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Firm dynamics and job creation: revisiting the perpetual motion machine

1. Purpose and scope

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This note presents analyses of firm dynamics in New Zealand. The purpose of the analysis is to revisit the findings of Meehan and Zheng (2015), to see if firm dynamics have changed since that study.

Meehan and Zheng (2015) analysed firm mortality and employment growth in New Zealand in the decade from 2001 to 2011 using Statistics New Zealand’s Longitudinal Business Database (LBD). The analysis focussed on the cohort of firms born in 2001. The main findings were:

  • most firms are born small and die young;
  • firms that are born small have higher death rates; and
  • job creation and destruction are both highly concentrated in a relatively small number of firms.

This note revisits the dynamics of the 2001 cohort of firms, between 2011 and 2016 and finds:
much lower rates of growth, in numbers of employees, amongst firms in the period 2011 to 2016, compared to the period 2001-2011;

  • persistently high rates of mortality amongst firms that are born very small, but less distinct or
  • persistent differences in mortality rates amongst firms of other birth sizes; an
  • continued significant job creation by a small number of firms that started out very small.

All of these findings are consistent with comparable analyses of firm dynamics in OECD countries.
Analysis of the 2001 cohort, for the first 10 years of life, has been extended to investigate variations in firm dynamics between different cohorts. This shows that:

  • firm dynamics vary significantly across different cohorts, questioning the extent to which findings for any year-specific cohort can be generalised
  • job creation is concentrated in the early stages of firms lives and that, overall, creation of new firms is a key driver of job growth.

This paper also investigates the dynamics of “digital” firms – firms in industries that produce digital and communications technologies or support their use by other firms and consumers, or produce and sell digital content and media. Collectively these are referred to as the “digital sector”. These “digital” firms are compared to firms in a comparator group of industries. The differences are not profound, in the sense that patterns of firm entry, growth and death are similar across all industries. But “digital” firms tend to be smaller, are more likely to die young, and surviving firms grow faster, than firms in the comparator group (for a break-down of industries in the digital sector and the comparator group see Table 7).