Utopia, you are standing in it!

It is claimed that New Zealand lacks large firms, that “New Zealand has one very large firm – Fonterra – and a long tale of large to mid-sized firms”. The percentage of the workforce employed by large firms in New Zealand is in the middle of the pack. It is not in any way an outlier.

Source: Entrepreneurship at a Glance 2015 – OECD 2015.

A hurdle to cross-national comparisons of firm size distribution is the number of small firms will fall and the number of large firms will rise with increases in real wages (Lucas 1978; Poschke 2013; Gollin 2008; Eeckhout and Jovanovic 2012). Nations that are more productive than New Zealand have higher wages because they have accumulated more capital per worker. One consequence of more capital per worker is real wages increase at a faster rate than profits (Gollin 2008; Eeckhout and Jovanovic 2012). For example, the rate of return on capital was stable over the 20^th century while real wages increased many fold (Jones and Romer 2010).

Higher wages reduces the supply of entrepreneurs and increases the average size of firms because entrepreneurship becomes a less attractive occupational choice (Lucas 1978; Gollin 2008; Eeckhout and Jovanovic 2012). For example, in the mid-20^th century, many graduates who were not teachers were self-employed professionals. With an expanding division of labour because of economic growth, many well-paid jobs and new occupations emerged for talented people in white-collar employment.

OECD countries richer than New Zealand should have less self-employment and more firms that are large because paid employment is an increasingly better-rewarded career option for their high skilled workers. The U.S. had the second lowest share of self-employed workers (7 percent) in the OECD in 2010 – the latest data – which is less than half the rate of New Zealand self-employment (16.5 percent) in 2011 (OECD 2013). The Australian self-employment rate was 11.6 per cent in 2010 (OECD 2013).

A companion reason for larger average firm sizes in countries richer than New Zealand is more capital-intensive production can prosper in larger corporate hierarchies than can labour-intensive production (Lucas 1978; Becker and Murphy 1992; Poschke 2011; Eeckhout and Jovanovic 2012).

The more able entrepreneurs can run larger firms with bigger spans of control in richer countries because their employees can profitably use more capital per worker with less supervision. The diseconomies of scale to management and entrepreneurship should rise at a faster rate in less technological advanced countries such as New Zealand because they are more labour intensive economies (Lucas 1978; Becker and Murphy 1992; Poschke 2011; Eeckhout and Jovanovic 2012).

Importantly, the more able entrepreneurs benefit most from introducing frontier technologies because they can deal more easily with their increased complexity and more uncertain prospects (Poschke 2011; Lazear 2005; Shultz 1975; 1980). Growing technological complexity reduces the supply of entrepreneurs because it takes longer to acquire the necessary balance of skills and experience needed to lead a firm (Lazear 2005; Otani 1996).

The more marginal entrepreneurs will switch to be employees as technology advances so the average size of firms will increase. The entrepreneurs that remain in business will be the most able, more skilled and more experienced entrepreneurs and will be more capable of running larger firms that pioneer complex, frontier technologies (Poschke 2011; Lazear 2005, Otani 1996; Lucas 1978). Countries more technologically advanced than New Zealand will have both larger firms and less self-employment because of growing technological complexity.

The greater is the exposure to foreign competition, the smaller is the fraction of self-employed and small firms in a country (Melitz 2003; Díez and Ozdagli 2012). More foreign competition increases wages because of lower prices, which makes self-employment less lucrative. More exporting favours larger firms both because of the fixed costs of entering export markets and because the stiffer competition will weed-out the lower ability entrepreneurs who run the smaller firms (Melitz 2003; Díez and Ozdagli 2012). Countries that export more than New Zealand also will have larger firms.

Average firm sizes are often larger is richer countries because of their high labour productivity and higher wages rather than labour productivity is low in New Zealand because average firm sizes are smaller. Other factors can countermand the effects that occupational choice, frontier technologies, exporting and capital intensity have to increase the average size of firms as real wages rise. This makes comparisons of firm size distributions are even more fraught with institutional complexities.

Tax and regulatory policies appear to reduce the average size of firms in many EU member states to levels that are similar to New Zealand. A nuance in international comparisons of firm size distributions is the EU is less likely to have large firms in its labour intensive sectors. Employment protection laws, product market and land use regulation and in particular, high taxes stifled the growth of labour intensive services sectors in the continental EU (Bertrand and Kramatz 2002; Bassanini, Nunziata and Venn 2009; Rogerson 2008).

EU firms are a biased sample. Their firms are more capital intensive with fewer employees than otherwise because labour is so expensive to hire in the EU. Small and medium sized firms can struggle to grow in much of the EU because of regulatory burdens that phase in with firm size (Garicano, Lelarge and Van Reenen 2012; Hobijn and Sahin 2013; Rubini, Desmet, Piguillem and Crespo 2012). Average firm sizes are 40 percent smaller in Spain and Italy than in Germany. Obstacles to firm growth originate in product, labour, technology and financial and the binding constraints differ from one EU member state to another (Rubini, Desmet, Piguillem and Crespo 2012).

Bartelsman, Haltiwanger, and Scarpetta (2009) found that the USA had a very high proportion of above-average sized firms. Western Europe had smaller firms in most industries with one of the exceptions in low-tech UK industries. Apart from the USA, they could not map differences in firm size against the overall size of the country, the technology levels of an industry, or its degree of maturity.

Another confounding factor is the average number of employees in firms with 500 or more employees in France and New Zealand is similar: 1667 and 1593 respectively (Mills and Timmins 2004; Hobijn and Sahin forthcoming). Preferring the UK over France as the benchmark for very large firms calls for a detailed analysis of Anglo-French institutional differences. This defeats the very purpose of the simple statistical comparisons undertaken to date. These simple cross-national statistical comparisons presuppose relatively common economic drivers and institutional backgrounds. If that is not so, a detailed institutional analysis is required before cross-national comparisons are possible. Bartelsman, Haltiwanger, and Scarpetta (2009) suggest that cross-national comparisons of firm dynamics and firm size distribution are subject to substantial definitional and measurement problems and no one measure will capture properly the many institutional and regulatory differences.

Average firm sizes in the USA and UK may be larger because of fewer tax and regulatory policies that limit business growth. Bartelsman, Scarpetta and Schivardi (2005) found that new entrants in the U.S. started on a smaller scale than in Europe but grew at a much higher rate. This willingness to experiment on a smaller scale was worth the risk because the payoff was much larger in terms of growth in the more flexible U.S. markets.