How do we reverse New Zealand’s decline in global competitiveness?

By Shaun Hendy 15/09/2010 16


The World Economic Forum has just released its latest global competitiveness rankings for 2010-11.  New Zealand has fallen from 20th to 23rd place, and is now seven places behind Australia.  What puts us behind our competitors, and why are we slipping?

First, not all the news is bad.  We are ranked particularly well for the quality of our institutions (3rd), education (5th) and a variety of efficiency measures.  In fact, we are ahead of Australia in all these areas.  You will be aware of these strengths if you have read my series on Philip McCann’s analysis of the New Zealand economy.

However, where we rank poorly is in infrastructure (37th), market size (60th), innovation (25th), technological readiness (25th) and business sophistication (30th).  We are behind Australia in each of these areas — well behind in some cases.

What do these indicators have in common?  I would say scale — as you would guess if you have been following this blog.  Market size obviously depends on scale.  So does infrastructure, where costs are often measured by the kilometre:  the higher the population density, the lower the cost per person for infrastructure.

What about innovation?  There is now a lot of evidence that innovation depends on scale.  For example, when adjusted for scale, I found that we perform on par with Australia in patents per capita.  Our low population density and high spatial transaction costs for knowledge makes it harder to innovate than our neighbours in Sydney or Melbourne.  Scale also appears to correlate with business spending on R&D (for which we are ranked 38th).

Of course, understanding the problem is not the same as fixing it.  How might we compensate for our lack of scale?

As discussed in previous posts, I believe we need to build multi-institutional, multi-institutional networks in our science and innovation system.

Vote Research, Science and Technology (through the Foundation, FRST, soon to amalgamate with the Ministry) has only dabbled with this approach through consortia and platforms, typically restricting collaborative tools like these to areas that don’t have a technological focus.  Vote Education has been more brave, however, investing in Centres of Research Excellence (CoREs) that span the country (such as the MacDiarmid Institute).

If we are to arrest our decline in competitiveness, the new Ministry of Science and Innovation will have to address our lack of scale in technological fields.

How might we pick technologies in which to develop scale?  At the moment, FRST relies on a competitive process to fund scientists and engineers at the project team level.  There is no reason that such processes couldn’t be used to pick the areas that could be taken to scale.  In fact the Royal Society, and then TEC, used such a process to choose Vote Education’s CoREs.  I think this was a very successful exercise, revealing some areas of surprising strength such as nanotechnology.  Could we exploit such an approach in Vote RS&T?

We should also take a fresh look at the make up of our Crown Research Institutes.  At the moment, we only have one medium-sized CRI (Industrial Research Limited, IRL) with a focus on high-tech manufacturing, despite the fact that IRL supports one of the most diverse sectors in the New Zealand economy.  Given the importance of manufacturing to the New Zealand economy, shouldn’t IRL be one of our largest CRIs?

Finally, the World Economic Forum rates New Zealand very poorly for the availability of scientists and engineers (67th) and government procurement of advanced technology products (73rd).  The lack of skilled knowledge workers is not just down to brain drain — we train very few engineers and physical scientists in the first place, as one example.  This needs to be addressed, along with our government’s reluctance to invest in New Zealand technologies.  Could our investments in infrastructure take advantage of home grown technologies?


16 Responses to “How do we reverse New Zealand’s decline in global competitiveness?”

  • Shaun, good topic for debate (I have posted a link to the TechNZ group of LinkedIn).

    However, personally I do not find “scale” an acceptable excuse for our performance. Let’s look into the performance of Singapore a country of comparable population (so presumably “scale”) to NZ.

    Singapore is an intriguing case – negligible population (4.7 mil), negligible native resources (they even have to import their drinking water across the causeway!). Yet Singapore currently ranks 3rd on the global competitiveness scale, and shows growth in GDP/cap WAY ahead of the average for “advanced economies” – indeed theirs is growing at the same rate that ours is declining relative to this norm (see graphs on WEF Global Competitiveness Report P256 for NZ, P96 for SG) .

