NZ needs more than good public policy to claw its way out of the Covid-19 crisis. Photo / SkyCity
COMMENT by David Teece and Kieran Brown:
New Zealand's economy and the firms that power it are at a perilous moment in the wake of the Covid-19 pandemic. The worst may still be ahead of us.
It's going to take more than good public policy and smart government actions to bring about recovery, and the economic transformation New Zealand really needs.
The private sector and private sector leadership and action has to be the lynchpin of economic recovery and transformation.
New Zealand has an ongoing productivity problem. Our productivity growth pre-Covid was abysmal.
According to the Organisation for Economic Co-operation and Development (OECD), New Zealand has lost ground relative to the top half of the OECD countries due to low international engagement, weak clusters even in sectors with comparative advantage (mainly primary), risk-averse management styles and ownership structures, burdensome regulation, and insufficient investment by both the government and the private sector in skills and innovation.
However, while weaknesses on management are sometimes mentioned (the OECD ranks New Zealand poorly… alongside Poland and Portugal) they are seldom analysed in detail.
There is little doubt in our minds that the steady drumbeat of more and more government regulations is a major drag on New Zealand productivity.
But New Zealand management isn't up to snuff either. Organisational and management capabilities are under appreciated and only vaguely understood, yet they are the key to building firm-level productivity and competitiveness.
As London School of Economics Professor John Sutton notes "The proximate cause of differences in the wealth of nations lies, for the most part, in the capabilities of firms".
Yet capability development at the firm level is typically ignored by industrial policy, which, like economic theory, tends to treat firms as homogeneous and interchangeable black boxes. Policies unsupported by a deliberate focus on corporate capabilities will fall short over the long run.
To move the New Zealand productivity frontier closer to the global frontier and improve international competitiveness, New Zealand firms need a long-term programme to strengthen what we call "dynamic capabilities", along with what we call "ordinary capabilities."
Leading multinational firms and start-up super stars have strong dynamic capabilities… by which we mean the ability to figure out the right stuff to do, as compared to the right way to do it. The dynamic capabilities framework fosters a mindset that favours innovation and effectiveness over efficiency.
This dynamic capabilities framework has grown rapidly since its introduction in 1990s. Outside New Zealand it is now the leading perspective in the field of strategic management. Firms with strong dynamic and managerial capabilities are more resilient and productive, allowing them to pay higher wages. They support innovative cultures.
Such traits are especially valuable in the context of volatile uncertain complex and ambiguous environments (VUCA). The Covid-19 world is faced with a VUCA world.
Building strong dynamic capabilities can bring a potential payoff in the form of higher productivity and higher wages. It expands production and innovation frontiers outward. Dynamic firms are more competitive, domestically and internationally.
Meanwhile, better ordinary capabilities, such as industry best practices, can only move laggards towards the frontier. That's the easy stuff that is still missed by many business leaders. Dynamic capabilities is harder. They must be built as they cannot be bought. However, they can support break out strategies and uncommon success.
For New Zealand companies, an increasing amount of the board's attention is focused on compliance, risk, and reporting which many believe comes at the expense of time spent on long-run value building.
The gospel of shareholder primacy, which dominates western corporate governance approaches (New Zealand's included) need not—but does tend to—deflect attention from long-run stewardship and building dynamic capabilities to short term cost cutting and small incremental improvements.
Now, more than ever, boards need to favour the future, tolerate mavericks, and support bold investment to help catapult the best New Zealand firms toward the global frontier.
New Zealand needs bold and smart action, not just from government, but from businesses small and large to reboot and transform the economy. This will require the birth of more new enterprises and the transformation of established companies. They must become more entrepreneurial and clear eyed innovators and stewards.
In our report, New Zealand frontier firms: A capabilities-based perspective published by the Productivity Commission on Friday as part of their Frontier Firms inquiry, we recommend establishing a cross-sector frontier firms programme.
The programme should bring together business leaders, scholars and the government to work collaboratively to test and stage specific interventions into promising sectors of the economy. Other small nations like Singapore and Denmark engage in similar exercises all the time.
This is not "picking winners" but backing the best to help catapult them further. In addition, the government should establish a competitive challenge fund to speed up the identification, adoption, and diffusion of managerial practices and technologies that can improve productivity and performance.
This approach is showing promising results in the UK. New Zealand should also consider establishing (for incumbent and future directors) a strategic programme for "Long-run Growth, Prosperity, and Stewardship" which includes members of the start-up and tech community to ensure the thinking does not get dominated by large/listed firms.
New and more dynamic ways of thinking and governing can emerge. New Zealand definitely needs both private and public sector leadership and acumen to claw its way out of the Covid-19 crisis.
Professor David Teece is the chairman and a co founder of Berkeley Research Group. He has twice founded and grown companies to NZ$750 million in revenues with several businesses in New Zealand. Kieran Brown is a London-based Fellow with the BRG Institute, and Visiting Scholar at UC Berkeley. He also consults with governments and Fortune 500 firms globally.
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