Energy Efficiency, Employment and Competitiveness: Firm Level Evidence from Ethiopian Manufacturing

Manufacturing firms in low-income countries face a dual challenge: persistent energy inefficiency constrains competitiveness, while energy-intensive production patterns conflict with green industrialization goals. This paper provides firm-level evidence on the relationship between energy efficiency, employment, and total factor productivity (TFP) in Ethiopian manufacturing, using a 21-year unbalanced panel of 2,142 establishments from the Large and Medium Scale Manufacturing Industry census (1996–2016). Energy efficiency scores are estimated with a translog stochastic frontier model and linked to employment and TFP using a dynamic System GMM estimator that addresses reverse causality and unobserved firm heterogeneity.,Results show that the average firm operates at 63 percent of its energy-efficiency frontier, with medium-sized firms outperforming both smaller and larger establishments. Energy efficiency improvements reduce employment among small and medium firms consistent with capital-embodied labor displacement but generate net employment gains among large firms through an output-expansion channel. Positive competitiveness (TFP) effects are robust for small and medium firms and exhibit diminishing returns for larger establishments. These findings challenge the assumption that energy efficiency uniformly benefits all firm types and call for explicitly size-differentiated industrial policy: efficiency mandates should be paired with adjustment support for smaller enterprises, while large firms require demand-side and market-access measures to translate efficiency gains into sustained output and employment growth.