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

Implications for policy

By encouraging the acquisition of skills and capital, promoting increased innovation and encouraging the sustainable management of natural resources, New Zealand can provide high quality inputs into the production process. But it is the entrepreneur that takes these inputs and uses them to achieve new investments and new ventures that drive productivity growth. The entrepreneur creates new methods of production and products that replace the old ways of doing things and produce what Joseph Schumpeter termed creative destruction, which ultimately drives growth.

New Zealand’s productivity is 22nd out of 30 OECD countries. This observation, combined with evidence that suggests poor performance of large firms and difficulties internationalising, suggest there may be issues in the business environment inhibiting firm productivity, such as the scale of the domestic market. The paper has looked at the role that management skills, access to resources and a range of government policies have in enabling entrepreneurial activity.

Subjectively, management skills appear poor compared with other countries and may be limiting firm productivity. The evidence of a link to productivity is much stronger, however, for management practices: a firm's processes, practices, and structures. Above all else, the strongest driver of improved management practices appears to be competition, which stimulates the need for better organisational practices and focuses management attention on improving firm performance. Beyond that, the provision of best practice information and measures to attract and create skilled managers should be considered.

Access to resources: capital, skills and ideas, may be limited. In each case, factors in the domestic market are creating hurdles for firms. Underdeveloped capital markets, tight labour markets and difficulties accessing foreign sources of ideas impinge on the quality of the business environment. Three papers published alongside this paper, provide more detailed discussions on investment, skills and innovation respectively.

The policy framework can create the incentives that reward entrepreneurship. The benefits of competition are critically important for enterprise and productivity. Barriers to both product market and capital market competition should be minimised so that managers and firms have the incentives to focus on improved performance. Beyond this, the tax and regulatory settings can impact on the incentives to engage in a range of economic activities. In particular, regulation needs to be continually assessed and reviewed in order to maintain a regulatory environment that is fit for purpose.

By removing barriers to entrepreneurship, allowing the competitive market to spur firm performance, encouraging skill acquisition, investment and the adoption of new ideas, and putting in place a framework that rewards entrepreneurship, New Zealand can create a business environment in which entrepreneurial activity thrives.

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