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.

Notes

John McMillan, Graduate School of Business, Stanford University, Stanford, CA 94305–5015, USA, email: [email protected]

I thank Robert Buckle, Tim Hazledine, Robert Joss, David Skilling, Bryce Wilkinson and Mark Wright for comments. I acknowledge support from the Center for Global Business and the Economy at the Stanford Graduate School of Business. An earlier version was presented at the workshop on “Productivity: Performance, Prospects and Policies,” sponsored by the Treasury, the Reserve Bank and the Ministry of Economic Development, Wellington, July 28–29, 2004.