7. Conclusions

In the post-war Bretton-Woods era, characterised by largely closed economies, restricted factor flows, and bilaterally-regulated trading arrangements, geography was regarded as being largely irrelevant by many economists, because Ricardian theories of comparative advantage appeared quite sufficient to explain observed trade behaviour. Even the extreme geographical peripherality and low population density of New Zealand was not regarded as being of any real significance because New Zealand was a very prosperous country with significant natural factor endowments. New Zealand’s exports, based on cheap land inputs supported a high standard of living via imports.

Over the last two or three decades the international situation appears to have changed markedly. Changes in technology and institutional structures mean that global markets can me serviced more easily from a smaller number of locations. This is because for most sectors, the information and transportation (transactions) costs associated with coordinating the movements of goods and people across global geographical distances have generally fallen. In particular, the geographical distance costs associated with standardised goods and services have fallen over time.

On the other hand however, the increasing variety, quantity and complexity of information generated by modern markets means that the acquisition of non-standardised and tacit information becomes ever more important as a determinant of competitiveness (Porter 1990; Krugman 1991). The acquisition of these types of information is highly dependent on face-to-face contact, and is therefore based on the geographical proximity and accessibility afforded by industrial clustering in cities. If the relative importance of this non-standardised information is steadily increasing over time, this also implies that there is an increasing role played by agglomeration economies in determining long run economic growth. Krugman (1996) argues that this particular combination of localised agglomeration economies of scale and falling distance transactions costs, benefits the highly urbanised locations at the expense of the more peripheral and less populated areas.

From the perspective of New Zealand’s long run economic growth and competitiveness, these agglomeration and clustering arguments would appear to be rather pessimistic. New Zealand’s urban areas are not large enough to generate widespread agglomeration economies on the scale required for international competition. One manifestation of this is that many corporate organisations will progressively shift higher-order value-adding activities away from New Zealand to Australia, leaving relatively lower-order activities behind in order to service the local economy. In the long run his tendency will be growth-depressing.

This is not the end of the story, however, because the development of new firms and industries is also essential for the long-run competitiveness of the economy (Hart and Oulton 1999). For the SME and new-firm sectors, the relationship between the geography of New Zealand and competitiveness is rather more complex than is the case of the multinational sector.

In most OECD countries the focus of industrial policy thinking has shifted towards promoting the growth of new SME firms in highly dynamic and innovative sectors. There are two reasons for this. Firstly, the new variety outputs of these sectors are regarded as generally being price inelastic and income elastic, and secondly, these sectors are also regarded as being somewhat responsive to policy measures. As we have discussed in this paper, however, innovation depends crucially on both the skills-base of the labour market and also on ability to access to tacit non-standardised information.

In terms of upgrading the domestic skills-base, the focus of New Zealand’s industrial policy has been on further developing the education of the population at all skill levels, and also on fostering innovation in key growth potential sectors such as biotechnology, information and communications technology, and the creative industries.[6] This policy is largely in line with the policies adopted by other OECD countries such as the UK[7].

Meanwhile, in order to overcome the problems of facilitating the transfer of tacit information, UK innovation policies are also structured within a framework which aims to promote competitiveness via the development of industrial clusters[8] within a tight land-use planning regime[9]. In the UK this type of policy is possible because the combination of existing large urban scales with short inter-urban travel times allows for agglomeration effects to be generated relatively easily (Gordon and McCann 2000). The role of UK central and regional government authorities therefore primarily concerns the provision of the types of industrial sites and locations which are deemed appropriate for new businesses in these innovative SME sectors.

In the case of New Zealand, however, the absence of either large urban scales or proximity between urban centres suggests that policies designed to encourage the transfer of tacit information across the geography of New Zealand industry cannot be implemented in quite the same way as in the UK. An alternative approach may be required. On this point, New Zealand has a rather unusual geographical and social structure which can be turned to its own competitive advantage. New Zealand has both a highly educated labour force and low population level. Potentially, this combination provides for a much higher level of inter-personal connectedness than is possible in high population societies where individuals are largely anonymous. This can allow local economic growth to be fostered via slightly different mechanisms than orthodox agglomeration arguments would imply. In particular, as an analytical and policy framework, we have argued here that the social network model is more applicable to New Zealand’s growth potential than is the agglomeration model.

In this social network framework, the development of strong inter-firm and inter-personal networks within New Zealand is essential in order to facilitate the transmission of tacit information across geographical space in conditions where agglomeration outcomes are largely ruled out. As such, a policy designed to foster such links would be aimed specifically at internalising many of the externalities associated with tacit information.

From the perspective of the geography of New Zealand, however, these networks must be developed not only across the whole country, but also beyond the borders of the country. This is essential in order to reduce the small-market constraints imposed on the SME sector because of the difficulties associated with acquiring tacit information. Policy measures of this type can play a significant role because a simple reliance on market mechanisms alone will not provide for many of these types of information networks in a geographically dispersed economy.

Here we have argued that a possible policy prototype which New Zealand could adopt and develop would be something along the lines of the UK’s Export Explorer programme, which is designed specifically to circumvent information constraints. Yet, whatever the actual form of any policy adopted might be, the essential features of it must be the encouragement of long-term business relationships both within the New Zealand SME sector and also between the New Zealand SME sector and overseas customers. In the case of New Zealand, it is these relationships which will provide the link between the development of income elastic outputs, economies of scale and long-run growth, rather than straightforward agglomeration arguments.