Australia's Firm-level Productivity - a New Perspective

Abstract

Not all firms contributed to Australia’s impressive productivity growth in the 1990s. Some performed better than others, and entrants arrived even as incumbents exited. If firms make decisions on input demand and liquidation based on their productivity, the latter known to them but unobserved by the econometrician, this gives rise to simultaneity and selection problems which bias the traditional estimators of production function coefficients. We apply a semiparametric technique that endogenises input choices and firm exit decisions to obtain production function estimates on Australian firms. Estimation is carried out using the Business Longitudinal Survey, Australia’s only business longitudinal micro-dataset which tracks firm entry and exit. We analyse over twenty industries at the 2-digit ANZSIC level. Results from production function estimation provide interesting insights on the micro processes at work within industries and the differences across industries. The relative contribution of continuing and entering/exiting firms to Total Factor Productivity growth is then assessed, using a recently proposed decomposition method that corrects for earlier methods’ failure to meet the property of monotonicity in their indicator of aggregate productivity change. This highlights the role of firm dynamics, and the forces of regulation, innovation and competition propelling them, as an indelible part of the bigger productivity improvement picture.production function, total factor productivity, semi-parametric estimation