Increasing international connection
[ Last Updated 15 August 2008 ]
Understanding international connection
International connection drives innovation, improved productivity, and economic growth. It can be thought of as the broad range of economic and non-economic linkages that connect a country with the rest of the world and the infrastructure that makes them possible. These linkages include:
- flows of goods and services
- people
- investment
- information
- ideas
- knowledge
- technology and culture.
From a growth perspective, the importance of the "softer" connections (such as flows of people, ideas, knowledge and information) is increasingly being emphasised in the literature and policy debate.
It is useful to distinguish "openness" from "connections". Openness refers to the absence of formal barriers to forming linkages. Connections refers to the actual flows generated by the linkages. Being open is necessary for having strong international connections, but it is not sufficient. If openness is opening the door, connections are about walking through it.
New Zealand is now relatively open to the rest of the world. The challenge is to make the international connections that will help us grow and prosper.
Why international connection is important
Being internationally connected is important for a small economy like New Zealand. International connection supports and encourages innovation, higher productivity, and economic growth in a number of different ways.
- Greater interaction with the rest of the world provides fresh perspectives and new ideas that boost productivity.
- Being better connected globally helps focus the broader domestic innovation system on exploiting commercial opportunities.
- International connection creates competitive pressure from offshore and provides much greater consumer choice, giving businesses more incentive to innovate.
- Businesses can identify and access new markets and take advantage of new opportunities.
- Businesses are able to specialise in what they are best at and exploit economies of scale.
- International connection builds management capability through experience gained in operating in global markets.
- Businesses benefit from having access to larger and deeper pools of skilled labour and capital.
- Flows of people bring ideas, linkages and knowledge of other markets. Similarly, capital flows can bring access to new technology.
New Zealand's international connections
The Economic Development Indicators 2005 report presents a number of measures that indicate the extent of New Zealand's international connections.
Together, they suggest that New Zealand is quite well-connected internationally, but has some way to go to match small high-growth OECD countries, particularly in exports as a proportion of GDP.
New Zealand's exports as a percentage of GDP were ranked 19th in the OECD in 2002. This was lower than several other small economies including Ireland and Scandinavian countries, but higher than countries such as Australia, the UK and the US.
New Zealand has one of the lowest shares of high and medium-high technology manufactured goods in total exports of all OECD countries. This reflects, to a degree, the structure of the economy. For example, the food and beverage industry in New Zealand has a relatively high research and development intensity, although the OECD classifies it as a low technology industry.
Foreign direct investment (FDI) is another important indicator of international connection. International experience has shown that FDI can generate valuable spillover benefits. For example, FDI can improve access to overseas resources and markets. It can also contribute to the dissemination of better technology and better managerial practices for our firms.
Small economies tend to have high levels of FDI due to the scarcity of domestic resources. In 2003, New Zealand had the sixth highest FDI stock in the OECD as a proportion of GDP (55 percent).
Although inflows of FDI have reduced in recent years, in 2003 they were reasonably consistent with those into countries such as Australia, the UK and Denmark (48 percent).
New Zealand also appears to have reasonably well-developed channels for collaboration, with offshore research and development activity being just above the OECD median on this measure. Although internationally comparable data is not readily available, New Zealand scientists are actively involved in international collaborations. For example, at any one time, there are about one thousand active New Zealand/US scientific collaborations.
A more internationally connected New Zealand
Over time we would expect enhanced international connection to be reflected in:
- higher flows of exports, imports, investment, and people
- higher quality exports, imports, and foreign direct investment, and more highly skilled people being attracted here, in other words, moving up the value chain
- greater numbers of New Zealand businesses successfully exporting goods and services based on local innovation (which in turn leverages off imported knowledge, ideas, investment, and technology)
- more New Zealand exporters benefiting from large-scale production, distribution and marketing, and from locally supplied specialist inputs
- productive networks linking people in our research, business, youth, and creative communities with their overseas counterparts.
The role of government
A working group led by the Ministry of Foreign Affairs and Trade is developing policy initiatives to improve New Zealand's international connection. The working group has focused on some of the barriers to improving our international connection, including information costs, transaction costs, externalities, and distance.
The information the working group has generated has provided a useful platform for developing policy recommendations for budgets and work agendas across government.
The 2004 Budget included funding for a range of international connection initiatives.
Contacts and links
Contact
Convenor
Interdepartmental Working Group on International Connection
Ministry of Foreign Affairs and Trade
P: +64-4-439 8000
E: gif@mfat.govt.nz
Links
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