Domestic business environment
The overall business environment in a country is the single major determinant of its long-run economic performance. New Zealand’s domestic business environment is characterised by such positives as:
- macroeconomic stability, e.g. through the Reserve Bank and Fiscal Responsibility Acts
- a simple, broad-based and efficient tax system with few distortionary exemptions
- strong public and private sector institutions
- an effective legislative and regulatory framework for business
- low levels of corruption
- reasonable educational attainment and skill levels
- good, though not world class, infrastructure
- high levels of global connectedness
- a benign security environment, leading to a low defence burden.
- constraints of economic geography and distance from markets
- small firm size, limited domestic markets and high fixed costs of moving into exporting that make it difficult for businesses to achieve the critical mass and staying power to grow in international markets
- significant regulatory barriers and compliance costs, that often have a disproportionate effect on smaller businesses
- modest domestic savings and investment rates
- weaknesses in the capital market
- investment distortions in favour of residential property rather than wealth-creating business investment
- persistent and high current account deficits
- short-term approach to business investment, and therefore a discounting of inherently long-term investments such as in innovation, R&D and long-term market development
- increasing strain on infrastructure, and increased competition for scarce resources (e.g. water, land)
- “thin markets” for skills and for specialised technology and service providers
- a long tail of people with poor work-related skills.
Key domestic issues of concern for the agribusiness and forestry sector include:
Perceptions of the agribusiness and forestry sectors, and realities
The agribusiness sector has been considered a declining, “old economy” sector. This perception has detrimental impacts on the sector because it makes it more difficult to encourage young and skilled people into careers in it, as illustrated by declining tertiary enrolments in agricultural and horticultural sciences. It has led to reductions in public R&D investment in agriculture and horticulture in favour of other sectors or disciplines. It also has the potential to lead to distortions in resource allocation between sectors as the tax streams from agribusiness and forestry are used to subsidise more “glamorous” sectors such as tourism, film making, information technology (IT) and yacht racing.
There is an assumption that the agribusiness and forestry industries will at least maintain their economic contribution and that policy must focus exclusively on future growth potential. In fact, a lot of effort must go in to ensuring that the sectors do not go backwards; for example as a result of biosecurity breaches, breakdown in trade negotiations, excessive regulatory barriers and compliance costs, or under-delivery by the science and innovation system. Less directly, social and labour market policy and the performance of the education and training systems have profound effects on the agribusiness and forestry sectors.
It is helpful to understand the perception of the agribusiness and forestry sectors from an historical perspective. In the mid-1980s some commentators suggested that New Zealand would become a world-leading financial sector and that agribusiness and manufacturing would no longer be central to the economy, a view that did not survive the 1987 sharemarket crash.
In the 1990s there was a belief that IT would transform countries such as New Zealand into knowledge economies that could achieve high per capita income without an agribusiness and manufacturing base. However, the main economic contribution of IT has been as an enabling technology that has boosted the productivity of the services, manufacturing, agribusiness and other sectors rather than being a major stand-alone sector in its own right. Software is an input into, rather than a substitute for, food, beverages, cars, whiteware, clothing, hospitality, travel and other products and services. IT is contributing enormously as an enabler of the productivity of the agribusiness, forestry and other industries, however the exports of software per se are very minor compared to earnings from dairy, meat and forestry exports.
While there is no doubt that niche, technology-based industry is important, the “dot.com” crash and decline of the NASDAQ market resoundingly taught the lesson that all technology obeys the laws of economics, and that markets pay for functionality and service delivery, not for irrational exuberance.
Agribusiness and forestry have been considered to be sunset industries, with a declining contribution to GDP. In fact, since 1986/87 (after fiscal support for agriculture had been removed) the contribution of agribusiness (including components of transport and wholesale trade sectors2 ) to GDP rose from 14.2 percent to an estimated 16.5 percent. Agribusiness and forestry are currently estimated to contribute around 20 percent of GDP. There is every possibility of this rising further over time. Perhaps significantly, this very substantial enhancement in the contribution of the agribusiness and forestry sectors to GDP seems to correlate with an increase in the trend rate of New Zealand’s per capita income growth.
