New Zealand’s productivity paradox: Part VI

By Shaun Hendy 10/06/2010

ResearchBlogging.orgThis is the last post in my series on Philip McCann’s paper [1], which considers New Zealand’s productivity paradox: why, despite being ranked very highly for the factors that are normally thought by economists to drive economic growth, is New Zealand’s economy is just an average performer? In the previous post, I discussed why McCann doesn’t see a paradox. In fact:

’In the current era of globalisation, New Zealand’s combined lack of any major home market effect, the lack of major agglomeration effects, and the extreme geographical isolation, breaks the usual link between entrepreneurship, innovation and growth which is evident in other countries.’

McCann’s argument is based on ideas from economic geography, in particular that high spatial transaction costs in knowledge-based activities have lead to the regional agglomeration of high technology industries. New Zealand’s small population base means that we don’t enjoy the benefits of agglomeration in knowledge generation experienced by larger countries and cities.

Do agglomeration benefits exist? My patent data seems to suggest they do, and the continued existence of regional clusters of knowledge-based industries (such as the Nokia cluster of inventors in Helsinki) seems to be further evidence of this.

This may not seem intuitive; we are told every day that the world is flat.  However McCann argues that it is only in low knowledge-intensity activities where the terrain has levelled off.  The landscape for knowledge-intensive activities, McCann’s work suggests, has become more mountainous.  Despite the availability of electronic communications, my personal experience is that face-to-face contact in scientific collaborations remains vital.

Picking winners?

So what can New Zealand do about its economic geography? Are there some silver bullets for Mr English?

One approach discussed by McCann is to reduce spatial transaction costs between New Zealand and Australia (and the rest of the world).  He suggests that we move towards economic union with Australia, invest heavily in broadband, and look to reduce the monopoly that Auckland’s international airport currently enjoys.  I’ll leave it to the reader to rank these in order of political feasibility.

McCann also suggests that government will need to ’pick winners’ i.e. find mechanisms to grow New Zealand companies to scales at which they can invest and grow offshore rather than simply export.

… finding systems that also encourage New Zealand firms to move from simply exporting to overseas ownership, thereby promoting outward FDI and increasing New Zealand’s global engagement, would appear to be critical. Such an approach can also be allied  with  an  approach  that  targets  particular  types  of  inward  investors. While ‘picking winners’ is widely regarded as having a poor history in much of New  Zealand’s  industrial  policy,  using  inward  FDI-promotion  strategies (Boston Consulting Group, 2001) to help to attract technologies regarded as  critical for New Zealand (and agri-biotechnology technologies would appear to be high on the list) is a pragmatic approach that is freely adopted by almost all of New Zealand’s competitor countries.

I would add that government will need work out how to deliver the highly-skilled human capital that these ‘winners’ will require.

A city of four million people

Another obvious approach is to increase our own domestic levels of agglomeration.  As a colleague of mine put it, ’New Zealand needs to act like a city of four million people’.

McCann makes several suggestions as to how we might do this:

  1. Take full advantage of our existing spatial agglomerations e.g. Auckland-Hamilton-Tauranga by ensuring their continued growth and by investment in their infrastructure.
  2. Increase knowledge flows between Auckland and the rest of the country.  McCann argues against concentration of resources in the University of Auckland, suggesting that knowledge transfer primarily occurs through the mobility of people between regions rather than through direct spillovers.
  3. Increase competition on domestic airline routes to lower internal airfares.
  4. Reduce the breadth and fragmentation of our RS&T sector. In particular, he cites Rod Oram [2], suggesting that we focus on our agricultural sector.

With regards to point 4, as I have revealed before in this blog, my opinion is that a sole focus on agri-biotechnology for New Zealand is risky and perhaps even misguided.  New Zealand has exceptionally low export diversity, with a heavy reliance on commodity dairy products.  Do we play to our strengths by trying to leverage the existing scale in our dairy sector, or do we try to develop fresh export sectors, building scale from scratch?

This is a question that occupies the minds of many commentators.  A conservative approach would be to play to our perceived strengths.  In New Zealand’s case, these are generally perceived to lie in agriculture, so it is not hard to make a case for putting our brain power to work in this sector.  Yet as McCann points out, our labour productivity in agriculture is only 16th in the OECD, despite the strong agricultural focus of our RS&T system.

