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• Executive Summary

• Regulatory Policy

• Compliance Costs

• BCC Perceptions Survey

• BCC Survey Summary
• Perceptions of NZ Firms
• Media Statements

• Project Objectives
  • Objective 1: To Gain an Understanding of the Perceptions of New Zealand Managers on the Consequences of Compliance
  • Objective 2: To Develop an Appropriate Methodology for Assessing Compliance Perceptions
• Project Methodology
• Results
  • Constraints on Exporting
  • Constraints on Productivity and Growth
  • Costs versus Benefits
  • Compliance and Firm Dynamics

There has been a considerable amount of research undertaken on the topic of business compliance both in New Zealand and overseas. Many of these studies have focused on estimating the "cost" of compliance (and defining the different types of cost), and on exploring the ways in which these costs can be minimised (by changes in the way legislation and regulations are developed and/or administered by government agencies). A secondary focus has been on gaining a greater understanding of what motivates the individuals who exhibit high levels of compliance.

Some research has focused on comparing the cost of compliance in different countries, and in 2001 the OECD undertook a study of eleven countries.¹ This study made a distinction between administrative compliance costs (filling in forms etc), capital costs (capital investments needed for compliance purposes), and indirect or efficiency costs which arise when regulations reduce productivity and innovativeness. The study² (which suggested that in New Zealand the direct cost of compliance is low by comparison with other OECD countries) provided important information to the government agencies that are charged with reducing the negative impact of compliance in New Zealand.

The Ministerial Panel on Business Compliance Costs was established in December 2000 to provide advice to the government on ways to reduce unnecessary or over-burdensome compliance costs to business arising from central and local government regulation. The Panel identified a number of concerns that are held by New Zealand firms, and the various reports that were produced as a result of the Panel's work provided the platform for further work by the Regulatory and Competition Policy Branch of the Ministry of Economic Development (MED).

One of the priorities of this work programme was to undertake a pilot study into the way in which the managers of New Zealand firms perceive regulations and legislation as having an impact on their performance and on their ability to be innovative.

Project Objectives

The focus of the present project was to assist the Ministry of Economic Development in understanding more about the way in which New Zealand firms (particularly those that are small and medium in size) are currently facing their compliance commitments. The intention was to undertake (and report upon) a piece of research while at the same time developing and testing a method for measuring the perceptions of New Zealand business people about compliance. In keeping with this dual focus, two main objectives were identified:

Objective 1: To Gain an Understanding of the Perceptions of New Zealand Managers on the Consequences of Compliance

In terms of this objective the researchers were asked to provide MED with a report which:

1.1 Identifies and describes the perceptions held by the managers of New Zealand firms in respect of their compliance commitments (with a particular focus on the way this commitment affects the firm's performance and its ability to innovate).

1.2 Provides information on the impact of the compliance commitment (and its associated costs) on the firm's performance and its ability to innovate (relative to other factors).

1.3 Provides information on the types of strategies that firms put in place to manage their compliance commitment and ameliorate any associated costs.³

Objective 2: To Develop an Appropriate Methodology for Assessing Compliance Perceptions

In terms of this objective the researchers were asked to develop a methodology that will make it possible for MED to measure the three items listed above, and which has been tested within the context of this project. This methodology will enable MED to:

2.1 Identify changes over time in the perceptions held by the managers of New Zealand firms in respect of their compliance commitment.

2.2 Understand how the compliance commitment affects the firm's performance and its ability to innovate (relative to other factors).

2.3 Build up a picture of the strategies that firms put in place to manage their compliance commitment and ameliorate any associated costs.

2.4 Assess whether the actions taken by government agencies are having the desired effect.

The objectives were modified slightly after Treasury became involved with the project. Their interest in firms that are exporting (or which have the potential to do so) meant that the researchers identified exporters (and potential exporters) as a specific sub-sample, to be addressed in the data gathering that was undertaken for Objective 1.

Project Methodology

The studies already undertaken in New Zealand provided the research team with a valuable starting point for this project, by identifying some aspects of the nature of the compliance burden, and to a certain degree exploring the way in which this burden manifests itself for different groups. For example, in the 2001 review respondents identified three main ways in which compliance impacted on their business: the time spent complying, the fact that compliance has a stifling effect on innovation and competition and the cost of expert assistance. These general concepts were used by the researchers in this project, to explore more specific ways in which the compliance burden can express itself within the context of a single firm.

