Dancing with the stars? - The international performance of the New Zealand economy
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DISCUSSION PAPER 2005 / 4 Dancing with the stars? The international performance of the New Zealand economy DAVID SKILLING | DANIELLE BOVEN DECEMBER 2005
The New Zealand Institute The New Zealand Institute is a privately funded think-tank that aims to introduce new and creative thinking into the economic and social policy debate in New Zealand. We are committed to the generation of debate, ideas, and solutions that creatively address New Zealand's economic and social priorities in order to build a better and more prosperous New Zealand for all New Zealanders. The Institute’s members come from a variety of backgrounds in business, education, and community service, and have a wide range of views on issues. But we are all committed to contributing to building a better and more prosperous New Zealand. The Institute’s work is non-partisan, is based on evidence and analysis, and draws on the best ideas and practice from around the world as well as New Zealand. The New Zealand Institute PO Box 90840 Auckland 1030 New Zealand P +64 9 309 6230 F +64 9 309 6231 www.nzinstitute.org
‘Dancing with the stars?’ is the second paper in a series that forms part of the New Zealand Institute’s research project on ‘Creating a global New Zealand economy’. This paper follows on from our first paper – ‘No country is an island’ – which was released in November.
FOREWORD:
C R E AT I N G A G L O B A L N E W Z E A L A N D E C O N O M Y
The New Zealand economy has performed importance of international engagement,
well over the past 15 years, with economic and the difficulties that some New Zealand
growth rates that exceed those generated in firms face in going global, that provides the
previous decades and that compare well motivation for this project.
against the US and Australia.
This project is being undertaken to identify
The challenge now is to build on this good the actions and policies that will move New
performance, so that New Zealand’s income Zealand towards becoming a genuinely
levels converge to those of other developed global economy, in which much more of
countries. Sustaining high rates of economic New Zealand’s national income is generated
growth into the future will necessarily involve a offshore and where New Zealand firms win
substantial increase in labour productivity growth. systematically abroad.
New Zealand is a small economy, and Over the next several months, we will be
substantially raising New Zealand’s labour releasing a series of reports examining different
productivity will require much greater levels aspects of this issue. Initial reports will describe
of exporting and foreign investment by New why taking the New Zealand economy to the
Zealand firms. Exporting and investing offshore world is vitally important, will examine New
provides scale, growth opportunities for New Zealand’s current exporting and international
Zealand’s most productive firms, and great investment outcomes, and will identify some
learning opportunities for New Zealand firms. of the key reasons that New Zealand’s
New Zealand cannot achieve and sustain high international outcomes do not compare well
rates of productivity growth without making against other small, developed countries.
much greater use of larger markets through
international activity. An important part of this project will be
conversations with a wide range of business
However, New Zealand’s international and political leaders about the key issues and
performance does not compare well against the actions that can be taken to increase
many other developed countries, and only a exporting and international investment by
small number of New Zealand companies are New Zealand firms.
substantially engaged in international markets
in terms of either exporting or investing. New This will provide the basis for reports that focus
Zealand is not participating in increased on a range of solutions. The aim of the project
international economic activity to the extent is to identify the actions of government,
that many other countries are. business, and others, which are required in
order to take the New Zealand economy to
Of course, New Zealand firms do face the world in a material and successful way.
particular difficulties in terms of moving into Creating a global New Zealand economy is
international markets because of the small an important but demanding challenge, and
size and remoteness of the New Zealand will require sustained leadership from both
market. It is this combination of the the private and public sectors.
CONTENTS EXECUTIVE SUMMARY 1 1.0 INTRODUCTION 4 2.0 NEW ZEALAND ’ S EXPORTING PERFORMANCE 5 THE LEVEL OF EXPORTING 5 THE COMPOSITION OF EXPORTS 10 DECOMPOSING THE SOURCES OF SLOW EXPORT GROWTH 16 SUMMARY 19 3.0 NEW ZEALAND ’ S INTERNATIONAL INVESTMENT 20 THE LEVEL OF INVESTMENT 20 INTERNATIONAL BENCHMARKING 22 SUMMARY 25 4.0 THE INTERNATIONAL ACTIVITIES OF NEW ZEALAND FIRMS 26 FIRM - LEVEL EXPORTING 26 FIRM - LEVEL DIRECT INVESTMENT ABROAD 27 INTERNATIONAL PERFORMANCE OF NEW ZEALAND FIRMS 28 IMPLICATIONS FOR FIRM GROWTH 30 SUMMARY 33 5.0 DISCUSSION 34 INTERNATIONALISATION INDEX 34 PROSPECTS FOR THE FUTURE 37 SUMMARY 40 6.0 CONCLUDING REMARKS 42 REFERENCES 45 ABOUT THE AUTHORS 47
EXECUTIVE SUMMARY
As a small country, international There has been little change in the
engagement is vitally important to composition of New Zealand’s exports
New Zealand’s future economic over the past couple of decades
prosperity. This report examines the compared to the type of change
extent of exporting and foreign direct observed in other small developed
investment by New Zealand firms, countries. The composition of New
considering how New Zealand’s Zealand’s exports looks very similar
international economic activity has now to 25 years ago. New Zealand’s
changed over time as well as how it exports of both goods and services
compares to other developed countries. remain heavily land-based.
New Zealand’s exports are relatively This export composition is an important
low as a share of national income, are reason that New Zealand’s overall
not growing as rapidly as in many export growth has been relatively slow.
other countries, and are distinctive 81% of New Zealand’s exports by value
in composition are in categories that have grown less
rapidly than average world export growth.
