Recent growth accelerations in Africa are characterized by declining shares of the labour force employed in agriculture, increasing labour productivity in agriculture, and declining labour productivity in modern sectors such as manufacturing. To shed light on this puzzle, this study disaggregate firms in the manufacturing sector by average size using two newly created firm level panels covering Tanzania (2008-2016) and Ethiopia (1996-2017). It identifies a dichotomy between larger firms with superior productivity performance that do not expand employment and small firms that absorb employment but do not experience much productivity growth. Large, more productive firms use highly capital-intensive techniques, in line with global technology trends but significantly greater than what would be expected based on these countries’ income levels or relative factor endowments.

This article is part of the Private Enterprise Development in Low Income Countries (PEDL) programme.