The level of New Zealand's total fixed investment, as a percentage of gross domestic product (GDP), is around the OECD average.
Business investment as a percentage of GDP has been around the OECD median over the last ten years.
Plant and machinery investment, as a percentage of GDP, has been towards the top of the OECD since 1970.
Housing investment as a percentage of GDP has been on the increase since the mid-1990s, but still falls close to the benchmark OECD economies.
Government investment spending has increased over the past decade following a sharp decline in the mid-1980s, but still falls short of the high rates seen in the 1970s and 1980s.
Household and national saving rates are low and have been falling more quickly in New Zealand than in benchmark economies, creating a need for overseas funds to supplement domestic savings in financing domestic investment.
While the banking sector is very well developed, the venture capital and sharemarket are small compared with the better-performing OECD economies.

Introduction

Economic growth is generated by high rates of labour utilisation and/or labour productivity.

There are, however, a number of factors that underlie labour productivity growth. This chapter and the next examine the part some of these factors play in New Zealand's growth performance.

3.1.1 Investment

Physical capital accumulation plays an important role in labour productivity growth. Investment in new capital increases the amount and quality of machinery, equipment and infrastructure available for workers to use in the production process, thus raising the capital-labour ratio and increasing labour productivity. Investment in new capital is also one way of incorporating new technology into the production process. However, investment is not an end in itself. It can only add to prosperity if it earns sufficient returns to cover its costs. This implies a need for continued attention to factors that may influence the cost of and returns to investment. For example, encouraging innovation and enterprise may increase the level of multi-factor productivity and so increase the return to investment.

New Zealand's total fixed investment as a percentage of GDP is around the OECD average, and has been growing.

Business investment as a proportion of GDP has been around the OECD median over the last ten years, but significantly less than that of Australia's.²² Business investment impacts directly on labour productivity growth by increasing the amount of capital and technology available to each worker. In particular, plant and machinery investment has been above the OECD median in most years since 1970. This is important to New Zealand's growth prospects, since private sector investment in capital equipment is associated with improved firm productivity and profitability.²³

As a percentage of GDP, gross housing investment has been on the increase since the mid-1990s, and now falls close to the benchmark OECD economies.

New Zealand historically had a high level of government investment as a percentage of GDP compared with the benchmark economies. However, this declined in the mid-1980s in part due to tighter fiscal constraints and a shift in the classification of activities between the public and private sectors. While it has increased over the past decade, it is far from the levels of the 1970s and 1980s.

Appropriate government investment can be important for productivity growth because it can contribute to the economy's infrastructure, and support the development of a healthy and educated population. There may also be important interactions between government investment in infrastructure and private business investment.

3.1.2 Saving

New Zealand's net national saving (gross national saving minus depreciation of fixed capital) as a percentage of GDP lies below that of Australia, the UK and Denmark, as well as falling short of the OECD average. This is also reflected in household saving data, with New Zealand's households saving a low proportion of their disposable income. The negative figures since the early 1990s indicate "dis-saving", i.e., New Zealanders have been consuming more than their household income. This is likely to be associated with the increased household wealth resulting from increasing house prices. However, household dis-saving has been offset to some extent by higher government and business saving.²⁴

3.1.3 Financial Market Development

In an open economy such as New Zealand's, capital

is relatively mobile. If total domestic investment exceeds the amount of domestic saving, which it does in New Zealand, then the balance comes from drawing on the savings of foreigners.

However, domestic and foreign savings are not perfect substitutes, and factors such as distance, language differences and regulatory differences can affect the type and amount of capital flow from overseas. In particular, small and start-up companies, and companies with limited collateral, can be disadvantaged if there is a less-developed domestic capital market.

Apart from retained earnings or profits, firms can access investment capital from a number of other sources: banks, the sharemarket, the venture capital market, or informal capital markets

(i.e., borrowing from friends and family or from angel investors). Consequently, improving financial development in all these markets (as proxied by indicators based on size, activity and efficiency) can stimulate economic growth.

The overall efficiency of the New Zealand financial system can be measured by a capital access index. The Milken Institute's Capital Access Index evaluates the ability of new and existing businesses to access capital in countries around the world. New Zealand ranks 14th out of 121 countries and 12th in terms of OECD economies, suggesting that, while New Zealand is not as financially developed as countries such as the UK, the US, Denmark or Australia, it is still above the middle of the OECD pack.

Sharemarket development can be approximated by the level and growth of market capitalisation as a percentage of GDP. New Zealand's sharemarket capitalisation is smaller than for comparator countries and is not growing. Similarly, the size

of the venture capital market in New Zealand - a relatively small but important source of finance for smaller companies - sits at the lower end of the OECD range.