New Zealand’s exports to GDP ratio
is currently 29% of GDP, only slightly New Zealand’s direct investment
higher than in 1990 and at about the offshore is low by international
same level as in the mid-1980s. And standards and has reduced
New Zealand’s exports have declined since 1990
as a share of national income over the
past several years, while the domestic International engagement can also occur
economy has grown strongly. through New Zealand firms investing
directly abroad. However, New Zealand’s
New Zealand’s export growth has been international investing performance
consistently below the OECD average does not benchmark well against
over the past few decades. This slow other developed countries. At 9.5% of
growth rate has resulted in a low level GDP, New Zealand’s stock of outward
of exports to GDP compared to other foreign direct investment (FDI) is about
developed countries. This is one third of the developed country
particularly the case relative to other average, and New Zealand’s FDI
small developed countries that are outflows have been among the lowest
more reliant on exporting to generate in the OECD over the past decade.
national income.
New Zealand’s stock of outward FDI
The composition of New Zealand’s has reduced from about 15% of GDP
exports is distinctive in being dominated in 1990, due to reduced investment
by land-based exports, with a low outflows as well as retrenchment by
technological intensity of exports. This many New Zealand companies. This
is also true for New Zealand’s exports reduction in New Zealand’s outward FDI
of services, which are dominated by contrasts sharply with the international
tourism with relatively little income experience over the past 15 years. FDI
from the export of business services. outflows from OECD countries rose by
1
DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
a factor of more than three from 1990 has few large companies and very few
through 2004, and the overall level of genuine multinationals compared to
outward FDI has more than tripled across other countries of similar size.
the developed world over this period.
These outcomes have been
The returns on New Zealand’s outward generated despite a positive
investment have also been low. The environment for strong
average return on outward equity international performance
investment has been 5% over the past
decade as opposed to a 9% return on Overall, New Zealand’s international
foreign investment into New Zealand. performance over the past 15 years in
terms of exporting and outward FDI
Only a small number of New does not compare well with other
Zealand firms are actively engaged developed countries. At a time when
in international activity, and many global economic integration has been
have not generated strong proceeding rapidly, with substantial
financial performance increases in international trade and
investment flows, New Zealand’s
New Zealand’s exporting and foreign exports have grown relatively slowly
investing activity is dominated by a and foreign direct investment by New
relatively small number of large Zealand firms has reduced.
companies, such as Fonterra, Zespri,
and PPCS. Only a small proportion New Zealand is the only developed
of New Zealand firms are engaged in country whose overall degree of
significant international activity, either international integration has reduced
through exporting or investing. For over the past decade. Over the past
example, only 361 New Zealand firms few years, the levels of both exporting
exported more than $10 million in 2005 and the stock of outward FDI have
and only 50 firms exported more than declined as a share of the New Zealand
$75 million. economy. The world is globalising but
New Zealand is not participating
In addition, the firm-level data suggest meaningfully in this process. New
that New Zealand firms that operate Zealand is not dancing with the stars
internationally do not generate the on the international stage.
returns generated by domestic firms.
Over the past decade, the group of This is despite the international
large listed New Zealand firms with environment being conducive to
substantial international operations have improved trade and investment over
generated lower shareholder returns the past decade or so. Strong income
than have domestically-focused firms. growth in world markets has been a
significant factor in increased
As a result of this domestic focus, the international trade and investment
potential size of many New Zealand firms flows. And New Zealand has obtained
is constrained by the scale of the New particular benefits from the successful
Zealand market. Indeed, New Zealand conclusion of the Uruguay Round of
2
DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
trade liberalisation in 1994, reduced But the good news is that achieving a
costs of transport and communications, significant improvement in New Zealand’s
and strong export prices. international performance in a short
period of time is possible. Many
The challenge going forward countries have substantially increased
their exporting and investing activities
The world is changing rapidly and over the past decade, and there is no
countries are moving ahead quickly. reason that New Zealand cannot do
But New Zealand’s international likewise. The message of this report,
performance has not kept pace with however, is that New Zealand will not
these developments, and worryingly, generate such an improvement on
there are signs that New Zealand is current course and speed.
going backwards in terms of the level of
its international economic engagement.
Going forward, significant competitive
pressures are emerging that will affect
New Zealand’s exporting and investing
performance.
3
1 INTRODUCTION
For a small country like New Zealand, This report considers the extent
raising the level of international to which the New Zealand economy
economic activity is vital to achieving is successfully engaged in the global
and sustaining higher rates of economy through New Zealand firms
productivity growth. New Zealand’s selling goods and services to world
ability to generate economic prosperity markets or investing directly in
will depend to a large extent on the these markets.
ability of New Zealand’s firms to
compete successfully in international The report begins by describing New
markets, either through exporting or Zealand’s exporting activity in terms of
international investment. its level and composition. The change
over time is outlined and New Zealand’s
New Zealand has a history of being a outcomes are compared with those of
trading nation, engaged economically other countries, particularly small
with other countries. This began with the developed countries. The report then
trading of seals, whales, and timber in considers the level and nature of New
the early days of European settlement, Zealand’s direct investment abroad,
and then pastoral exports after the advent and compares this activity to that which
of refrigerated shipping in the 1880s and is observed in other developed countries.
the creation of the “protein bridge” to
the UK (Belich (2001)). As a small country, After this analysis of the aggregate data,
there has long been an understanding the firm-level outcomes are assessed.
in New Zealand of the importance of How many New Zealand firms are
international engagement to secure engaged in exporting or investing
New Zealand’s economic future. directly abroad, and how have these
firms performed in terms of growth
But the world moves on. The past and profitability?
several decades have seen another
wave of significant global economic These national and firm-level outcomes
integration, with substantially higher are then evaluated. Overall, how does
levels of international economic activity. New Zealand’s international economic
International flows of goods and services, performance benchmark against other
investment capital, companies, and countries? And what are the prospects
people have increased considerably, for New Zealand’s future international
and particularly over the past decade performance?1
or two. The pace of change and the
intensity of competition are likely to
increase further as China and India
continue to integrate into the global
economy over the coming decades.
