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NZ’s productivity problem

Look beneath the glowing headlines and you’ll see New Zealand has a problem. A productivity problem.

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The New Zealand economy has been a strong performer in recent years. Gross domestic product (total economic activity) grew by 1 per cent in the June quarter. That helped lift the nation’s GDP annual growth rate to 2.8 per cent.

"New Zealand has a comparatively low level of productivity growth relative to other OECD nations.”

But New Zealand has a comparatively low level of productivity growth relative to other OECD (Organisation for Economic Co-operation and Development) nations.

Per capita GDP was 0.7 per cent in the year to June. In 2017 New Zealand was ranked 22nd out of 48 countries by the OECD, compared with ninth place in 1970 and 20th in 1999.

A new report from ANZ Insights, ‘Innovation and Productivity,’ has urged New Zealand manufacturers to invest in innovation to boost their productivity.

The report contains research showing manufacturers who invest in innovation – such as new products and services or a change in the way they run their business - can enjoy significant productivity gains over those that do not.

“We understand that investing in innovation can seem risky and a big leap for some businesses” ANZ Commercial & Agri General Manager Penny Ford says.

“But we believe innovation is important, and can be achieved through an ongoing series of small steps – including research and development, adding new machinery, making better use of data, and introducing new skill-sets.”

What is productivity?

When economists talk about productivity they don’t mean working harder or putting in more overtime. They are really talking about finding a better or smarter way to do things.

For companies, that could mean growing their earnings by adding a new product or service, data system, technology or by finding new ways of running their business.

New Zealand’s GDP per capita consistently trails the United States, Australia, Canada, the UK, France and Japan.

The authors of the ANZ Insights report say the per capita growth figures “challenge our long held perception of ‘Kiwi ingenuity’.”

The reasons for New Zealand’s low productivity growth are complex. There is no one simple solution.

The report suggests a number of ways New Zealand firms can try to improve their productivity. These include operating in new markets and encouraging capital investment.

Investing in innovation

As part of putting together the report, researchers looked at 49 manufacturers which had received Government co-funding grants for R&D activities through Callaghan Innovation. They were benchmarked against 504 other businesses operating in the same sectors.

Callaghan Innovation is a government agency which supports hi-tech businesses in New Zealand. It was named in honour of physicist Sir Paul Callaghan and established in 2013 with the aim of making New Zealand businesses more innovative.

The 49 grant recipients generated a median Return on Invested Capital (ROIC) over four years of 14.1 per cent, compared to 10.9 per cent for the control group of 504 businesses. They also grew sales revenue faster, achieving a median result of 9.3 per cent a year relative to the control group at 6.4 per cent.

“The research shows that companies who decide to invest in innovation can be rewarded by gains in productivity,” ANZ’s Penny Ford says.

“New Zealand’s competitors are embracing change and investing in innovation. It is important we also think differently about how we drive our future growth.”

Innovation is occurring in many businesses which have not received a grant from Callaghan Innovation.

The report includes profiles of four businesses, two of them recipients of grants from Callaghan and two other firms which have also put an emphasis on innovation.

You can read about one of the companies, Doyle Sails, here on bluenotes – and can keep an eye out for continued coverage of the businesses over the coming weeks. 

 “We are seeing great examples of New Zealand businesses that have invested in innovation and, as a result, are recognising significant productivity gains over those that haven’t,” Ford says.

“Investing in innovation can mean higher risk and potentially more volatile earnings. But we believe it is a risk worth taking.”

Tony Field is a bluenotes contributor

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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