    Already Singapore’s GDP/cap is 40% ahead of New Zealand’s and is sprinting away. Yet my earliest memory of Singapore is as a schoolboy in the late ‘50’s making aid donations to this third-world country. I only hope that during my lifetime that situation is not reversed!

    So how does Singapore fare on the measures you identify as deficiencies for NZ, and attribute “scale” as the common denominator? You highlighted infrastructure (NZ = 37th; SG = 5th), market size (NZ = 60th; SG = 41st), innovation (NZ = 25th ; SG = 10th), technological readiness (NZ = 25th ; SG = 11th) and business sophistication (NZ = 30th ; SG = 15th). We are beaten at every hurdle and not apparently by a measure of scale consistent with our marginally diferent population scale.

    What has Singapore done differently to us? I am not expert enough to be definitive, but my IMPRESSION is that where New Zealand has embarked on three decades of institutional “proliferation” (DSIR to CRI’s, dispersed utilities, multiplicity of educational institutions), Singapore has stuck with an integrated institutions model. For example I estimate that one can attend just 3 state-funded Singapore universities, but in New Zealand there are 8. Singapore boasts 5 polytechnic institutions, New Zealand has 24 polytechnics/Institutes-of-Technology, and 3 Wananga. What Singapore appears to have realised, that we have not, is that a small country with scarce resources cannot afford duplication. If there is anywhere that your measure of “scale” appears it may be in these institutions, where we have made discretionary choice to reduce our scale by proliferation, where Singapore has associted where sensible.

    The clear irony is that our strategy of proliferation was intended to generate efficiencies and quality institutions through competition, whereas the outcomes tip in favour of the Singapore consolidated model. For example, Singapore has 2 universities in the world top 100 , NUSingapore (31st ), NanYang Tech (74th) according to 2010 QS World University Ranking; NZ has one – Auckland at 68th. Ah well, at least we are getting a Cordon Bleu School!

    Could it be that the real cause of our diminishing returns is culture, and that we are just too damned comfortable here to want to succeed?

    Allan Main

  • Hi Allan, actually I think the difference between Singapore and New Zealand is in the way the population is distributed. What I (and others) have found is that New Zealand and Australian cities of a similar size perform similarly on metrics of innovation and productivity. Hence, the difference between Australia and New Zealand comes down to the superior performance of Sydney and Melbourne. Philip McCann’s hypothesis is that this is due to the high spatial transaction costs in generating new knowledge. So Singapore performs better than New Zealand because those 4.7m people have an easier time exchanging ideas and knowledge within that city than a similar population of Kiwis do across the country. Hence I see a need for New Zealand to start acting like a city of 4 million people.

  • It would seem to me that you both have good points. Like most problems there is seldom one main cause. The geographical spread of the population over a much larger land area probably creates a perceived need for more tertiary institutions. However, is there not a significantly different cultural approach to education if New Zealand and many other, particularly Asian countries which must have some effects? Relative to many Asian and Scandinavian countries, New Zealanders seem to undervalue education leading to underinvestment and less citizens pursing advanced tertiary study.

  • I would also like to toss into the mix that part of Singapore’s recent success is that it has been setting up as a hub for foreign multi-national companies to base themselves, by sinking a large amount of capital to ‘seed’ this (huge buildings, subways stations, recruiting the initial players, etc., none of which are cheap). The infrastructure costs (i.e. before people and research costs) alone must be comparable to NZ’s annual science budget. (?)

    My own impression (i.e. subjective) was that Singaporeans themselves aren’t any more well-educated at the post-graduate level than anywhere else.

    Wasn’t DSIR one “institution”, but with many arms? Point is, I’m not sure the DSIR/CRI comparison holds here.

  • According to UNESCO figures 2007, Singapore has 6088 researchers per 1 million people, NZ has 4365 researchers per 1 million.
    Not sure how they define “researcher” but it is a significant difference.

