What is productivity, and why is it important in New Zealand small businesses?
There are three main ways New Zealanders can lift their average incomes: work more; get better export prices in international markets; or produce more from each hour at work.
Kiwis are already among the hardest working people in the OECD, so there's limited scope left to increase incomes by working more. We have also done well out of gains from exporting in recent years, but that won't continue indefinitely. So the third way - lifting productivity, or output per hour of work - is the most promising and sustainable to increase the wellbeing of New Zealanders. It will give us more choices, and higher income per person means more money to spend on health, education and other things to enhance our quality of life.
How do our small businesses stack up internationally on productivity? What impact does that have on our economy as a whole?
New Zealanders work about 15% longer than the OECD average to produce about 20% less output per person, and labour productivity here is one-third lower than in Australia. Sure, the international wellbeing statistics paint us as pretty happy as a nation. But our average incomes lag behind, a direct reflection of our poor productivity record.
Recent work by the Commission found that our labour productivity is lower than Australia's particularly in mining, agriculture, most branches of manufacturing, construction, retail and wholesale trade and financial and insurance services. However, New Zealand does better than Australia in food and drink manufacturing, utilities - electricity, gas, water and waste services - and arts and recreation services.
Small and young businesses are a vital part of the New Zealand economy. Small businesses make up around 90% of all businesses and 30% of employment. A large number of these are in the services industry, which accounts for 70% of GDP. Services contribute to the wider economy both directly and by providing services to other businesses. If we can lift the productivity of service businesses, that can have a major effect on the economy.
What are some of the challenges our small businesses face when it comes to boosting their productivity?
New Zealand's productivity performance is below par in the OECD both across the economy and in many individual industries. This underscores the need for our policy environment to be strongly supportive of productivity growth and for firms to have a clear focus on improving productivity. New Zealand's low population density and its distance from international markets limit competition and the opportunities for New Zealand firms to achieve economies of scale. Competition drives innovation and gives consumers more choice, better products and lower prices. Helping firms to make sure they are using the most competitive suppliers, and are getting the best use of information and communications technology - ICT - would make New Zealand firms more competitive on a world stage.
A recent survey of senior decision makers in 1,526 New Zealand businesses conducted by Colmar Brunton found that they generally have a reasonable choice between alternative providers of most business services, but have less choice in administrative support; education and training; recruitment, human resources and payroll; and rental of equipment. Firms considered that most service providers made limited efforts to gain or retain their business, and that lack of information about providers also made it difficult to find a better provider.
ICT is revolutionising the way that services operate. However, New Zealand has yet to experience the full productivity benefits of ICT, and the survey found that this in part due to the lack of skilled ICT professionals and ICT-savvy managers, and the high initial cost of ICT services.
What help is there for small business owners to overcome these challenges? What changes could have the most impact to boost productivity?
The Productivity Commission is currently conducting inquiries into boosting productivity in the services sector, as well as looking at how to improve the regulatory system. Ways to increase competition include increasing the use of comparison websites and improving competition law.
Streamlining the process for filling ICT jobs from overseas and helping ICT graduates to adapt to the workplace would increase the number of employees and managers with ICT skills. Cloud computing has great potential to reduce the costs of setting up ICT services, but firms need encouragement to adopt cloud-based services.
The Commission has made a number of draft recommendations in these areas and will be issuing its final recommendations to Government in April. The Commission is also working on recommendations to improve the regulatory system in New Zealand to make it easier for businesses to comply with existing regulations, and to ensure that any new regulations do not add unnecessary cost to the New Zealand economy.
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