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Investment and Productivity

As we will see in later sections, accumulation of physical capital through investment is a direct driver of productivity. The level of labour productivity (measured as the output per unit of labour employed) is affected by both the level of capital stock per worker and the level of multifactor productivity (MFP) — which measures the efficiency with which this labour and capital is combined to produce goods and services. Investment directly adds to the stock of capital that workers have available to them so they can produce more for a given level of labour input.

Investment also can have an indirect impact on labour productivity through spillover impacts on MFP. For example, through:

  • new equipment making possible changes in work practices and also assisting labour to gain new skills, increasing their efficiency
  • the creation of ‘knowledge spillovers’ as skilled personnel seek to understand and improve on technologies embodied in new capital equipment (PC 1999) and
  • embodied technical change not captured in the market price of new equipment.

The relative strengths of these direct and indirect effects are discussed later in the paper.

As well as its immediate impact on labour productivity, growth in MFP can also support capital deepening by raising the profitability of capital and providing an incentive to increase investment. The rate of MFP growth will reflect underlying factors such as institutional quality, geography, technology and the environment for enterprise and innovation.

At an economy-wide level, the allocation of capital to different economic activity (sectors) can also influence economy-wide productivity performance.

New Zealand’s Performance

Investment

New Zealand’s rate of investment has been increasing but many OECD countries are investing at a faster rate

Investment in fixed assets in New Zealand represents around 23 percent of GDP. This rate of investment has varied quite substantially over the four decades varying from a high of over 31 percent in 1975 to a low of just over 17 percent in 1991/1992 (Figure 1). The period since 1992 has seen a steady, but moderate increase in investment as a share of GDP.

Government investment contributed significantly to the relatively high rates of the measured investment in the 1970s and early 1980s. Government investment accounted for around 21% of total fixed investment (just under 5 percent of GDP) in 2007.

Figure 1: Components of Gross Fixed Capital Formation
Figure 1:  Components of Gross Fixed Capital Formation.
Source: OECD, Economic Outlook 82 Database

Investment in residential building accounts has been accounting for an increasing share of fixed capital formation — rising from around 19 percent of fixed investment in 1988 to around 28 percent in 2007 (figure 2). Investment in plant and machinery also represents a significant share of fixed investment (26 percent). As a share of GDP, New Zealand’s rate of investment in plant and machinery is higher than the OECD median (Treasury, Statistics NZ and MED 2007).

Figure 2: Gross Fixed Capital Formation by asset type year ended 2007
Figure 2:  Gross Fixed Capital Formation by asset type year ended 2007.
Source: Statistics New Zealand, National Accounts Data

Overall business investment (taking account of investment in other types of assets such as non-residential buildings and other construction, transport equipment, land improvements and intangible assets) represents around 11.5 percent of GDP. It has largely fluctuated around this level since the 1990s and has been consistently below the OECD median (Figure 3). This relatively flat performance suggests that the increase in total investment (as a share of GDP) has been driven predominantly by increases in investment in residential dwellings and government investment.

Figure 3: Business investment as a share of GDP 1970 to 2006
Figure 3:  Business investment as a share of GDP 1970 to 2006.
Source: OECD, Economic Outlook 82 Database
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