Good availability of bank credit and informal capital can partially but not completely substitute for underdeveloped equity markets. The data suggests that bank credit is an important source of external finance for firms in New Zealand, as reflected in

the size of the banking sector relative to the sharemarket. The size of the banking sector can be measured by its bank assets as a proportion of GDP. The relative size of New Zealand's banking sector has been growing since the 1990s to become greater than that of the US and Australia.

Informal investment also appears to be an important source of funds for new firms in New Zealand. OECD countries with a strong economic performance tend not to rely on informal investment. Although measurement is uncertain, the informal investment market is larger here than the formal venture capital industry.

The presence of a strong banking sector and informal sources of capital benefits New Zealand's overall performance. However, traditionally important sources of capital like the sharemarket are underdeveloped in New Zealand by OECD standards.

Figure 3.1 Total fixed investment as a percentage of GDP

Source OECD Economic Outlook No 80

→ Full size version of Figure 3.1 [173 kB JPG]

3.1.1 Investment. The level of New Zealand's total fixed investment as a percentage of GDP has increased from an average of 21.2 per cent in 1995–2000 to 22.3 per cent in 2001–2006. This is similar to other high-income economies and just above the OECD median.

Figure 3.2 Five-year average annual growth rate of real total fixed investment

Source OECD Economic Outlook No 80

→ Full size version of Figure 3.2 [186 kB JPG]

New Zealand's investment growth rate lagged behind comparator countries through to the mid-1990s. Since then, it has been close to benchmark economies.

Figure 3.3 Investment as a percentage of nominal GDP

Source OECD Economic Outlook No 80

→ Full size version of Figure 3.3 [185 kB JPG]

Business investment has risen since 1990 after falling as a percentage of GDP through the 1980s. Government investment was high in New Zealand through to the mid-1980s. It declined after that, in part due to tighter fiscal constraints and a shift in the classification of activities between the public and private sectors, but has since risen significantly.

Figure 3.4 Plant and machinery investment as a percentage of nominal GDP

Source OECD Economic Outlook No 80

→ Full size version of Figure 3.4 [187 kB JPG]

New Zealand's investment in plant and machinery as a percentage of GDP now exceeds that of all other benchmark countries. Plant and machinery investment contributes to labour productivity.

Figure 3.5 Housing investment as a percentage of GDP

Source OECD Factbook 2007

→ Full size version of Figure 3.5 [176 kB JPG]

There has been an increase in housing investment as a percentage of GDP in New Zealand since the mid-1990s. However, it still falls within the OECD pack and close to the benchmark economies.

Figure 3.6 Net national saving as a percentage of GDP

Source OECD Factbook 2007

→ Full size version of Figure 3.6 [179 kB JPG]

3.1.2 Saving. New Zealand's net national saving (gross national saving minus depreciation of fixed capital) as a percentage of GDP has fallen since 2003 and lies below all of the benchmark economies with the exception of the US.

Figure 3.7 Household net saving as a percentage of disposable household income

Source OECD Factbook 2007

→ Full size version of Figure 3.7 [152 kB JPG]

Historically, New Zealand's households have saved a low proportion of their disposable income. The negative figures since the early 1990s indicate "dis-saving" (i.e., household consumption has been higher than income). Since 2000, the saving rate has fallen more quickly in New Zealand than for benchmark economies.²⁵

Figure 3.8 Capital Access Index

Source Milken Institute, Capital Studies, 2005 Capital Access Index, October 2005

→ Full size version of Figure 3.8 [128 kB JPG]

3.1.3 Financial Market Development. The Milken Institute's Capital Access Index evaluates the ability of new and existing businesses to access capital in countries around the world. It incorporates 56 quantitative and qualitative variables from multiple data sources. New Zealand ranks 14th out of 121 countries and 12th in the OECD.

Figure 3.9 Size of banking sector (measured by bank assets)

Source OECD Factbook 2007; Denmark National Bank; Reserve Bank of Australia; Reserve Bank of New Zealand; The Federal Reserve Board

→ Full size version of Figure 3.9 [121 kB JPG]

The size of New Zealand's banking sector, measured by its bank assets as a proportion of GDP, has been growing since the 1990s and is greater than that of the US or Australia.²⁶

Figure 3.10 Size of sharemarket

Source World Federation of Stock Exchanges; OECD Factbook 2007

→ Full size version of Figure 3.10 [118 kB JPG]

New Zealand's sharemarket capitalisation, measured by market capitalisation as a percentage of GDP, is smaller than for comparator countries and is not growing.