  • As I expected, a lively debate. Let me take it further.

    As Dr Mike says there is no one dimensional explanation that will account for differences in national prosperity and competitive accomplishment. But I buck the argument “it’s all about scale, dammit” if only for the reason that it offers a soft out, being something we are never going to change, and I’m not ready to roll over and bequeath to my grandchildren a nation bound for the third world.

    Shaun, you rationalise that Singapore operates as a big city and its performance is consistent with that. You argue that we have the same population but dispersed across one relatively moderate city and many, many villages, and that is why we perform with (expected) mediocrity.

    So let me draw your attention to another nation of similar size(4.9 mil) but with a comparable population distribution to NZ – Norway. Oslo urban region has a population of 1.4 mil (Auckland 1.3 mil), and there are comparable scaled population distributions for tier 2 and 3 cities for the two countries. By your theorem we should have comparable competitiveness profiles in those factors that are “scale” affected.

    Norway, while not as high in the competitive pecking order as Singapore, still blitzes New Zealand. GDP/cap is nearly three-fold our own, and is growing markedly faster than the “advanced economy” norm (even faster than Singapore) whereas we are declining.

    Again comparing the competitiveness attributes that you draw out as unsatisfactory for NZ, we see infrastructure (NZ = 37th; SG = 5th NO = 29th), market size (NZ = 60th; SG = 41st; NO = 44th), innovation (NZ = 25th ; SG = 10th; NO = 17th), technological readiness (NZ = 25th; SG = 11th; NO = 9th ) and business sophistication (NZ = 30th ; SG = 15th ; NO = 14th). So on the comparison with Norway, I am not prepared to excuse our performance by saying “we are just too small”. There is greater similarity in NO vs SG than there is in NO vs NZ despite our demographic similarities with Norway.

    Further, it seems to me that it is in the later competitive factors, innovation, technological readiness and business sophistication, that we really let ourselves down.

    We have to get beyond finding excuses for ourselves for our pitiful innovation performance by blaming trumped-up reasons beyond our control. We have to MAKE it responsive to our control, or we are destined to continue slipping down the snake in this game of international competitiveness snakes and ladders.

    Again, I suggest it is a cultural matter; we are too comfortable in our mediocrity, and do not have the drive to convert our high class creativity into market innovations that generate prosperity. It’ not an easy pill to swallow, but at least we should be able to do something about it!

    PS: A glimmer of hope today from the announcement that F&P have unveiled a revolutionary “step change” refrigerator compressor of their own R&D providing 30% greater energy efficiency. F&P have patented the technology (hallelujah!!!) and have exclusively licensed to Brazilian manufacturer Embraco, which is owned by US whiteware giant Whirlpool. By that strategy F&P will “clip the ticket” of every refrigerator in the world that is sold when their technology is incorporated. Who needs manufacturing when you build a money machine!!! We need more of these to make our worm turn.

  • Hi Allan, I am not arguing that scale is the only thing that matters in innovation – it certainly isn’t, especially when one compares a more diverse bag of countries, rather than countries that are similar in all but scale such as New Zealand and Australia. So while scale is not everything, it is nonetheless very important for innovation. New Zealand won’t solve its productivity problems unless it develops policies that take account of this. Successful small countries like Scandinavia, Israel and Singapore have all learned to build scale in innovation, something that we have yet to master.

  • Hello again Shaun. I hear what you are saying and accept that, all other things being equal, increasing the scale of innovation would be helpful. However, not only do I think that scale is not the only factor for NZ’s dire performance, I do not think even that it is in the top 10. Furthermore I doubt very much that NZ would gain much, if anything, from doubling the research input without first fixing the systemic deficiencies in our national S&T innovation system which is excessively front-end loaded.

