance of the rural non-farm sector in Ethiopia and assesses the effects of rural investment climate and household characteristics on enterprise performance. Findings include:

• Non-farm enterprise sector is sizeable, particularly important for women, and plays an important role during the low season for agriculture;
• Returns to non-farm enterprise employment are low on average, especially for female-headed enterprises;
• Women have higher participation rates than men;
• Most enterprises are very small, relying almost exclusively on household labor;
• Few firms add to their capital stock or increase their labor inputs after startup;
• Local fluctuations in predicted crop performance affect the performance of non-farm enterprises;
• Enterprise performance is affected by localized nature of sales and limited market integration.

Finally the paper states that policies facilitating integration of markets would make non-farm enterprises less dependent on the local rural economy, and may help them develop beyond supplying a small and volatile local market with low value-added products.