Figure 3.11 Investment in venture capital as a percentage, 2000-2003

Source OECD Science, Technology & Industry Scoreboard 2005

→ Full size version of Figure 3.11 [128 kB JPG]

Venture capital is a relatively small proportion of the economy in most OECD countries, but the size of New Zealand's venture capital industry is towards the lower end of the OECD range (17th).

Figure 3.12 Informal capital market - informal investment, 2004

* The mean is of all countries surveyed. Not all those countries are represented on this graph, and some of those surveyed are not in the OECD.

Source Global Entrepreneurship Monitor 2005 Executive Report

→ Full size version of Figure 3.12 [122 kB JPG]

Informal investment is an important source of funds for new firms in New Zealand and exceeds that of other benchmark economies when measured as a percentage of GDP. Countries with strong economic performance tend not to rely on informal investment.

3.2 Innovation and Entrepreneurship

Key Points

Innovation underpins aggregate productivity growth, and entrepreneurship drives innovation.
Indicators in this section present a mixed but improving picture for entrepreneurship and innovation in New Zealand.
Overall, New Zealand ranks low relative to other OECD countries on the formal measures of innovation activity - research and development (R&D) and patenting. This underperformance can be explained by our distance from major world centres, lack of large firms and relatively large primary sector, suggesting that New Zealand has to be better than other countries in promoting innovation.
Our basic science base is delivering relatively high levels of research outputs compared with the OECD average, we have a relatively large number of researchers, and our R&D has been growing at a fast rate relative to the OECD.
New Zealand firms have high entry and exit rates.
New Zealand firms have on average somewhat higher innovation rates than EU firms across a range of measures but very low levels of R&D.
The level of high and medium-technology products exported by New Zealand firms is also far behind the OECD average, although sophisticated technology underpins the primary sector, which the OECD classifies as a "low technology intensive" sector.
Although the level of business R&D is very low in New Zealand, it is growing much more rapidly than the OECD.
Commercially viable innovations are often developed by a firm working in collaboration with other agencies. Proxy measures of collaboration across the innovation system suggest strong research links between business and government²⁷ in New Zealand but weaker research links between business and universities, and internationally.

Introduction

Innovation is essential to ongoing labour productivity growth. Innovation is the dynamic and uncertain process through which firms create new economic value by creating, adopting and adapting knowledge into new or improved products and services, operational processes, organisational and managerial processes, and marketing methods, in pursuit of profits. Entrepreneurship is the human activity of envisaging these profit opportunities and undertaking the work necessary to take advantage of them.

Innovation activity is difficult to measure, and there is no single widely accepted indicator of the nature or extent of innovation. This chapter uses a suite of indicators that are individually partial but, taken as a whole, give some insight into how effectively innovation processes are functioning in New Zealand.²⁸

3.2.1 Formal Measures of Innovation

Two formal and widely recognised but narrow measures of innovation are aggregate R&D and patenting. R&D is an input to innovation activity.²⁹ Theory and empirical evidence suggest that R&D plays an important role, both in generating new knowledge and in facilitating technology transfer and the absorption of overseas knowledge.

Patent-based indicators provide an indication of the effectiveness of New Zealand's R&D spending in generating commercial applications.³⁰

New Zealand continues to have a low level of R&D and patenting compared with the OECD average. The low levels of R&D and patenting rates in New Zealand can be explained by our distance from world centres, small firm size, and an industrial structure weighted towards primary production.³¹ However, the growth of R&D in New Zealand has been one of the strongest in the OECD. We generate more science and engineering research publications than the OECD average, and we have a relatively larger proportion of human resources devoted to research, mostly in the public sector.

3.2.2 Innovative Firms

In business, generating and absorbing new ideas and translating them into new goods, services, processes or markets is essential to enhance firm competitiveness. Innovative firms are more likely to record an increase in market share, profitability and total sales than non-innovative firms.³² As described in Chapter 1, it is the dynamic process of innovation and productivity improvement at the firm level that drives aggregate productivity and economic growth.

The picture on New Zealand firms' innovation performance is mixed. Compared with the European Union (EU) average, our businesses generally have higher rates³³ of product innovation³⁴ and marketing methods innovation, and a similar rate of operational processes innovation, but a lower rate of managerial and organisational process innovation. Compared with Australian firms,³⁵ our firms are more innovative in every industry except electricity, gas and water supply. In terms of inputs to innovation, our firms have one of the lowest levels of R&D in the OECD, although the growth rate has been strong recently.

Another indicator of how well our firms are doing in harnessing innovation is their ability to produce products with high technology content that are competitive in the world market. The OECD³⁶ notes that technology-intensive exports³⁷ accounted for much of the growth in trade over the decade to 2005 and grew more rapidly than total manufacturing exports in all OECD countries except Japan.

