2  Firm dynamics and productivity

This section outlines the classification of firms as either entering, exiting or continuing in any given period. Concepts such as entry, exit and turnover rates and labour productivity are defined. The data used are discussed and descriptive statistics presented.

2.1  Definitions

Consider two years, and . Between these two years firms may enter or exit an industry, while others will continue to operate. Entering firms are present in but not in ; exiting firms are present in but absent in ; and continuing or surviving firms are present in both and . The number of firms present in any given industry in year , as well as the numbers of firms that enter, exit or continue in that industry between and are defined as follows:

the number of firms that enter an industry between and ;

the number of firms present in an industry in both and ;

the number of firms that exit an industry between and ;

the total number of firms present in an industry in year .

The literature provides a number of possible alternatives for calculating entry and exit rates. The procedure adopted in this paper is to calculate entry and exit rates using the total number of firms present in an industry in year .[1] This has the attractive property that the entry and exit rates share the same denominator. The denominator of the exit rate represents the pool of all possible exiting firms in . The pool of possible entering firms however, cannot be observed.

Entry () and exit () rates for any given industry between and are defined as follows:

(1)     

and

(2)      .

The turnover rate () for the same period is then the sum of the entry and exit rates,

(3)      .

The level of productivity for firm in year is defined as the ratio of real outputs to real inputs ,

(4)      .

When constructing productivity at the firm level, choices need to be made as to whether to use real gross output or real value added as the output measure, and whether to use a single input or multiple inputs in forming the real input measure. When the real input is formed using a single input the corresponding productivity measure is a partial productivity measure.

Throughout the remainder of this paper the focus will be on labour productivity. Real value added will be used as a measure of output and hours worked by employees as an input measure. This partial productivity measure has a number of limitations, the most obvious being that its value can be influenced by omitted inputs such as capital. Available data does not however permit the calculation of multifactor productivity.

2.2  Data

Data have been assembled on employment and output for a large proportion of New Zealand firms that were in existence between 1994 and 2003. Analysis is conducted at the enterprise as apposed to the plant level.[2] The sample covers an average of over 200,000 firms in any given year.

Output data comes from GST data collected by the Inland Revenue Department. GST sales and purchases data are combined with industry producer price input and output indices to produce estimates of the real value added by a firm over a given year.

Employment data comes from the Business Demography Statistics (BDS) database. There are four labour input variables in this database which give the numbers of full time and part time employees and the numbers of full time and part time working proprietors for each firm. These simple head counts are combined with Household Labour Force Survey (HLFS) 4 digit industry average hours worked by type of worker to arrive at an estimate of the number of hours of labour used by a firm over a given year.[3]

The BDS industry coverage is not the same from year to year. To maintain constant industry coverage over the period, enterprises in industries that were not included in the BDS in every year between 1994 and 2003 were dropped. This means that agriculture and livestock production, residential property leasing and rental, commercial property and leasing, child care services, residential and non-residential services, business professional and labour organisations, religious organisations, social and community groups, and sporting and recreational services industries were excluded from the firm-level productivity database. Results reported for the aggregate throughout this paper include all industries except those listed above.

Entry, exit and turnover rates are based on the first and last years that either employment or GST data are observed for a firm. There are likely to be a number of false births and deaths for various reasons such as ownership changes. There are other data limitations. Small enterprises that have annual GST sales below $30,000 are excluded from the BDS. Employment data are for a point in time, while sales and purchases data are on an annual basis. For entering and exiting firms in particular, sales and purchases data were not always available for the entire year of entry or exit and had to be annualised. In addition, employment, sales and purchases data in a number of cases were not always observed over the entire lifetime of a firm and had to be imputed. These limitations mean results should be interpreted with a degree of caution. For more information on data sources, limitations and construction see Appendix 1.