This process provides a substantial
opportunity for New Zealand, but it is
simultaneously a major challenge.
1 Additional data and analysis are available on the New Zealand Institute’s website at www.nzinstitute.org
4
2 NEW ZEALAND’S EXPORTING PERFORMANCE
This section considers New Zealand’s early 1970s until the mid-1980s.
exporting performance. In particular, it Interestingly, aside from an immediate
examines the level of exporting, both dip around 1973, there is no indication
in terms of how it has changed over that the loss of preferential access to
time and how it benchmarks against the UK market on the UK’s entry into
other countries. The composition of the European Community did lasting
the goods and services exported from damage to New Zealand’s export
New Zealand is also considered, and income. Rather it seems that New
compared to the export structures of Zealand successfully found alternative
other developed countries. markets for its primary exports.
THE LEVEL OF EXPORTING However, New Zealand’s exporting level
The standard measure of a country’s has been static since the mid-1980s.
exporting performance is the share of Despite several pronounced peaks and
exports of goods and services in the troughs in the export series, there has
overall economy. New Zealand’s exports been no trend of increased exporting
to GDP ratio has trended upwards activity over the past 20 years. The share
over the past few decades, from 22% of exports in New Zealand’s national
in 1971 to 29% in 2005, as shown in income has gone sideways. Indeed, the
Figure 1. This rise in exports to GDP level of exports in 2005 was the same
over the past few decades means that, as in 1983 at 29% of GDP. This suggests
on average, exports have grown slightly that increased exporting activity has
more rapidly than the overall economy and not been an important driver of New
are making an increased contribution Zealand’s economic growth over the
to New Zealand’s national income. past 20 years. New Zealand’s growth
has been driven to a much greater
New Zealand’s exports grew as a extent by domestic activity, such as
share of GDP most rapidly from the strong private consumption spending.
FIGURE 1: NEW ZEALAND’S EXPORTS AS A % OF GDP, 1971-2005
40%
30%
20%
10%
0%
95
97
99
01
03
2
75
81
87
71
73
77
79
83
85
89
91
93
Q
19
19
19
20
20
19
19
19
19
19
19
19
19
19
19
19
19
05
Source: World Development Indicators (1971-1987); Statistics NZ (1988-2005)
5DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
This reliance on the domestic New This is reflected in the strong export
Zealand economy to generate economic growth observed across the world over
growth has been particularly evident the past few decades. Overall world
over the past several years. New trade grew by 9.5% a year between
Zealand’s exports have reduced from 1970 and 2002, substantially in excess
a high of 36% of GDP in 2001 to 29% of world income growth. And the World
of GDP in 2005. This indicates that the Trade Organisation (2004) reports that
export sector has not made a strong world merchandise exports grew by
contribution to New Zealand’s recent 6.4% annually between 1990 and
economic growth. 2000, considerably faster that world
merchandise production at 2.5% per
To place New Zealand’s exporting year. The trend for world trade growth
performance in context, this experience to exceed world income growth has
needs to be compared to the level and been a consistent phenomenon since
growth of exports in other developed the end of the Second World War
countries. (World Trade Organisation (2005)).
There has been a worldwide trend These export growth rates significantly
towards aggressive international exceed New Zealand’s export growth
engagement, with most developed over the past few decades, as can be
economies substantially more integrated seen in Figure 2. New Zealand’s exports
into the global economy than was the grew at 7.8% per year between 1971
case 20 years ago. A common feature and 2002, slower than the world growth
in the growth experience of the past rate of 9.5% per year. Indeed, of the
few decades has been countries 24 OECD member countries in 1971,
rapidly expanding their international New Zealand’s export growth rate
economic presence. ranked 23rd over the three decades
FIGURE 2: VALUE OF GOODS AND SERVICES EXPORTS, INDEXED TO 1971
2500
2000 World
66% Gap
1500
OECD
1000
19% Gap
New Zealand
500
0
01
03
75
81
87
71
73
77
79
83
85
89
91
93
95
99
97
20
20
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
Note: 1971 = 100
Source: World Development Indicators
6DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
New Zealand’s relatively slow export
growth has been a consistent feature
of the past three decades. However,
slow export growth has been
particularly apparent in New Zealand
over the past several years with
exports declining as a share of GDP.
This contrasts sharply with the strong
world export growth in recent years.
The World Trade Organisation (2005)
estimates that real exports of goods
grew by 9% across the world in 2004,
almost double the world’s rate of real
income growth. And real trade growth
is projected to grow by 6.5% during
2005. Similar estimates have been
made with respect to the growth of
exports of commercial services.
As a consequence of New Zealand’s
from 1971-2002. Only Switzerland consistently slow export growth,
generated slower export growth than New Zealand’s level of exports to
New Zealand over this period. GDP is now lower than in most other
developed countries. This is clear
So although New Zealand’s level of from Figure 3. At 29% of GDP, New
exporting as a share of national income Zealand’s level of exports is in the
has increased slightly over the past few bottom third of the OECD, ranking
decades, this has been more than 21st out of 30 OECD countries.
matched by other countries. This is
reflected in a decline in New Zealand’s New Zealand’s relatively low level of
share of world trade from 0.28% in 1980 exporting activity is particularly apparent
to 0.22% in 2004, a reduction of 19% relative to other small developed
over a 24 year period. countries. Small countries tend to have
a greater reliance on exporting than do
Over time New Zealand’s slower rates larger economies like the US and Japan,
of export growth have accumulated who have larger domestic markets to
into a very large gap in the level of leverage. This is an important reason
exports. Had New Zealand’s exports why Australia’s level of exports to GDP
grown at the world average rate since is lower than that of New Zealand.
