Bernard Hickey: Flight from top hits bottom line

One overlooked aspect of the New Zealand brain drain of the past decade is the quality of management running our companies.

Policymakers worry about losing skilled workers such as doctors, engineers, nurses, teachers and truck drivers. Yet entrepreneurs and managers are the people we can least afford to lose.

There are no statistics on how many managers and entrepreneurs have been lost, but we're seeing the results in the poor profitability of New Zealand-owned businesses. The managers in New Zealand aren't as good as the ones who have left, or in foreign-owned businesses operating here.

Figures prepared by the Inland Revenue Department for the Tax Working Group show foreign-controlled businesses in New Zealand produce an average return on equity of 26 per cent, while New Zealand-owned businesses return an average of just 12 per cent.

The difference is startling and the range of foreign-owned businesses earning much more than 26 per cent shows they are routinely very profitable compared to their New Zealand-owned competitors.

There may be a couple of reasons why this difference is so wide that have nothing to do with management quality. First, foreign-owned businesses tend to be larger and in less competitive industries or sectors.

Foreign companies often choose to buy businesses with strong or monopoly-type market positions. Media and banking have high foreign ownership and relatively stable customer bases. Also, large businesses often produce economies of scale that increase productivity and profitability.

Many New Zealand-owned businesses tend to be small and family-owned. They aren't attractive to foreign owners because they don't have the scale or market positions that can be turned into higher profits in the long run.

Any small businesses that grow into larger businesses are often snapped up by foreign owners, either directly through acquisitions or indirectly through a sharemarket listing where foreign-run funds own a dominant share.

But there is another factor at work. Many foreign-owned companies in New Zealand are managed by New Zealanders living here, or New Zealanders living in Australia.

Many New Zealand managers aspire to work for foreign-owned companies because there are better prospects for promotion to higher-paid jobs overseas, or they are paid more here. A good chunk of New Zealand's emigrants are transferring overseas with their foreign-owned companies.

One in four New Zealand graduates works overseas, the highest rate in the OECD. There is the pull factor of higher wages and opportunities for promotion, but there is also the push factor of lower wages and unaffordable housing. It becomes a vicious circle where low wages beget low wages.

The Government must work urgently to break this cycle by encouraging New Zealand's best and brightest and most entrepreneurial managers to stay, or at least return.

We need higher wages, higher profits and real wealth generation. The Tax Working Group will recommend tax changes to encourage investment in businesses rather than unprofitable residential property. We need a nation of entrepreneurs aspiring to be billionaires.