Where are our world class companies?

Some of you may have read the NZ Productivity Commission’s report into frontier firms (the top 10% most productive firms in New Zealand) and compared our productivity to other Small Advanced Economies (SAEs) such as Belgium, Denmark, Finland, the Netherlands and Sweden. This is great research with various studies and benchmarks, and I highly recommend a read.

The findings of the research were that our most productive firms have operated at around 53% of the best performing firms of those listed countries for over a decade, and there are no signs of this changing.

The report identified several drivers behind this, including that we inefficiently utilise our allocations of labour, and that we don’t see benefits from technology diffusion (awareness and access to best technology that then diffuses through our markets).

Contributing factors include our geography, lower levels of international trade, weak innovation system or low capital intensity to name a few.

So what are the other countries doing that we are not? What can we learn from them?

Firstly, they focus on internationally oriented companies, as they have a small domestic market, they are more focussed on growing and supporting organisations that are focussed on international trade.

Secondly, they encourage and develop clusters of firms organised around areas of strength and capabilities.

These clusters of related capabilities create scale, efficiency, and productivity gains, but more importantly they enable the innovation engine to develop. Consequently, this capability then attracts international engagement, which contributes to overcoming the technology diffusion issue.

Thirdly, they invest in research and development. Most countries invest twice what we do each year as a percentage of Gross Domestic Product (GDP) into R&D. New Zealand is the third-lowest R&D investor of all SAEs, which correlates with us sitting in the bottom three for productivity.

New Zealand also has the lowest export investment and outward direct investment shares of GDP of all SAEs at 28% and 8% of GDP respectively. This compares with an average of 59% and 84% across the reference group of SAEs.

When you consider how much of the New Zealand economy is built on exports, these numbers should be seen as unacceptable.

The long and short of it is we need to pick winners. We are not big enough and we don’t have a large enough domestic sector to be all things to all companies. In an increasingly competitive world, we need to compete where we can win and sustain our advantages. Clearly the primary sector is one area we already excel in.

We can also look at what is defined as weightless (has little mass so easy to transport, such as software) as another easy first choice.

We should not be looking to support all sectors equally, as we want to develop and maximise on these beachhead markets before any dilution of effort or resource into our less-established markets.

Once we’ve picked our would-be winners, we can then ensure best practices and methodologies are deployed for maximum effect.

One of the barriers to adoption of best practices is the large number of SMEs with limited resources and capacity. In creating clusters you can overcome the limitations of size and achieve the gains of larger economies and access to technology and knowledge capital.

As I have mentioned in previous pieces, if we want to be world class, we need to have a co-ordinated effort of our government, unions, businesses and industries, researchers and universities around a common purpose: developing and growing world class companies and clusters to achieve the scale and innovation to outperform competitors and achieve lasting sustainable advantage.

This capability must be nurtured, developed and protected, hence the need for focussed agency (perhaps a subset of New Zealand Trade and Enterprise) brief. This is another key area that the other SAEs have embedded into their trade and growth culture.

Some of these other SAE economies are outperforming us two-to-one. Imagine if we produced twice as much output per dollar invested.

The country could ensure minimum standards for pay, housing, fully fund Pharmac, and build the roads and infrastructure we need. My point is this is a goal and mission worth pursuing for all our wellbeing.

I’m keen, let’s do this.

By Ian Walsh, Managing Director - Intent Group NZ

If you'd like to meet and chat about how we can help you and your organisations on it's journey to World Class then get in touch with Ian on 027 534 9258 / email iwalsh@intentgroup.co.nz or local contact Antony Gibson on 021 161 9705