6 Conclusions and policy implications
This paper has undertaken an extensive comparative analysis of firm dynamics in New Zealand and other OECD countries. The paper has highlighted a range of measurement differences in the way that firm dynamics statistics are collected and reported on across countries, and has attempted to control for these measurement differences by obtaining new data for New Zealand that is more comparable to the data available for other OECD countries. The paper has also looked at a broad range of firm dynamics variables, including some (like firm growth rates and the size of entering and exiting firms) that have not been covered in depth in previous studies.
One overriding conclusion that can be drawn from the analyses in this paper is that measurement differences are important. The criteria used to determine whether firms are included and excluded from the data – and in particular, the treatment of zero-employee and one-year firms – can have a substantial impact on measures of firm size, firm turnover rates, and firm survival and growth rates. This reinforces the need to be cautious when comparing indicators of firm dynamics and business demography across countries, and to try to understand and control for measurement differences before drawing conclusions.
Overall, the findings in this paper suggest that once measurement differences are taken into account, New Zealand’s firm dynamics and business demographics are broadly within the OECD range. In particular, while our firms are generally at the smaller end of the size distribution, New Zealand no longer appears to be an outlier in terms of having very small firms relative to the rest of the OECD. The distribution of firms and employment in New Zealand is very similar to that in a number of benchmark countries, including Australia, Canada, Finland and Denmark.
While New Zealand’s firm turnover (entry and exit) rates are still at the top of the OECD range even when measurement differences are controlled for, they are not substantially higher than turnover rates in countries like the USA and Canada which also have low barriers to business entry. Finally, the size of entering and exiting firms relative to incumbents, and the survival and growth rates of new firms, are also comparable to other OECD countries – although growth rates seem to follow a similar pattern to European countries, rather than the high rates of growth found in US firms.
Although New Zealand’s firm dynamics appear to be generally within the OECD range, there are still some apparent areas of difference, which were highlighted in the paper. These include: relatively small average firm size in the manufacturing sector; large firms that are smaller on average than large firms in at least some other countries (eg, the USA and the UK); high firm turnover rates, although not as high as has previously been thought; and rates of growth similar to European countries, despite a business environment that appears to be more dynamic in other respects.
Drawing policy implications from descriptive data at the aggregate level is difficult. However, the analyses in this paper do seem to offer some potential insights into a number of current policy issues. In general terms, the results are reassuring from a policy point of view as they suggest that New Zealand’s business dynamics are broadly in line with those of other OECD countries. Once measurement issues are taken into account, there is no obvious evidence that New Zealand firms face particular difficulties in terms of survival and growth, by comparison with firms in many other countries.
In terms of more specific implications, one conclusion that can be drawn from the analyses in this paper is that policy interventions and/or policy issues that are based on a rationale that New Zealand has an unusually large proportion of small firms are probably not well founded. Areas of policy that are often discussed (at least in part) in these terms include: access to finance and the functioning of financial markets; compliance costs; the delivery and reach of business assistance programmes; and workplace training. All of these issues have been suggested as being potentially more important in New Zealand than in other countries due to the high proportion of small firms. For example, it has been suggested that the large proportion of small firms in New Zealand poses particular issues for financial markets, due to information asymmetries between borrowers and lenders that are more difficult to overcome efficiently when firms are small. It is also often argued that compliance costs are of more concern in New Zealand than in other OECD countries, due to the high proportion of small firms and the fixed costs associated with compliance. Finally, it is sometimes suggested that administering business assistance programmes and delivering workplace training programmes is a particular challenge in New Zealand due the small size of New Zealand firms.
Generally speaking, the data do not support these conclusions. Of course this is not to argue that issues around access to finance, compliance costs, business assistance and workplace training for small firms are not important, or that they do not need to be addressed through policy. The data in this paper simply suggest that these problems are unlikely to be more acute in New Zealand than in a number of other OECD countries.
While policy rationales based on the proportion of small firms appear to lack support given the findings in this paper, policy issues that relate to the apparently smaller average size of New Zealand’s large firms may still be worth considering. One relevant issue in this context could be the level of R&D activity, given that R&D tends to be concentrated in large firms. Although further analysis is needed on this point, it seems plausible that the smaller size of New Zealand firms at the top end of the size distribution could be a constraint on R&D activity, and could in part explain our low levels of private sector R&D.
This paper has highlighted several potential areas for future work on firm dynamics. An obvious next step would be to try to explain those remaining aspects of New Zealand’s firm dynamics where we still appear to differ somewhat from other countries. In particular, further work could look at the impact of issues such as particular regulations, the size of the domestic market and distance from overseas markets, sectoral composition of the economy, and business cycle effects on indicators of firm dynamics.
In terms of specific issues of interest, one question that warrants further investigation is the relationship between firm size and performance in the manufacturing sector. The analysis in this paper suggested that New Zealand’s manufacturing firms do tend to be at the low end of the size distribution internationally, and the manufacturing sector has also generally performed poorly in terms of productivity growth (Black, Guy, and McLellan, 2002). While this in itself is no evidence of a causal link, it would be of interest to carry out further work on the relationship between scale and firm performance/productivity in the manufacturing sector.
Another area that could be worth looking into further is the growth rates of new firms. While the analyses in this paper suggested that New Zealand’s growth rates are broadly in line with the European OECD countries, this could be interpreted as somewhat disappointing, given that New Zealand has higher levels of firm entry and exit and more flexible regulations around firm entry and hiring and firing than do most European countries. In light of this, it would be interesting to do further work on the growth rates of New Zealand firms (for example, as suggested earlier comparing growth rates in New Zealand to other non-European countries like Australia and Canada) to try and better understand how New Zealand’s growth rates compare internationally and whether there are regulatory or non-regulatory barriers to firm growth in New Zealand.
Finally, there is also work that could be done to further improve the available New Zealand data and to address remaining measurement issues. Some of this work could be done now, while other improvements to the data will become possible in future with the development of the LEED database – for example, the capacity to clean the data of false entry and exit. This should allow more accurate comparisons to be undertaken on rates of firm and employment turnover, firm survival, and firm growth.
