5.5  Promoting the services trade

Service exports and imports have evolved significantly over recent years. Between 1999 and 2003, New Zealand moved from being a net importer of services to being a net exporter, with a surplus of over $1 billion in the year to March 2003 (see figure 7).

Figure 7 – Services trade, New Zealand, year to September

Source: Statistics New Zealand

The reasons for the switch from a deficit to a surplus are the sharp increases in tourism receipts and education exports. Tourism has gone up by 50% in value while education exports almost tripled in value (see figures 8 and 9).

Figure 8 – Inbound tourism, New Zealand, year to September

Source: Statistics New Zealand

Education exports aside, the bulk of the service trade is transport, business travel, and tourism (see figure 10). Royalties and licence fees aside, transport and tourism and the rest of the services trade are not major gateways for technology. Chance encounters where tourists visit New Zealand and return as immigrants or as investors do happen but there is no data on whether these connections are major sources of new external links.

Figure 9 – Education exports, New Zealand, year to September

Source: Statistics New Zealand

The growth in the number of tourists (and of students) coming to New Zealand can be best explained by: the strength of the source-country economies; and the strength of the source-country currencies. The regions that continue to offer the strongest growth prospects are the Asia-Pacific and South Asia (World Bank 2003). The East Asia economies are expected by the World Bank (2003) to grow at twice the pace of the high-income countries in the next few years.

Figure 10 – Service exports, New Zealand, year to September

Source: Statistics New Zealand

The focus countries for tourism should be markets with major growth potential, those markets that are short- to medium hauls and/or are markets that are familiar with New Zealand as a holiday destination. These tourist markets are Australia, USA, UK, Japan, Korea, and China. The UK and the USA are long-haul markets but they are markets well familiar with New Zealand and send many tourists to New Zealand (see figure 11).

The horizon markets for tourism would be the ASEAN countries due to their growth potential, proximity, and rising incomes.

Figure 11 – International visitors by market, New Zealand, July 2002 – June 2003

Source: Statistics New Zealand

The focus on Asia for tourism is important because the World Tourism Organisation’s (2003) projected growth in global tourist arrivals from East Asia is 8.2% for 2000-2010, which is notably higher than the global average growth forecast of 4.5%. The Tourism Research Council New Zealand (2003) also forecasts Asia to be New Zealand’s strongest growth markets for tourism arrivals in the decade to 2010.

For New Zealand’s education exports, the focus should be North and East Asia. The aim should be to deepen relationships with the major markets of China and Japan while diversifying into the smaller markets to mitigate single-market risk. For example, in 2000/01, no more than 11 to 18% of foreign fee-paying students in Australia, Canada and the USA came from any one country. Comparatively, in New Zealand, 30% of students came from Japan in 2000. By 2002, the largest single education export market had changed and nearly 40% of students came from China.

Market size and growth potential identify China, Japan, South Korea and the ASEAN countries as the focus countries for education exports. Given the high current exposure to China and Japan, there is a need to diversify by increasing efforts to attract students from Thailand, Malaysia, South Korea, Taiwan, Hong Kong and Indonesia.

India and Pakistan would be the horizon countries. India is a close call and it could be classified as a focus country. This is because India and China and are the two major emerging markets for education exports. As an additional complication, growth in education exports to India and Pakistan are full of twists and turns because of immigration over-stay risks and difficulties in verifying documentation.

5.6  Increased people-to-people linkages

People-to-people links bring access to knowledge of preferences in offshore export markets, to technological developments, to the latest ideas and thinking and to a larger pool of skilled labour. Deeper international people-to-people links can further lift the growth rate of the economy by increasing the average amount of human capital in the work-force and by increasing the stock of offshore knowledge that New Zealanders can access and exploit. Not all new technology diffuses in the form of written blueprints for new products. There is a role for direct learning and the human capital that is embodied in each worker and researcher. This raises the possibility that more interactions between New Zealand and overseas ideas workers could benefit domestic productivity rates.

Some new inventions spread quickly across borders. Others are more localised and are held closely by specific individuals and companies. For example, in biotechnology, an industry based almost exclusively on new knowledge and cutting edge scientific discoveries, firms tend to cluster together in just a handful of locations. Clustering is often due to the location of star scientists: those individuals with high amounts of human capital who are able to appropriate their knowledge thorough start-up firms (Audretsch and Feldman 1996). The importance of proximity is shaped by the role played by the scientist. The scientist is more likely to be located in the same region as the firm when the relationship involves the transfer of new economic knowledge or some other specialised input. When the scientist is providing a service that does not involve knowledge transfer or a specialised input associated with the human capital of specific individuals and groups, proximity and star scientists are less important (Audretsch and Feldman 1996).

