Industry Mix, Plant Turnover and Productivity Growth: A Case Study of the Transportation Equipment Industry in Canada

Article excerpt

THE TRANSPORTATION EQUIPMENT manufacturing industry is one of the few Canadian industries that is as productive as its U.S. counterpart. Van Biesebroeck (2007) finds that in 1994-2004, Canadian automobile assembly plants required about 1.5 less hours to assemble a vehicle than U.S. assembly plants. In addition, the transportation equipment manufacturing industry experienced high productivity growth in the previous two decades, and had contributed significantly to aggregate productivity growth in Canada in the 1995-2000 period. Motor vehicles, for example, contributed the third most to aggregate multifactor productivity (MFP) growth in that period, after finance, insurance and real estate (FIRE) and retail trade (Ho, Rao and Tang, 2004).

However, the productivity performance in the Canadian transportation equipment industry has weakened in recent years. According to Statistics Canada, labour productivity growth in this industry has declined from 4.5 per cent per year in 1981-2000 to 1.7 per cent per year in 2000-2007. (2) The industry alone accounted for 29.3 per cent of the productivity growth slowdown (3.6 percentage points per year) in the Canadian manufacturing sector between 1997-2000 and 2000-2007 (Sharpe and Thomson, 2010). Compared to its U.S. counterpart, its productivity advantage declined from 10.7 per cent in 2002 to 1.7 per cent in 2007 (Tang, Rao and Li, 2010). (3)

Is an unfavourable structural shift within this industry responsible for Canada's poor productivity growth in this industry over time as well as relative to its U.S. counterpart? This article investigates whether the restructuring and the reallocation of output and resources within this industry contributed to its productivity growth slowdown. The restructuring and/or reallocation includes the composition change of constituent industries (or industry mix), the entry of new firms and the exit of existing firms, and/or the growth and decline in continuing firms. These components of the restructuring/reallocation process are examined using data from the Annual Survey of Manufactures (ASM) from Statistics Canada for Canada and from the U.S. Census Bureau for the United States.

Productivity growth at the industry level is ultimately driven by firm growth and the competitive process that constantly shifts market shares from the exiting firms to the entrants and from declining firms to those firms in growth. Baldwin and Gu (2004) show the main source of productivity growth in most manufacturing industries is the competitive process or plant turnover that shifts output shares toward the plants that are more productive.

This article first examines whether unfavourable structural shifts in the transportation equipment manufacturing in the 2000s contribute to Canada's weaker productivity growth in this industry over time as well as relative to its U.S. counterpart. It then traces the decline in the industry's productivity growth into its sources at the plant level. For the latter exercise, we address two questions: (a) has slower productivity growth at the plant level been responsible for the slower industry productivity and (b) has there been a change in reallocation and the entry and exit process that contributed to the slower productivity growth? In addressing these questions, this article focuses on labour productivity (due to data limitations). (4)

The structure of this paper is as follows. In the first section, we present the analytical framework for the analysis of the impacts of industry structural shift and plant dynamics on labour productivity growth. In section two, we discuss data and measurement issues. In section three we present the empirical findings on the effect of industry mix. In section four, we present findings for plant turnover on the productivity growth of transport equipment manufacturing. The final section summarizes the key findings and discusses possible reasons for the productivity growth slowdown in this industry. …