    Our innovation failure is in converting investment in science into market competitive advantage, and hence national prosperity. That failure is not in the front end of the innovation system, the creative end, but in adoption and implementation, the “conversion” end. A substantial part of that issue is that we operate a strategy that is too heavily technology push operating in a user vacuum, with a business naivety and intellectual property ignorance. In short that strategy has very little to do with innovation (“the development and implementation of useful new approaches”) but rather encourages science as a destination, not science as a creator of prosperity.

    The role models that you cite as successful small countries (Scandinavia, Israel and Singapore) do more than just have scale to their innovation. More importantly they create environments where there is linear integration along the innovation chain linking academia, technologists, industry and markets with effective feedback loops that focus innovation effort to high benefit opportunities. We do not have that necessity and so we regularly fund S&T projects that are decoupled from any route to market, that have no market opportunity or market vision being driven by a doctrine that scientists best know what is marketable and once they have created this, industry will trample each other to implement the solution. That is a 1950’s model that is well-broken and long superseded. Ask any innovator in Scandinavia, Israel or Singapore.

    We have to change this model if our national prosperity is going to benefit from the innovation-led growth we are entitled to expect as taxpayers investing in science. And that demands a cultural change as well as a structural change.

    Allan Main

  • Hi All
    While it is important to have a correct diagnosis prior to treating the patient, we have spent the last 30 plus years analysing to the point of paralysis our mediocre economic performance. As Allan so correctly notes, we cannot change our small size and distance from market. A better question to be asking is “Why have we not responded to our declining performance in the manner that would be expected of a highly inventive, practical hard working nation?” The answer is to a large degree, as Allan suggests – cultural. Kiwi culture gives us a predisposition to doing new things including discovery and invention, but we are less motivated by the cognition and behaviour associated with the activities required to convert our excellence in inventiveness into productivity, profit and prosperity. Our culture provides us with a very low threshold of “enough” and our declining ability to afford the very things that we value – education, health, superannuation etc, are masked by our perception of quality of life. In fact what we have is “ease of living” – benign climate, good social safety nets etc. In Michael Porter’s words we satisfice rather than maximise. That does not mean we are lazy, it means that we are not cognitively inclined to figure out what we have to do to convert the maximum value from what we already do. (That of course is increasing productivity). We have confused productivity and efficiency and focused our innovation efforts on process innovation to drive down the cost of production (note our efficiency ranking in Shaun’s first post – evidence of being able to succeed with process innovation) but not on creating and harvesting value. There are strategies that we can adopt that would make sense in any economy/environment that will help to increase our creation and capture of value. We need to be starting the journey there. We do not need to nor should we wait as a nation for “policy settings” to solve our innovation puzzle.

    On the subject of scale – of course it’s important and as Shaun notes, not the only thing that matters, but models like the F&P one are to leverage off other people’s/nation’s scale. This is a great lesson – a perfect example of by passing our problem of scale – doing the inventiveness here (the bit of the innovation process we are good at) and the creation and harvesting of value (that we are not good at) somewhere else. If we do not adopt these sorts of strategies – ones designed for the 21st century rather than persisting with ones designed for the 19th/20th then we will as Allan fears, hand on a country of mediocrity to our grandchildren.

  • It is interesting to look at what other countries have done, and to consider their similarities. but one must also keep in mind the differences. Finland, for example, excelled in part by focusing on developing a high tech industry (e.g. Nokia and other telecommunications technology), a first rate education system and also on green technologies to reverse environmental damage. However, one significant difference they have to us is they are much closer to large markets for their good.
    Part of their education system is a strong focus on at least one second language (English). I wonder if a focus on more NZers learning asian languages would be beneficial given our proximity to asia?
    Just some random thoughts.

  • @ DrMike,
    I am not intimately familiar with Nokia, but I am aware that they do not only manufacture their mobile phones in Finland; they have plants in Brazil, China, Great Britain, Hungary, India, Mexico, Romania, and South Korea in addition to their home factories. So rather than being successful through “being much closer to large markets for their goods”, they have taken their manufacture to locations that are close to large markets for their goods.

