Do New Zealand firms catch up to the domestic productivity frontier? Working Paper

Do New Zealand firms catch up to the domestic prod…
01 Jun 2015

New Zealand has a poor productivity track record at the level of the aggregate economy and there is little evidence of productivity “catching up” towards that of leading economies. At the same time, there is a very wide distribution of productivity levels among firms within the same industries and it is at least possible that some New Zealand firms are among the most productive in their industry globally. In this case, the relevant question is why new technologies and production techniques do not diffuse from high- to low-productivity firms within New Zealand.

As such, this paper explores technological diffusion among New Zealand firms using a model of convergence in which a firm’s multi-factor productivity (MFP) growth depends on its ability to catch up to its industry’s productivity frontier. We find that convergence to the frontier is statistically and economically important, indicating a tendency for technology to diffuse from high- to low-productivity firms. The results also indicate that firms in the services sector have slower convergence speeds than firms in the primary and goods-producing sectors. This raises questions about the extent to which firms in some parts of the services sector are exposed to, and influenced by, the domestic productivity frontier.

We also extend the base model to assess the impact of exporting and foreign ownership on MFP growth and the speed of convergence. This allows for the possibility that by exposing firms to new technologies and larger markets, international openness may enhance incentives and opportunities to adopt leading production techniques, thereby increasing the speed with which firms catch up to the productivity leader. The results suggest that firms that are more open internationally experience faster MFP growth and speed of convergence.  However, greater international openness at the industry level can slow the speed with which low-productivity firms converge towards the frontier. This may reflect the fact that exporting or foreign-owned firms tend to have relatively high productivity levels, so that faster MFP growth in these firms increases the average “distance to frontier” for other firms in the industry.

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