Competition in small markets

By Eric Crampton 13/09/2013

Another for the “New Zealand’s Fixed Costs Matter” file: Aaron Schiff posts on the relative lack of competition in New Zealand. Where inefficient firms are driven from the market in other places, New Zealand has a long tail of pretty unproductive outfits.

Roger Procter has dug into the stats a bit deeper and found that some New Zealand firms have very high productivity but there is a very long tail of unproductive firms that are able to survive.
He notes that the ratio of the productivity of the firm at the 90th percentile (i.e. near the top) to the 10th percentile (bottom) of the productivity distribution in New Zealand industries is around nine.
In other words, a firm that is nine times less productive than the best in the same industry can survive in New Zealand. In Denmark, for example, the ratio is reported to be around 1.6 to 3.5. Danish firms that can’t achieve at least a quarter of the productivity of the best firms get killed off quickly.
Roger argues, and I agree, that lack of competition is a major reason for this. Competition forces firms to increase productivity and kills off those that don’t.

Aaron agrees with Procter’s assessment that New Zealand’s low level of international trade hurts things, then makes a rather interesting argument for import-led growth.

We’re stuck in a low-competition, low-productivity, low-trade equilibrium. New Zealand domestic markets are too small to support enough intense competition to get us out of this state. Exporting is hard work and not enough firms are motivated (or forced) to drag the economy up the productivity mountain.
On the other hand, if low cost imports from productive foreign firms start coming in, maybe NZ firms will be forced to improve their game, or get killed off.
I realise this is a harsh “stick” type strategy, rather than an export “carrot”. Exports create jobs and imports can destroy them, at least temporarily. Maybe I’m getting soft in my old age but there might need to be assistance for some workers during the transition. But given the dire productivity stats, maybe a strong shock to the system is required.

There’s not a lot that we can do to make New Zealand even more open to imports: tariffs are very low, GST rules around imports currently make sense, and we see no need for the New Zealand government to enforce at the border any exclusive dealing arrangements that foreign manufacturers have seen fit to make with New Zealand retailers. But getting rid of our ability to run parallel importing, or doing dumb things imposing GST on low-value imports, or forcing a policy preference for New Zealand Made products, would do harm.