    I further suspect that more material to Nokia’s success than being close to markets for goods (the push factor), is their close engagement with their users and prospective users and they use the insights from those relationships to inform their innovation goals so ensuring more meaningful innovations for users (the pull factor). This is the model I was advocating above as a more effective system for improving national innovation success.

    Not to labour the F&P Whiteware example too much, this approach is central to their strategy. I think that F&P is in the process of generating an exemplar for successful innovation-led participation in global markets for manufactured goods when based in NZ.

    We must stop creating excuses!

    Allan

  • Allan – you’ve hit at least one of the nails squarely on the head. Research commissioned by NZTE and our own research here in New Zealand shows we have a propensity to “think for our customers”. In other words we engage with them from our perspective not theirs. We assume that what we want is what they want, what we value is what they value, what we take for granted ….. That means that we miss the opportunity to properly align our value proposition offer with the customers value proposition demand and thereby fail to create and harvest the maximum value from the effort that we expend. There is an assumption in economics that players will engage in maximising behaviour and that the value created and harvested is a function of the market over which we have little control. Not a valid assumption in our case. A similar assumption is made in marketing theory. And again not valid. We let a surprising amount of value slip through our fingers. How we think and behave is quite different to how we believe we think and behave – in fact sometimes the exact converse. This might only trim 5-10% off the life time value of a trading relationship but that is enough to make the difference between mediocrity and prosperity.

    The NZ Institute’s “Paper Standing on the Shoulders of Science” is well worth reading and I also refer you to a gentle introduction to success behaviours in our joint paper with the NZ Institute at http://www.forte-management.co.nz/resources/45-Behaviours_to_increase_international_business_success.pdf.ashx (you’ll have to copy and paste I think).

    An important point is that, it is not that we cannot convert discovery and invention into productivity, profit and prosperity, it is that unwittingly we engage (as a result of our cultural conditioning) in cognition and behaviour that does not favour gaining the maximum returns from the amount of effort that we expend.

    Best wishes
    Tony

  • @Tony
    Thanks Tony. I’m familiar with both the documents you reerence and commend them to others who are following this discussion.
    A.

  • I’ve been overseas for three years now working in hi-tech. I’ve been fortunate enough to travel the world and there seem to be a few key things the NZ is missing in order to be competitive at a global scale.

    1. The government is simply not seen as favoring innovation or driving business. I know that you’ll say that we in fact have policy to support it, but the problem is the policy is inward looking. If you were a big business or innovator, you look at all of the offers worldwide, not that fact the NZ is trying to support such business.

    2. The tax system doesnt support rapid growth. Ireland seems to be the best example for us to truely model ourselves on. 20 years ago they were the equivilent of Poland, today while not the booming economy they once were you could argue that theyre far better off than before. Singapore is another great example of this, why do you think most multi-nationals run their HQ for APAC there?

    3. NZ isnt as innovative as we think we are. This one hurts me the most. The problem is that we tend to err on the side of niche rather than owning a prominent industry. If you look to succesful regions worldwide, they can usually pin their economy to a hub of innovation.

    4. Agri/Hort are topped out. Sorry but we need to shift the economy to drive other business. Eventually countries with cheaper labor and cogs will have our technology or be good enough and then we’re out of this market. We need to think finance, tech, etc. Channels that allow us to recruit ww and arent markets ‘racing to the bottom’

    5. We need to stop benchmarking off of Australia and find other compariables, We’ll never have their resources, or they ties with US/China because of it.

    6. We need to change NZ attitudes. Someone mentioned the relaxed NZ attitude so true. NZ needs to step up its game (and Im not talking rugby) if it wants to be a global competitor.

    Great debate hopefully a few people in Wellington are reading this.

  • @Snakedoctor.
    Your perspective on NZ’s innovation aligns well with my experience for each of your items except one; I can’t accept that “agri/hort have topped out” for innovation-driven wealth creation. There is much mileage left there yet, provided we make a strategic shift to associated ag/hort downstream and peripheral industries.

