Employment Creation and Employment Quality in African Manufacturing Firms

SEED Working Paper No. 26

This study, applying econometric methods to a unique longitudinal data set of Tanzanian manufacturing firms put together by the World Bank, explores differences in net employment creation in firms of different sizes, and relates them to characteristics of firms and entrepreneurs and the business environment. Compared to larger firms, micro and small firms, as well as younger firms, grow faster but suffer from a higher variability of their growth rate, in Tanzania as well as in other African countries. In addition, entrepreneurs' wealth and level of academic education are found to have a significant positive impact on firms' performance and their capacity to generate additional employment.

The lack of access to inputs is a major external constraint to growth, especially for informal small enterprises. In Tanzania as well as in other African countries, the unfriendly business environment might be at the origin of the "missing middle" as small firms are forced to remain small and informal. Formality, by facilitating access to inputs, relieves one of the highest constraints faced by MSEs. Interestingly, despite high barriers to entry into the formal sector, econometric evidence points out to the superior employment creation potential of small formal firms compared to informal ones. These findings confirm that creating a conducive environment for small enterprises can make a substantial contribution to employment creation and increase productivity and wages.