The productivity and investment climate survey suggests that the perceptions managers have of the investment climate in Ethiopia has improved dramatically since the first investment climate survey in 2001-2002. The share of managers and owners who report being constrained by the investment climate, defined as the 'location-specific factors that shape the opportunities and incentives for firms to invest productively, create jobs, and expand' in the 2005 World development report, was extremely high for almost all measured variables in the 2001 survey. Five years later, the share of complaining firms has declined to the point that Ethiopia performs more favorably than the low-income international averages. Despite serious economic challenges that became more acute after the survey was completed, the long-term trend is clearly toward improvement. The paper focuses on productivity because differences in productivity explain differences in income between countries, and attracts new investment. When firms become more productive, they are able to offer a product more likely to meet the quality and cost requirements of foreign markets. They are able to pay higher wages, employ more workers, and the profitability will attract more investment. Developing a private sector that is able to fulfill its development role requires solutions to three challenges: the challenge of productivity and growth, the challenge of inclusion, and the challenge of formalization.