New Zealand has one of the lowest shares of high- and medium- to high-technology manufactured exports of all OECD countries, although it is growing at a fast rate. In part, this low share is due to New Zealand's concentration on primary sector exports, which are classified as low-tech, even though there is a sophisticated science and technology base underpinning them.

A study by Hausmann and Rodrik creates an outcome indicator of the sophistication of each four-digit product export. According to this measure, the sophistication of New Zealand's exports is consistent with its per capita income³⁸ - good for a resource-based exporter, but well below the most sophisticated exporters.

3.2.3 Innovation Linkages

Networking and collaboration play an important role in innovation. Commercially valuable innovations often do not arise in isolation, but develop out of collaboration between firms, customers, suppliers, employees, universities, government research institutes and other players. The degree to which such linkages exist may be an important indicator of the functioning of the innovation system as a whole.

Linkages are difficult to measure accurately - even more so than other aspects of innovation activity. One proxy measure for innovation linkages is the level of R&D financed across sectors and borders. The private sector in New Zealand appears to be well connected to public sector R&D providers (CRIs and government departments), with 17.5 per cent of government R&D financed by business - the highest proportion among those OECD countries shown. However, the level of New Zealand R&D financed from overseas is low compared with the OECD average, and our businesses finance only a low percentage of R&D carried out by universities.

3.2.4 Firm Dynamics

Firm turnover rates give an indication of the availability and uptake of new business opportunities. OECD research³⁹ suggests that up to 50 per cent of labour productivity growth in OECD countries can be attributed to the entry of new and more productive firms into the market, and the exit of less productive firms. Preliminary results of Treasury research⁴⁰ on firm-level productivity indicate that similar figures are likely to apply in New Zealand.

New Zealand's firm turnover rates were between 22 and 23 per cent between 2001 and 2005, with entry rates slightly higher than exit rates.⁴¹ Entering firms were mostly in the property and business services industry (40 per cent),⁴² followed by the agriculture and construction industries, both with approximately 10 per cent of all entries. The government administration and defence sector is the least likely industry for businesses to enter.

Comparing New Zealand's firm turnover rates with those of other countries is difficult, as there are many methodological differences in collecting and interpreting entry and exit data across countries.⁴³ Preliminary results of Treasury research⁴⁴ that attempted to account for some of the methodological differences show that New Zealand's firm turnover rates were at the top of the OECD range in the 1990s, although not greatly different from countries such as the US and the UK. This may indicate that there is a relatively high level of entrepreneurial behaviour in New Zealand. However, one likely explanation for this high rate of start-ups is the relative ease of starting a business in New Zealand. Chapter 4.3 discusses New Zealand's business environment further.

Figure 3.13 Research & Development as a percentage of GDP (GERD), 2004

Source OECD in Figures 2006–07, page 40

→ Full size version of Figure 3.13 [138 kB JPG]

3.2.1 Formal Measures of Innovation. New Zealand has a lower share of gross expenditure on R&D (GERD) as a percentage of GDP than the OECD average. Our business expenditure on R&D (BERD) as a percentage of GERD is particularly low (New Zealand is 19th out of 24 countries).

Figure 3.14 Average annual growth of GERD and BERD (selected OECD countries 1995-2004, or latest year available)

Source OECD Science, Technology and Industry Outlook 2006, Table 38; NZ data from Ministry of Research, Science and Technology, A Decade in Review

→ Full size version of Figure 3.14 [112 kB JPG]

The growth of New Zealand's GERD and BERD⁴⁵ has been substantially higher than the OECD average.

Figure 3.15 Science and engineering articles per million inhabitants, 2003

Source OECD Science, Technology and Industry Outlook 2006, Table 38

→ Full size version of Figure 3.15 [155 kB JPG]

New Zealand publishes more science and engineering articles than the OECD average (New Zealand is 9th out of 23 countries).

Figure 3.16 Researchers⁴⁶ per thousand employed and average annual growth, 1995-2003 (or latest period available)

Figure 3.16 Researchers per thousand employed and average annual growth, 1995-2003 (or latest period available)

Source OECD Science, Technology and Industry Scoreboard 2005, Figure B8.1

→ Full size version of Figure 3.16 [149 kB JPG]

The number of researchers in New Zealand is above the OECD average (New Zealand is 7th out of 23 countries). The number of researchers employed by New Zealand firms has been growing at the fastest rate in the OECD.

