3. Growth and Innovation Indicators: Broad Findings
This chapter gives an overview of New Zealand's current growth and innovation performance. It highlights the potential inconsistencies between:
- the high-level indicators of growth and innovation performance (e.g. GDP per capita and labour productivity) where New Zealand ranks at the lower end of the OECD
- some of the lower-level indicators (e.g. openness to trade, firms' innovativeness, stocks of foreign direct investment). New Zealand is doing better on a range of key growth and innovation indicators than relative per capita income, productivity levels and economic growth might suggest. This may not be sufficient to improve productivity and growth performance.
Current Performance
Material Standard of Living
While the New Zealand economy grew throughout the 1970s and 1980s, other OECD countries grew more rapidly, on average. This means that New Zealand's ranking in terms of per capita income trended downwards for much of the 1970s and 1980s, resulting in a drop in ranking on real GDP per capita from ninth in the OECD in 1970 to 21st in 2001 (of 30 member countries). The performance of the economy improved in the 1990s and we now appear to have halted New Zealand's fall down the OECD rankings.
Productivity: A Key Contributor to Income Levels
To achieve higher levels of real per capita income, it is critical that New Zealand raises productivity, including labour productivity. Over the past decade, New Zealand's labour productivity performance has been near the bottom of the OECD. New Zealand has also performed poorly in terms of labour productivity growth, despite improvement in the rate of productivity growth. The majority of OECD countries over the period 1998-2002 experienced labour productivity growth of around two to 3 percent compared with 1.5 percent in New Zealand. There was also a marked divergence in economic performance. New Zealand was not in the top group over the 1990s in measures of economic performance.
Further increases in New Zealand's productivity growth will require an enhanced supply of skills and talent (matched to labour demand), improvements in investment, strengthened innovation, entrepreneurship and technological change, and increased global connectedness. Stable macroeconomic policy settings, regulatory transparency and competition, and the availability of infrastructure provide the necessary foundations for growth and innovation.
Supply of Skills and Talent
A well-educated, skilled and adaptable workforce is crucial if New Zealand is to sustain higher rates of economic growth through innovation. The skills necessary to support innovation and productivity improvements include:
- Foundation skills. These skills, including basic literacy and numeracy, enable people to participate in the labour market and provide a basis from which to build other skills.
- Technical skills, particularly in science and engineering, but also in the trades.
- Business management capability. This is needed to spot opportunities, use new technology and effectively manage rapidly growing businesses.
Educational attainment in New Zealand is average when compared to a selection of 18 higher-income OECD countries. The level of attainment is improving but the overall numbers of those with post-secondary qualifications is static. There is also a long "tail" of poor educational achievement, and the difference between the top and bottom ends of educational achievement is one of the largest in the world.
Although on-the-job training by employers is high, we continue to face skill shortages in most sectors of the economy, particularly technical skills. These shortages are impacting the expansion of firms.
New Zealand has a low rate of unemployment. But Māoriand Pacific peoples' unemployment rate is higher than for other New Zealanders. This represents an increasing opportunity cost to the economy and poses potential risks for social cohesion. Labour force participation rates for women, while average for the OECD, could also be higher.
Addressing performance in each of these areas has the potential to improve the skills available to employers and, therefore, contribute to higher levels of innovation and labour productivity.
Migration is also important for maintaining the supply of skills as well as contributing to global connectedness. While, over the past two decades, there have been fluctuations in New Zealand's net migration, there appears to have been a 'brain exchange' between New Zealand and other countries, rather than a 'brain drain' from New Zealand. There is also a high level of inflows and outflows of migrants. This potentially increases global connectedness, although with settlement and other costs.
Changes in Investment
Investment is driven by the ability to generate returns on capital. Making such returns in New Zealand requires developing market opportunities - mostly offshore. This requires access to appropriate finance, a pool of appropriately skilled labour, innovative ideas and entrepreneurial drive.
Confidence in economic prospects is likely to be shown through:
- Offshore interest in investing in New Zealand, principally through foreign direct investment (FDI). New Zealand has a high level of international investment (stock of FDI as a percentage of GDP). However, more recently New Zealand has attracted only moderate amounts of FDI when compared to similar countries. It is also evident that New Zealand's current stock of FDI is focused more in the non-tradeables sector (e.g. finance, electricity and telecommunications) than in sectors with a greater emphasis on exports. This may have made New Zealand more cost competitive (one part of productivity), but may not have provided the impetus for identifying and taking new offshore market opportunities.
- Levels of domestic investment, particularly in plant, machinery and equipment. Investment in plant, machinery and equipment (PME) has been increasing over the past decade. The ratio of capital per worker and researcher is also higher than that of a selection of OECD countries. This probably reflects New Zealand's small size, where production runs are smaller than would be the case overseas for plant and equipment of similar capacity. However, given New Zealand's relatively poor productivity and income levels, this higher ratio may also indicate that appropriate skills are not available to take full advantage of the investment by ensuring that the plant, machinery and equipment are tailored for New Zealand-specific conditions.
Innovation, Entrepreneurship and Technological Change
Innovation is complex. Successful innovation depends on having people who can come up with new ideas and have the entrepreneurial drive to develop, manage and market them. The innovation system covers all aspects of formulating an idea for a new or improved product or process from initial concept through to taking it to markets. This includes the research and development (R&D) process, the commercialisation process, entrepreneurial effort and obtaining capital.
