Is the Ethiopian Leather industry on the right track?: an Empirical investigation.

This study aimed at examining the existence of technical efficiency differences among tanneries and leather processing firms using stochastic frontier production function models. The study considered 10 tanneries and 24 leather processing firms for the period 1996 to 1999. Mean technical efficiency of tanneries was about 83 percent for the entire period, albeit showing a declining trend. Among tanneries, larger firms were found to be more efficient because of the advantage of scale economies. Contrary to the widely held view, exporting tanneries were not as efficient as inward oriented ones except that they were using capital intensive and relatively modern technologies which might have allowed them producing good quality products for their target markets. Although, leather processing industries were operating far below their designed capacity, the empirical evidence externalized the causes for their poor performance. The Translog production function estimated through OLS was found to better characterize their production technology implying that there was not statistically significant technical efficiency difference amongst them. External constraints might include unfair competition with illegal imports, lack of easier access to finance, and limited government support in light of the fiercely competitive global trade and the infant nature of the sector. Albeit, statistical tests do not affirm it, an increasing trend of inefficiency has been observed in leather processing industries. This is perhaps a reflection of firm level weaknesses associated with mediocre product design, use of backward machines, limited international exposure and passive reaction to competitive products. Thus, both tanneries and leather processing industries ought to firmly work in addressing their weaknesses and accustom themselves with the challenges of the changing global environment. Government should also play its supportive role in terms of ensuring a fairly competitive domestic market, providing market and technology related information, supporting trainings, and minimizing transaction costs related to the provision of its services.

Getnet, Alemu
Alemayehu, Seyoum
Alemu, Mekonnen
Eyob, Tesfaye
Ayele, Gezahegn
Diwan, Ishak
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Journal Article
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Ethiopian Journal of Economics, Volume 10, Number 2
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VOLUME X NUMBER 2 October 2001

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