1971, they would be 66% higher than The Australian market is over five
they currently are, as shown in Figure 2. times as large as the New Zealand
This gap is continuing to widen as economy, which makes export activity
world export growth continues to less of an imperative for Australia than
exceed New Zealand’s export growth. for New Zealand.
7DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
FIGURE 3: EXPORTS AS A % OF GDP, 1990 AND 2004
168
1990 ■
142 2004 ■
100%
80%
60%
40%
20%
0%
d
lia
SA
e
nd
ep
ria
en
nd
ay
ea
D
k
le
na
d
an
or
ar
an
EC
hi
ra
w
or
ed
hi
R
la
la
st
U
m
ap
C
al
nl
or
st
C
Ire
er
O
Au
K
ak
Sw
en
Ze
Fi
ng
N
Au
itz
h
ov
D
ut
Si
ew
Sw
Sl
So
N
Note: OECD average for 1990 and 2003
Source: OECD; National government statistics for Chile, China, and Singapore
FIGURE 4: EXPORTS AS A % OF GDP AND POPULATION, 2003
100%
Slovak Rep
80%
Ireland
Czech Rep
60% Hungary
Austria
South
40% Denmark Poland Korea Germany
Sweden
Iceland Finland Spain
New Zealand Turkey
Greece
20% Italy
Australia
USA
Japan
0%
100,000 1,000,000 10,000,000 100,000,000 1,000,000,000
Population (Log)
Note: Population displayed on a logarithmic scale. Line reflects regression against
all OECD countries with 2002 data for Mexico, Netherlands, and Switzerland
Source: OECD; The New Zealand Institute calculations
The negative relationship between small developed countries. It turns out
country size, as measured by that New Zealand’s level of exporting
population, and the share of exports in is at the bottom of the group of small
the economy, can be seen in Figure 4. developed countries and is well below
Larger countries, such as the US, the trend line shown in Figure 4.
Japan, and Australia, tend to have
significantly lower levels of exporting Most small developed countries have
than do smaller countries. This suggests levels of exports to GDP that are
that New Zealand’s level of exports substantially higher than New Zealand’s
ought to be compared to that of other level. The average level of exporting
8DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
terms of population, including the US,
Import content Japan, and Australia. The perception
of New Zealand as a small trading
of exports nation is unfortunately well out of date.
One factor to bear in mind when
comparing exports to GDP across It is also apparent from Figure 3 that
countries is the import content of many countries substantially increased
these exports. Some countries with their exports between 1990 and 2004.
high levels of exports to GDP, like
Across the OECD, exports have been
Hong Kong, have a high import
growing more rapidly than the overall
content of exports in which a good
economy leading to higher levels of
is imported, some processing is
exports to GDP. The median increase
undertaken, and then the processed
good is exported. This may increase in the level of exports to GDP across
the level of exporting relative to all OECD countries between 1990 and
countries in which there are fewer 2004 was 12% of GDP, which compares
imported inputs. to an increase of 2% for New Zealand.
Significant increases in the share of
New Zealand’s exports have a low
exports in the economy have been
import content because primary
widespread over the past decade: the
sector exports have few imported
ratio of world exports to GDP rose
inputs, and also because New
from 20% in 1990 to 30% in 2003
Zealand’s manufactured exports
have a relatively low import content. (World Trade Organisation (2004)).
Black et al. (2003) estimate that
New Zealand’s import content of By international comparison, then,
exports is about 20% compared New Zealand’s export growth over
with the UK at 25%, Sweden and recent decades has been substantially
Denmark at 35-40%, and slower than in most other developed
Singapore at 60%. countries. New Zealand has not kept
pace with the substantial progress
However, New Zealand has a low
export share even after adjusting made by many other developed
for this. And the exports to GDP countries in terms of expanding their
ratio is still a useful measure as it exporting activity.
gives a sense of the extent to
which an economy is integrated Trade balance
into the global economy. New Zealand has traditionally
generated a merchandise trade surplus
of about 1-2% of GDP. However, a
for the 15 OECD countries with merchandise trade deficit has been
populations of 10 million or less is run since 2002 and New Zealand’s
53% of GDP, almost double the level trade deficit is now about as large as
in New Zealand. There is no developed it has been for about 30 years. As at
country with a similar population size September 2005, the annual trade
that exports less than New Zealand. deficit was $5.8 billion or about 3.9%
The countries ranking below New of GDP. The merchandise trade deficit
Zealand are considerably larger in for the month of September was
9DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
about $1.0 billion, which represents THE COMPOSITION
42% of total exports for September. OF EXPORTS
This is on the back of the $1.1 billion In addition to New Zealand’s relatively
August trade deficit, which Statistics low level and growth of exporting, New
New Zealand noted was “the highest Zealand’s exporting performance is also
deficit recorded for any month”. distinctive in terms of its composition.
This is the case for the composition of
These deficits are due to New Zealand’s New Zealand’s exports of both goods
import growth consistently exceeding and services.
export growth over the past decade,
with imports growing at 6.0% per year New Zealand’s exports of goods are
and exports growing at just 4.2% per dominated by primary goods, like wood
year. Although there are some cyclical and pulp, meat, dairy, and other food,
drivers of the trade deficit, such as the with about two thirds of goods exports
high value of the New Zealand dollar, currently coming from the primary
there are also some important longer- sector (NZTE (2005)). Manufactured
term factors at work as suggested by exports comprise just one quarter of
the earlier discussion. New Zealand’s exports. The reliance
on exports of primary goods can be
This merchandise trade deficit has been seen by scanning the list of New
partly offset by an improvement in the Zealand’s top 20 exports in Table 1.
