NZ's productivity & innovation lags behind Singapore, Denmark - report

New Zealand's most productive firms have a lot to catch up on if they are to reach productivity levels achieved by their peers in other countries - and innovation is key to change.

That's the word from the Productivity Commission's New Zealand Firms: Reaching for the frontier report, which paints a damning picture of the country's productivity levels.

These levels are based on the analysis of 'frontier firms', which are the most productive companies that set the bar for productivity and wellbeing for all firms in New Zealand. These firms invest in innovation and exports through their size or collaborative efforts with other firms.

However, the report notes that these frontier firms can be up to 45% less productive than comparable frontier firms in other countries.  And the reason, according to Commission chair Ganesh Nana, is because of a lack of innovation.

"Without [innovation], products and production processes become standardised and leaves us trying to compete against lower‑wage economies," says Nana.

Instead, New Zealand must focus on changing the status quo, lift organisations' performance levels and improve productivity.

"Innovation is the key. With it, we have a chance to build a world-class competitive advantage in some markets.

Small advanced economies such as Denmark and Singapore have capitalised on exporting specialised, distinctive products at scale. However, New Zealand could be focusing too closely on its own domestic market, as Nana says just 30% of companies account for more than half of New Zealand's exports.

The report notes, "Because of the small size of the domestic market, New Zealand firms that wish to grow beyond domestic borders must begin exporting when they are still small firms by international standards. This makes expanding overseas even more difficult, expensive and risky.

But for New Zealand's software, health tech and creative industries, that shouldn't be as much of a problem because they are what the report calls 'weightless'.

"Small countries can't be world class in everything. New Zealand needs to make some tough choices about where to prioritise investment on a few targeted innovation ecosystems, much like we do in sport.

Sport investments go into infrastructure, talent development and research, and the same needs to be done in other areas of business.

"Kaupapa Māori firms can help light the way because they take a long-term perspective and use innovation to manage multiple objectives."

These firms are more heavily involved in exporting, supported by value such as kaitiakitanga, manaakitanga and whanaungatanga that help to differentiate their goods.

However, the Government needs to support Māori firms by providing more legislative flexibility, improve procurement processes, protect intellectual property and mātauranga Māori, enhance the relationship between Māori and the Crown, and by supporting a Māori-led approach to optimising the Māori business ecosystem.

The report notes that New Zealand needs to overhaul its innovation system and refocus investment in what Nana calls 'areas of existing or emerging economic strength and competitive advantage'.

"The Government will need to make significant investments in infrastructure, research and people, in a small number of focus areas, to complement the efforts and investments of the business sector. It should also take a more proactive and targeted approach to attracting foreign direct investment that is innovative, oriented to exporting, likely to stay long term, and a source of spillover benefits.

But these strategies can only come to life through partnerships with other stakeholders, such as industry, researchers, Māori, workers, entrepreneurs and innovators, says Nana.

The report concludes, "New Zealand is experiencing a very significant economic shock from the spread of COVID-19. Such shocks require governments to respond by temporarily supporting businesses and workers in the face of deteriorating economic conditions.

"Yet, as critical as this is, it is important to keep considering longer-term structural issues that drive productivity – because productivity growth is what will deliver business success, better jobs, higher incomes and improved wellbeing over the medium to long term.