    Clearly, just doing more of what we currently do will not help us yield the GDP growth rate shown by the top ten competitive nations we would like to emulate. A step change is essential if this sector is to jump to the next wealth creation curve. By my vision, that will be accomplished by refocusing sector innovation from volume-add to value-add, in short to convert our primary produce to foods that uniquely deliver current international consumer demands. (I find his so patently obvious that I cringe at having to state it!) In short innovation in ag/hort must crash change our primary industry from the land of sheep, milk and honey to the land of sophisticated foods, functional nutrition and assured safety in food….. I suspect that in the next 50 years the world is going to place a higher value on sourcing nutritious, safe, sustainable foods than on mobile technology nic-nacs!

    By focussing sector innovation efforts on downstream (food) and peripheral (equipment and services) we will see a surge in GDP growth from the ag/hort sector without placing our productive land under greater pressure.

    It’s evident from prior postings that I’m prone to citing exemplars to supot my views, and I have one here too.

    Look at Denmark, another major dairying country. But over he past 50 or so years, Denmark has leveraged its dairy industry into so many more wealth generators than we have, including foods (unique-to-Denmark cheese varieties, tinned butter-cookies, milk chocolate…), associated ingredient supplies (enzymes, microbial cultures…), food manufacturing equipment (Danish manufacturers are global leaders in modern food processing machinery), agricultural inputs (animal remedies, pasture grass seed…) , agrifood services (consulting, design…), and the list goes on!

    A further Danish exemplar is their fishing industry. Denmark ranks fourth among world suppliers of fishery products. Historically they caught fish in local waters, processed them into both simple (commodity bulk frozen) and complex (retail food products) and exported them. With the decline in North Sea fish stocks they have re-jigged their industry to be trading based. Now fresh fish is generally imported from non-EU countries, then processed and re-exported to other EU member countries. Increasingly, Danish fish exporters are becoming even more global, buying fish at vessels on the sea, processing them in China and directly shipping to markets in Europe. THAT is how you transition your industry expertise into greater value than your local resource base will allow, and is the model our own ag/hort businesses must adopt to generate greater national wealth. Denmark’s food business might not be as sexy as their famed wind energy technology, but it spins multiples of the earnings that the wind energy business does.
    (Aside: indeed some players in the NZ Agrifood sector already “get” this new model, for example Zespri with ZESPRI GOLD and ENZA with their new apple varieties, both of which contract growers outside NZ for the Kiwi companies to market their proprietary varieties through their own distribution channels under their own brands. Fonterra also operates similar strategies. But our agribusinesses have barely lit the fuse on this opportunity to leverage local know-how into new national prosperity.)

    So I advocate that New Zealand must “grow out” from its ag/hort traditions by innovating at the fringes of that which we already do so well. In reasonable time we too will have a reputation for sophisticated foods, for food processing equipment, for consultative services, and in that growth we will have created the necessary wealth to take a punt on sexy high tech (and high risk) endeavours that might develop our version of the wind energy business.

    I just can’t see us jumping direct to that endpoint without crashing and burning.

    (PS: As you say … hope some of our decision-makers in Wellington are following this).

    Allan

  • Totally agree with Allan. Primary production certainly has a limit determined by suitable land availability, water etc. But as well as the excellent examples that Allan cites, our production systems are also underpinned by a vast reservoir of intellectual assets that we usually treat as a cost of production but in fact represent value generating opportunities in their own rights. This is not about taking these assets and using them to set up farms etc in other places, it is about about developing and selling the technologies and knowledge direct. There is usually resistance in the form of the argument that we will give away our competitive advantage – but we have a long history of literally “giving” it away. We have the potential to become a an economy trading in knowledge, leveraging off the knowledge that we already have. This just takes a change in mind set.

    Best wishes

    Tony