The project had three components:

1. A review of the international and New Zealand literature on compliance.
2. A series of focus groups to identify the particular concerns of New Zealand exporters.⁴
3. A telephone survey of approximately 400 business owners and managers. Those recruited to take part in this survey were selected to provide data on the following characteristics: firm size; export involvement; firm stage; growth intentions and industry type.

These methods are explained in more detail in Appendix A.

Results

A summary of the findings follows.

Constraints on Exporting

When asked to comment on a number of factors (a list of these was read to the respondents) and to consider whether these factors were restricting or slowing their export growth (or their ability to earn foreign exchange if this was more appropriate), the 388 respondents (those who were already exporting or felt they had the potential to do so), most commonly identified:

• The conditions and regulations placed by overseas governments (over 60% said this was a factor that restricted their export growth, or had the potential to do so, compared to 37% who said that this factor was not a concern).
• The cost and time needed to represent the firm overseas (over 60% said this was a factor that restricted their export growth, or had the potential to do so, compared to 37% who said that this factor was not a concern).
• The effort and distraction of complying with regulations in New Zealand (over 54% said this was a factor that restricted their export growth, or had the potential to do so, compared to 45% who said that this factor was not a concern).
• The executive time and the expense of collecting information and researching a possible new overseas prospect (54% said this was a factor that restricted their export growth, or had the potential to do so, compared to 45% who said that this factor was not a concern).
• Getting identity and exposure for the firm or brand overseas (51% said this was a factor that restricted their export growth, or had the potential to do so, compared to 48% who said that this factor was not a concern).

However, the factors were not raised to the same degree by the five different groups that were surveyed. The key differences between the groups in relation to the top three factors shows that:

• Respondents that answered "yes, significantly" in relation to the "conditions and regulations placed by overseas governments" were most likely to be from firms that: employ more than 11 FTEs, export, are neither "mature" nor "new", intend to grow strongly and come from the food and primary industry sectors.
• Respondents that answered "yes, significantly" in relation to the "cost and time needed to represent the firm overseas" were most likely to be from firms that: do not employ and that employ more than 11 FTEs, do not export, are new, intend to grow strongly and are from the software and primary industry sectors.
• Respondents that answered "yes, significantly" in relation to the "effort and distraction of complying with regulations in New Zealand" were most likely to be from firms that: employ 2-10 FTEs, export, are "mature" and "new", intend to contract or consolidate, and are from the food, tourism and primary sectors.

Viewing the entire set of factors from the perspective of the groups themselves, there were also visible differences:

• In terms of firm size, all groups identified the "cost and time needed to represent the firm overseas" and the "conditions and regulations placed by overseas governments" as factors that restrict growth. Firms with fewer staff were more likely to identify the "effort and distraction of complying with regulations in New Zealand" as a factor.
• In terms of export involvement, both groups identified the "cost and time needed to represent the firm overseas" and the "conditions and regulations placed by overseas governments".
• In terms of firm stage, all three groups identified the "cost and time needed to represent the firm overseas" as a factor. However, recently established firms noted "getting identity/exposure for firm overseas" and "time/expense re possible new overseas prospect" as factors.
• In terms of growth intentions, all three groups identified the "conditions and regulations placed by overseas governments". Respondents from firms that are contracting identified "New Zealand's requirements for health/safety at workplaces" and the "effort and distraction of complying with regulations in New Zealand" as factors.
• In terms of industry type, almost all groups identified the "conditions and regulations placed by overseas governments" and the "cost and time needed to represent the firm overseas". However, the other answers demonstrate the varied nature of the New Zealand business population, and the variance in the impact of compliance on different industry sectors.

Constraints on Productivity and Growth

In relation to factors that divert and distract the firm away from focusing on productivity and growth, it is noticeable that on almost all of the factors the majority response was that the firm readily deals with the issues involved. However, given the focus of this study (on providing MED and other agencies with information that they can use to reduce the compliance burden for New Zealand firms), the researchers identified all those factors where more than 30% of respondents identified the factor as an issue - irrespective of the proportion of those who indicated that they were "dealing with it". On this basis the issues of most concern to the 490 respondents (the whole sample) were:

• The regulations that apply to releasing a person who no longer suits the business (46% said this was a factor that diverts or distracts them, compared to 39% who said that this factor was not a concern).
• The ACC insurance arrangements as they relate to the firm business (37% said this was a factor that diverts or distracts them, compared to 58% who said that this factor was not a concern).
• The arrangements that are needed for health and safety of employees business (32% said this was a factor that diverts or distracts them, compared to 59% who said that this factor was not a concern).
• Providing a range of employment and other data on the firm to government agencies business (30% said this was a factor that diverts or distracts them, compared to 57% who said that this factor was not a concern).

