New Zealand firms: Reaching for the frontier 2021 April The Productivity Commission aims to provide insightful, well-informed and accessible advice that leads to the best possible improvement in the wellbeing of New Zealanders. New Zealand firms: Reaching for the frontier Final report April 2021 The New Zealand Productivity Commission Te Kōmihana Whai Hua o Aotearoa1 The Commission – an independent Crown entity – completes in-depth inquiry reports on topics selected by the Government, carries out productivity-related research and promotes understanding of productivity issues. The Commission aims to provide insightful, well-informed and accessible advice that leads to the best possible improvement in the wellbeing of New Zealanders. The New Zealand Productivity Commission Act 2010 guides and binds the Commission. You can find information on the Commission at www.productivity.govt.nz or by calling +64 4 903 5150. How to cite this document: New Zealand Productivity Commission (2021). New Zealand firms: Reaching for the frontier. Final report. Available at www.productivity.govt.nz/inquiries/frontier-firms/ Date: April 2021 ISBN: 978-1-98-851960-9 (print) ISBN: 978-1-98-851961-6 (online) Copyright: This copyright work is licensed under the Creative Commons Attribution 4.0 International License. In essence you are free to copy, distribute and adapt the work, as long as you attribute the source of the work to the New Zealand Productivity Commission (the Commission) and abide by the other license terms. To view a copy of this license, visit www.creativecommons.org/licenses/by/4.0/. Please note that this license does not apply to any logos, emblems, and/or trademarks that may be placed on the Commission’s website or publications. Those specific items may not be reused without express permission. Inquiry contacts Administration T: (04) 903 5167 Website www.productivity.govt.nz E: [email protected] Twitter @nzprocom Other matters Geoff Lewis Linkedin NZ Productivity Commission Inquiry director T: (04) 903 5157 E: [email protected] Disclaimer The contents of this report must not be construed as legal advice. The Commission does not accept any responsibility or liability for an action taken as a result of reading, or reliance placed because of having read any part, or all, of the information in this report. The Commission does not accept any responsibility or liability for any error, inadequacy, deficiency, flaw in or omission from this report. 1 The Commission that pursues abundance for New Zealand Foreword i Foreword For the last thirty or forty years, New Zealand’s main approach to maintaining and growing our living standards has relied on adding more people into the workforce, having employees working longer hours, and expanding production in industries with damaging environmental impacts. This approach is not sustainable. Long working hours can be harmful to individual and social wellbeing, our labour force participation rates are already high, and we are harming our natural resources and taonga. If we in Aotearoa are to enjoy the incomes we aspire to while protecting our wellbeing and collective assets, we need to take a new approach. The key challenge for New Zealand is to increase our overseas earnings by growing the value of our export offerings. New Zealand needs to move from mainly exporting commodities to selling distinctive specialised goods and services. To do this, New Zealand needs to develop a cohort of large, globally significant firms that can innovate and take new goods and services to the world. Only such firms will have the scale and capability needed to successfully develop new products and enter new markets. They will also underpin innovation by networks of researchers and other local firms, raising the performance of the wider economy and acting as exemplars for others. Building this cohort of large firms will require a different approach from the Government. Rather than spreading its research and innovation efforts thinly, it will need to focus more tightly on areas where New Zealand has existing or emerging strengths and can achieve critical mass. The Government will also need to review its policy and regulatory settings to ensure they sufficiently support innovation. And there is a pressing need for the Government to test whether its policies and rules are holding back the development and growth of innovative Māori firms. These kaupapa Māori firms are distinctive for having long-term horizons and managing multiple stakeholders and objectives, and offer valuable lessons for other New Zealand businesses. Although this will be a new approach for New Zealand, we can look for lessons from other small advanced economies. Countries such as the Netherlands, Sweden, Switzerland, Singapore – all with similar population sizes to New Zealand – have global firms that set the pace and frontier in specific market niches. New Zealand’s small size and distant location from markets have for too long been used as excuses. Other countries have escaped these traps and we can too. This report lays out the challenges New Zealand faces, and the way in which the Government can change direction to boost New Zealand’s long-run productivity and the incomes and wellbeing of all in Aotearoa. This inquiry commenced under the leadership of the previous Chair Murray Sherwin. I acknowledge and appreciate his contributions to this inquiry and report, as well as the major role he played in establishing the Commission and its reputation. I also acknowledge the support of my fellow Commissioners Andrew Sweet, Gail Pacheco and Bill Rosenberg, and the work and dedication of the inquiry team: Geoff Lewis (inquiry director), Steven Bailey, Ron Crawford, Sally Garden, Nicholas Green, Jenesa Jeram, Patrick Nolan, Hamed Shafiee, Geoff Simmons and Jo Smith. Also, the work of Anaru Mill and Declan Millin on Māori firms was hugely valuable. We all benefited immensely from our engagements with many firms and stakeholders, who shared their experiences, wisdom and insights with us, and from the consultants and experts who provided specialist advice and research to the inquiry. On behalf of the Commission, I thank each and every one who submitted on our issues paper and draft report, met with the Commission to discuss the inquiry topic, or provided research and policy inputs. Your contributions have made our advice stronger and better. Dr Ganesh R Ahirao (Ganesh Nana) Chair, New Zealand Productivity Commission Te Kōmihana Whai Hua o Aotearoa Paenga-whāwhā 2021 ii New Zealand firms: Reaching for the frontier Terms of reference New Zealand Productivity Commission inquiry into maximising the economic contribution of New Zealand’s frontier firms Issued by the Ministers of Finance, of Economic Development and of Trade and Export Growth. Pursuant to sections 9 and 11 of the New Zealand Productivity Commission Act 2010, we hereby request that the New Zealand Productivity Commission ("the Commission") undertake an inquiry into maximising the economic contribution of New Zealand's frontier firms. Context While aspects of New Zealand's recent economic performance have been strong, productivity growth is persistently weak and a significant drag on living standards and well•being. This inquiry focusses on a central aspect of New Zealand's productivity performance - the economic contribution of New Zealand's frontier firms. Frontier firms are the most productive firms in the domestic economy within their industry. These firms play an important role in shaping aggregate productivity performance, both through their own performance and through the way they diffuse new technologies and business practices into the New Zealand economy. While New Zealand has some world-leading firms, on average our frontier firms are not performing as well as their international peers, and the diffusion of innovations from the domestic frontier to other domestic firms seems slow. The purpose of this inquiry is to identify policies and interventions that could maximise the performance and contribution to the economy of New Zealand's frontier firms through: • improving the performance of the frontier firms themselves; and • helping innovations diffuse more effectively from frontier firms to other New Zealand firms. This requires using the Productivity Commission's high quality independent analytical capacity, and its links with OECD research and analysis, to accurately characterise the New Zealand situation and identify and evaluate relevant policies and interventions. As the final report will be delivered in the year that New Zealand is hosting APEC, its substance could inform discussions through the Economic Committees. Scope Having regard to the context outlined above, the referring Ministers request that the Commission undertake an inquiry into maximising the contribution of New Zealand's frontier firms to aggregate productivity growth through their own performance and through the diffusion of innovations from frontier firms to other domestic firms. For the purposes of the inquiry the Commission should: • establish a coherent and measurable classification of what constitutes a frontier firm, and what the distribution of New Zealand firms looks like behind the productivity frontier. This could include benchmarking the performance of New Zealand's firms with international peers. • building on research from New Zealand and elsewhere, investigate the internal or external characteristics of New Zealand's frontier firms that correlate with productivity performance, and where