1. Growing a more diverse economy

Changing technology and resource pressures will see businesses facing new challenges to succeed. More diverse economies are more robust and, over the long term, more sustainable.1 Different businesses and even different sectors respond to economic challenges and opportunities in different ways. As a small economy in a globalised world, it can be difficult for New Zealand to set the agenda. New Zealand businesses need to be well-positioned to take advantage of future opportunities, and develop resistance to economic downturns and changes. The greater flexibility of a more diverse economy makes New Zealand less vulnerable to shocks or technological change and enables the economy to create more high-value jobs.

Diversity may involve: diversity of business size, diversity of sector, diversity of business models and strategies, and diversity among different geographic regions (a spread of successful businesses).

Diversity among successful businesses also has the potential to pay social dividends. Genuine diversity may result in a better spread of returns throughout the economy. An environment where more businesses have the potential to succeed is likely to result in more opportunities for economic participation either in terms of employment or building one’s own business. The potential for greater sharing of economic gains in this way may in turn encourage greater contribution to and participation in a fairer, more equal society.

A key question is the appropriate level of government intervention in stimulating the economy. Should government policy look to provide a level of general support to all businesses, or should limited resources be targeted to specific areas? Smaller businesses and businesses operating in high-growth economic sectors (or both) may be able to make a credible claim for targeted assistance if the likely economic benefits are higher than the investment of resource committed.

The key challenges are likely to include:

  • Capacity building: People grow businesses, whether small or large. Small businesses may need assistance with hiring employees (and minimising the impact if the wrong hiring decision is made). Larger businesses may need mentoring support or access to senior executives and directors. Could the Government build on work of organisations like The Icehouse to create a pool or network of people with expertise in business across a range of fields that growing businesses can tap into?

  • Time: All of the easing compliance issues are focused on the goal of giving time back to owner operators to manage and grow their business. In the early days for instance, the Government could consider giving assistance to micro businesses (perhaps by lifting the GST threshold) so they don’t have to face compliance requirements while they are very small.

  • Money: Businesses need capital to grow, but also for operational matters like ensuring wages and bills are paid on time. Finding new ways to open up access to capital could be a big part of the new economy. Are new technologies like crowd funding an indicator of the kinds of start-ups that the Government should provide further support to? Could prompt payment measures or tax reform assist business to achieve more reliable cash flow?  

At a sector level, the Government should consider facilitating clusters of businesses. Clusters such as those organised by the US Small Businesses Administration act as a networking hub to connect large companies, university researchers, regional economic organisations, investors and small businesses.2 Could clusters be a way to reorient the economy towards higher growth and higher value sectors relatively quickly?

International evidence is that clusters have the potential to realise the following benefits:

  • the creation of intellectual property, knowledge flows and spillovers;

  • enhancing networking and learning opportunities, and pooling shared services;

  • strengthening entrepreneurship by boosting new enterprise formation and start-up survival;

  • enhancing productivity, income-levels and employment growth in targeted sectors;

  • positively influencing regional economic performance; and

  • promoting access to capital by attracting sector-specific investment and increasing opportunities to win major contracts.3

A key challenge with clustering is the Government’s potential role in ‘picking winners’. This can be mitigated by supporting the sector rather than individual businesses. Overseas clusters have worked well where existing businesses are established and looking to grow. There is an open question about whether such initiatives should support pre-existing, market-tested initiatives or genuinely take the New Zealand economy in a new direction. Sector-level government support could take a number of forms such as the use of accelerated depreciation to support the forestry industry. Where this leads to greater employment or spillover benefits for the wider economy, an investment in a particular sector could possibly return higher social dividends as well.

A more diverse economy will be one that includes aspirations for a greater contribution from Māori economic development. Māori investment can help build the long-term success of New Zealand Inc. The Government, Iwi and Māori should work in partnership across industry sectors – in particular the primary sector – to build high value exports, greater productivity, and better skills and wages.

Core infrastructure, deriving greater value from natural resources through research and innovation is a growing area of opportunity. A partnered approach can help the Māori economy inject long-term investment into infrastructure that contributes to regional development. The Post-Settlement environment has injected new capital into regions but achieving intergenerational aspirations requires a new conversation about shared expectations and long-term investment that builds sustainable and resilient models for wellbeing.

There is not only one pathway to success, but a Government prepared to factor in Māori participation is more likely to achieve solid gains. Key factors include; the role and contribution of Mātauranga Māori to innovation and the commercialisation of new knowledge and products, supporting the entry of Māori Inc products to export markets, freeing up legislative impediments to collective economic opportunity, supporting greater innovation in the education system to improve outcomes for Māori, and access to capital for Māori SMEs.

Discussion questions:

  • What does it take to create a truly diverse economy (considering our size and remoteness)?

  • How can economic policy promote greater social mobility and participation?

  • How can government best work with the market to achieve a shared vision for New Zealand’s economic future?

  • Should policy support be targeted to specific initiatives and sectors? If so, which ones?

  • What are the main challenges to clustering, and how can they be overcome?

  • How can Māori potential best be supported as part of a sustainable economy?

1   Strategy&, 10 May 2011, Resilient, stable, sustainable: The benefits of economic diversification, http://www.strategyand.pwc.com/global/home/what-we-think/reports-white-papers/article-display/resilient-stable-sustainable-benefits-economic

2   Optimal Solutions Group, June 2013, The Evaluation of the U.S. Small Business Administration’s Regional Clusters Initiative: Year Two Report, https://www.sba.gov/sites/default/files/files/SBA%20RCI%20Public%20Year%202%20Report%20508%20Compliant%20FINAL.pdf

3   Bruce Katz and Mark Muro, 21 September 2010, The New "Cluster Moment": How Regional Innovation Clusters Can Foster the Next Economy, http://www.brookings.edu/research/papers/2010/09/21-clusters-muro-katz Darrell West, 19 October 2011, Technology and the Innovation Economy, http://www.brookings.edu/research/papers/2011/10/19-technology-innovation-west