The study investigates productivity spillover from foreign direct investment to domestic firms in the Ethiopian manufacturing industries. The System Generalized Method of Moments (SYS-GMM) estimator using panel data of manufacturing firms for the years 2011 to 2016 with 12006 observations grouped under 102 industries was employed. The results show a coexistence of both negative and positive productivity spillover effects from FDI to domestic firms at moderate level of absorptive capacity. Specifically, foreign presence in the industries contributed a positive and significant horizontal and backward productivity spillover effect to domestic firms on an average level. The horizontal productivity spillover is transmitted to local firms through demonstration and competition effects at a moderate level. Likewise, vertical productivity spillover occurred through the channel of sales of intermediate goods and services to foreign firms. We have observed that the technology gap is a critical factor among those factors that determine the productivity spillover occurrence. Finally, policy measures aimed at minimizing the technology gap between foreign and domestic firms to maximize the productivity spillover effect are suggested. Since the result shows that the spillover effects in all firms are not equal, prioritization as per their promise is recommendable in an FDI attracting framework.