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Enterprise and Productivity: Harnessing Competitive Forces - TPRP 08/04

What does the level of internationalisation say about New Zealand’s business environment?

Export growth has been weak, few firms export and they tend to be concentrated in agricultural sectors

While the distribution of firms broadly matches a number of OECD countries, there are a low number of firms that internationalise by exporting. In 2006, New Zealand’s export-to-GDP ratio was 28.9 per cent. While this is similar to the United Kingdom and greater than the USA and Australia, it is low given the size of New Zealand’s economy. The smaller European countries have export to GDP ratios of two to five times greater than New Zealand (OECD, 2008b). However, many countries achieve a high absolute quantity of exports by importing goods to which they add comparatively less value before exporting them. Evidence suggests that exports in New Zealand have a higher value added component. In other words, while New Zealand exports less, the income generated from a unit of exports is higher (Claus and Li, 2003).

OECD countries have been rapidly expanding the extent to which they export goods and services, but the growth rate of exports-to-GDP in New Zealand has been weak. The majority of growth in exports comes from firms that are established exporters, exporting existing products, with new or intermittent exporters contributing less to the growth rate. A small number of firms account for the majority of exports and they are concentrated in the agricultural sector; 90 per cent of export value is generated by 20 per cent of exporters. There has been a recent increase in the number of firms exporting but they export only a small amount and do not export in every year. Broadly, the export data suggest that New Zealand has experienced slow growth in exports, with small numbers of firms exporting consistently and a high level of concentration of exports in the agricultural sector.[2]

New Zealand’s size and distance are important…

Market size and geographical distance are important. Companies in the European Union have access to over 400 million consumers and companies in the USA have access to over 250 million. New Zealand has a domestic market of 4 million (although it also has access to Australia under the Closer Economic Relations Agreement). A small market means that firms are more reliant on international connections to provide new sources of information or technological breakthroughs, as a source of inputs such as labour and capital, as a market for finished goods and services and to provide the competitive threats that help to drive improved performance and innovation. A key barrier for firms is in finding and accessing new overseas markets for their goods and services and in finding the entrepreneurial and managerial talent to overcome these hurdles.

A small domestic market suggests that many firms will have to export in order to grow. Firms need to internationalise and export at an earlier time than they would in other countries. This is not a problem if firms can access foreign markets with the ease in which they can access local markets, however there are a number of barriers that firms need to overcome in order to internationalise. To access a foreign market, firms need new market information including demand, tastes, local suppliers and distribution networks. They need to overcome language and cultural barriers. They may need to engage in new networks in order to assess shifts in demand patterns or new opportunities.

…and may exacerbate weaknesses in management skills, competition and access to resources

Low levels of internationalisation could also be symptomatic of underlying weaknesses in management skills; poor levels of competition; or poor access to the global stock of new ideas, technologies, people and capital, as well as difficulties in accessing export markets. New Zealand’s market size and distance from international markets can exacerbate these factors: firms need to internationalise earlier in their lifecycle suggesting additional pressures for managers, and New Zealand’s geographical position may diminish levels of competition or access to resources such as skills and ideas.

Sectoral variations in productivity

Not all sectors are equal

Sectoral variations in productivity performance abound. On aggregate, New Zealand sectors compare unfavourably with the UK on multifactor productivity.[3] However some sectors fare better than others: agriculture, forestry and fishing; mining; food, drink and tobacco manufacturing; accommodation, restaurants and bars; finance and insurance; business services; and cultural and recreational services outperform the UK in terms of multifactor productivity. Broadly, the manufacturing, retail, wholesale, construction and utility sectors underperform relative to the UK (Mason and Osborne, 2007). A wide variety of factors can help to explain these disparities, such as sectoral variations in the size and scale of markets, the level of competition and the degree of exporting or sector specific factors such as the UK’s reduction of low value added manufacturing over recent years (helping to drive up average productivity). The exact manner in which sectoral variations in productivity can be explained by the factors considered in this paper is still unknown and forms an interesting area for further work.

Figure 2: Multifactor productivity levels compared with the UK (UK=100), 2002
Figure 2:  Multifactor productivity levels compared with the UK  (UK=100), 2002.
Source: Mason and Osborne (2007)

Notes

  • [2]Ministry of Economic Development analysis of the Longitudinal Business Database, Statistics New Zealand.
  • [3]Multifactor productivity measures the efficiency with which inputs, of both capital and labour, are turned into output. It is the increase in output that cannot be attributed to increases in the quantity or quality of the labour or capital inputs. For example, it would include more efficient deployment of resources.
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