Firm Turnover and Productivity Growth in Selected Canadian Services Industries, 2000 to 2007

Abstract

The nature of the competitive process that causes a reallocation of market shares within an industry contributes to aggregate productivity growth. This paper extends our understanding of industry differences in the competitive process by examining firm turnover and productivity growth in various services industries in Canada and situating them relative to retailing and manufacturing, two industries that have been the focus of these studies in the past. Seven industries in the services sector, namely wholesale trade, transportation and warehousing, air transportation, truck transportation, broadcasting and telecommunications, business services and financial services, are examined. The effectiveness of entry (measured as market share captured) differs considerably more across industries than does its intensity (measured in terms of the percentage of new firms experimenting with entry at any point in time). Business services and truck transportation have the highest effective entry rates. The failure process within entrants is similar across industries, but in industries where entrants are relatively large at birth, the penalty for entry at suboptimal size or productivity is higher. The reallocation process of market share varies across industries, ranging from shifts between incumbents solely in broadcasting and telecommunications, to large gains by entrants at the expense of incumbents in business services and truck transportation. However, firm turnover contributes positively to productivity growth in all industries, with the turnover due to entry and exit being the most important contributor to productivity growth. The industries that most resemble retail in terms of relative importance of entry and its contribution to productivity growth are business services and truck transportation.