New Zealanders like to think that we "punch above our weight". And in many fields – think sport, food, wine – we do. But when it comes to our incomes and productivity, we have lagged behind other countries for some time.
Some suggest this is because we are a small group of islands far away from other markets. But this seems more an excuse than a reason.
Several other small advanced economies like Ireland, Denmark, and Sweden have prospered despite the challenges of size. Then there's countries like South Korea and Singapore that have progressed despite their distance from markets.
These provide evidence that a growing cohort of large, innovative exporting firms is one way to overcome the challenges of size and distance.
Innovation and developing distinctive, specialised goods and services matter for improving productivity and achieving a competitive advantage. These goods and services are hard to copy, giving their creators more ability to defend their market share and earn healthy rewards. And innovation can 'spill over' to other businesses and workers, creating benefits outside the firm doing the research and product development.
Several Kiwi firms already take an innovation-led approach. Zespri's long-running investments in new kiwifruit cultivars have created new premium products and helped save the industry from the PSA virus. And Fisher & Paykel Healthcare's partnerships with hospitals and doctors here and in the US have allowed it to build niches in health technology.
The problem is, we don't have nearly enough such firms and the ones we do have are small by international standards. Yet other small advanced economies have large, globally significant firms.
For example, Denmark - with just under six million people - has major firms in shipping (Maersk), pharmaceuticals (Novo-Nordisk), renewable energy (Vestas), brewing (Carlsberg), amongst others. Switzerland (around 8.5 million people) has large firms in food, technology, healthcare, insurance and watchmaking (Nestle, ABB, Novartis, Swiss Re, Swatch).
These large firms not only boost national incomes through their export earnings, they also underpin innovation and productivity growth in other local firms. As demanding clients, large firms drive quality and performance improvements in their local suppliers. As major buyers of innovation, large firms support research infrastructure and attract skilled staff that can benefit other firms.
Being large matters because innovation and exporting are risky and costly. Putting resources into untested markets or new ideas and then failing to sell enough quantity to cover those costs, and more, will reap little, zero or even negative returns.
For smaller firms, the risks can be fatal. Large firms can not only wear these risks and raise the necessary funds, they can more easily spread the costs of successful innovation by investing in capacity to meet high demand. Large firms allow small countries to overcome the disadvantages of their size.
So how do we go about growing this cohort in New Zealand? In its recent report on 'frontier firms', the Productivity Commission identified four priorities.
The first is that the Government needs to concentrate its innovation resources on a small number of areas where New Zealand has current or growing strength and expertise. If New Zealand is to develop globally significant firms, business and Government will need to invest at scale rather than spread limited funds thinly.
This doesn't mean picking specific businesses and backing them no matter what. It means investing in research, new technologies and skills in areas that can add the most value and where New Zealand has the potential to be a global leader – such as horticulture, health technology and software. It also means being hard-headed and withdrawing funds where projects don't deliver.
The second priority is to make sure that New Zealand's regulations are suitably friendly to innovation.
Regulations should be regularly reviewed to ensure they are not inappropriately restricting innovation effort.
For example, genetic modification rules need to remain relevant given changes in techniques, while dairy industry regulations need to ensure innovative new firms are not unfairly restrained. In other areas, the absence of specific regulations (eg, consumer data rights) makes it harder for local firms to create new goods and services.
Third, the Government should ensure New Zealand's migration policies are providing the right types of skills that firms need to grow and innovate.
Finally, the Government should make sure that its laws, regulations and policies are not holding back the growth of Māori firms. There are many examples of innovative Māori "frontier" firms, with Māori firms recording much higher rates of innovation than all NZ businesses.
Values of kaitiakitanga and manaakitanga, alongside mātauranga Māori, help provide the crucial distinctiveness much sought after by discerning consumers abroad. But Māori firms face unique challenges around issues such as the use of land and the protection of intellectual property.
Being small and distant is not a barrier to New Zealanders once again enjoying world-leading living standards. Other small countries flourish, and New Zealand can too. If we are to succeed, we need to specialise and back ourselves.
New Zealand needs a cohort of large firms that can create and take distinctive, valuable goods and services to the world. They are likely to share a long-term perspective for investing in innovation and enterprise, together with a skilled and valued workforce, delivering improved productivity and wellbeing.
The disadvantages of size and distance can be overcome by our advantages of an envious natural endowment, with government, iwi and Māori, and industry, researchers and entrepreneurs embracing innovative people and connected communities.
- Ganesh Nana is Chair of the New Zealand Productivity Commission.