Some economic commentators have suggested that the long-term historical decline in New Zealand’s terms of trade could well be reversing in our favour, due to our mix of agribusiness and forestry merchandise exports, and the impact newly-industrialising countries such as China, Vietnam, Malaysia and Thailand are having on world markets for manufactured products. China alone is increasingly commodifying world trade in a vast array of low and medium technology manufactured goods, and increasingly in high technology products. Microchips, consumer electronics, computers and cellphones are increasingly price-driven commodities manufactured in low income countries by low wage workers and earning diminishing premiums. The prices of many “new economy” products, even from advanced industrial economies, are dropping much more quickly than food and fibre products – international telephone calls, Microsoft Windows and off-patent pharmaceuticals are examples.
Although the statistics are incomplete and difficult to interpret, analysis of agribusiness price index time series and of ratios of agribusiness export price indices to key import price indices suggests that New Zealand’s agribusiness-dominated terms of trade may, on balance, be improving. If this trend is secular and not cyclical it has positive implications for New Zealand’s future economic performance.
The above performance of the agribusiness and forestry sectors has been underpinned by productivity growth and by new market development and innovation:
Productivity growth
Agricultural productivity has improved substantially over the last fifteen years as a result of technological change, effective targeting of investment, cost cutting and efficiency gains, and scale economies through the expansion of the average size of farms and orchards. Identifiable productivity gains in specific sectors are covered in the sector overview papers. Productivity trends over agriculture as a whole from 1972 to 2002 are illustrated in Table 1:
|
Table 1: Growth and productivity rates: agriculture |
||||
|
Total output gain |
Total input increase |
Total input |
Total factor productivity (%) |
|
|
1972 to 2002 |
1.7 |
0.3 |
1.4 |
3.3 |
|
1972 to 1984 |
1.1 |
0.5 |
0.6 |
2.1 |
|
1985 to 2002 |
2.1 |
0.7 |
1.4 |
3.0 |
Source: MAF Policy
It should be noted that when times are good producers increase their investment (their input expenditures) and when times are bad they reduce inputs. There are lag times before investment results in lifts in output. Thus in the short run, when times are good, productivity can fall and when times are bad productivity can rise. This helps explain why, for the agricultural sector, total factor productivity has fallen from 1999 to 2002.
Productivity trends in forestry and logging are illustrated in Table 2:
| Table 2: Growth and productivity rates: forestry and logging | ||||
|
Total output gain |
Total input
increase |
Total input |
Total factor |
|
|
1972 to 2002 |
3.6 |
2.4 |
1.2 |
3.0 |
|
1972 to 1984 |
3.5 |
3.0 |
0.4 |
1.4 |
|
1985 to 2002 |
4.0 |
2.9 |
1.0 |
2.5 |
Source: MAF Policy
Notes to tables
- Total input productivity = gross output/total inputs.
- Total input = non-factor inputs and factor inputs.
- Net output = gross output – non-factor inputs.
- Total factor productivity = net output/factor inputs.
- Factor inputs = labour and capital.
- Non-factor inputs = inputs from other sectors (termed intermediate consumption).
For the forestry and logging sector, total factor productivity rose sharply from 1987 to 1991, and has since declined. It is possible that the restructuring of government involvement in forestry and logging and its subsequent exit has caused aberrations in the data.
New market development and innovation
Product innovation and market development have been critical to the growth and economic contribution of the sectors, with a major focus being moving from commodity into higher value added markets. Examples include many dairy product innovations ranging from biochemicals and functional food ingredients to food service innovations, and the development of halal meat and chilled lamb markets. The forestry sector has actively developed new added value wood products from radiata, and the horticultural sector is a world leader in breeding of premium fruit varieties and development of innovative niche markets, such as for processed fruit products and extracts.
The innovation system
The innovation system (in the wider sense) is a key driver of the long-run performance of the agribusiness and forestry sectors.
New Zealand’s private sector R&D intensity (R&D investment as a proportion of total sales) is low compared to other OECD countries. The major reason for this is that New Zealand’s market structure is dominated by low R&D intensive sectors. The homogenous nature of the agribusiness and forestry sectors means that R&D focuses on a small number of major products and processes and R&D costs can therefore be spread over large production volumes. This leads to low R&D intensity, however it is typically associated with high R&D productivity because innovations are adopted widely and have large aggregate effects. Conversely, more niche-oriented businesses competing in lower volume, more differentiated markets often have high R&D intensity and may earn high premiums over smaller production volumes.
