Study: Firm turnover and productivity growth in the retail trade sector

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Competition arising from firm turnover has been responsible for almost all the productivity growth in Canada's retail trade sector. The annual rate of labour productivity growth in retailing was 2.4% from 1984 to 2007, while it was only 1.3% in the business sector as a whole.

Turnover occurs as some firms gain market share and others lose it. Some of this turnover is a result of the entry of new firms and the exit of existing firms. Another part arises from the growth and decline in continuing firms.

During the 1980s and 1990s, the retail trade sector underwent considerably more firm turnover than the manufacturing sector, and more of this turnover came from firms that entered and left.

The restructuring due to firm turnover in retailing that was associated with the entry of big box stores into Canada, shifted output and input from less productive exiting firms and incumbent firms that shrank, to more productive entering firms and existing firms that expanded.

On average, firms that entered the retail trade sector from 1984 and 1998 had labour and multifactor productivity that were about 20% higher than the firms that exited during this 15-year period.

The retail trade sector has had high rates of firm turnover. About 60% of firms present in 1984 were no longer in existence by 1998. At the outset, exiting firms accounted for 25% of total sales and 30% of total employment.

About 70% of firms that were in operation in 1998 were new firms that had entered the retail trade sector during the previous 15 years. They accounted for 42% of total sales and 41% of total employment.

Firm entry and exit accounted for 70% of labour productivity growth in the retail trade sector. Restructuring and firm turnover among surviving firms accounted for 35% of overall productivity growth.

Without this competitive restructuring, overall productivity growth in the retail trade sector would have been negative because the productivity of an average incumbent declined slightly over the period.

The importance of restructuring in retail trade stands in sharp contrast to its effect on the Canadian manufacturing sector, where entry and exit and firm turnover accounted for only about 50% of labour productivity growth over a 10-year time period on average.

In the manufacturing sector, only part of overall productivity growth came from firm turnover and the reallocation of resources from the less to the more productive. The remainder was a result of internal, organic productivity growth taking place across all producers on average.

Within the retail trade sector, foreign-controlled firms made a substantial contribution to aggregate productivity growth.

Foreign-controlled firms contributed 30% of labour productivity growth and 45% of multifactor productivity growth in retail trade during the study period. This was mainly a result of the entry of foreign-controlled firms and the expansion of more productive foreign-controlled existing firms.

The contribution of foreign-controlled firms to productivity growth was disproportionately larger than their contribution to sales.

The research paper "Firm turnover and productivity growth in the Canadian retail trade sector" is now available as part of The Economic Analysis Research Paper Series (11F0027MWE2008053, free), from the Analytical studies module of our website.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Wulong Gu (613-951-0754), Micro-economic Analysis Division.