2 Measurement issues in firm dynamics
2.1 New Zealand studies
As discussed in the introduction, several studies have now looked at evidence on New Zealand’s business demographics and levels of business dynamism over time (Johnson, 1999; Carroll, Hyslop, Maré, Timmins, and Wood, 2002; Skilling, 2001; Simmons, 2002; MED, 2003; Mills, 2003). These studies have highlighted some apparent differences between New Zealand and other OECD countries in terms of indicators of firm dynamics and business demography.
First, almost all of the studies of firm dynamics in New Zealand have concluded that New Zealand has a very high proportion of small firms (and correspondingly low average firm size) by comparison with other OECD countries. An exception is MED’s (2003) study “SMEs in New Zealand: Structure and Dynamics”, which concluded that the proportion of SMEs in New Zealand was broadly in line with other countries, although the proportion of employment accounted for by SMEs was higher in New Zealand. Mills (2003) also presented some preliminary data to suggest that New Zealand’s firms were not as small as had been claimed in previous studies.
Secondly, Carroll et al’s (2002) study presented comparisons with the USA and UK (based on OECD work) which suggested that New Zealand has high rates of employment turnover (ie, job creation and destruction) compared with other countries. Carroll et al (2002) suggested that this could be linked to the high proportion of small firms in New Zealand, as job turnover tends to be higher in such firms.
Thirdly, Mills (2003) compared New Zealand’s firm turnover (entry and exit) rates with other OECD countries, and found the New Zealand rates to be substantially higher than typical OECD figures. New Zealand’s firm turnover rates – as calculated by Johnson (1999) – averaged about 37% per year over the 1990s, as compared with a modal OECD figure of approximately 20%.
Fourthly, although good comparative data were not available, Skilling (2001), Simmons (2001), and Carroll et al (2002) all presented preliminary data that suggested low or modest rates of employment growth among New Zealand firms. However, Mills (2003) presented data that suggested employment growth among new firms in New Zealand was slightly higher than in European countries, although lower than in the USA.
A range of views has been expressed as to whether these features of New Zealand’s firm dynamics and business demography should be seen as positive, negative or neutral for economic performance. As discussed above, business dynamism is generally thought to be positive for economic performance and productivity. However, some authors (eg, Skilling, 2001; Simmons, 2001) have argued that high rates of firm entry and exit, small firm size, and low rates of firm growth could be indicative of a difficult economic environment – possibly due to size and distance – that impedes growth in New Zealand firms.
2.2 Measurement issues
Regardless of whether the features of New Zealand’s firm dynamics outlined above are thought to be positive or negative for economic performance, a major unresolved question is the extent to which differences in firm dynamics between New Zealand and other countries can be explained by measurement differences. The comparability of firm demographic data across countries has been noted by the OECD as an important potential constraint on studies of firm behaviour, and improving data comparability was a major reason for the instigation of the OECD’s firm-level project (Scarpetta et al, 2002; Bartelsman, Scarpetta, and Schivardi, 2003). This project attempted to construct a uniform business demography database covering ten OECD countries, through harmonisation of key measurement dimensions (eg, definition of entry and exit, definition of a firm). However, New Zealand was not one of the countries included in the study.
Measurement problems in comparing firm dynamics across countries were also highlighted in a recent OECD paper by Brandt (2004). Brandt made use of a new firm dynamics database – developed by Eurostat – which had some different characteristics from the OECD firm-level project database, but covered many of the same countries. By comparing firm dynamics statistics derived from the OECD and Eurostat databases, Brandt was able to show that specific measurement differences in the data were strongly associated with differences in firm dynamics indicators. A particularly important factor highlighted by Brandt (2004) was that of zero-employee (non-employing) firms – these firms were excluded from the data in the OECD firm-level project, but included in the Eurostat data. Brandt found that the inclusion of zero-employee firms made a large difference not only to measures of firm size, but also to the measurement of other variables, including firm turnover rates and firm growth.
Mills (2003) drew on an early draft of Brandt’s (2004) paper to put forward some initial hypotheses on how measurement issues might affect New Zealand’s firm dynamics indicators. Mills suggested that the inclusion of zero-employee firms in New Zealand’s business demography data might lead to estimates of smaller firm size, higher turnover rates, lower survival rates, and higher growth rates than would otherwise be the case. However, at that time the data needed to test these hypotheses had not yet been obtained.
