This study investigates the relationships of informal competition with formal manufacturing firms labor productivity measured by value added per total fulltime workers and capacity utilization rates in Ethiopia. A combination of cross-sectional and panel regression methods are employed to investigate the relationships using the 2011 and 2015 World Bank Enterprise Surveys. The results from both the cross-sectional and panel analyses show that informal competition is significantly associated with lower labor productivity and capacity utilization rate. The negative effects of informal competition are large especially on large manufacturing firms which is a disincentive to firm growth. An additional finding is that those formal firms competing against the unregistered firms are found to engage in innovation practices especially in the methods of production and marketing to mitigate the negative consquences of informal competittors on their market performance. The policy implication of the findings is that Competition and Consumers’ Protection Authority (incollaboration with police and judciary) should exert more efforts to reduce the malpractices of informal competitors especially those engaging in brand piracy. Formalizing the informal competitors through improved access to credit, tax incentive, and training can also play an indispensable role. Firms should also promote their producs aggressively through different methods to help their customers identify genuine products from fakes.