However, the factors were not raised to the same degree by the five different groups that were surveyed. The key differences between the groups in relation to the top three factors shows that:

• Respondents who identified "releasing an employee" as a factor that diverts and distracts them were most likely to be from firms that: employ 6-10 FTEs and more than 11 FTEs, export, are "mature", intend to contract, and are from the primary, non-food, wholesale, retail and manufacturing sectors and the food industry.
• Respondents who identified "labelling controls and standards" as a factor that diverts and distracts them were most likely to be from firms that: employ 6-10 FTEs and those that do not employ, are not currently exporting (but anticipate doing so) and those that are exporting, are neither "mature" nor "new", intend to grow and are from the food, and wholesale, retail and manufacturing sectors.
• Respondents who identified "getting consent to use land, water and air" as a factor that diverts and distracts them were most likely to be from firms that: employ more than 11 FTEs and those that employ 6-10 FTEs, export, are neither "mature" nor "new", intend to contract and are from the food and primary sectors.

Viewed from the perspective of the groups themselves, there were also some differences, although the responses to this question provided the least differences between the groups.

• In terms of firm size, all groups identified "arrangements expected when need to fire someone" and "ACC levy arrangements as they relate to your firm" as factors that divert and distract them. Respondents from larger firms were more likely to identify "arrangements for health and safety of employees" as a factor that diverts and distracts them.
• In terms of export involvement, all groups identified "arrangements expected when need to fire someone" and "ACC levy arrangements as they relate to your firm" as factors that divert and distract them.
• In terms of firm stage, all groups identified "arrangements expected when need to fire someone" and "ACC levy arrangements as they relate to your firm" as factors that divert and distract them.
• In terms of growth intentions, all groups identified "arrangements expected when need to fire someone" and "ACC levy arrangements as they relate to your firm" as factors that divert and distract them.
• In terms of industry type, almost all groups identified "arrangements expected when need to fire someone", "ACC levy arrangements as they relate to your firm" and "arrangements for health and safety of employees" as factors that divert and distract them.

Costs versus Benefits

In relation to costs versus benefits, the issues of most concern (i.e. where respondents perceived that the cost and time outweighed the benefit) were:

• The regulations that apply to the process of releasing a person who no longer suits the business (43% said that the cost and time outweighed the benefit, compared to 13% who felt that the benefit was greater than the cost)
• The ACC insurance arrangements as it relates to the firm (39% said that the cost and time outweighed the benefit, compared to 15% who felt that the benefit was greater than the cost)
• Providing a range of employment and other data on the firm to government agencies (37% said that the cost and time outweighed the benefit), compared to 13% who felt that the benefit was greater than the cost)

The issues of least concern (i.e. where respondents perceived that the benefit outweighed the cost and time involved) were:

• The guidelines for firms trading fairly in relation to each others products and services, and in relation to customers (27% said that the benefit was greater than the cost, compared to 9% who felt that the cost and time outweighed the benefit).
• The regulations that need to be taken into account when a new person is being hired (27% said that the benefit was greater than the cost, compared to 16% who felt that the cost and time outweighed the benefit).
• The arrangements expected of the firm in regard to clean air, water and environment protection (21% said that the benefit was greater than the cost, compared to 14% who felt that the cost and time outweighed the benefit).

Again, these perceptions were not identical across the different groups that were surveyed. The key differences between the groups in relation to the top three factors shows that:

• Respondents who described the time, effort and cost of "releasing an employee" as outweighing the benefits were most likely to be from firms that: employ 6-10 FTEs and employ more than 11 FTEs, are not currently exporting, are "mature", are contracting and are from the non-food, primary sectors and the wholesale, retail and manufacturing trades.
• Respondents who described the time, effort and cost of "ACC insurance arrangements" as outweighing the benefits were most likely to be from firms that: employ 2-5 FTEs, are not currently exporting, are "mature" and from the primary, non-food and food sectors (there was no difference in terms of firm growth intention).
• Respondents who described the time, effort and cost of "providing data to government agencies" as outweighing the benefits were most likely to be from firms that: employ more than 11 FTEs, are not currently exporting, are "mature", and are from the software and business service industry and the primary sector (there was no difference in terms of firm growth intention).

