Exceptional firms drive the production frontier out on the world’s edge
Employing a novel definition of the production frontier, we investigate the characteristics and performance of New Zealand’s frontier firms from 2005 to 2018. This paper draws on the Fabling-Maré labour and productivity datasets available in the Longitudinal Business Database, finding that frontier firms:
are disproportionately important in the economy - while constituting only 8% of firms, frontier firms account for 13% of total labour input, 27% of aggregate gross output, 29% of value added (gross output minus intermediate consumption) and 22% of aggregate capital services;
have much higher levels of labour productivity than non-frontier firms. On average, frontier firms’ value added per worker is almost double that of the second most productive group of firms (those in the second decile) and is nine times as productive as those firms in the bottom 10% of the productivity distribution, ranked by MFP ;
have had low labour productivity growth over the period, yet the combination of their high productivity levels and input share has meant that they have made a significant contribution to aggregate productivity growth since 2005. If, for example, frontier firms had experienced no increase in labour productivity or in labour inputs over the period, the annual growth rate in labour productivity would have fallen from 0.83% to 0.59%; and
are marginally younger, employ more skilled workers and pay a higher firm wage premium than non-frontier firms. They are also more likely to be in most major urban areas such as Auckland.
This work was commissioned by the New Zealand Productivity Commission as a research input into its frontier firms inquiry.
R Fabling. 2021. “Living on the edge: An anatomy of New Zealand’s most productive firms” Motu Working Paper 21-01. Motu Economic and Public Policy Research. Wellington, New Zealand.