It is fundamental to our success as a species that we learn from each other. If we only knew what we had figured out for ourselves from scratch, well, there would not be 7 billion of us for a start.

Something of the sort is true of businesses as well. What economists call "absorptive capacity" — a firm's ability to acquire, adapt and utilise knowledge from external sources — is crucial to lifting productivity.

The more cheerful productivity numbers from Statistics New Zealand yesterday — reflecting upward revision of the historical track for gross domestic product — do not change the overall picture that labour productivity in New Zealand wobbles around a trend level that is low by developed country standards.

As the Productivity Commission's director, economics and research, Paul Conway, told a conference at Te Papa last week, "This is not just about data. Look across New Zealand firms and very few of them resemble the innovative, skills- and capital-intensive, globally connected firms that drive productivity growth internationally."


When it comes to investment in knowledge-based assets, we don't know that much about the New Zealand situation, Conway said. "But there are indications that it isn't that flash. For example, R&D is low, and management quality may also be an issue."

Suspecting that part of our productivity problem is inadequate diffusion of technology and know-how from the best firms in an industry to the middling ones, the commission commissioned some research by professor Richard Harris of Durham University and Trinh Le of the Wellington think tank Motu, looking into absorptive capacity at the firm level. They trawled through data from Statistics NZ's business operations surveys, which every other year include a bunch of questions for the thousands of firms surveyed, about how they come by information or ideas for innovation.

It might be from other businesses, including suppliers or customers. It might be from new hires or professional advisers, industry organisations, universities, Crown research institutions or overseas sources. There are many possible channels.

Based on those responses, Harris and Le were able to compile summary measures of a firm's absorptive capacity and then see how that related to characteristics which are proxies for healthy productivity — innovation, exporting (which implies international competitiveness) and in-house research and development.

They conclude that "the results showed that absorptive capacity as measured here — net of the impact of, for example, foreign ownership and human capital — has a substantial influence on exporting, innovation and undertaking R&D and consequently on firm-level productivity."

Importantly, when they divide up the firms by sector and look at the gap in absorptive capacity between the best and the median, it typically is wide. That is dispiriting as a starting point, but encouraging in what it says about the scope for improvement.

A firm that surfs one wave of technology is often not that well prepared for the next.


Looking at which firms have higher levels of absorptive capacity, they found that firms primarily engaged in manufacturing performed best, followed by those in the services sector, while the primary sector tended to have lower absorptive capacity.

International connectivity matters. New Zealand-based multinationals generally scored well for absorptive capacity. Next highest were partly foreign-owned companies, followed by wholly foreign-owned ones. Purely domestic firms had the lowest levels of absorptive capacity.

Conway said other research had found it was hard to identify positive spillovers from foreign-owned to domestic firms in the same industry and yet such spillovers are one reason we are supposed to like foreign direct investment.

A possible explanation for that, he suspects, is that in a small country markets can be highly concentrated and less than ferociously competitive, reducing the incentive for small domestic firms to learn from foreign-owned multinationals.

Harris and Le found that larger firms tended to have higher absorptive capacity and were more likely to engage in innovation and R&D (and exporting in the case of manufacturers) but, a little paradoxically, that older firms are less likely to export, innovate or do R&D.

But don't larger firms tend to be older? "Often innovations are brought to market by new start-ups, so a firm that surfs one wave of technology is often not that well prepared for the next, which is why churn, creative destruction, is important for the economy," Conway said.

"Very few New Zealand firms operate at the global technological frontier in their industry and there are long tails of very small and low-tech firms surviving in small, fragmented and insular domestic markets with weak competition. That is not exactly a recipe for productivity growth." So what is?

Harris and Le argue that firms' absorptive capacity processes evolve over time and cannot be copied in any simple fashion.

But in general terms they are processes for identifying technological opportunities in relation to customer needs, seizing those opportunities and capturing value from doing so, and continual renewal.

The implication for public policy is to pivot away from the approach embodied in the previous Government's business growth agenda, with its focus on improving the environment in which businesses operate, to more direct assistance to individual firms.

Assistance that will help them learn how to learn.

There are some models of hands-on assistance already, in the way New Zealand Trade and Enterprise works with a limited number of exporters, and Callaghan Innovation's R&D grants and access to specialised help in developing new products.

"So that kind of thing, but broader-based," Le said.

Might there also be a role for business organisations and trade associations in this endeavour?

"There totally is," Conway said. "There is a strong role for business organisations to get out there and just talk to their members about what is happening at the frontier of firms in their industry, what kind of technology they are using and what impact it is having on their productivity, their profitability and the wages they are able to pay their workers."