Viewed from the perspective of the groups themselves, there were also some differences:

• In terms of firm size, all groups identified "the ACC insurance arrangements as they relate to your firm", "the regulations that apply to releasing a person who no longer suits the business" and "providing a range of employment and other data on your firm to government agencies" as examples of legislation where they felt the costs outweighed the benefits.
• In terms of export involvement, all groups identified "the regulations that apply to releasing a person who no longer suits the business", "the ACC insurance arrangements as they relate to your firm" and "providing a range of employment and other data on your firm to government agencies" as examples of legislation where they felt the costs outweighed the benefits.
• In terms of firm stage, all groups identified "the regulations that apply to releasing a person who no longer suits the business", "the ACC insurance arrangements as they relate to your firm" and "providing a range of employment and other data on your firm to government agencies" as examples of legislation where they felt the costs outweighed the benefits.
• In terms of growth intentions, all groups identified "the regulations that apply to releasing a person who no longer suits the business", "the ACC insurance arrangements as they relate to your firm" and "providing a range of employment and other data on your firm to government agencies" as examples of legislation where they felt the costs outweighed the benefits. The exception was contracting firms, which were more likely to comment on taxation.
• In terms of industry type, all groups identified "the regulations that apply to releasing a person who no longer suits the business" and "providing a range of employment and other data on your firm to government agencies" as examples of legislation where they felt the costs outweighed the benefits.

Compliance and Firm Dynamics

• In relation to whether the time and effort that respondents have put into compliance has changed over the previous year or two, 273 (56%) said there had been an increase. Respondents who said that there had been an increase were more likely to be from firms that were contracting, and were from the food and primary sectors.
• In terms of the potential for compliance commitments to impact on firm dynamics, 283 (58%) respondents said they could identify a particular piece of legislation in relation to the nine factors that were read to them. This compares to 206 (42%) who said they could not identify a piece of legislation that had this effect.
• Respondents who could identify particular pieces of legislation that they saw as having the potential to "distract and divert senior staff", were most likely to be from firms that: employ more than 11 FTEs and employ 6-10 FTEs, export, are "mature", are contracting and are from the food, non-food and primary sectors.
• 312 (64%) respondents could identify particular pieces of legislation that they saw as having the potential to be "ambiguous to interpret or apply". This compared to 178 (36%) who said no to this question.
• 179 (36%) respondents could identify particular pieces of legislation that they saw as having the potential to "draw the firm into legal expenses". This compared to 310 (63%) who said no to this question.
• 121 (25%) respondents could identify particular pieces of legislation that they saw as having the potential to "generate conflict and disagreement with regulatory agency staff". This compared to 368 (75%) who said no to this question.
• 177 (36%) respondents could identify particular pieces of legislation that they saw as having the potential to "dampen the manager's enthusiasm for innovating". This compared to 312 (64%) who said no to this question.
• 118 (26%) respondents could identify particular pieces of legislation that they saw as having the potential to "impact on the value or speed with which your industry can grow export earnings". This compared to 363 (74%) who said no to this question.
• 189 (38%) respondents could identify particular pieces of legislation that they saw as having the potential to "oblige the firm to engage outside consultants". This compared to 301(62%) who said no to this question.
• 162 (33%) respondents could identify particular pieces of legislation that they saw as having the potential to "leave a sense of unfairness with your firm". This compared to 328 (67%) who said no to this question.

¹OECD. (2001). Businesses' Views on Red Tape: Administrative and Regulatory Burdens on Small and Medium-Sized Enterprises. Paris: OECD.

²There are some limitations that are important to note when relating the findings to New Zealand. The most important is that the survey excluded firms with no employees and did not include all areas of regulation.

³After some discussion between the researchers and MED about the difficulty of collecting valid data on this topic (see Section 7 for further discussion of this point), it was decided not to attempt to address this topic in the project.

⁴These groups were not part of the initial proposal, but were added to answer the needs of the Treasury team. The results from this component of the project are reported on separately.