The Treasury

Global Navigation

Personal tools

Treasury
Publication

Putting Productivity First - TPRP 08/01

Creating an entrepreneurial culture

Like all start-up enterprises, the New Zealand company, Icebreaker started with an idea, in this case, that merino wool could be used in outdoor clothing. But the scientific breakthrough was not enough to create worldwide success. Icebreaker went on to create a strong brand name, enter global markets, forge relationships with other leading manufacturers around the world, develop new products and market the brand successfully in over 30 countries, selling in 2000 stores.

This is just one example of a firm starting up, seeking out new business opportunities, taking some risks and, eventually, providing the vision and motivation for others to do the same. However, enterprise is broader than just start-ups. The individuals that identify new working practices or seek out new investment opportunities are also entrepreneurs, even if they work in large multinational organisations.

New Zealand’s enterprise performance

New Zealand is an easy place to do business…

New Zealand scores consistently well in providing the conditions for high levels of entrepreneurship. The World Bank ranks New Zealand as one of the best countries in the world for ease of doing business. In 2008 New Zealand is ranked second overall, scoring particularly well on ease of starting a business, dealing with licenses, registering property, getting credit and protecting investors.[12] The World Economic Forum’s Global Competitiveness Report ranks New Zealand 24th out of 131 countries, ranking highly in health and primary education, financial market sophistication, labour market efficiency, institutions and goods market efficiency.[13]

…and has a strong competitive environment that helps to drive entrepreneurship

A competitive environment drives improved firm performance. It creates the incentives for innovation and entrepreneurship, rewards those who take risks and demands continuous improvement from firms in order that they remain competitive. It provides the impetus for all productivity enhancing actions. The potential for new entrants into product markets, competition for corporate control and the need to access capital markets for sources of funds create an increased need for continual firm improvement and help drive increased productivity.

Overall, product markets work well and New Zealand has put in place well designed laws and institutions that provide a solid framework to underpin competition and promote efficiency. On measures of competition focused on barriers to entry, New Zealand compares well, ranking 7th out of 24 OECD countries for promoting competition.[14] However, a number of other smaller OECD countries, such as Demark, Ireland and Iceland, have improved more rapidly and now rate more favourably. Whilst barriers to entry are low, some sectors are dominated by a small number of firms. This is in part due to New Zealand’s small domestic market and distance from potential competitors. Transport and information costs act like tariff barriers which, in conjunction with a small market, provide shelter from competition for some firms.

The competitive framework for corporate control is strong and New Zealand is open to flows of foreign investment. As a percentage of GDP, the stock of FDI in New Zealand was higher than Australia, the UK and the United States in 2004.[15] However, the corporate structures of a few large and economically significant firms may be sheltering them from capital and corporate control market pressures, to varying degrees, due to firm or sector specific circumstances. These protections diminish competition and reduce the incentives for managers to improve the performance of firms.

New Zealand has a strong entrepreneurial spirit

The business environment provides the basis for a strong entrepreneurial culture: the number of small firms and the rate of business start-up are comparable, or slightly greater, than in other OECD countries. New Zealand has a higher than average level of creative destruction: average annual firm turnover is 24.1 per cent, higher, but not considerably so, than the USA, Canada and the UK.[16] Firm turnover adds positively to productivity growth; firms that enter and survive beyond their second year achieve rapid productivity growth, while firms that exit tend to have declining productivity and below average productivity at the point of exit.[17] Creative destruction is a productivity-enhancing force, but it is also important to consider any potential barriers to growth that could be increasing the level of firm exit and constraining the growth of firms.