The alternative is to develop new sectors of our economy, as small countries as Denmark and Finland have done over recent decades.  As I have noted in my study of Finland’s inventor network, this will require substantial targeted investment in human capital over a sustained period.

The reality is that to maintain our place in the world we will need both to back our existing strengths and to develop new ones, quite simply because other countries are also doing both.

Depth not breadth

The science reforms in the early 1990s were intended to make New Zealand’s RS&T sector more efficient and paid little heed to the idea of building scale.  Institutional financial needs pre-empted wider collaboration and FRST effectively capped the size of the grants it awarded, explicitly acknowledging that it could not manage programmes larger than ~$NZ2m. (Note to overseas readers: this is not as large as it sounds, partly as it is in NZ$ ;-), but mostly as it is full-cost funding rather than marginal funding – in a University or a CRI for instance, it might fully fund 7-8 scientists.)

An early policy response to this problem was the establishment of the Centres of Research Excellence (CoREs), including the MacDiarmid Institute which I work for, and seven other organisations.  In fact, I have come to think of the MacDiarmid Institute as a mechanism that has both reduced spatial transaction costs for collaboration and increased the scale and coherence of the physical sciences in New Zealand.

If we are going to take the economic challenges ahead of us seriously, then I think it is worth carefully studying the way that the CoREs have built scale and collaboration within New Zealand science.  The MacDiarmid Institute experience is that a multi-institutional network of researchers distributed across the country can be an effective way to build scale and increase research productivity and impact.  This is something I am now looking at quantitatively with the Ministry of Education and will no doubt be blogging about soon.

Where to from here?

Most of us would agree that New Zealand must diversify its economy through knowledge intensive-industries to reduce its dependence on low-value commodity exports.  Policies that seek to do this, but that do not take into account our economic geography (scale in particular) will probably not succeed.  Nonetheless, small countries, such as Denmark, Finland and Israel, have overcome the disadvantages of size to build successful high-technology industries with scale in areas unrelated to previous strengths.

I will conclude with an observation that Philip McCann made to me over coffee last year.  We were discussing my study of the Finnish experience, and I was arguing that a similar economic transformation was possible here.  He did not agree, yet his argument was not based on economics, but rather on culture.  His view was essentially that science and technology are so much more deeply embedded in the Scandinavian worldview that their businesses and governments have the ability and confidence to do things that ours cannot.

Unfortunately, it is difficult to disagree with this last statement.  Conventional wisdom in New Zealand politics holds that Kiwis don’t care about science and technology, so good policy and increased spending in this area doesn’t win votes.  We will need to change this, if we are to ensure that New Zealand’s economic geography is not its destiny.

[1] McCann, P. (2009). Economic geography, globalisation and New Zealand’s productivity paradox New Zealand Economic Papers, 43 (3), 279-314 DOI: 10.1080/00779950903308794

[2] Oram, R. (2007). Reinventing  paradise:  How  New  Zealand  is  starting  to  earn  a  bigger, sustainable living in the world economy. North Shore: Penguin Books.

0 Responses to “New Zealand’s productivity paradox: Part VI”

  • I also think NZ needs more people. Lots more (a view generally unpopular amongst native New Zealanders) 🙂

  • Perhaps it is also related to how governments view their role in the value stream? I am thinking NZ govt needs to move from a compliance burden (regulator, enforcer) to an enabler (by providing more efficient/effective processes), and joining the other stakeholders in sharing information. Rod Drury suggested something similar too, here

