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It’s all in the mix

Principal Advisor, Productivity Commission
3 February 2020

In our first four draft reports, the Commission focused on questions like:

  • Is technology progress accelerating?
  • What does technology do to work and employment?
  • How can we help workers better adapt to more change in technology and work?

In our fifth - and last - draft report (now online), we’re focusing more on firms, for a couple of reasons. First, this inquiry is about technology adoption and decisions about this are taken by individual firms. Understanding the factors that affect these firm decisions is important for designing policies that promote more technology adoption (because, as our first draft report concluded, New Zealand needs more technology, not less).

Second, productivity growth happens as a result of all these firm decisions – although not in the way you might think. If you are a fan of management consultants and other hawkers of ‘productivity hacks’, you might have got the impression that productivity growth happens mainly as firms buy new machines, computer programmes or introduce new business processes. That’s certainly part of the story – but other things matter more.

Most productivity growth occurs as a result of what is collectively called ‘reallocation’. Reallocation can be broken down into three main forms:

  • Entry: new firms enter the market, either with new goods and services or with better and more efficient ways of providing existing goods and services.
  • Exit: some firms close.
  • Between-firm: more productive firms gain market share at the expense of less productive firms.

In dynamic markets, there is lots of entry, exit and between-firm shifts, and ‘resources’ (money, people, land, buildings, etc) move as a result. All things going well, ‘resources’ should move from the less productive (and failing) firms to the more productive firms, leading to a lift in overall productivity. International research suggests that 70-80% of productivity growth results from reallocation.

What does technology adoption by individual firms have to do with this? Well, technology is often a driver of entry, exit and between-firm reallocation. Take some recent, high-profile examples.

This reallocation of resources was often accompanied by the growth of new types of jobs, showing how technological progress does not mean the end of work.

Of course, firms need reasons to adopt technology. Watch out for my next post where I’ll talk about the factors that affect technology adoption decisions, and the things the Government could do to encourage more adoption.

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