Firm Size Distribution in African Manufacturing Firms: Revisiting the ‘Missing Middle’

Abstract

There has been a widespread view that firm size distribution (FSD) in developing countries has been characterised as having a ‘missing middle’. We have investigated this question using evidence from the entire population of Ethiopian manufacturing firms, including small informal firms. Based on the analysis, we have documented the following four facts. First, there is no evidence of a bimodal distribution in the FSD. Second, small firms overwhelmingly, and increasingly, dominate the distribution. Third, the distribution of the average product of factor input is neither bimodal nor an inverted U-shaped. Fourth, we have investigated the potential regulatory notches of employment sizes of the sort often thought to discourage firm growth and have found no unusual bunching of firms near the notch points. More recently it has been argued by Tybout that instead of looking at the actual FSD to capture a ‘missing middle’, the actual should be compared with an undistorted one, which could be characterised as Paretian. We show, using this approach, that there is a ‘missing middle’ when using employment shares. However, when we look at firm share, by size category, over time large firms have been missing as well.