Firm dynamics and productivity growth
31 August 2020
The Productivity Commission contracted Sense Partners to assess the state of knowledge about firm dynamics in New Zealand.
This research note recommends that research shifts from mostly descriptive analysis to models of how firms operate in practice, to provide greater insight into:
- why firms grow
- how firm performance affects aggregate productivity growth
- what role policy can play in improving productivity growth.
The note comprises two distinct parts. The first is a high-level review of existing analysis and research methods. The focus is on empirical analysis that makes use of firm-level data and the use of Stats NZ’s Longitudinal Business Database (LBD). The objective is to identify any significant gaps in research to date, in terms of answering the three questions listed above.
They find that descriptive analysis predominates in the research and there is comparatively little research, at least in recent years, that can be a basis for diagnosing problems and informing policy decisions.
They also find that existing descriptive analyses provide mixed evidence on important questions such as whether new firms contribute positively to productivity growth.
In the second part of this note there is an updated decomposition of the contribution of firm dynamics to productivity growth. This update makes use of improved firm-level productivity data and improved decomposition methods, proposed by Diewert and Fox (2010).
The research note concludes with a comment on directions for future research that would provide greater insight into firm dynamics, issues affecting productivity growth and potential policies to improve productivity growth.