Study links firms' productivity with population density and R&D spending

Department of Labour research shows a positive relationship between population density and expenditure on research and development, and business productivity.

The relationship is stronger for small firms and new firms.

A research report ‘Productivity and Local Workforce Composition’ investigates the relationship between the productivity of firms and the characteristics of the local population where the firm is located. It is part of a series of research projects on the economic impacts of immigration.
The research was based on annual firm-level production data covering a large proportion of the New Zealand economy and area-level workforce characteristics obtained from population censuses.

The research focused on three characteristics of the local population: the proportions that are highly qualified, newly arrived in the area, and foreign-born.
It shows that:

Population density has a clear positive relationship with productivity, for example a 10 percent higher density is associated with productivity that is 0.1 percent higher.
Firms operating in areas where the workforce is relatively highly qualified have higher productivity than similar firms located in areas with a smaller proportion of highly qualified workers. There are several mechanisms that could drive this finding, including less scarcity of skilled labour for firms to compete for, or the knowledge transfers between skilled workers increasing productivity.
The benefits of a higher skilled local workforce are even greater for firms that:

use a high proportion of high skilled labour
have a higher than average R&D spend, e.g. where more than 0.5 percent of the industry’s total expenditure is on R&D

The benefits are even greater when these two features are present.
Overall, the only relationship between the population that is new to the area and productivity is for firms that produce goods and services for local consumption.
Productivity advantages associated with new people may stem from their effects as consumers rather than as workers.
The findings from this study may be used to inform the design and targeting of potential spatially-oriented policies.

Papers from the Economic Impacts of Immigration Working Paper Series can be obtained online.