5.6  Firm growth

Another question of interest in terms of firm dynamics is the growth rates of those new firms that do survive. In theory firm growth could be investigated in terms of either financial growth (earnings/turnover/profit) or employment growth. The approach taken in this paper is to look at employment growth, but this is not to imply that financial indicators of growth are not also of interest.

Mills (2003) compared the employment growth rates of New Zealand firms with data from the OECD firm-level project, and found that the growth rates of surviving new firms in New Zealand appeared to be slightly higher than in most European countries, but significantly lower than in the USA. However, it is possible that the inclusion of zero-employee firms in the New Zealand data could have affected growth rates, probably by biasing them upwards. This is because small firms tend to expand more rapidly relative to their starting size than do large firms (Brandt, 2004).

5.6.1  Comparison with OECD firm-level project

Figure 6 compares the employment growth of surviving firms in New Zealand with other OECD countries from the OECD firm-level project. Growth is measured as a percentage of initial employment, for firms that survive two, four and six years. As with the survival rates, growth rates at two and four years are averaged across the 1995 to 1997 birth cohorts, but growth rates at six years were calculated for the 1995 birth cohort only. Two figures are again shown for New Zealand: one with zero-employee and one-year firms included, and one with zero-employee and one-year firms removed.[13]

Figure 6 suggests that, as expected, the removal of zero-employee firms from the New Zealand data does lead to some reduction in observed growth rates. Growth rates of surviving firms in the adjusted data stand at 12.0% for two year survivors, 22.0% at four years, and 37.9% at six years; this compares with growth rates of 17.0%, 30.3% and 46.6% when zero-employee and one-year firms are included. Once zero-employee firms are removed from the New Zealand data, our growth rates appear very similar to the European OECD countries. The growth rates of six-year survivors are still higher than any of the European countries, particularly when we take into account that growth rates for the other countries are shown after seven rather than six years. This comparison should be interpreted cautiously though, given that the six-year growth rates for New Zealand are based on only one birth cohort of firms.

Figure 6 – Employment growth of surviving firms, NZ and OECD firm project data

Sources: Statistics NZ and OECD/Bartelsman et al 2003

5.6.2  Comparison with Eurostat data

An alternative approach to analysing firm growth rates is to compare the growth rates for New Zealand (with zero-employee and one-year firms included) against those from the Eurostat data (Brandt, 2003). Comparing growth rates with the Eurostat data is likely to be more feasible than comparing firm survival and firm turnover rates, given that the latter are strongly affected by the cleaning of “false” entry and exit.

Figure 7 shows that the two-year growth rates of New Zealand firms (with zero-employee and one-year firms included) are at the lower end of the range of countries covered by the Eurostat, although not the lowest of the countries surveyed. However, this comparison should be treated with some caution, for at least two reasons. For one, the Eurostat data on firm growth is only available for one birth cohort (1998), and at one time period (two years following birth). For another, it is possible that the cleaning of false births and deaths from the Eurostat data could also have an effect on growth rates. For example, if a firm changes ownership this would be treated as a firm exit in the New Zealand data, and thus the firm would not be included in the growth figures. However, in the Eurostat data the firm’s growth would continue to be measured. If high growth firms are more likely to be bought out (which seems possible), this could bias the growth rates downward in the New Zealand data relative to the Eurostat.

Figure 7 – Employment growth of surviving firms at two years following birth, NZ and Eurostat data

Sources: Statistics NZ and Eurostat/Brandt 2004

5.6.3  Summary and discussion

The above analysis suggests that once measurement differences are taken into account, the growth rates of new firms in New Zealand are broadly similar to the European OECD countries, but significantly lower than growth rates of new firms in the USA. The Eurostat comparison suggested that growth rates in New Zealand might actually be somewhat lower than in many European countries, but it is best not to infer too much from this comparison, given uncertainty around the impact that cleaning the Eurostat data of false entry and exit might have on observed growth rates.

When looking at indicators of firm growth, one relevant factor to consider is the size of entering firms relative to incumbent firms. Other things being equal, it might be expected that if firms enter at a small size relative to incumbents, they are likely (if successful) to grow more quickly. Data from the OECD firm project provide some support for this view, suggesting that new firms in the USA and Canada tend to enter at a smaller size (relative to incumbents) than do new firms in European countries. (This pattern seems to be particularly evident in the manufacturing sector.) However, surviving new firms in the USA then grow very rapidly by comparison with European and New Zealand firms.

Bartelsman et al (2003) interpreted this pattern as consistent with a more “experimental” approach to market entry in the USA, whereby firms enter small (and often at lower productivity), and then expand rapidly over time if successful. This in turn could be related to the lower costs of firm entry and exit in the USA (for example, administrative costs of setting up a business, costs of hiring and firing) by comparison with most European countries.

The analysis in Section 5.2 above suggested that the size of entering firms in New Zealand, relative to incumbents, is at about the middle of the OECD range. Overall then, New Zealand firms seem to start at a moderate size (relative to incumbent firms), and then grow at a similar rate to new firms in European countries. North American firms seem to enter at a smaller size (relative to incumbents), and then grow rapidly if they survive.

While New Zealand’s firm growth rates are not out of line with the OECD as a whole, it is perhaps of some interest that our growth rates appear more similar to European countries than to the USA. New Zealand, like the USA, has very low administrative barriers to business entry and exit, and the costs of hiring and firing in New Zealand are also relatively low by comparison with many European countries (World Bank, 2004). However, while rates of firm entry are high in New Zealand, New Zealand firms enter at a larger size (relative to incumbents) than do North American firms, and successful new firms grow at a modest pace, similar to firms in European countries.

In light of this, it would be particularly interesting to know whether new firms in other Anglo-Saxon countries like Australia, the UK and Canada also grow rapidly in the way that US firms appear to do. Comparisons with these countries could shed some light on whether New Zealand is unusual in having modest firm growth rates despite a generally flexible business environment, or whether it is the USA that is unusual in having very rapid growth in new firms. Unfortunately, the data to answer this question were not readily available for the current paper, but this could be a question for future research.