Figure 3.17 Patents per million population, 2003

Source OECD Science, Technology and Industry Outlook 2006, Table 30; NZ Treasury database; MED calculation

→ Full size version of Figure 3.17 [125 kB JPG]

New Zealand has a low level of patents per head compared with the OECD average (we are 19th out of 24 countries).

Figure 3.18 Rates of innovation activity by type, New Zealand 2005, EU 2002-2004

Source Statistics New Zealand, Innovation in New Zealand 2005; Eurostat, Innovation in Europe 2004

→ Full size version of Figure 3.18 [97 kB JPG]

3.2.2 Innovative Firms. Compared with the EU average, New Zealand has higher rates of product innovation (we are 8th out of 26 countries) and marketing method innovation (4 out of 26), and a similar rate of operational processes innovation (14 out of 26), but a lower rate of organisational or managerial processes innovation (15 out of 26).

Figure 3.19 Percentage of business innovating by industry, 2005

Source Statistics New Zealand, Business Operation Survey, Module B; Australian Bureau of Statistics, No. 8158.0

→ Full size version of Figure 3.19 [137 kB JPG]

New Zealand firms are more innovative than Australian firms in every industry except electricity, gas and water supply.

Figure 3.20 R&D tax concessions for large firms and SMEs, 2004

Source OECD Science, Technology and Industry Scoreboard 2005, Figure A 12.1

→ Full size version of Figure 3.20 [121 kB JPG]

New Zealand has one of the lowest levels of tax concessions⁴⁷ for business R&D in the OECD (New Zealand is 19th out of 21 countries). This level will increase once the new tax credit (announced in Budget 2007 and coming into effect in 2008/09) is introduced.

Figure 3.21 Grants and subsidies for business R&D, 2005 (or latest year available)

Source OECD, Main Science and Technology Indicators, December 2006, Table 36

→ Full size version of Figure 3.21 [137 kB JPG]

The New Zealand government provides more grants and subsidies for business R&D than many OECD countries (we are 7th out of 21 countries). In part, this reflects the low level of R&D tax concessions to business.

Figure 3.22 Share of high- and medium-high- technology industries in manufacturing exports, 2003

Source OECD Science, Technology and Industry Scoreboard 2005, Figure 8.1

→ Full size version of Figure 3.22 [185 kB JPG]

New Zealand has low levels of high or medium-to-hightechnology⁴⁸ manufacturing exports compared with other OECD countries (we are 22nd out of 23 countries), although the growth rates are higher than the OECD average. The classifications for "high", "medium-tohigh", "medium-tolow" and "low" technology industries are made according to their aggregate R&D intensities, based on those of 13 countries, not including New Zealand.⁴⁹

Figure 3.23 Percentage of research funded by business carried out by government research organisations and departments

Source OECD, Main Science and Technology Indicators, December 2006, Table 55

→ Full size version of Figure 3.23 [151 kB JPG]

3.2.3 Innovation Linkages. New Zealand has the highest percentage of government R&D financed by business in the OECD.

Figure 3.24 Percentage of total research and development expenditure financed from overseas, 2005 (or latest year available)

Source OECD Science, Technology and Industry Outlook 2006, Table 13

→ Full size version of Figure 3.24 [175 kB JPG]

New Zealand has a lower percentage of GERD financed from overseas than the OECD average (we are 14th out of 23 countries), although the rate has been increasing.

Figure 3.25 Percentage of research funded by business carried out by higher education institutes

Source OECD Main Science and Technology Indicators 2006, Table 48

→ Full size version of Figure 3.25 [153 kB JPG]

New Zealand universities carry out a lower proportion of R&D financed by business than the OECD average (we are 20th out of 23 countries). The proportion in 2005 is significantly lower than in 1995.

Figure 3.26 Firm entry, exit and turnover rates, 2001-2005⁵⁰

Source Statistics New Zealand Business Demographic Statistics Review Report, May 2006, page 31

→ Full size version of Figure 3.26 [75 kB JPG]

3.2.4 Firm Dynamics. New Zealand's firm turnover rates remained around 22 per cent over the period 2001–2005, with entry rates slightly ahead of exit rates.

3.3 International Linkages

Key Points

International linkages are important for productivity and economic performance. Such linkages support knowledge flows from overseas, help foster business relationships, provide markets for our exports and support the import of technology embodied in new equipment.

New Zealand's share in world trade is 0.36 per cent and has been relatively static, in line with the OECD average. As a percentage of GDP, New Zealand's share of exports and imports falls in the lower half of the OECD, which is unusual for a country of New Zealand's size.

High levels of inward and outward foreign direct investment (FDI) are important for small, open economies like New Zealand's. The stock of New Zealand's inward FDI is high by OECD standards, with "greenfield" investment about average. Outward FDI is among the smallest in the OECD as a percentage of GDP.

