Creating jobs: new or existing businesses?

Business attraction is a key focus of regional economic development. The rationale is that new businesses create jobs, which in turn support wellbeing in local communities. But I am often left wondering whether this focus makes sense in the real world.

I decided to test whether new or existing businesses are the engine for jobs growth in regional New Zealand. From an economic development perspective, these insights can help inform the extent to which resources should be focused on business attraction or building up resilience of existing enterprises.

The answer to my investigation is that both economic development roles matter. New businesses generate a steady stream of jobs across all parts of the country, but these gains can be quickly eroded when existing businesses backpedal.

Existing businesses are a frequent drag

The following graph shows the total number of jobs created by businesses each year, split into those from new and those from existing businesses.

Immediately obvious is that new businesses consistently create jobs. Existing businesses, on the other hand, are a frequent detractor from overall job creation.

On average over the ten years to 2018, total jobs in businesses rose by 1.2%pa. New businesses accounted for a 1.9%pa percentage point contribution to this growth, while existing businesses detracted 0.7%pa from the result.

Since 2005 there were only two years, 2009 and 2010 following the Global Financial Crisis, where total jobs fell. However, there were an additional five years where existing businesses shed workers. In these five years, total jobs would have gone backwards had it not been for new businesses adding employees to the workforce.

These findings are no surprise when one considers just how cut-throat the business world is. Approximately 10% of all businesses fail each year and only 26% of enterprises that were born in 2008, were still in operation 10 years later in 2018.

Building up resilience is key

At face value these observations could lead someone to conclude that economic development resources are best directed at startups.

But such a conclusion would be short-sighted.

Although startups are indeed an important part of the jobs growth engine and must be supported, excessive swings in the fortunes of existing business are the more detrimental factor during bad times.

Some natural pruning is warranted to weed out business models that are out-of-sync with longer-term trends in supply and demand, but there are some businesses that fail because they have insufficient resilience to weather short-term storms.

This need to build up resilience provides relevancy to the work that economic development practitioners do with existing enterprises to help them become more cost efficient, productive, competitive, and sustainably financed.

Casting a spotlight at the best performing local economies

Casting a spotlight across New Zealand sheds some interesting findings.

Over the three years to 2018, the top ten performing territorial authorities in terms of jobs creation all had better-than-average performances from existing enterprises.

But only five of the top ten had startup scenes that outperformed the national average in terms of jobs creation. These findings are summarised in the table below.

To single out an example, it is no surprise to see Queenstown-Lakes at the top of the list of job creation. But scratching beneath the surface still raises some concerns. Diving deeper into the data shows that Queenstown’s employment growth, across both new and existing enterprises, largely centred on construction and accommodation and food services. The resilience of these businesses will be questionable during an inevitable future ebb in tourism and real estate.

Turning our focus to the bottom areas

Questions regarding the resilience of existing businesses are again raised when the spotlight is put on the worst performing parts of New Zealand for jobs creation.

Over the three years to 2018, the worst performing territorial authorities were all dragged down by existing enterprises shedding jobs heavily.

Immediately evident when I did some digging into the structure of these economies was that these areas all had a high degree of concentration on one or two major industries. For example, Buller has suffered heavily from low prices for coal pulling down the mining sector and associated support services.

Focussing on enabling resilience will help in some situations in these areas, but at times the hollowing out of an industry is being dictated by a broader macro trend that cannot be counteracted. In these situations, investment to support and enable entrepreneurial activity to flourish in other industries may help diversify the local economy and build resilience for the future. These are the rationale that the Provincial Growth Fund has at its core to justify investment in the regions.

Conclusions for economic development practitioners

This analysis provides a strong evidence-based justification for economic development’s twin roles of supporting and assisting both new and existing businesses.

New businesses are a consistent creator of jobs, but these gains can be quickly lost when existing businesses backpedal. At a regional and district level there is significant divergence between the relative contributions of each of these sources of jobs creation.

My discussions with economic development practitioners have highlighted that there is a strong appetite to learn more about how jobs are created in local economies. Practitioners have told me that such insight can not only provide an evidence basis for planning and prioritising projects, but can help with stakeholder engagement to overcome misconceptions about the role of economic development.

Research is available for your local area

In response to this demand we will be producing research reports that analyse the contributions of new and existing businesses to jobs growth to a territorial authority level of detail. The reports will also focus on how these twin avenues of jobs creation differ between industries and what that means for wages and the material wellbeing of local residents. These trends matter for attracting people to your local area. After all economic development is about people and making a place great to live, work and do business.

Please contact me if your organisation would like to find out more about purchasing a report for your local area. The reports will cover recent data to 2019 and can also be paired with a workshop of the findings.