This report was commissioned by the Productivity Commission to understand the key characteristics of firms at New Zealand’s productivity frontier through the use of Stats NZ’s Longitudinal Business Database. Theory and international evidence suggest that firms at the New Zealand productivity frontier may be especially important for the diffusion of knowledge from the global productivity frontier, acting as a conduit for new technologies and ideas to flow into the domestic economy.

Key findings:

• Frontier firms are disproportionately important in the economy. While constituting only 8% of firms, frontier firms account for 13% of total labour input, 27% of aggregate gross output, 29% of value-added (gross output minus intermediate consumption) and 22% of aggregate capital services
• They have much higher levels of labour productivity than non-frontier firms. On average, frontier firms’ value added per worker is almost double that of the second most productive group of firms (those in the second decile) and is nine times as productive as those firms in the bottom 10% of the productivity distribution, ranked by MFP 
• They have had low labour productivity growth over the period, yet the combination of their high productivity levels and input share has meant that they have made a significant contribution to aggregate productivity growth since 2005. If, for example, frontier firms had experienced no increase in labour productivity or in labour inputs over the period, the annual growth rate in labour productivity would have fallen from 0.83% to 0.59%
• They are marginally younger, employ more skilled workers and pay a higher firm wage premium than non-frontier firms. They are also more likely to be in most major urban areas such as Auckland.