A direct way of linking star foreign talent with New Zealand opportunities is short- and long-term immigration. Labour mobility is an important source of knowledge diffusion. One survey of the founders of companies on a 1989 list of the 100 fastest growing companies in the U.S. found that 71% of them replicated or modified an idea encountered through previous employment (see Bhide 1994). A study of patent data from the U.S. semiconductor industry by Almeida and Kogut (1999) found that ideas are spread through the mobility of key engineers. Song, Almeida and Wu (2001) used patent data to find that engineers who moved from the USA to South Korea or Taiwan built their subsequent innovations upon knowledge from their previous firms in the USA.

Direct learning across borders has a long history as the foundation for new industries and products. The U.S. textile industry in the 19^th century and the Japanese automobile industry in the 20^th century were both established after sending study missions abroad. The missions that Japan sent to the West after the Meiji restoration is a classic example of the potential of face-to-face learning. After World War II, the Marshall plan sponsored 20,000 people from Europe to visit the USA to learn the latest ideas.

New Zealand firms can hire foreign scientists and engineers. New Zealanders can interact with foreign competitors who invested here, read the scientific and technological literature, or have direct contacts with foreign engineers and other researchers in conferences or fairs and through joint ventures. Import-competing companies can acquire technology by R&D collaboration, reading patents and licenses; analysing competing products for reverse engineering and imitation; consultation with experts; communications with suppliers; mergers and joint ventures/alliances. Exporters can obtain new technology through R&D out-sourcing, analysing competing products, purchasing equipment, contacts with customers, joint ventures/alliances, and personnel exchanges.

The impact that new foreign knowledge has on New Zealand’s productivity depends on having the capacity to digest such knowledge, and to make efficient use of it. This calls for sufficient technological capacity, human capital and R&D facilities to capitalise on the off-shore innovations. Countries may differ in their ability to absorb imported technologies even if the new knowledge is global and free. Barriers to diffusion and adaptation include regulation and taxes (Eaton and Kortum 1999, Jones 1994, Parente and Prescott 1994, 1999) and insufficient domestic human capital to absorb quickly the imported technology (Caselli and Coleman 2001, Caselli and Wilson 2003).

The rate at which the gap between the global technology frontier and the present level of productivity in New Zealand is closed depends heavily on the current level of human capital. More highly skilled workers are likely to learn new technologies faster than less skilled workers. Consequently, a New Zealand with a more skilled and globally connected labour force is likely to grow faster than an economy with a less skilled and less internationally connected labour force. Thus, the performance of the economy depends not only upon the size and growth of the labour pool in New Zealand, but also upon the level of skills possessed by and international connectedness of the members of that labour pool. The productivity of a worker with a given amount of human capital depends upon the human capital of other workers he or she interacts with (Lucas 2002).

As discussed in section 2.4, one strand of the new growth theories proposes that productivity gains come from investments in R&D with research labs producing blueprints of new products. Another strand of the new growth theories suspects that the relationship between new technology and economic growth is more indirect with human capital as the key. Economic growth and technological diffusion are much more than the turning discoveries into commercial blueprints. An important share of advances in knowledge may come from learning-by-doing (Lucas 1993). This may lead to delays between the appearance of a new technology and its peak usage (or full diffusion) in New Zealand. The leaning-by-doing and on-the-job accumulation of human capital must be repeated.

A different literature has emphasised the impact of networks and social capital found in a region or country (Agrawal, Cockburn and McHale 2002, Rauch 1999, 2003). Relational networks exist at multiple levels and they can link individuals, groups, firms, industries, regions, and countries. These relational networks create the face-to-face and work-place contact that facilitates the leaning-by-doing and on-the-job training prized by new growth theory. Human capital formation is a social activity, involving groups of people in a way that has no counterpart in the accumulation of physical capital. We learn from each other in acquiring a skill—each member of a group raises not just his own productivity but also the skill level and average productivity of the whole group. For example, research laboratories and facilities of New Zealand universities and their pool of foreign students and researchers and off-shore links and networks are sources of innovation-generating knowledge that are available to local private enterprise for commercial exploitation.

Research at universities provides a link that facilitates knowledge spillovers in the form of recruiting international talent to New Zealand, transferring technology through local and international linkages and interactions, placing students in industry, and providing a platform for firms and researchers to interact. Crown research institutes can also perform the hub and linking functions for research similar to those just described for universities. The mid-field ranking of New Zealand patent applications among OECD members at the European Patent Office that are international co-inventions or have cross-border ownership suggests New Zealand has good international R&D links (see tables 1 and 2).