balance of trade in services, which is Much of New Zealand’s export activity
now in surplus at about 0.6% of GDP is land-based and involves New Zealand
on the back of strong tourism growth. extracting value from its natural
TABLE 1: NEW ZEALAND’S TOP TWENTY EXPORT CATEGORIES
2004 Rank Commodity Description 1980 Rank
1 Meat and edible meat offal: fresh, chilled, or frozen 1
2 Milk and cream 4
3 Fruit and nuts: fresh and dried 13
4 Cheese and curd 10
5 Butter 3
6 Wood: simply worked, and railway sleepers of wood 15
7 Aluminium 5
8 Starches, insulin, and wheat gluten; Albuminoidal substances; Glues 6
9 Wool and other animal hair (excluding tops) 2
10 Fish: fresh, chilled, or frozen 12
11 Edible products and preparations, not elsewhere specifed 79
12 Pulp and waste paper 9
13 Paper and paperboard 7
14 Other wood: in the rough or roughly squared 16
15 Crustaceans and molluscs: fresh, chilled, frozen 14
16 Alcoholic beverages 52
17 Vegetables: fresh, simply preserved; Tubers, not elsewhere specified 20
18 Household-type equipment, not elsewhere specified 29
19 Crude petroleum and oils from bituminous minerals New
20 Veneers: plywood, “improved” wood and other, not elsewhere specified 23
Source: UN Comtrade 3 digit annual trade data
10DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
resource endowment, particularly its in terms of having a heavy reliance on
land and climate. commodity products like agriculture,
minerals, and oil, but this is unusual in
New Zealand’s export composition is the context of OECD countries.3
highly distinctive in comparison with
other OECD countries. New Zealand The other notable feature of New
has the highest share of land-based Zealand’s export composition is the
exports in the developed world, and absence of substantial change over
this share is not reducing significantly the past few decades. Although there
over time. This runs counter to the
2
has been some change in the overall
clear trend in other developed composition, this has been mainly due
countries, in which the primary export to a couple of large changes such as
share is declining as manufacturing the decline in the export share of wool
and services exports increase. Figure from 18% of goods exported in 1973
5 describes the export structure for to 2% in 2004.
several developed countries.
The most rapid change in the
Most developed countries rely to a composition of New Zealand’s exports
much greater extent on the export of occurred between 1970 and 1980.
manufactured goods. The World Trade Since then, the pace of change has
Organisation (2004), for example, progressively declined. The composition
estimates that 75% of total world of New Zealand’s goods exports has
trade is manufacturing trade. Australia not changed in a material way since
and Norway are probably the two 1990 relative to the changes observed
most similar countries to New Zealand in preceding decades.
FIGURE 5: COMPOSITION OF GOODS EXPORTS, 2004
100%
MANUFACTURING ■
OTHER ■
80% CHEMICALS / MINING / OIL ■
LAND - BASED ■
60%
40%
20%
0%
d
nd
k
ea
ep
ep
a
en
d
lia
ar
si
an
an
ra
or
ed
R
R
la
ay
m
nl
al
Ire
st
K
ch
ak
Sw
en
al
Fi
Ze
Au
h
M
ov
ze
D
ut
ew
C
Sl
So
N
Source: UN Comtrade
2 The only significant areas in which New Zealand has a higher world export share than predicted by its
relative economic weight are in the primary sector (Ballingall & Briggs (2002)).
3In 2003 about one third of Australia’s exports were minerals, which is equivalent to about 7% of
Australia’s GDP.
11DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
One indication of this can be seen in There are rapidly growing sectors
Table 1. Most of the top 20 export in New Zealand, such as the wine
categories in 1980 were also major industry, information and
exports in 2004. Indeed, the top 20 communications technology (ICT),
categories in 1984 accounted for 80% and biotech, but these sectors tend
of New Zealand’s goods exports in to be growing from a low base and
1980 and these same categories do not yet comprise a significant share
accounted for 60% of export value in of New Zealand’s exports. Exports of
2004, suggesting only modest change goods from these sectors are small
over the past quarter of a century. 4
compared to New Zealand’s total
This absence of change is also evident exports, and the emergence of these
when more disaggregated analysis is sectors has not been sufficient to lead
conducted, examining the changes in to a transformation in the composition
more detailed export shares. of New Zealand’s exports. For example,
Comalco generates over $1 billion
Although there has been some change annually in exports of aluminium,
in the composition of New Zealand’s which is over twice the $435 million
exports over the past decade or two, exported by the entire New Zealand
this is better described as incremental wine industry in the 12 months to
change rather than transformational. June 2005.5 Indeed, wine exports
The majority of what New Zealand comprise just 1% of New Zealand’s
firms export today is recognisable total exports despite the rapid export
from 25 years ago. growth of the wine industry.
4 14 percentage points of this 20 point reduction was due to the declining export share of wool,
from 16% in 1980 to 2% in 2004.
5 Winegrowers Federation 2005 Annual Report.
12DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
So although the emergence of in terms of the degree of value-adding
successful new industries deserves to processing rather than in terms of the
be showcased and celebrated, the export categories: for example, to the
extent of this success to date should extent that New Zealand is exporting
not be over-interpreted. As yet, the processed wood products rather than
new industries have not made an unprocessed logs. There has been a
impact on the overall composition of steady decline in the share of primary
New Zealand’s exports. Many more exports that leave New Zealand in an
years of rapid growth will be required unprocessed way, from 27% in 1988
before this will happen. to 15% in 2001. And the share of
elaborately transformed manufactures
New Zealand’s record contrasts sharply increased from 11% to 16% over this
with the experiences of other small same period (Black et al. (2003)). But
countries in terms of the pace and although this suggests some increase in
scale of change in the composition of the extent of processing, the extent of
exports. Small countries like Ireland change has not been rapid or substantial.