Innovation combined with entrepreneurship drives technological change. Technological change has two principal impacts that drive increases in productivity:
- the development of new products that create new markets
- the ability to use new processes and capital (e.g. tools and machinery) that can lower costs.
The public and private sectors need to make the most of the current investment in innovation which should result in businesses being increasingly more able to explore and develop new ideas and knowledge. In particular:
- Government funding and basic research dominate R&D by sector and type: New Zealand's investment in R&D is lower than the OECD average. Private sector investment is particularly low. As a result, basic research appears to predominate. However, New Zealand is a net importer of technology, and businesses (including farmers) need to be able to successfully apply this technology, often combined with local R&D, to have a material impact on productivity.
- New Zealand's investment in knowledge (intangible investment) is increasing: This should, over time, contribute to increased innovation, and enhance our ability to make the most effective use of new capital and processes and to respond to niche market opportunities. Currently, however, intangible investment levels remain lower than in many OECD countries.
- New Zealand firms are relatively innovative and a majority are using up-to-date technology: New Zealand firms appear to be quite innovative and are investing in technology that is new for New Zealand. Small firm size, however, may contribute to a lack of connections with the research community to make the most of innovative ideas in New Zealand. A lack of global connectedness may also reduce firms' awareness of the demand for innovative products and services. Current returns on investment in innovation and new technology may be significantly below their potential.
- The contribution of high technology to New Zealand's total value-added is increasing: However, international comparison is difficult because major areas of New Zealand's economy, for example agriculture and the food, beverage and tobacco industry, are significantly more technology intensive than in other OECD countries.
Global Connectedness
International relationships and connections are a key driver of innovation and growth for New Zealand. New Zealand is relatively well connected internationally. However, when compared to other small countries, there is room to do better. The key indicators of this are:
- New Zealand's openness to international trade: New Zealand's exports as a percentage of GDP are average for the OECD, but lower than comparable small countries, particularly those that have had sustained periods of above-average economic growth.
- The export of high and medium-high technology goods and knowledge-based services: New Zealand has also not been particularly strong in the export of high and medium-high technology goods and knowledge-based services, as defined by the OECD. This measure of performance is strongly influenced by New Zealand's economic structure, where agriculture tends to be more technology driven than typical OECD countries.
- The ranking of New Zealand's cities internationally: Cities in New Zealand rank very well in international quality-of-life surveys. This ranking has improved in the last 12 months, making New Zealand an increasingly attractive place to live, as well as to visit, even if there is a significant difference in income levels. Such a ranking provides the potential to attract and retain skilled people and investment from offshore.
As noted above, migration trends also have a significant impact on global connectedness. By international standards, New Zealand has high gross and net migration flows. For example, currently one in five New Zealanders was born overseas.
Other Indicators
The foundations of the New Zealand economy and economic policy create the necessary conditions for New Zealand's economic transformation. While not the subject of this report, they are a significant part of its context.
Sound monetary and fiscal management are necessary to maintain business confidence, encourage private sector investment and ensure resources are used to generate the best returns over time. Pro-competition regulations and low trade barriers are also necessary. Because they encourage competition they drive innovation and lower costs. This leads to higher productivity.
Recent efforts to strengthen the foundations of the New Zealand economy provide a generally sound economic base from which to work towards higher growth rates. These include:
- Stable monetary and fiscal frameworks: New Zealand has had eight years of uninterrupted government surpluses, matched within the OCECD only by Finland. The government has consistently maintained a tight fiscal policy and adopted a consistent monetary policy approach, with resulting low inflation.
- Average government size: Size of government comparisons need to ensure that all levels of government are taken into account, rather than focusing only on central government. Up-to-date comparable fiscal information for general government suggests that New Zealand has a relatively small government sector. There are also doubts about the significance of the size of government for growth.9 The impact on growth of the structure of the tax system and of government expenditure may be the issues that require further investigation.
- Low regulatory and administrative burdens: Regulatory barriers and compliance costs in New Zealand are similar to those faced by businesses in Australia and the United States, and lower than in most OECD countries.10 Progress is being made in reducing the regulatory burden on businesses (e.g. the government is making amendments to the Resource Management Act, implementing the recommendations of the business compliance cost panel, and making ongoing efforts to improve regulatory and business compliance cost statements). It may be, however, that further effort to reduce compliance costs is required, taking into account the costs and benefits of regulations.
- Infrastructure: Infrastructure in New Zealand is generally good, but requires ongoing investment to support and keep pace with economic growth and changes in technology. For example, the OECD suggests that, in telecommunications, New Zealand has good (privately supplied) low-speed internet access, but limited high-speed internet access and only limited e-commerce activity. Project Probe aims to increase New Zealand's broadband capacity and a range of e-commerce initiatives has been put in place. Roading is a further important infrastructure item (at least in some geographic areas). Business groups in New Zealand raise roading maintenance and congestion as a potential hindrance to business expansion, primarily in the Auckland region and in some rural areas.11 Government is also focusing on electricity to ensure that the challenges of New Zealand's geography and energy sector are effectively managed.
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