Size matters

The Economist thinks that the prevalence of small firms in Greece is a problem.

A bias to small firms is costly. The productivity of European firms with fewer than 20 workers is on average little more than half that of firms with 250 or more workers (see right-hand chart). …If the best small firms were able to grow bigger, Greece and the rest might solve their competitiveness problems…

This is pertinent to New Zealand since we also have a small number of very large firms, although we may not have the prevalence of very small firms that Greece does. Beyond the arguments over data issues, it’s interesting to ask whether we might agree with The Economist that this poses a problem for growth. Certainly, New Zealand’s growth might be higher if firms grew, but then why haven’t they already? Not because the owners don’t want to reap the rewards of growth, surely.

Of course, what we need to ask is why the proportion of small firms/large firms is the way it is. The Economist points to tax and labour laws in Greece that punish large firms. In New Zealand it is hard to point to similar legal barriers to growth in firm size, as far as I know. It may be that New Zealand firm owners prefer smaller firms, or that it is difficult for firms to find local, skilled labour (random speculation, not to be taken too seriously). What this highlights is the importance of understanding the differences in countries, as well as their similarities, before rushing to emulate them. Are we the next Ireland/Singapore/Finland? Well, no, we’re a bit different from all those countries and we can’t replicate their successes without understanding those differences.

3 replies
  1. Hutchison
    Hutchison says:

    Why would you rule out the possibility that NZ firm owners don’t want to reap the rewards of growth?  Growing a firm has costs – time, stress, hard work, risk, being despised as a “rich prick” – as well as benefits.  Seems to me entirely credible that many small business owners don’t think the latter justifies the former.

    • jamesz
      jamesz says:

      Absolutely. That is why it’s so important to focus on some sort of welfare measure rather than growth when you define a problem: you could easily lift growth while making people worse off.

  2. Simeon
    Simeon says:

    Or another possibility, growth in employment is based on growth of market size, NZ is market constrained (compared to the US), where the winner can get very “large” before they need to leave the home region. By this stage they are used to being large companies. Where-as NZ and Greece are small countries, and until recently trade with neighbors was expensive due to currency issues, thus we both have a tendency to stay local/small.

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