Wednesday, December 06, 2017

Fast-growing job-generating companies harder to find

Just 9 per cent of Australian firms generate half of all net new jobs, fifteen per cent generate two thirds of net new sales.

Until now it's been hard to identify those highly-valuable so-called high-growth firms and find out what makes them special.

Now new cutting edge research from the Department of Industry has identified them and tracked them over time, using unique identifiers created from Tax Office business activity statements and pay as you go records. Linked to Bureau of Statistics survey data they paint a picture of what makes high-growth firms and what happens to them over time.

The most-important finding in the study released on Wednesday is that the 11,000 firms are typically younger than other firms (8 years old compared to 11) and much the same size and in most of the same industry sectors as other firms. They are not overwhelmingly high tech startups.

The firms whose high growth was in turnover spent more than others on research and development. The firms whose high growth was in employment spent less on research and development. While R&D had an ambiguous effect, the effect of innovation was clearly positive.

"Firms that are innovation-active are more likely to grow their revenue and profits, and they're more productive," said Department of Industry chief economist Mark Cully. "This association stands after controlling for a range of other factors, and we were also able to test and establish that the causality runs from innovation to growth."

"Introducing a new product or a marketing innovation had the greatest impact on a firm's revenue, boosting it by 3 and 4 percentage points. For high-growth firms these numbers were greater still. A focus on innovation as a business strategy increased their revenue growth by almost 10 percentage points, all else equal."

After four or so years, most high growth firms grow more slowly. The study concludes that high-growth firms are not a specific type, but "a phase that some firms go through during their life cycle".

Its most disturbing finding is that there are fewer such firms. It defines them as firms with an annual turnover of at least $75,000 employing at least five people with average annualised growth in sales or employment of more than 20 per cent a year over three years.

It says the number and persistence of high-growth firms has deteriorated since the global financial crisis, although in the last few years it seems to be stabilising. They are also growing more slowly.

Slower high growth rates.

Mr Cully said said it wasn't clear whether the slower growth was caused by the slower-growing economy or was a cause of it.

"It is higher in years when the economy is growing strongly, and lower in years when growth is weaker," he said. "The proportion of high-growth firms declined between 2005 and 2014, coinciding with the trend slowdown in Australian GDP growth after the global financial crisis."

In The Age and Sydney Morning Herald