Flows of people (and their knowledge) also contribute to economic growth in New Zealand. Our net immigration has been high relative to the benchmark economies, with a significant share of these people educated to tertiary level.

International students are a source of current export earnings, a potential source of future skilled migrants for New Zealand, and an important way of developing international networks. The number of foreign fee-paying students in the university sector has diminished in recent years.

Introduction

The depth of New Zealand's international linkages is a key influence on economic performance. International linkages can impact on productivity via the development of scale economies, knowledge and technology transfers, increased domestic competition and improved resource allocation. Several forms of international linkage are discussed below. Cross-border R&D, discussed in Chapter 3 (section 3.2.3) above, is also important.

3.3.1 Trade and Foreign Investment

International trade can impact on domestic productivity levels, and vice versa. Entering and competing in international markets can help some types of firms to lift their performance higher than would otherwise be the case. Effective trade connections can also provide some firms with the opportunity to exploit markets for their products, develop economies of scale, and identify and develop new niche products and services.

As a percentage of GDP, New Zealand's trade levels (sum of exports and imports) increased from the mid-1980s to 2006. Exports, however, have reached a plateau and have not increased as a percentage of GDP since 2000.

New Zealand is an outlier, for a small country, in having a small ratio of exports and imports to GDP. Economies of a similar size, such as Denmark, have considerably higher levels of trade. In part, this is likely to be due to our distance from world markets.

Important international connections and improvements in productivity and growth can

also be forged through inward and outward FDI.⁵¹ High levels of FDI are important for and common among small, open economies like New Zealand's. Through its effect on competition, FDI may indirectly enhance the effectiveness of resource use in the host economy. FDI is also associated with a range of potential spillover benefits. These include the transfer and diffusion of technology, information, skills and management practices, which in turn can facilitate improvements in firm capability, and access to overseas resources and markets.

Like many small economies, New Zealand has a high stock of FDI relative to GDP.

One important type of FDI is "greenfield" investment. Greenfield FDI refers to investment projects that entail the establishment of new production facilities such as offices, buildings, plants and factories. Greenfield FDI thus directly adds to production capacity and capital formation in the host country. When adjusted for population size, the number of greenfield projects in New Zealand falls roughly in the middle of the OECD pack.

Outward FDI is typically driven by a firm's desire to gain improved access either to the host country's market or to production inputs, including skilled labour, infrastructure, production facilities or raw materials. While the stock of New Zealand's inward FDI is high by OECD standards, New Zealand's levels of outward FDI are among the lowest in the OECD.

3.3.2 Migration

In addition to trade and investment, the flow of people (and their accompanying knowledge and ideas) is an important contributor to the strengthening of New Zealand's international linkages. Flows of people can expand and develop international networks, improve the understanding of international cultures, societies, markets and economies, and facilitate growth in trade flows.

New Zealand's net migration levels (expressed per thousand of the population) have been high relative to benchmark economies. However, large net inflows of migrants are insufficient in themselves to ensure improvements in outcomes related to New Zealand's international connections. As with FDI, it is the quality of flows that is important. Flows of appropriately skilled migrants facilitate the transfer of knowledge and ideas, and grow the skilled labour supply required to support New Zealand's ongoing economic development.

Recent data shows that, around 2000, there was a high percentage of New Zealand born people with tertiary qualifications resident in other OECD countries, but New Zealand has also attracted a high percentage of immigrants with a tertiary education (both from the OECD and from the rest of the world). This means that New Zealand has experienced more of a "brain exchange" than a "brain drain".

New Zealand now has one of the highest proportions of immigrant populations in the OECD. While this inflow of human capital has proved invaluable to attaining our "brain exchange", it raises important issues about effective settlement of new arrivals and ongoing social cohesion - dimensions that are important for economic growth and overall well-being.

International students are a potential source of future skilled migrants for New Zealand. They also contribute to current export earnings, the transfer of knowledge and ideas, and the expansion of international networks. The number of foreign fee-paying students in tertiary education reached a peak of 31,430 in 2004, with the majority being in the university sector. However, this number has been diminishing.

Figure 3.27 New Zealand's and other countries' share in the world trade for merchandise and services

Source OECD Country Profile 2007

→ Full size version of Figure 3.27 [168 kB JPG]

3.3.1 Trade and Foreign Investment. New Zealand's share of world trade has remained relatively steady over the past 10 years, in line with the OECD average.