We see opportunities for considerable enhancement of the science and innovation system. Issues include long-term strategic directions for science, funding of strategic research in agriculture and horticulture, the incentives and behaviours of science providers, especially CRIs, and private sector R&D investment.
Long-term strategic directions for research
The Foundation for Research, Science and Technology (FRST) is the major public investor in industry-oriented research. The Government sets strategic priorities for FRST on an outcome basis and FRST develops a strategic approach for research funding in consultation with stakeholders. There is currently no statement of science priority that signals to FRST the Government’s strategic priorities for research on a sector-aligned basis. The result is that science providers find it difficult to plan for the longer term, and even to retain existing capabilities.
In its own I-3 Challenge for research, science and technology (RS&T), the Government has identified three vital areas for the RS&T sector that are important in addressing these system challenges. They are: Ideas – to focus ideas ideas and knowledge generation more strongly on meeting national needs; Innovation – to develop stronger long-term research capabilities to drive innovation; and Investment – to gain a greater benefit out of public investment in RS&T and generate greater private investment. The following discussion should be seen as part of the response to the I-3 Challenge.
The I-3 Challenge sets out the need for areas of national importance requiring RS&T support to be identified. There is considerable agreement on the need for a longer term and more strategic approach to research that gives stability to science providers and gives more confidence to the sectors in the long-term direction of the public science system. Arguably this could be supported by the devolution of detailed decision making from central government agencies to science providers and industry groups working closely together, probably with much higher levels of secure, long-term funding for science providers.
Strategic research in agriculture and forestry
Since the 1992 Statement of Science Priorities, funding for much agricultural and horticultural research has declined in real terms, even though since the mid-1980s the sectors’ contribution to GDP has increased compared to the rest of the economy. Funding reductions have typically been in production research and have led to significant redundancies, most recently in HortResearch. This has severely impacted on some of the key capabilities needed for New Zealand’s biologically-based industries.
In recent years public research funding decisions have focused on areas such as molecular biology and other disciplinary priorities seen as leading edge. This has been at the expense of areas such as biochemistry, ruminant physiology, farm management systems etc., that are needed to make modern biotechnology productive in the economy. There are some concerns with FRST’s Research Consortia mechanism. While co-funding of short-term and more applied research in Consortia or other frameworks is appropriate, co-funding requirements should be a complement to and not a substitute for long-term, publicly-funded research that creates, applies and sustains competencies critical to the underpinning of private sector innovation. We would be very troubled if public funding of agricultural and horticultural research was increasingly limited to that which was co-funded by industry within Research Consortia or other such frameworks.
To sustain, let alone enhance, the productivity and international competitiveness of New Zealand agribusiness there needs to be greater investment in publicly-funded research that is industry aligned and which encompasses a longer term investment horizon than would be supported by the private sector.
It is understood there may be an increased FRST focus on research likely to be commercialised by specific firms rather than strategic research aligned to and adopted by sectors. It is important to be clear about what policy and investment instruments are appropriate for particular industry sectors. Centralised CRI research is probably best focused on strategic research aligned to sectors, while firm-specific research is best supported through programmes such as Technology for Business Growth (TBG) and Technology in Industry Fellowships (TIF).
Science provider incentives and behaviours
CRIs are companies with the primary statutory objective of benefiting New Zealand, and with an obligation to run as successful commercial businesses. The Crown Research Institutes Act 1992 makes explicit that the primary principle governing CRIs is that they undertake research for the benefit of New Zealand. They are also required to be financially viable, however this is not as an end in itself but is intended to ensure they can continue to do research that is to New Zealand’s benefit. The high dependence of CRIs on contestable and unpredictable funding from FRST has created a strong incentive for them to make themselves more financially independent, including by commercialising their own research. In some cases CRIs are understood to have delayed release of research results to industry in the hope of developing their own intellectual property from it. CRIs have developed their own commercial products and sold technology and services overseas rather than focusing on delivery to the New Zealand sectors.
CRIs should be there to do what the market can’t do, not what it can do, and they should be focused on the social returns to the sectors not the private returns to themselves. The excess of social returns over private returns to R&D is, after all, one of the most consistent empirical findings in all of economic literature and is the fundamental rationale for both the creation of CRIs and government funding of them.
2The methodology used to derive these figures weighs the contributing sectors by significant coefficients from an input-output table derived from Statistics New Zealand’s inter-industry studies.
Contact for Enquiries
Monitoring and Evaluation
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0623
Contact this person
