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Sectors and Regions - Another Angle on Innovation and Productivity


This Document is Archived


Overview - Advancing Economic Development

[ Last Updated 10 January 2006 ]


Factors impacting on productivity growth and firms' international competitiveness vary by sector and region. Many of these factors will not be very apparent from a national approach. Taking a sector- or region-specific cut on the barriers to and drivers of productivity growth sharpens the focus of policy and programme design and implementation. Issues of co-ordination across government policies and programmes, and between public and private sector investments will, in many cases, be more tractable when approached at the sectoral or regional level.

Sectors

  • Productivity levels and growth vary greatly by sector within a country and across countries in the same sector - suggesting significant scope for improving productivity and competitiveness through a sectoral approach.
  • This requires a detailed understanding of what is driving differences in firm performance across sectors, and across countries in the same sector, and close collaboration between government agencies and business in identifying these factors and designing responses.
  • Fast growing and rapidly changing sectors or niches are the most likely to experience problems with responsiveness of government-funded or government-provided goods and services.
  • Since 2001, New Zealand has pursued a "whole-of-government" approach to working with selected sectors. The objective has been to develop a practical programme for development, using an industry-led, market-focused approach to understand and respond to barriers to international competitiveness. A major engagement with the food and beverage sector is currently underway. NZTE is also working with a range of other sectors.
  • A sector-led approach depends on the willingness of the sector to engage. Sectoral strategy has to be owned by the sector, not imposed.

Sectoral Performance - A Varied Picture

Sectors in New Zealand vary greatly in their contribution to aggregate labour productivity growth - reflecting their size, rates of technological progress and reallocation of resources to more productive firms. Transport and communications made a particularly strong contribution over the last 20 years, reflecting both the effects of reform and the rapid adoption of new technologies. Manufacturing made a strong contribution in the first 10 years (possibly reflecting the exit of less productive industries and firms in the face of increased international contribution), but a slightly negative contribution in the second - perhaps reflecting the increased utilisation of low-skilled labour and reduced incentives for businesses to invest in new capital and innovation.

Sector productivity growth is also different across countries. In most sectors, labour productivity growth in New Zealand has lagged that in Australia, with the exception of transport and communications. The gap in growth rates is the largest in the manufacturing sector.

Sector Contributions to Aggregate Labour Productivity Growth

Graphic of "Sector Contributions to Aggregate Labour Productivity Growth"

Source: Statistics New Zealand National Accounts and Household Labour Force Survey.

Regions

New Zealand's regions vary in their contribution to economic growth. The experience over the last few years has been one of increasing economic activity across all regions, in a relatively balanced way, with latest year-on-year to June 2005 recording growth ranging between 5.0% (Taranaki) to 1.9% (Hawke's Bay).

A regional development perspective is based broadly on:

  • Firm innovation and adaptation takes place in a regional and local context. Firms operating in an area develop local networks of customers, competitors and suppliers, and through working with other economic actors such as CRIs and educational institutes. These networks cannot be easily replicated, but tend to develop over time and through repeated interactions that build trust and information sharing. The geographical location of firms will encourage specific and unique innovations and adaptations.
  • High-growth companies need environments that sustain and enhance their growth such as support services, infrastructure, research, skills and quality of life. Otherwise they are likely to move to more supportive environments, in some cases, off-shore.

Regions support economic development and firm competitiveness through:

  • developing an environment for sustaining growth - through, for example, the effectiveness of local institutional governance and leadership; the provision of infrastructure, local planning and regulation; and the ability to make strong linkages within the region
  • developing an environment for enhancing growth - through, for example, offering a business environment and quality of lifestyle that attracts and retains investment, firms and skilled people; and education and research facilities that enhance growth.

Auckland

  • As New Zealand's largest city, Auckland is a key to innovation and improving New Zealand's international competitiveness. Around the world, cities are associated with a more than proportionate amount of innovation.
  • Firms benefit from locating with similar firms and related industries in a large city - because of specialised suppliers, the availability of a pool of especially skilled labour and learning from the experience of other firms.
  • Increasingly, some specialised, higher-skilled business functions are being located in a small number of larger cities in the developed world. Auckland is likely to be able to attract some types of economic activity that would otherwise not locate in New Zealand.
  • An effective transport infrastructure, good learning institutions and amenities that make it attractive to well-educated people will help Auckland attract highly productive firms and grow successfully as a centre for innovation.
  • Local government has a key role to play in addressing these issues. Fragmented responsibility for regional infrastructure is an issue both in Auckland and in other parts of the country.
  • The Ministry has led the establishment of a shared policy office in Auckland to strengthen the policy focus on Auckland and co-ordination between agencies.

