4 What Are The Causes of These Hurdles?
Small domestic market size and distant location and exchange rate volatility appear to be the chief causes of the first hurdle. Capital markets are also often blamed for these hurdles, however there is little consistent evidence to confirm this.
4.1 The impact of domestic market size and location
The impact of distance is the subject of considerable investigation in economic geography literature. Leamer and Storper (2001) argue that a countries’ exporting performance can largely be accounted for by location, specifically the effect of distance from trading partners. In fact, when this is taken into account, Smith (2001) shows that New Zealand seems to perform relatively well. The issue that arises from this is how distance flows through to have a negative impact on a firm’s ability to export.
The qualitative research canvassed in this paper suggests that New Zealand’s market size and distance from trading partners has a major impact on both the hurdle to entering exporting and the ongoing hurdle to exporting.
The impact of size and distance on the first hurdle to exporting, and firm’s export strategies as a result, is common in the case-study literature. The key issue here is that New Zealand’s small domestic market forces firms to export while they are still comparatively small if they wish to expand sales. This was discussed in section 2 above, and will not be repeated here.
New Zealand’s location and distance from major markets - customers, competitors and suppliers - also affects the flow of information (on tastes, standards and other regulations, innovations and competitiveness) to firms. Scouting missions or even local representation in a market are needed to test and stay in touch with consumer demands. This adds to the fixed costs of the move into exporting, and also increases the risks of costly mistakes. As discussed, fixed costs are bigger issues for a smaller firm.
The distance and size of the domestic economy combined also seem to raise some serious credibility issues for New Zealand firms. Greater distance increases time to market.[16] Also the smaller size of New Zealand firms and distance from markets raises credibility issues with overseas customers, for whom reliable supply is crucial.
The impact of size and distance on distribution economies (the ongoing hurdle) are more subtle. Investment in distribution and marketing takes capital. Greater scale allows the firm more resources to undertake such an investment, and often means the firm has a broader product range across which it can spread the relatively fixed costs of the investment. New Zealand’s small domestic market and the strategies used by New Zealand firms to circumvent the first hurdle to exporting means that firms often struggle to reach the necessary scale.
In the case of distribution economies it is easier to discount the impact of elements other than sheer scale. It is more difficult to blame poor management or lack of skills – many of these small firms are recognised world leaders in their speciality, and are profitable enough to attract the skills needed. In some cases, owners may sell out purely for lifestyle reasons although this is certainly not the case in many firms where the former owners continue to work in the company. When a New Zealand business is sold to overseas interests it typically goes to a foreign business in the same field. Why is this? If this move were not overcoming some sort of problem faced by the business (i.e. the exploitation of distribution economies) and were simply a matter of additional finance for expansion, the sales would just as likely take the form of a public listing on the stock exchange.
If this theory is correct, one remaining question is why specialised trading houses have not developed in New Zealand to overcome the distribution problem? It could be that the industries that New Zealand firms are involved in outside of agriculture are too diverse and small to effectively manage as a whole.
Overall, it seems that market size and location have an important part to play in explaining the hurdles to exporting. It is worth reiterating here that further systematic research is needed to confirm the existence of this first hurdle. Other factors may be important such as culture or management skills, although it is difficult to draw conclusions in these areas.
4.2 Domestic market size and location can sometimes help…
In some cases a small domestic market and distance may be an opportunity rather than a constraint. Strategies developed to deal with these issues have become a major source of competitive advantage for certain firms. There are several reasons for this, and these are discussed below.
For some firms, the experience in producing for the small domestic market forces the development of expertise in flexible manufacturing. This skill lends itself to the growing practise of customisation. There are many examples of this advantage in the firms surveyed in the Infometrics Manufacturing Export Survey.
Isolation may also means that New Zealand’s culture and intellect are relatively unencumbered by many overseas paradigms. This is frequently mentioned as a positive attribute of New Zealand R&D staff, engineers and designers. Similarly, isolation often forces do-it-yourself problem solving. This “tinkering” stimulates alterations to standardised products, often creating niche products.
The feeling of isolation from foreign ideas can also cause a disproportionate effort in response. Some firms report that their feeling of isolation has created a culture of curiosity about the outside world which leads to them being more well informed than their overseas counterparts (especially now that codified information moves so easily).
Having smaller firms forces the few employees in a firm to have a broad, generalised knowledge. While this can have its drawbacks (especially if specialised knowledge is needed), in some cases this seems to lead to better service and even improved innovation from the cross fertilisation of ideas. As a result of this generalised knowledge, smaller companies can be very responsive to customer demands and general change.
The informality of small firms can also improve innovation (there is some evidence indicating that smaller firms are more efficient innovators, despite the proportional R&D spend being lower for small firms (see Watt (2001)).
These factors seem to lend weight to the idea that New Zealand is a nursery economy for niche products. New Zealand firms are well suited to developing innovative niche or customised products. Due to distribution economies however, local firms may struggle to fully capitalise on these ideas internationally.
Example: PEC
During the 1980’s John Williams of PEC outsourced many of the company’s functions in an effort to maintain staff numbers below 100. He feared losing the intimacy of the company, which he believed was the source of its “innovative culture”. This strategy had to be revisited as sales continued to grow.
Source; Campbell-Hunt/ CANZ (2001)
Example: Nuplex
Nuplex is a New Zealand based company with operations in Australia and Vietnam. The company manufactures and markets resins, polymers, construction materials and offers services for the treatment of special wastes. Global resin manufacturers have tended to specialise in an increasingly narrow range of products. Being in a small firm, Nuplex staff are forced to keep abreast of a wide range of products. Nuplex believes this has enhanced their service to the customer, as the staff have a wider knowledge base and can tailor solutions to the customer. Nuplex begins “by seeking to understand the customer’s need, whereas larger and more specialised competitors often begin and end with their one and only solution.”
Source; Campbell-Hunt and CANZ (2001)
Notes
- [16]Improved transportation times and IT have helped, however just in time inventory systems have had a countervailing effect. Case studies suggest that this is still an issue for many New Zealand firms.
