1 Introduction
Sustaining and increasing per capita GDP growth over the long run requires sustaining and increasing labour productivity growth. Arithmetically, labour productivity growth is made up of contributions from the labour productivity of continuing and entering firms, less the contribution from the labour productivity of exiting firms. More fundamentally, analysing the evolution of industry labour productivity growth is about understanding an economic process in which firm entry, exit and continuation play an integral part. This process is about firms making product, process and organisational innovations, investing, and learning to create and exploit profit opportunities in an environment where outcomes are to some extent uncertain. Firm entry occurs because entrepreneurs believe they have a product or process that will enable them to make a profit. Firm exit occurs as competitive pressures result in the closure of less productive firms.
An extensive literature exists that seeks to understand the relationship between firm dynamics and economic performance. Theoretical models have been developed where entrants discover information about their relative profitability that influences their decisions to expand, contract, or even to exit. This may occur in a passive fashion as firms receive information on realised profits (Jovanovic 1982) or as firms actively explore their economic environment (Ericson and Pakes 1995; 1998). Empirical work has focused on measuring the contributions from firm entry, exit and continuation to productivity growth, the dispersion of productivity within industries, the mobility of firms within the productivity distribution, and how these are correlated with various firm characteristics such as size and ownership. More recent empirical work has examined the influence of the business environment on firm dynamics (Klapper, Laeven and Rajan 2004).
This paper should be viewed as a microeconomic counterpart to the productivity work presented in Black, Guy and McLellan (2003). The aim of this paper is to evaluate the contributions from firm entry, exit and continuation to labour productivity growth in New Zealand over the period 1995 to 2003. Decomposition techniques developed by Griliches and Regev (1995) and by Foster, Haltiwanger and Krizan (1998) are employed. These techniques have been commonly used in the international literature (see for example, Balk and Hoogenboom-Spijker 2003 and Disney, Haskel and Heden 2003) however, this is the first such study to be undertaken for New Zealand. Interest in New Zealand results is reinforced because of the economic restructuring that commenced in the middle of the 1980s that “… focussed on developing a competitive environment in which no sector was singled out for encouragement by policy intervention: rather, the market place was to be the sole determinant of commercial outcomes.” (Evans, Grimes, Wilkinson and Teece 1996).
The remainder of this paper is organised as follows. Section 2 provides some definitions, describes the data, and reports summary measures of firm dynamics and labour productivity. Section 3 describes the techniques used to measure the respective contributions from firm entry, exit and continuation to industry labour productivity growth and Section 4 the results. Resource reallocation and firm productivity life cycle dynamics are examined in Sections 5 and 6, respectively. The final section provides some concluding discussion and suggests avenues for further work.
