There’s a couple of ideas swirling around my head at the moment, stimulated by MOTU’s paper on New Zealand Frontier Firms, and Bob Jones’s observation here:
That fate may still await us if we don’t open the immigration doors. The average age of European kiwis is 40, that is past an age of initiating new enterprises.
(emphasis mine)
Frontiers Firms as Dynamic Engines of Innovation and Growth
“Frontier firms” are New Zealand’s economic “best of the best”: they are our most productive producers; they have our best managers; they employ our brightest and smartest, and they carve out a place on the world economic stage, not because they’re New Zealand, but because they are simply the best.
They:
- Employ more than 12 people – they’re not your mum and dad engineering firm.
- Are mainly labour-intensive firms within service industries, so not a monopoly exploiting its capital to generate value. They’ve got around $4,900 worth of physical per unit of labour.
- Frontier firms have fully up-to-date capital and IT: they are at the “bleeding edge” of the available technology for their industry, and perceive less competitor threat compared to non-frontier firms.
- Attract more skilled workers and pay higher wage premiums. Their average worker skill level is higher, and they pay higher wages than equivalent workers in non-frontier firms.
- MOTU found frontier firms share the benefits of their higher productivity. This isn’t a story of union forces ripping gains from business owners who exploit labour as griss to its capitalist mill. Frontier firms recognise the value of their staff and reward them appropriately. Frontier firms have better human resource management practices than non-frontier firms.
- Frontier firms are more likely to be exporters and have higher export intensity than non-frontier firms.
- Frontier firms are significantly more likely to be foreign-owned and to have foreign-ownership stakes in overseas ventures (outward direct investment, ODI).
Most importantly,
- Frontier firms are marginally younger than non-frontier firms, and are more likely to be in the biggest of our cities.
- Being at the frontier this year does not guarantee your place at the frontier next year – the frontier is dynamic. The worst performing firms in one year are more likely to remain in the worst performing category in the following year. But only 47-50% of firms at the frontier will still be there next year. Conversely, a significant proportion of firms from slightly off the frontier this year will move up to the frontier the next year. Fortunes for the innovate change very quickly, but vary very slowly for the laggards.
- Their spend more on research and development it 66% higher than non-frontier firms, but they don’t always get it right. Reported innovation outcomes are, on average, weaker for frontier firms across all metrics: they try more different things, and those more different things are not more successful. But they try more things more often then their non-frontier counterparts. Being at the frontier requires greater investment in order to innovate successfully. Non-frontier firms have the benefit of being able to follow their successes and by-pass the failures.
Sources of Entrepreneurial Finance, age and Housing Inequality
The MOTU paper didn’t talk about how frontier firms are funded, nor how they develop. Clearly, they’re not one-man bands, and have already a head of financial steam under them.
Every big company started as a small company. And most small companies are notoriously under-capitalised. MOTU don’t talk about it, but its probably no coincidence that frontier firms are service-based, and labour-intensive: no starting company can afford to fund a hefty capital bill, and the skillled labour employed is the owner who perceives they’ve got the right skills and have the entrepreneurial bent to back themselves.
And these people are under 40 years old.
From experience, I was a 27 year old graduate who, together with my ex-partner, backed ourselves into a business, and came across the lack of financing. Fortunately, at that time, we owned a house, which the banks recognised as equity they could lend against. When one business venture, fell down, we licked our wounds and put five figures of loss onto the mortgage, and started again.
We could do that because we were young, and had the time-assets to fail: failing at a young age is significantly different from failing at an older age. And we had a house whose mortgage operated to smooth our risk over time.
That asset buffer does not exist for the Millennials and Generation Z’s. They have the time-profile to take risk, but without the asset buffer, how are they going to generate New Zealand’s future frontier firms?!?