Industry Capability Development and Export Promotion Policies

  • Firm turnover contributes to growth. Exiting firms have low and declining productivity, and entering firms that survive eventually contribute positively to productivity growth. More productive firms enter into exporting, and their growth also contributes to productivity growth.
  • Over the 1990s, unlike most OECD countries, New Zealand had only a limited set of industry capability development and export promotion policies. The emphasis was on macroeconomic stability, opening the economy through reducing barriers to trade, and increasing competitive pressures and market disciplines.
  • More recently, New Zealand has made greater use of industry capability development and export promotion policies, drawing on successful experience in other countries, improved understanding of the determinants of economic growth, and a greater focus on the particular circumstances of New Zealand firms. The primary aim is promoting innovation and "shortening the learning curve" to international competitiveness.
  • Venture capital (VC) is a component of private equity markets that has an increasing role in innovation world-wide, particularly in countries with very good commercialisation rates. VC tends to focus on new business opportunities with high risk/return potential. A review of the New Zealand Venture Investment Fund finds that it has been instrumental in stimulating VC capability in New Zealand. Judgements will be required by government on the evolution of the VIF as part of the portfolio of support for innovation processes.
  • Most industry development and export promotion policies are complex to implement and require detailed understanding of the context in which they are being applied. They require judgements about where to apply resources, given uncertainty about how the economy will evolve. Thus they need to be selected carefully and with a clear public policy rationale.
  • Agencies administering these programmes need discretion to make judgements about resource allocation that take account of the issues facing particular segments of the economy. They need to base this on dialogue and collaboration with the relevant sectors.
  • But decisions also need to be transparent to avoid "capture", and rigorous ongoing evaluation of processes and impacts is required.
  • A wide range of programmes is in place. This challenges scarce policy development and operational resources. It risks overlaps in delivery and may cause confusion among client firms.

Is the Mix Right?

New Zealand still devotes a relatively small proportion of GDP to industry capability development and export promotion policies. Experience in designing, implementing and evaluating these policies is uncovering some recurrent themes.

  • What is the appropriate scale of industry capability development programmes? Programmes limit the amount of assistance that can be given to individual firms or collaborative innovative projects. Some potentially valuable opportunities have fallen outside these criteria. The wider economic benefits from assisting particular firms and building "critical mass" in centres of innovation should be the main criterion guiding decisions.
  • Should capability development programmes be targeted to larger firms than current criteria allow? Larger firms account for a large proportion of innovation and exporting. They may also stimulate innovation in smaller firms that are suppliers or customers.
  • What is the right balance between central guidance and agency discretion in making the judgements about where to apply resources? NZTE has been developing a framework for consistent administration of industry assistance programmes. Together with the annual review of programme effectiveness, this provides a good basis for determining future delivery options.

Skills derived from formal education, on the job training and migration are essential if New Zealand firms are to innovate and improve international competitiveness. Though these policy areas are outside the Ministry's direct responsibility, they are an integral part of a successful economic development strategy.

  • There is good New Zealand evidence that firms that adopt good human resource practices (including in particular staff training and performance pay) perform better. Adoption of good HR practices is related to general indicators of good business practices, indicating that underlying management capability is important to firm performance.
  • New Zealand has relatively high participation in job-related continuing education, compared to other countries.
  • However, the IMD World Competitiveness Yearbook rates New Zealand 47th out of 60 countries for the availability of competent senior managers, lower than Australia, the UK and many OECD countries. New Zealand managers are rated as lacking in international experience (47th out of 60) and not giving priority to employee training (26th out of 60).
  • Policy development could usefully focus on more effective and swifter means to relay industry demand for skills through to education providers and students. The sector approach to industry development is a key way to identify upcoming skill requirements and training issues.

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