Quantifying creative destruction: Entrepreneurship and productivity in New Zealand

Abstract

This paper (a) provides a framework for quantifying any economy's flexibility, and (b) reviews the evidence on New Zealand firms' birth, growth and death. The data indicate that, by and large, the labour market and the financial market are doing their job. Creative destruction “revolutionizes the economic structure from within,” Joseph Schumpeter famously said, “incessantly destroying the old one, incessantly creating a new one” (Schumpeter, 1975, p. 83). Innovation in business - bringing new goods, new markets, new methods of production, new ways of organizing firms - is the “fundamental impulse that sets and keeps the capitalist engine in motion.” Does the economy have enough flexibility? Are there barriers in the way of entrepreneurship? This paper develops a framework for quantifying creative destruction. Applying the framework to New Zealand, I conclude that the sluggish productivity growth of the past fifteen years cannot be blamed on economic rigidities. The data depict an economy with ample creative destruction. Ascribing New Zealand's slow growth to a business-unfriendly culture is a misdiagnosis.

The Geography of Firm Formation in New Zealand

“…He contends that this is not, as many claim, the outcome of earlier economic reforms, but rather the result of labour utilisation. Thus, it is not surprising that McMillan (2004) argues that New Zealand exhibits little sign of structural change through creative destruction and productivity gains. Today, New Zealand has one of the most business‐friendly regulations in the world (in 2005), as measured by the World Bank's ‘doing business’ indicators, which investigate regulations that ease doing business and those that constrain it (The World Bank 2006).…”