Far from the frontier

Richard Harris spent a bit of time going through firm-level panel data on NZ firms, looking at the productivity frontier here and the distance to the global frontier.

Here's the upshot:

The most important conclusion from this study is that while there is some evidence of a failure of productivity-enhancing technologies to diffuse from firms operating at the national productivity frontier, the major problem is failure of productivity-enhancing technologies to diffuse from firms operating at the global productivity frontier. New Zealand’s major problem is that frontier firms are underperforming because of their characteristics (e.g. small and lacking international connections) while productivity is overall adversely affected by a lack of competition, which generally creates barriers to exiting and insufficient reallocation of market shares from lower- to higher-productivity firms. In terms of the policy response needed in New Zealand, Andrews et al. (2015, p. 93) note that ‘innovations at the global frontier do not immediately or inevitably diffuse to all firms ... frontier innovations often need to be adapted to national circumstances’. However, to increase the likelihood of diffusion from the global frontier, there is a need for a sufficient level of global connections via trade, FDI, participation in global value chains and the international mobility of skilled labour. New Zealand does not do well on any of these factors. In addition to improving the trajectory of firms at the national frontier (towards the global frontier), there is also the need to ensure greater resource reallocation towards more productive firms. As Andrews et al. (op. cit., p. 97) argue: 

If small firms are (on average) old, this might reflect barriers to post-entry growth and weak market selection mechanisms ... A key message is that creative destruction and up-or-out dynamics are central: entry matters but what happens next is crucial – all else equal, young firms should grow rapidly or exit (i.e. “up-or-out”) but not linger and become small-old firms. 

With respect to New Zealand, there does appear to be clear evidence that here are higher exit barriers (except for frontier firms where the wrong firms, with higher productivity, were exiting 2001–16) due in part to a lack of competition associated with an over emphasis on producing for small domestic markets.

One particularly depressing bit: the data from his study ended in 2016. Over the fifteen years covered, "only mining saw a substantive upward trend in the frontier." 

Which part of mining? 

"In mining, being located in the rest of the lower North Island provides a nearly 11% greater probability (cet. par.) of belonging to the frontier in this sector (reflecting the gas and oil sector that is predominantly located in the Taranaki region." 

Tarankai's oil and gas industry was speeding ahead of the rest of the sector, and ahead of every other sector. 

Of course, that kind of behaviour cannot long be tolerated around here.