Overseas thrust no easy task, says think tank

Individual companies will have to rise to the challenge if this country is to expand exports and outward investment, the New Zealand Institute says. However, although policy changes would help, the Auckland-based think tank believes individual companies will really have to want it.

The institute's fourth report, which covers policy changes in the areas of tax, savings and the mandate of state-owned enterprises, also touches on research undertaken jointly with McKinsey on what needs to happen at the level of individual companies if the country is to lift its level of commercial engagement with the rest of the world.

"Many of the iconic global champion firms that grew out of small countries, like Nokia from Finland, were characterised by high aspiration and a long-term commitment to international success," it says.

"The focus needs to be on becoming a global company, not merely on having some modest international activities that supplement the company's domestic operations."

But that advice relates to the ultimate objective, not how to get there.

Big bang, bet-the-company moves have tended to be less successful than a more incremental, learn-as-you-go approach, the institute says.

Firms need to have a competitive advantage and be clear about what it is.

"This is not the same as assuming that strong financial performance in New Zealand is proof of competitive advantage and that the New Zealand business model can be replicated successfully offshore."

Success at home may simply reflect the absence of intense competition.

"Development of a competitive position in international markets is likely to include some initial low-risk moves to test competitive advantage overseas, followed by more aggressive scaling-up once international competitiveness is proven."

The institute cites Pumpkin Patch as an example of that approach.

Obtaining real insights about international markets needs people on the ground.

"Desk research from New Zealand supplemented by occasional visits is helpful but unlikely to be sufficient," it says.

"This may require the deployment of senior executives into the foreign market well before entry, the development of a network of relationships with potential suppliers and customers and the recruitment of local executives with deep market knowledge."

It says this can be expensive.

While many of the costs of establishing a presence in overseas markets are deductible in the ordinary way, the institute advocates adding a system of tax rebates, which would effectively be the same as a 200 per cent deduction but with the added advantage of being payable in cash if the firm's taxable income was too small to fully utilise such a deduction.

It would have a minimum threshold of $50,000 of spending a year and a cap of $300,000.

A tax credit for export market development costs is one of the options in the Government's recent discussion document on business taxation.

The institute also advocates changes to the controlled foreign company or CFC rules, the stringent regime governing the taxation of the foreign offshoots of New Zealand companies.

Under the present rules, New Zealand companies are taxed on their worldwide income, with a credit for foreign tax paid.

They pay 33c in the dollar regardless of the local tax rate, putting them at a disadvantage in foreign markets.

There is an exemption for investment into eight "grey list' countries, but it includes only one Asian nation, Japan.

The aim of the CFC regime is to ensure there is no tax incentive for New Zealand firms to invest overseas rather than at home, but most countries do not take such a pure approach and the institute argues New Zealand cannot afford to either.

It calls for New Zealand-based companies not to be taxed in New Zealand on income from active, productive operations overseas (as opposed to passive investments in financial assets).

It also advocates moves to boost domestic savings and local capital markets.

New Zealand's high reliance on foreigners' savings is one of the reasons the cost of capital is higher here, it says.


What's needed

* The deployment of senior executives into the foreign market well before entry.

* The development of a network of relationships with potential suppliers and customers.

* The recruitment of local executives with deep market knowledge.