Figure 3.28 Value of exports and imports as a percentage of GDP - New Zealand

Source Statistics New Zealand

→ Full size version of Figure 3.28 [108 kB JPG]

As a percentage of GDP, New Zealand's imports increased from the mid-1980s to 2006, although this trend has been subject to cycles. Exports, while displaying a steady upward trend over the long term, have not increased as a percentage of GDP since 2000.

Figure 3.29 Trade as a percentage of GDP, and country size

Source OECD Country Profile 2007 and Factbook 2007

→ Full size version of Figure 3.29 [99 kB JPG]

New Zealand has a relatively low level of trade (value of exports and imports as a percentage of GDP) given its size. Small economies typically have high trade to GDP ratios.

Figure 3.30 Investment overseas, foreign investment in New Zealand and the net international investment position (stock measure)

Source Statistics New Zealand

→ Full size version of Figure 3.30 [134 kB JPG]

The level of foreign investment in New Zealand has been consistently higher than our investment offshore for a number of years, leading to an increasingly negative net investment position.

Figure 3.31 Inward and outward FDI stock as a percentage of GDP, 2004

Source OECD Factbook 2007

→ Full size version of Figure 3.31 [141 kB JPG]

The stock of New Zealand's inward FDI is high by OECD standards, measured as a percentage of GDP. However, New Zealand's outward FDI levels are among the lowest in the OECD.

Figure 3.32 Greenfield projects by destination per million population, 2002-2005

Source UNCTAD, World Investment Report 2006; OECD Factbook 2007

→ Full size version of Figure 3.32 [125 kB JPG]

Greenfield FDI refers to investment projects that entail the establishment of new production facilities. When adjusted for population size, the number of greenfield projects in New Zealand falls roughly in the middle of the OECD pack.

Figure 3.33 Permanent and long-term migration per annum

Source Statistics New Zealand

→ Full size version of Figure 3.33 [108 kB JPG]

3.3.2 Migration. Net permanent and long-term migration has been cyclical. Nevertheless, since 2001, long-term arrivals in New Zealand have exceeded departures.

Figure 3.34 Net migration per thousand population (annual average 2000-2005 or latest available period)

Source OECD Factbook 2007

→ Full size version of Figure 3.34 [133 kB JPG]

New Zealand's net migration per thousand of the population has been high relative to the benchmark economies and the OECD average.

Figure 3.35 Foreign-born people as a percentage of total population, 2004

Source OECD Factbook 2007

→ Full size version of Figure 3.35 [121 kB JPG]

Within the OECD, New Zealand has one of the highest proportions of immigrants in the population.

Figure 3.36 Foreign-born people with tertiary education, as a percentage of all residents with tertiary education, circa 2000

Source OECD Factbook 2007

→ Full size version of Figure 3.36 [177 kB JPG]

Circa 2000 (the latest available internationally comparable data), there was a high percentage of New Zealand-born people with tertiary qualifications resident in other OECD countries, but New Zealand has also attracted a high percentage of tertiary-educated immigrants (both from the OECD and from the rest of the world).

Figure 3.37 Foreign fee-paying students in tertiary education

Source Ministry of Education

→ Full size version of Figure 3.37 [75 kB JPG]

The number of foreign fee-paying students in the tertiary education sector has diminished since its peak in 2004. The majority have been in the university sector.⁵²

²² OECD Economic Outlook Number 80.

²³ Fabling, R. and A. Grimes, Practice Makes Profit: Business Practices and Firm Success, 2006, Ministry of Economic Development Occasional Paper.

²⁴ More information on saving in New Zealand can be found in various Treasury reports, working papers and policy perspective papers available on the Treasury website.

²⁵ These household savings rates exclude capital gains, which have been substantial. In addition, a recent study by the Reserve Bank of New Zealand (Hodgetts et al, Household Savings and Wealth, 2006) indicated that the strong negativity of the official savings rate in New Zealand may be overstated, although the long-term downward trend remains accurate.

²⁶ The UK has been omitted from this analysis since its bank assets also comprise considerable offshore funds, which makes its banking sector an outlier in relation to the other economies in the sample.

²⁷ Including Crown Research Institutes (CRIs).

²⁸ For more detailed analysis of New Zealand's innovation performance, see "OECD Review of New Zealand Innovation System 2007". Available online at the Ministry of Economic Development website.

²⁹ The Statistics New Zealand Research and Development survey defines R&D as follows: "Research and experimental development comprises creative work undertaken on a systematic basis in order to increase the stock of knowledge. Any activity classified as R&D is characterised by originality. Investigation is a primary objective."

³⁰ Patenting is not always the most effective way to protect intellectual property rights. This is particularly the case for industries where the rapid commercialisation of innovations and being first to market matter more than the long-term protection of securing a patent.

