Why our leaders must dump their pure market models

By WAYNE CARTWRIGHT*

Both business leaders and the Government have to lift their game in guiding the way in which New Zealand will build a position of prosperity and security in the world.

This article focuses on the challenges facing business leaders.

It may be a little unfair to equate business leadership with the Business Roundtable, because many business people would not agree with all its views. Nevertheless, its influence is pervasive because it focuses and articulates the thinking of leaders of the big corporates.

To lift their game, the business leaders represented by the Business Roundtable should first consider replacing the simple economic theories and ideology that they have relied on, because these bear little resemblance to the real world of international business and political economy.

One of the problems that New Zealand has had with the prescriptions from the Business Roundtable's pure market model is that most markets are now global. Achievement of efficiency in these markets has had positive impacts from global cost reduction gains and product/service innovation.

But there have also been negative impacts when capital, expertise and operations have shifted out of New Zealand. I suspect that the net effect of most of these impacts has been negative, and has been one of the causes of the brain drain.

This hollowing-out has resulted in the loss of executive and professional jobs. More importantly, it has removed from the community many of the role models of business management and innovation from whom people (especially young ones) learn essential knowledge and skills.

Our business leaders seem to have sat back and applauded these results of global equity markets at work.

Can New Zealand business leaders honestly claim that we have done our best to build sustainably profitable positions in these globalising markets? Even the one major industry in which New Zealand has begun to achieve this, dairy foods, is wavering. It could unwittingly be headed towards fragmentation and exposure to takeovers.

Another that had potential, the Fletcher Challenge group of wood fibre businesses, is now being dismantled.

These are not inevitable consequences of globalisation, but evidence of how the game must be lifted.



Some business leaders seem to be saying that New Zealand cannot hope to participate in world-class transnational corporations substantially owned and controlled from here and based on New Zealand advantages.

The role models of other small innovative countries suggest differently. It is possible for New Zealand to build successful transnational organisations. To suggest otherwise is premature, self-fulfilling defeatism.

For New Zealand to create wealth, it must have organisations that have stakes in global industries that generate sustainable future cash flows. It is not enough for New Zealanders simply to invest in foreign transnationals. This may generate wealth for investors, but it does not build global industry positions for the community, which is what the country needs.

The essence of this approach is building knowledge and competencies that are distinctive and proprietary to New Zealand, and linking these to the capabilities of overseas partners.

Of course, the business cases must be good enough to attract capital. But it requires much more than that: strong purpose, a compelling vision, and a committed clustering of resources and capabilities from commerce, educational and research institutions, community groups and Government.

Success is driven by a collective will to succeed, not just by market forces. It also requires very patient investors and funders, for such businesses usually take years to develop.



In tandem with building globally successful businesses, New Zealand should compete vigorously in parallel markets in which locations (countries and states such as New Zealand) compete for the presence, investment and access to embedded expertise of overseas transnational corporations.

This usually requires collaboration from Governments (national, and/or local), community groups and institutions, to create favourable environments for the transnationals' sites.

If this collaborative approach offends the purity of free market economic theory favoured by Business Roundtable members, that is tough. As a case in point, the unworldly market-only economic ideology that New Zealand has had for many years left the country poorly prepared to respond to the recent proposals from Motorola.

Business leaders' reliance on a neo-classical theory of individual property rights, perfect information, and free and perfect competition in product markets seems mind-bogglingly naïve.

They should base their guidance on concepts of competition between innovative business concepts (not just between products or services) and creation and utilisation of knowledge within collaborative networks and clusters.

They also need to be aware that technology and customer expectations are changing so rapidly that information flows are chronically insufficient. This business model is quite different to the one assumed by traditional microeconomic theory.

The leaders also have to acknowledge that the motivation of most people in these enterprises lies beyond financial incentives. Of course, they expect to be very well rewarded, but they are turned on by the stimulation and thrill of creating, inventing and seeing new concepts working for customers and partners. They care for and enjoy working with others in trusting business relationships.

The challenge of ensuring the success of the small and medium-sized businesses that are established and fuelled by New Zealanders' imagination and innovation is not just about impressive individual efforts. It is also about a national commitment to nurture and support these initiatives, and to retain them in New Zealand hands. Sale overseas often stalls the development of New Zealand competencies and opportunities for further growth.

Members of the Business Roundtable would probably say that its philosophies do not exclude all of this. My point is that they do not recognise or encourage it either.

* Tomorrow: Government's part.

* Wayne Cartwright is a professor in the department of international business at the University of Auckland, and has had several directorships.