Delivering more for less – achieving New Zealand’s productivity potential

Photo credit: Stephen A’Court. COPYRIGHT ©Stephen A’Court
Photo credit: Stephen A’Court. COPYRIGHT ©Stephen A’Court

 -Paul Conway, Productivity Commission

The New Zealand economy is currently doing well in some important ways – our public finances are relatively healthy, the labour market has been one of the most successful in the OECD at creating jobs, and incomes have improved over recent years. But despite this optimistic view, New Zealand’s productivity performance continues to be weak.

Achieving New Zealand’s productivity potential is the Productivity Commission’s commentary on New Zealand’s productivity performance.  The paper draws on a large body of research and the Commission’s previous 10 inquiries.

This shows that leading NZ firms do not achieve the same productivity growth as leading international firms in the same industry – our top firms are slow to adopt new technologies that enhance productivity.

The pace at which new technology and ideas diffuse across firms in the domestic economy is also an important key to lifting productivity. But too few New Zealand firms implement and benefit from advances in technology and knowledge.

Despite having relatively open borders, we are not well connected internationally. New Zealand firms have not been strong investors offshore, they don’t tend to be well connected to global value chains, and our stock of foreign direct investment as a share of GDP is growing more slowly than the OECD average.

This lack of international connection means that competition is weak and that NZ firms have limited opportunities to learn from leading international firms at the top of their game.

We also have onshore challenges – our small and insular domestic markets mean that small firms struggle to achieve economies of scale and specialisation.

Our productive firms have limited scope to grow and expand within these markets and, with limited competition, our unproductive firms survive for longer than they ideally would.

This results in valuable resources being locked up in less productive firms.

Encouragingly, new opportunities for international engagement are opening up as technology lowers the cost of distance and expands markets in some areas of economic activity.

With more knowledge-intensive products being traded down fibre-optic cables, New Zealand’s growing high tech sector is indicative of important new opportunities for New Zealand firms to connect internationally.

But to make the most of these opportunities, we need to build comparative advantage to compete successfully in international markets.

This entails investing in the assets necessary to fully benefit from the important changes taking place in the global economy, including skills, innovation and managerial capability.

For example, New Zealand firms that invest more in research and development and managerial capability are better placed to commercialise new ideas and absorb technology created elsewhere.

It’s not just up to New Zealand firms to improve productivity. Enhancing flexibility, openness and receptiveness to new technology also carry important implications for policy.

The Commission proposes fresh thinking in a range of policy areas – international connectedness; innovation and science; housing; skills; migration; lifting competitive intensity and policy capability – to help New Zealand firms make the most of new opportunities and improve their performance.

Getting this right would see the economy shift from a development model based on working more hours per capita to lift incomes to one in which productivity growth plays a more important role.

With low productivity so entrenched in New Zealand, this presents a monumental challenge for policymakers, business owners and workers.

However, with the right mix of coordinated regulatory and institutional reforms, New Zealand can achieve its productivity potential.

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