³¹ See Crawford, R., R. Fabling, A. Grimes and N. Bonner, Determinants of National R&D and Patenting: Application to a Small, Distant Country, 2005, MED Occasional Paper #06/02. This suggests that New Zealand will have to be more effective than other countries in generating innovation if it is to attain comparable productivity levels.

³² Statistics New Zealand, Innovation in New Zealand 2005.

³³ For this survey, innovation is defined as "the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations". 2005 Oslo Manual p46.

³⁴ Innovation performance is often measured by surveys and is subject to definition and methodology differences. The firm innovation statistics cited here came from Statistics New Zealand's innovation surveys and were compared with similar statistics presented in Eurostat.

³⁵ Data for this indicator came from the innovation surveys conducted by the Australian Bureau of Statistics, which also followed the definition of innovation from the 2005 Oslo Manual.

³⁶ OECD Science, Technology and Industry Scoreboard 2005, p172.

³⁷ The OECD measures high technology by the intensity of R&D undertaken by the exporting industry. This can be misleading where inputs to the industry employ sophisticated R&D.

³⁸ The indicator for each four-digit product is constructed by calculating the share of world exports coming from high-income countries. They assume that products mainly exported by high-income countries are more sophisticated than other products. See Hausmann, R., J. Hwang and D. Rodrik, What You Export Matters, 2006. Available online at the Harvard University Center for International Development website.

³⁹ Stefano, S., P. Hemmings, T. Tressel and J. Woo, The role of policy and institutions for productivity and firm dynamics: Evidence from micro and industry data, 2002, Paris: OECD, Economics Department, Working Paper No 329. Available online at the Organisation for Economic Co-operation and Development website.

⁴⁰ Law, D. and N. McLellan, The Contributions from Firm Entry, Exit and Continuation to Labour Productivity Growth in New Zealand, 2005, Wellington, Treasury Working Paper 05/01.

⁴¹ The turnover rates here came from Statistics New Zealand's Longitudinal Business Frame (LBF), which attempts to identify entries and exits of enterprises due to administrative churn (such as company restructuring and changes of ownership), so that genuine business start-ups and closures/failures can be better identified. Most of the firms in the survey are small, and small firms tend to have higher turnover rates than larger firms.

⁴² According to Statistics New Zealand's Business Demography Statistics, around 83 per cent of firms in the property and business services industry have no employees.

⁴³ See Vale S., The international comparability of business start-up rates, 2007, for a summary of the methodology differences.

⁴⁴ Mills, D. and J. Timmins, 2004 - this study omitted firms with no employees when comparing New Zealand's turnover rate internationally.

⁴⁵ The growth rates for New Zealand BERD and GERD come from the publication Research and Development in New Zealand: A Decade in Review, which accommodates the methodology changes between Statistics New Zealand's 2002 and 2004 R&D surveys. The growth rates reported by this publication, however, might be mis-estimated, as firms with fewer than 10 employees are excluded over the entire period.

⁴⁶ "Researchers" here is a subset of the OECD's Human Resources in Science and Technology (HRST) occupations. HRST are defined, according to Canberra Manual (OECD and Eurostat, 1995), as people having graduated at the tertiary level of education in a science or technology field of study, or people employed in a science and technology occupation for which a high qualification is normally required and the innovation potential is high.

⁴⁷ The tax concession is measured as 1 minus the B index. The B index is intended to represent the present value of pre-tax income necessary to cover the initial cost of R&D investment and to pay corporate income tax. The index is calculated using information on the depreciation allowances, tax credits and other specific allowances in national tax systems.

⁴⁸ High-technology industries include aircraft and spacecraft; pharmaceuticals; office, accounting and computing machinery; radio, TV and communications equipment; and medical, precision and optical instruments. Medium- to high-technology industries are electrical machinery and apparatus; motor vehicles, trailers and semi-trailers; chemicals excluding pharmaceuticals; railroad equipment and transport equipment; and machinery and equipment.

⁴⁹ Such classifications thus may not be appropriate for New Zealand. For example, the food and beverage industry is regarded as a low-technology industry, but it has a relatively sophisticated science and technology base underpinning it in New Zealand.

⁵⁰ Data for this graph was collected by Statistics New Zealand's Longitudinal Business Frame (LBF), which removed entries and exits of enterprises due to administrative churn, leaving genuine business start-ups and closures/failures.

⁵¹ FDI measures the value of cross-border capital transactions, both debt and equity, between enterprises in a direct investment relationship.

⁵² This graph omits students in private training establishments (e.g., language schools).

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Printed: 08/11/2009