and the Scandinavian countries have
generated some rapid changes in their Another measure of the composition
export structures over the past 15 years. of New Zealand’s exports is in terms
This experience shows that major of the technological intensity of
changes can be made in short periods manufactured exports. New Zealand
of time, rather than taking several is at the bottom of the OECD in terms
decades to accomplish. of the technological intensity of
manufactured exports, ranking 29th
For example, 25 years ago Finland’s out of 30 OECD countries in terms of
exports were dominated by forestry the share of manufactured exports that
exports, with wood, pulp, and paper are either high tech or medium-high
products making up 45% of their tech (OECD (2005b)).6 At 67%, the
exports. By 2000, these categories OECD average share of high tech and
accounted for just 27% of Finnish medium-high tech manufactured exports
exports, with the export share of is over three and a half times higher
high-technology manufacturing having than New Zealand’s 19% share. The
increased substantially. Routti (2001) share in Australia is 31%, substantially
reports that exports of electronics higher than in New Zealand.
rose from 4% of Finland’s exports in
1980 to 11% in 1990 and to 31% in However, New Zealand has the largest
2000. This is a transformational share of low tech manufactured exports
change in Finland’s export structure. in the OECD. At 70%, this share is over
three and a half times bigger than the
One argument sometimes made is that OECD average. This reflects the low
New Zealand’s exports are changing technological intensity of the food and
6The OECD estimates the technological intensity of an industry on the basis of its research and
development (R&D) intensity. The pharmaceutical industry, for example, is regarded as high tech
whereas the food and beverage sector is regarded as low tech.
13DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
beverage sector, which is New Zealand’s
main type of manufactured export.
The OECD also reports that New
Zealand generated relatively low growth
in high tech and medium-high tech
manufactured exports between 1994
and 2003, despite its low starting point.
Greece, the country immediately
above New Zealand in terms of the
technological intensity of its
manufactured exports, grew its high
and medium-high tech exports at
twice the rate of New Zealand over
the 1994-2003 decade. And this has
occurred despite Greece having no
obvious comparative advantage in this
type of activity relative to New Zealand.
Taken together, this evidence suggests
that, although improvements have
been made, there has not been a
substantial increase in the value added
component of New Zealand’s exports.
Across a range of independent
measures, the extent of change in
New Zealand’s exports has been neither
rapid nor substantial. This is particularly
evident when the scale and pace of
change in New Zealand is compared
to that observed in other developed to be made in New Zealand’s export
countries. And a key test of whether structure where there was an incentive
New Zealand is adding more value to to do so. However, there is little
its exports is whether overall export evidence of substantial change in the
value is increasing. From the earlier type of goods that are exported.
discussion, it is apparent that this is
not happening in a material way. In essence, New Zealand is still a
land-based economy that relies on
This absence of change in New Zealand generating export income from its
is perhaps surprising given the extensive natural resource endowment. This is
economic reforms that occurred from likely to continue given the low levels
the mid-1980s. Among other things, of research and development
these reforms removed distorted price spending in the New Zealand economy
signals and impediments to efficient and the small size of New Zealand’s
resource reallocation enabling changes non land-based export sectors.
14DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
Exports of services At 29%, New Zealand’s share of
29% of New Zealand’s exports were services exports in total exports is
comprised of services for the 12 months slightly above the OECD average of
to March 2005 (MFAT (2005)). The 7
24%. New Zealand’s services exports
proportion of services exports has share is higher than in Australia (23%)
increased from 22% of total exports in but lower than in the US (30%) and the
1990, indicating that New Zealand’s UK (32%). However, although the share
exports of services have grown more of services exports is approximately
rapidly than exports of goods. Indeed, the same as the OECD average, the
New Zealand’s exports of services grew composition of New Zealand’s exports
at 4.6% a year between 1995 and of services is quite different.
2003, well above the annual growth
rate of 2.8% for the export of goods. New Zealand’s services exports are
dominated by travel and transport,
This is consistent with the standard which together account for about 83%
OECD pattern in which the growth of total services exports. A large part
of services exports exceeds that of this category is personal tourism,
of merchandise trade. But although which comprises over half of New
New Zealand’s services exports grew Zealand’s services exports. Export
more rapidly than for exports of goods, education is also an increasingly
New Zealand’s 4.6% annual growth rate significant component of New Zealand’s
was still well under the 5.9% average services exports, at $1.7 billion or 14%
growth rate in exports of services of services exports (MFAT (2005)).
generated across OECD countries. Both tourism and export education
have enjoyed rapid growth over the
past several years, and these industries
have been the major drivers of growth
in services exports. Export education,
for example, has increased from under
$500 million in 1999, more than a
three-fold increase.
The basic composition of New
Zealand’s services exports has
remained unchanged over the past
15 years, with the travel and transport
categories consistently accounting for
about 80% of services exports (The
Boston Consulting Group (2004)).
In contrast, the OECD average share
from the export of transport and travel
services is just 44%. The OECD (2004a))
7 The services exports numbers are currently being revised by Statistics New Zealand and are likely to
increase, perhaps by 0.5% of GDP.
15DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
estimates that travel and transport And second, most of New Zealand’s
account for about 70% of Australia’s exports of services are essentially
services exports in 2003, about land-based. Tourism accounts for over
50% across the EU, and just over half of New Zealand’s services exports,
40% in the US. and this is largely about marketing
New Zealand geography. The Boston
Across most OECD countries, business Consulting Group notes that “most
services, such as finance, insurance, other developed countries tend to export
communications, and royalty and knowledge-based services rather than
licensing income, are the major natural resource-based services, as
component of exported services. tourism is in New Zealand” (2004).