Although there are a number of positives for New Zealand’s entrepreneurial climate, some measures suggest that there is room for improvement. Whilst further research is required, there are indications that productivity performance of larger firms may be poor as measured by value added and return on assets.[18] This could be due to economic geography reasons, with a small market unable to provide the level of competition or benefits of scale required by the largest firms, or by a shortage of managerial talent, or frictions in financial markets. For instance, the average number of employees in firms with more than 500 employees is 2532 in the UK, 3321 in the USA and 1594 in New Zealand, suggesting that the size of the local market combined with barriers to internationalising are inhibiting large firms from achieving growth.[19]

Policy Considerations

Skilled labour, efficient capital markets and a fertile research base provide the means to take advantage of a number of entrepreneurial opportunities

To build on this success and further promote entrepreneurship, New Zealand must continue to promote a climate that creates positive attitudes to risk and fosters the skills and vision that entrepreneurs require in order to identify potential opportunities. A skilled labour force, a fertile research base and deep financial markets provide entrepreneurs with the resources they require to realise the opportunities they have identified. A stable macro economy with a strong competition framework provides the conditions for entrepreneurs to invest with certainty and introduces the rigour of the market to provide the incentives to perform. The tax, regulation and industrial policy settings can reward entrepreneurship and provide the support and flexibility that entrepreneurial activity requires.

A strong competitive environment will help to drive firm performance

Given New Zealand’s small market size and geographical isolation, continued consideration should be given to the level of competition faced by New Zealand firms. Barriers to competition should be maintained at low levels and promoting competition should remain an important consideration in formulating policies that impact on the level of competition in both product markets and markets for corporate control. Policies that support the integration of New Zealand's domestic markets for goods, services and factors of production with international markets will be particularly important.

A sound tax system is important for the overall quality of the business environment

The tax system can affect productivity by altering the decisions that individuals and companies make, many of which are vital in creating an attractive business environment for both domestic and international firms. These decisions can include whether to acquire skills, whether to invest in physical capital and research and development, or whether to engage in other productivity enhancing activities. Tax changes that enhance the incentives to acquire skills and invest will improve the business environment and provide the incentives to undertake a broad range of entrepreneurial activities.

Assessment of the stock and flow of regulation can help maintain a regulatory environment that is fit for purpose

Regulation affects the availability of business opportunities, the costs of pursuing them, and the returns from doing so. New Zealand is generally regarded as having low compliance costs and low barriers to enterprise. In some areas, for example, telecommunications and energy markets, New Zealand’s regulations are relatively new and evolving rapidly, and as such, their performance may be expected to develop as both regulators and industry build experience.

Good regulatory management requires that the regulatory environment improves over time and remains fit for purpose. This requires not only providing quality assurance on the flow of new regulation, but also systematically reviewing the existing stock of regulation. Regulation should provide a genuine benefit to society, where the benefits of regulating exceed the costs and no alternative method offers a better way of achieving the desired outcome.

Notes

  • [12]Doing Business 2008, The World Bank.
  • [13]The Global Competitiveness Report 2007-08, World Economic Forum.
  • [14]Conway, P., V. Janod and G. Nicoletti, “Product Market Regulation in OECD Countries, 1998 to 2003” 2005, OECD Economics Department Working Paper No 419.
  • [15]OECD Factbook, 2007.
  • [16]Mills, Duncan, and Jason Timmins, “Firm Dynamics in New Zealand: A Comparative Analysis with OECD Countries”, New Zealand Treasury Working Paper 04/11.
  • [17]Law, David, and Nathan McLellan, “The Contributions from Firm Entry, Exit and Continuation to Labour Productivity Growth in New Zealand”, New Zealand Treasury Working Paper 05/01.
  • [18]Simmons, Geoff, “The Impact of Scale and Remoteness on New Zealand’s Industrial Structure and Firm Performance” in Jacques Poot, ed., On the Edge of the Global Economy. Cheltenham, UK and Northampton, MA, USA: Edward Elgar, 2004.
  • [19]Mills, Duncan, and Jason Timmins, “Firm Dynamics in New Zealand: A Comparative Analysis with OECD Countries”, New Zealand Treasury Working Paper 04/11
Page top