  • Hmm, interesting reading. Some issues could bear enlarging upon.
    Face to face contact remains important in the age of internet communications. I suspect that F to F is more a measure of unfettered interdisciplinary access to ideas: NZ’s strong protection of IP & copyright, physical isolation place severe, and expensive constraints on access to research by other means than personal networks.
    Case in point while reading this blog I thought I’d like to read McCann’s paper. As Im not affiliated with any subscribing institutions to read the paper I’d near to fork out 8% of my weekly income to purchase said paper from UK based publisher Taylor Francis Or at slightly lesser cost travel to Waikato University. Thus despite having direct access to the Global internet physical access to authors, and innovators remains important. Note that had the paper been authored overseas such travel would be prohibitively expensive. The solution is to enable direct low cost access by all NZer’s to at the very least ALL research funded, or undertaken by local NZer’s via a National’ subscription to publishing houses such as Taylor Francis, and Elsevier, perhaps via a portal (open to all kiwis to signup).
    Perhaps consideration of the unintended effects of the changes made to the DSIR (Department of Scientific and Industrial Research) in the late 1980’s on the NZ perception of science and technology is needed. I suggest that foremost amognst these is the distancing of the man in the street (including business investors, and researchers in other disciplines) from the not only the activity of researchers, but also their findings. Information that was once actively shared -admittedly too readily (with overseas interests) – has now become too proprietary i.e., exclusive thus without face to face collaboration and a cross- disciplinary, cross-organisation discussion of discoveries progress and economic success will be limited by direct funding available to particular research groups. A mechanism that could work to facilitate more of a national collegiate atmosphere, and enhance national investment and profitability in science and technology would be to provide a significant explicit tax advantage to organisations that freely share research via a national portal. Too a minor extent such facilities exist between NZ universities, but too often access is constrained to particular research groups. While there are some challenges to policing such a national portal to prevent unsanctioned overseas access to NZ IP, there are a variety of means available to manage this.
    NZ as a city of 4.5m people. Too right. NZ in effect is no further physically away from Sydney, than is Melbourne or Perth, and not much further away from Singapore or Taiwan. However NZ’s historical reliance on distribution channels via Britain, and Australia I suggest does adversely effect NZ’s ability to compete economically by surprisingly high infrastructure costs on NZ businesses. As does the third world attitude of many in the New Zealand business community, and present National Government that promotes the absurd notion that exporting ownership of NZ infrastructure, and IP will profit NZ, through attracting foreign investment.
    How does exporting (selling off) infrastructure and IP generate wealth for NZ? One could argue that is just another form of ensuring NZ remains a primary producer of science and technology, like a science plantation economy. Would it not be better to develop a retained value added economy?
    We need to succeed as a nation rather than a disparate mob of individuals reliant on selling our best ideas, and best researchers to overseas interests to then loose most of the benefits of local production to those interests.
    It is often sad that science and technology (and corporate business) in NZ is overly reliant on overseas investment and yet very few of the immigrant’s entering NZ under the investor category actually invest in NZ science, or technology development, or even business.
    At present the most significant foreign investment in the NZ economy is in the retail housing sector particularly by overseas banks who take advantage both of the exchange rate, and the significant (higher that the global first world norm) margins on borrowings (from the Reserve Bank), and then export those profits to overseas shareholders.
    It would make better economic sense for the NZ government to redirect at least some of the bank investment towards the NZ science sector by reducing the cash rate available to local banks that directly invest in science and technology. And also by ensuring that investor immigrants are encouraged (forced) to invest in business rather than housing, by curtailing immigrant and foreign ownership in the rental housing market. This requires a government focused on building NZ as a corporate entity rather than a profit center, i.e., one that is prepared to revisit it’s economic theory in the light of current evidence substantiating the failings of the neo-liberal agenda.
    Yes, NZ is geographically remote, but I would suggest that most of the advantages pointed to by McCann promote NZ as a profit centre for overseas interests to exploit, rather than enabling NZ interests to successfully compete other than in niches as yet undiscovered by overseas interests. Case in point NZ researcher’s at IRL are world leaders in high temperature superconductors. There we have an edge, and yet despite predictions of this predicted to be a 20 billion dollar Global industry in 2020, the NZ cut is estimated to be a mere $300 million, er that to me sounds as though NZ is going to spend $300 million on super conductor technology to replace our aging electricity reticulation infrastructure, but not really profit otherwise from the investment in this IRL research. So we get a small cost reduction in planned maintenance costs as a Nation, but given that the new Foreign owners of the electricity infrastructure will pass the entirety of this on to the NZ consumer we as a Nation will not really benefit from what could have been a significant competitive advantage. surely when selling the rights to the technology to Siemans IRL could have retained better than 0.00015% interest for the NZ stakeholders. Sure there was likely a large upfront injection of capital into IRL but negotiating a reasonable share of the long term returns should have been higher on the agenda. Oddly, IRL probably gained more from the recent award of the Prime Ministers Science prize to Tallon & colleagues, than will be earned from royalties on the technology.
    Thus the more important questions. How does NZ retain the benefits from the scientific research and technological innovation that is done locally? How did Finland retain the benefits from the idea? I suspect it was a combination of an adequate initial infrastructure including an aware and interconnected population, together with a legal and corporate environment that defended the retention of national interest, and promoted rapid investment in the technology.