7 Discussion and conclusions
Results reported in Section 2 suggest significant heterogeneity across both industries and firms in terms of their labour productivity. The standard textbook model of the representative firm predicts no variation in labour productivity amongst firms within an industry as firms face the same factor and output prices and have the same access to inputs (including technology, broadly defined). Moreover, even though the standard textbook model can be modified to include learning, technological diffusion etc, the reliance on comparative statics, obscures dynamic effects that are likely to be important in understanding the evolution of an industry’s economic performance.
An alternative paradigm to the representative agent model is to view the economic process that underpins the relationship between firm dynamics and productivity growth as one characterised by disequilibrium in which there is a “…constant competitive struggle of agents to beat each other, induced by the incentives of the economic system and enforced by competition…” (Eliasson 1992: 3). Firms make product, process and organisational innovations, invest, and learn to create, maintain and exploit profit opportunities in an environment where outcomes are to some extent uncertain. Entrepreneurial activity is at the heart of this process as firms experiment, engaging in resource reallocation to take advantage of these profit opportunities (Schultz 1975).
When experimentation takes place in an uncertain environment there will be a range of labour productivity outcomes because some firms succeed in their innovations while others fail, consistent with the findings of intra-industry variation in labour productivity presented in Section 2. Firm entry is likely to be an important source of innovation for an industry, as new firms bring new products, processes and organisational configurations. On the other hand, firms that fail to experiment or that experiment but fail, may find that competitive pressures force them to exit the industry. Firm learning also plays an important part in this process. As a firm’s management experiments with different innovations they will learn from both their successes and mistakes. Firms also learn by observing their competitors. A firm’s management may be able to infer things about its competitors’ activities by observing, for example, prices charged in the market or hiring decisions. This is likely to spur innovation if the observing firm perceives its market position is threatened.
Firm turnover in New Zealand is not unusual when compared with other economies. Around 60% of this turnover comes from the entry of new firms. Most of these firms’ initial level of labour productivity is below the industry average but grows rapidly thereafter. Cohorts of entering firms have average annual labour productivity growth of between 3% and 12%. Continuing firms generally add to industry labour productivity growth. On average exiting firms experience stagnant or declining labour productivity in the years leading up to their death and when they eventually die most have below average labour productivity for their industry. The average labour input share of each cohort of exiting firms declines through time by approximately 4% per annum.
This pattern persists even at a highly disaggregated industry level and indicates that firm turnover has positively contributed to labour productivity growth in New Zealand. It also points to the importance of policies that do not impede the firm turnover process.
