Study: Firm turnover and productivity growth in services industries

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Between 2000 and 2007, the nature of firm turnover varied across services industries as did its impact on the growth of productivity, a new study has found.

During this seven-year period, firm turnover contributed positively to the growth of productivity in most industries. Turnover that was a result of firms entering and exiting the industry was the most important contributor to the growth of productivity.

The study examined the relationship between firm turnover and productivity growth in a range of services industries. These included wholesale trade; transportation and warehousing; air transportation; truck transportation; broadcasting and telecommunications; business services and financial services.

Firm turnover occurs as market share is shifted from the less successful to the more successful firms in each industry. It can result from the entry of new firms and the exit of others; it may also be a result of shifts of market share between incumbent firms that are either growing or declining.

In industries where entry conditions facilitated higher entry, the entry-and-exit process that replaced less productive exiters with more productive entrants contributed substantially to overall productivity growth.

Between 2000 and 2007, there were large differences across the service sector in terms of the proportion of entry and exit. Business services and trucking had the highest effective entry rates.

The process of reallocating market share also varied across industries. In 2007, the market share gained by firms that entered since 2000 was highest in business service (+29.6%) and trucking (+22.8%), while it was less than 10% in the other service industries. Broadcasting gained 2.4% in market share, the slowest increase.

Turnover within incumbent firms in each industry also contributed to productivity growth, but generally less so than entries and exits. The average market share gained and lost by incumbents between 2000 and 2007 ranged from 23% in business services to 15% in financial services.

Industries with higher turnover from entry and exit generally had higher turnover within the incumbent sector, although there were smaller differences across industries in the market share turnover that occurred within incumbents.

While entry processes were quite different across industries, there was much greater similarity in the exit rates across industries. In addition, the failure process within entrants was similar across industries.

The percentage of entrants remaining after six years was about the same in the various service industries studied. Failure, which is endemic to the experimentation associated with entry, is quite similar across industries.

Note: This study used a special longitudinal data base derived from administrative records that followed corporate entities from 2000 to 2007. Market share was derived from company revenue, while employment was derived from wage data divided by an average wage rate. Productivity was defined as sales per employee.

The research paper "Firm turnover and productivity growth in selected Canadian services industries, 2000 to 2007" is now available as part of the Economic Analysis (EA) Research Paper Series (11F0027M2011072, free). From the Key resource module of our website, choose Publications.

Similar studies from the Economic Analysis Division are available at (www.statcan.gc.ca/economicanalysis).

For more information, or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (613-951-8588), Economic Analysis Division.