Frontier Firms follow-on review: detailed observations
1 May 2023
At the request of the Government, the Productivity Commission Te Kōmihana Whai Hua o Aotearoa has undertaken a follow-on review to its New Zealand firms: Reaching for the frontier (Frontier Firms) inquiry. The Commission describes the key findings and recommendations of its follow-on review in a main report Frontier Firms follow on review.
This document outlines detailed observations to support the findings and recommendations in the main report for the Commission’s Frontier Firms follow-on review. The purpose of this document is to provide the detail of what the Commission found during its follow-on review. As such, it should be treated as a supplementary resource.
This report is organised in line with the recommendations made in our final Frontier Firms report. Each recommendation is listed, followed by relevant progress in the implementation of existing policy and the development and implementation of new policy.
We found the most promising path for New Zealand to lift its productivity is to foster the development of innovation ecosystems in which large, export-orientated frontier firms can emerge and thrive.
Frontier firms are the most productive firms in an economy and are vital to lifting national productivity and wellbeing. They do this by lifting their own productivity closer to the global frontier, growing larger and diffusing innovation through the rest of the economy.
We found a lot can be learned from the successes and failures of high-performing small advanced economies (SAEs) like Denmark, the Netherlands, Sweden, and Switzerland. High performing SAEs typically have several large globally competitive firms with outstanding records of exporting sophisticated and distinctive goods and services. Around these large businesses exist ecosystems of complementary firms, researchers and innovators, pipelines of workers with the right skills, investments in enabling infrastructure and regulations, mentors and investors with deep knowledge and understanding of the industry.
New Zealand generally lacks such firms, but a few examples at or close to the global productivity frontier show that it is possible to overcome the disadvantages of a small domestic market and distant location. To do so, it needs to increase the rate and extent of innovation and exporting which are both weak by the standards of high-performing SAEs.
The allocation of labour and capital across firms is important for productivity performance. Our research found that the most productive firms in these European SAEs had higher shares of total capital than the leading New Zealand firms. European frontier firms (in terms of their labour productivity) also had higher shares of total labour. These findings reflect that frontier firms in European SAEs, compared to in New Zealand, are more capital intensive and larger, employing more people.
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