But only a small proportion of New In this sense, New Zealand’s services
Zealand’s services exports come in the exports composition is similar to that
form of such business services. Indeed, of exports of goods in that they
at 17% of total services exports, New are based on exporting a natural
Zealand’s exports of business services resource endowment.
are almost the lowest in the OECD,
with only Greece having a smaller DECOMPOSING THE
contribution from business services. SOURCES OF SLOW
EXPORT GROWTH
Royalty and licence fees account for The above analysis shows that New
just over 1% of New Zealand’s services Zealand’s export growth has been
exports, or about 0.3% of total exports, consistently slower than the OECD
suggesting that New Zealand is not and world averages, and that the
participating successfully in the global composition of New Zealand’s exports
knowledge economy. The OECD (2005b) is markedly different from most other
ranks New Zealand last among OECD developed countries in terms of its
countries in terms of New Zealand’s reliance on primary exports. It turns
technology payments and receipts. out that there is a direct link between
Whereas “in most OECD countries, the composition of New Zealand’s
technological receipts and payments exports and New Zealand’s relatively
increased sharply during the 1990s” slow export growth.
(OECD (2003b)), this source of export
income has not increased much in A country can generate relatively slow
New Zealand over the past decade. export growth for two reasons. The
first is where demand for the goods or
There are two distinctive features services that the country is exporting
about the services that are exported is growing less rapidly than exports in
from New Zealand. First, most of the general (the ‘commodity composition
services exported are consumed by effect’). The second is where the
foreigners in New Zealand, such as country is losing export market share
tourism and export education, rather in each category that it exports (the
than being sold and consumed in ‘competitiveness effect’).
foreign markets as is generally the
case with exports.
16DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
A major reason that New Zealand’s growth markets. In contrast, it has a
export growth has been less than that large presence in slower growing markets
of overall world trade growth is that such as those based on the primary
world demand for the goods that New sector. For example, New Zealand
Zealand exports has grown less rapidly has a substantial presence in the (low
than overall world exports. The World technology) food, drink, and tobacco
Trade Organisation (2004) reports, sector, which generated the slowest
for example, that agricultural trade growth rates of all the categories in
growth in the 1990s was lower than manufactured exports at about half
for manufacturing exports and other of the overall average growth rate.
types of services. And the OECD
(2003b) observes that “technology- Intra-industry and intra-firm trade has
intensive exports accounted for much also grown very rapidly over the past
of the growth in trade over the past few decades. This has occurred as
decade”. High technology industries technology has made it possible to
account for about 25% of total OECD undertake various steps in the production
trade, and generated the highest rates process in different countries.8 This type
of export growth. of trading pattern has been a major
driver of overall world trade growth.
New Zealand’s export composition But again New Zealand has not been
means that it does not have a significantly involved in these types
substantial presence in these high of trading activities. As a result,
8 Feenstra (1998), Hummels (2001), and OECD (2002) provide accounts of this process.
17DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
FIGURE 6: GOODS EXPORTS FROM NEW ZEALAND, 1990-2003
81% 19%
Dairy products and eggs 4.7 Misc food preparations 0.5
Wood, lumber and cork 1.4 Scientific and control instruments 0.4
Gaining
Share
Machinery, non-electric 1.3 Plastic materials 0.2 43%
Transport equipment 0.9 Rubber mfrs n.e.s. 0.1
Wood manufactures 0.4 39% Plumbing and heating fixtures 0.04
Share of 4%
world trade
1990-2003
15%
Meat 4.2 Chemical materials n.e.s. 1.1
Fruit and vegetables 1.6 42% Electrical machinery, apparatus 1.0
Losing Fish 1.2
Share
Misc manufactures, n.e.s. 0.5 57%
Non-ferrous metals 0.9 Medicine and pharmaceuticals 0.2
Textiles fibres not mfrd 0.8 Perfume, cleansing materials 0.2
Below Average Above Average
1990-2003 World Trade Growth = 6.3%
Note: Data shown is billions of New Zealand dollars, 2003 values;
n.e.s. is not elsewhere specified
Source: UN Comtrade 2 digit annual trade data; The New Zealand Institute calculations
New Zealand’s exports have not the world average growth rate between
grown as rapidly as have many other 1990 and 2003, they would be 28%
developed countries that are far more higher than they currently are.
engaged in this type of trade.
The effect of participating in slow
Indeed, 81% of New Zealand growth markets may be offset by the
merchandise exports by value were competitiveness effect if New Zealand
in categories that grew at a slower exporters are growing market share in
rate than average world export growth these products. However, New Zealand
between 1990 and 2003. These lost market share in categories that
categories included New Zealand’s major comprise 57% of its exports by value
exports like dairy, wood, and meat. Only between 1990 and 2003, with gains in
19% of New Zealand’s exports were in market share occurring in categories
high growth categories. This suggests that accounted for 43% of New Zealand’s
that the commodity composition effect export value. This acts to compound
provides a powerful explanation for the composition effect. Indeed, 42%
New Zealand’s low export growth. of New Zealand’s exports by value are
in slow growing categories in which
This has a substantial impact on the New Zealand is losing market share.9
level of New Zealand’s exports. If New This combination is not a recipe for
Zealand’s goods exports had grown at exporting success.
9 Similar conclusions are also reached in other studies (The Boston Consulting Group (2004),
Ballingall & Briggs (2001)).
18DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
The commodity composition effect can New Zealand’s export growth has
explain about 90% of New Zealand’s consistently lagged export growth in
slow export growth over the 1990-2003 most other small developed economies.
period, with the remaining 10% due to And New Zealand’s overall level of
the loss of New Zealand’s market share exports is lower than most other small
in specific export categories. developed countries, often by a
substantial margin.
