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Executive Summary

The ability of New Zealand firms to operate internationally is consistently raised as a key factor influencing the country's productivity performance and prosperity. Improving the connectedness of our firms can enhance productivity through increasing scale, enhancing competition and improving access to world-class ideas and technologies. While there are many aspects of international connectedness which are relevant for New Zealand's economic performance, policy interest has often focused on improving our export performance. In this regard, a key concern of policy makers is to establish whether there are specific factors that are holding firms back from overseas income generation, and whether these barriers may be amenable to policy intervention.

This note draws on data from the International Engagement module of the Business Operations Survey 2011 (BOS11) to examine the level of interest in earning international income among the population of New Zealand firms, and how the barriers that firms perceive in entering and maintaining a place in international markets differ by their level of interest and experience. It also considers the extent to which reported interest in earning overseas income translates into realised export activity in future years, through the incorporation of data from annual BOS surveys from 2007 to 2014.

The data shows that across the population of firms that are not already generating overseas income, there is little appetite to move towards greater international engagement. Over 90 percent of non-engaged firms state that they are either not interested in, or not suitable for, overseas income generation. Common reasons cited for this lack of interest are a need for physical proximity to customers, or satisfaction with the opportunities available in the domestic market.

Despite this, the absolute number of firms that are either actively seeking or are interested in exploring the possibilities for overseas income generation is sizeable compared to the current stock of engaged firms. Moreover, a sizeable number of those firms that expressed an interest, and particularly those that were actively exploring the options for overseas income generation, appear to have successfully entered at least one export market or had significant tourism earnings in the three years following the 2007 and 2011 International Engagement surveys. However, an interest in earning overseas income is clearly not sufficient to guarantee success - even among firms which reported that they were actively working towards earning overseas income and expecting to see some result within the next twelve months, over 40 percent of those that could be tracked over the following three years reported no exports or significant tourism earnings over that time.

Reported barriers to overseas income generation differ both by firms' level of experience and their level of interest. Among non-engaged firms, the most commonly reported barriers relate to a lack of experience in expanding beyond New Zealand, a lack of knowledge about specific markets and difficulty accessing finance for expansion. Firms that are interested in the possibility of earning overseas income in future but are not actively exploring that potential report a lower number of barriers overall, but are more inclined to cite “other” barriers, which may include a lack of managerial resources to devote to expansion. Similarly, among current exporters, level of interest in further expansion is positively correlated with the probability of reporting most types of barriers, with the exception of “other” barriers. Consistent with the greater level of experience that these firms have already gained, factors such as experience and market knowledge are less commonly reported by this group, with exchange rate levels and volatility coming to the fore alongside distance to markets and a lack of demand or strong competition in overseas markets.

These barriers are also reflected in firms' reported reasons for exiting from specific overseas markets, with nearly half of the firms that had left one or more markets citing falling market demand or increased competition as a reason for exit. Lower than expected profitability and exchange rate conditions were also common reasons for exit from specific markets. In contrast, relatively few firms cited exchange rate conditions as a factor in their decision to exit foreign markets altogether. Although it is difficult to draw conclusions about the motivation of firms which exited completely due to high non-response rates, to the extent that information is available, complete exits appear to have been driven more by changes in demand conditions or strategic direction, or occur because firms have completed a specific order or job.

Looking to the future, we also examine whether the barriers that firms report facing in 2007 and 2011 can help to predict their probability of entering new export markets over the following three years. The level of interest in overseas expansion is an important predictor of both initial entry by new exporters and additional market entry by firms which currently have overseas income. In contrast, while a number of barriers reported by firms with current overseas income are correlated with future expansion into new markets, there is no apparent relationship between the perceived barriers faced by non-exporters and the probability that these firms will commence exporting (including significant tourism earnings) over the next three years.

Among non-exporting firms, entry propensity is higher among those firms which stated that their interest was motivated by having reached the potential of the domestic market and those which believed that new contacts or alliances had opened up new market opportunities. Among firms with existing overseas income, future market entry is more likely among firms which perceived exchange rate volatility as a barrier to their ability to earn overseas income, and those which employed strategies of offering unique or innovative goods and services and those which entered one market to access another market, and less likely among those that reported either a lack of experience with expanding beyond New Zealand or low demand or increased competition as barriers. These relationships, however, are not necessarily causal, and may reflect unobserved characteristics of the firms or their target markets rather than a direct relationship between the reported barriers, motivations or strategies and future market outcomes.

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