Although this analysis has been
undertaken for goods exports, the same New Zealand’s exporting activity
effect can also explain the relatively is continuing to diverge from other
slow growth in the exports of services. developed countries that are taking
The services exports that New Zealand advantage of a rapidly globalising world
focuses on, travel and transportation, by increasing their export activity.
have grown less rapidly than have Although New Zealand’s exports have
exports of business services over the tended to increase as a share of GDP,
past couple of decades (World Trade this improvement in performance has
Organisation (2004)). This is an not been nearly as significant as that
important reason why the growth of generated by many other countries
New Zealand’s services exports has over this period.
been slower than the OECD average
over this period. The composition of New Zealand’s
exports is also highly distinctive. Unlike
Increasing New Zealand’s exports will most other developed countries, New
require an increased presence in high Zealand has not moved significantly
growth markets as well as at least beyond exporting based on its natural
maintaining market share in those goods resource endowment. Over three quarters
and services that New Zealand firms of New Zealand’s exports of goods and
currently export. However, the evidence services are based on this endowment.
outlined above shows that New Zealand New Zealand’s manufactured exports
is not moving rapidly into new markets are unusually low tech in nature, and
in which demand is growing more its high tech exports are growing slowly
rapidly. So this pattern of relatively slow compared to other countries. The
export growth is likely to continue. changes in New Zealand’s export
composition have occurred on the
SUMMARY margin, rather than being material
There have been some positive changes that have a significant impact
developments in terms of New Zealand’s on aggregate export outcomes.
exporting performance over the past
decade, such as a slight rise in the level
of exports to GDP and the ongoing
development of new strengths. Overall,
however, New Zealand’s exporting
performance does not compare well
to other developed economies.
193 N E W Z E A L A N D ’ S I N T E R N AT I O N A L I N V E S T M E N T
A second mechanism for international
engagement by New Zealand firms is The definition of direct investment is
in the form of outward foreign direct a foreign investment in which the
investment, which allows New Zealand investor has an equity ownership stake
of greater than 10%, which provides
to earn income from overseas
some control over the management
business activity. Outward foreign
of the investment. Direct investment
direct investment (FDI) occurs when
is different from portfolio investment
a significant investment is made in an
in which the investment is in
overseas firm or where a New Zealand overseas financial assets, such as
firm makes a new investment offshore investing in a mutual fund.
such as the creation of manufacturing
facilities or a distribution network or
the establishment of a retail presence. This section examines the overall level
of direct investment made by New
Direct investment offshore is a way Zealand firms abroad, how this has
for New Zealand firms to exploit their changed over time, and the income
competitive advantage across a global that is generated from this investment.
market and to access a larger customer These New Zealand outcomes are then
base. International investment allows compared to the outcomes generated
New Zealand firms to access internal in other developed countries.
and external scale economies, and
perhaps to produce more efficiently THE LEVEL OF INVESTMENT
than from a New Zealand base. New Zealand’s overseas direct
investment has gone through several
Such outward FDI may be made to support phases. Through the 1970s, there was
exporting activity from New Zealand. For relatively little outward investment by
example, investments in international New Zealand firms. However, New
distribution chains can be made to Zealand direct investment offshore
enhance the ability of New Zealand firms jumped significantly from the mid-1980s,
to get their New Zealand exports to with substantial international
market. Alternatively, direct investment investments being made by large
abroad can act as a substitute for New Zealand companies like Fletcher
exporting from New Zealand, where Challenge. The average annual
manufacturing facilities are established investment between 1982 and 1991 was
abroad to produce for foreign markets just under $1 billion. This investment
rather than exporting from New Zealand. activity generated a significant increase
in New Zealand’s level of outward FDI,
So in order to get a sense of with the stock rising from 2.3% of
New Zealand’s overall international GDP in 1980 to 14.7% of GDP in 1990
engagement it is important to look at (UNCTAD (2005)).
the outward FDI outcomes as well as
the exporting outcomes. Perhaps it is However, 1991 was the high water mark
the case that New Zealand firms invest for the level of outward FDI, and New
abroad rather than choosing to export Zealand’s FDI outflows have been much
from a New Zealand base. lower in the 15 years from 1990.
20DANCING WITH THE STARS ? : THE INTERNATIONAL PERFORMANCE OF THE NEW ZEALAND ECONOMY
investments. The reduced stock
of outward FDI is also due to New
Zealand firms becoming foreign owned,
with the effect that their international
investments are no longer recorded as
New Zealand FDI. Although there were
also some substantial outflows during
this period, as New Zealand firms
continued to invest offshore, the total
outflows during this period were
significantly less than through the 1980s.
This stock of outward FDI is much
lower than New Zealand’s stock of
inward FDI of about $79 billion in 2005,
which represents about 52% of New
Zealand’s GDP. Overall, New Zealand
has a direct investment deficit of over
$60 billion, or about 40% of GDP.
As a share of GDP, this is one of the
The average FDI outflows from New largest FDI deficits in the OECD.
Zealand between 1992 and 2002 were New Zealand has been successful
only about $580 million annually. And in attracting FDI into New Zealand,
recent outflows have been very low, particularly into the domestically-
with total outflows of only about $500 focused sectors of the economy
million between 2001 and 2004 (OECD (Skilling (2005)), but has been much
(2005a)). This is despite a high New less successful in terms of New Zealand
Zealand dollar that makes international firms investing significantly abroad.
investment by New Zealand firms
more attractive. These reduced FDI In addition to considering the level of
outflows have led to a reduction in outward FDI, it is also instructive to
New Zealand’s stock of outward FDI consider the returns generated on this
as a share of GDP to 11.9% of GDP investment. Unfortunately, the returns
($17.8 billion) as at June 2005, down on the international investments that
from about 15% of GDP in 1990.10 have been made are not that impressive.
For the 12 months to June 2005, the
There have been some significant return on New Zealand’s equity FDI was
negative flows over the past decade, 4.2%. This contrasts with the 14.1%
reflecting substantial retrenchments return on equity investment generated
during the 1990s as New Zealand by foreign investors on their New
firms reduced or sold their overseas Zealand FDI in the year to June 2005.11
10 Statistics New Zealand has recently revised these FDI numbers upward from 9% of GDP.
11These average returns are calculated by dividing the operating income from equity direct investment
(not including capital gains) by the stock of outward equity direct investment.
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