World Bank wants us to think big
Small businesses do not create jobs. They are less productive than big businesses. They are not the answer to New Zealand's export challenge.
Instead of supporting small businesses, New Zealand should create an environment that is friendly to large multinational companies and fast-growing start-ups. We should cancel the myriad programmes currently in place to assist small businesses to become exporters because there is very little evidence they work.
Those and other startling conclusions are included in a recent World Bank report, "Export Superstars" which finds that scale matters when it comes to exporting. It's a result that could lead you to think that much of what organisations such as New Zealand Trade and Enterprise (NZTE) do is pointless.
Export "superstars" are a unique group of firms, say the authors, Caroline Freund and Martha Denisse Pierola.
"They explain most of the export growth and diversification observed across countries, they drive comparative advantage, and they are born big or very rapidly become so.
"The cases of small firms making it to the top are rare."
The figures produced in support of that case, compiled from trade data of 32 countries, are compelling.
On average, the top firm alone holds almost 15 per cent of total (non-oil) exports between 2006 and 2008. The top 1 per cent of exporters accounts for 53 per cent of exports on average during the same period.
"The remaining volume of trade is mainly concentrated in the next tier of large firms. Specifically, the top 5 per cent of firms accounts for almost 80 per cent of exports on average and the top 10 per cent accounts for almost 90 per cent," the report said.
Given that instances of small exporting firms thriving to superstar levels are extremely rare, the authors conclude that disproportionately allocating resources to export programmes in support of SMEs might prove to be misguided.
"On the same line of thought, costly regulations that disproportionately target large firms will also hold back export growth. Finally, policies to attract large multinational firms are likely to be crucial for small countries interested in expanding exports and diversifying their export base."
The "superstars" research summarises other recent research on SMEs that indicates small-scale businesses have retarded productivity in India and Mexico by up to 25 per cent. Still other research has shown that large firms and high-growth start-ups are the primary job creators in the US - not small business, as is often claimed.
"Our work implies similar dynamics exist for trade, with highly productive firms growing quickly into large firms that dominate exports," the authors write. "Taken together this implies that jobs, productivity, export growth, and diversification all rely heavily on the ability of an economy to foster the development of large firms."
PHIL O'REILLY'S VIEW
Phil O'Reilly, chief executive of Business NZ, said the report is broadly right.
"We've known for quite some time that larger companies find it easier to export," he said. So do start-ups that are born as global companies or exporters rather than growing from a more traditional base targeting the local market.
There is an "excellent argument", O'Reilly said, for no industry support from government, but that would also require other radical changes, such as a cut in the company tax rate to around 10 per cent.
New Zealand still has unique challenges to overcome in its incredibly small scale and being the most isolated developed economy in the world, he said.
"You have to pull some levers. You can't overcome the issues of size and distance by magic."
O'Reilly said New Zealand has to be deliberate about the ways it tries to overcome those challenges and having almost no companies of scale.
Hostile to big business? Last week departing Coca-Cola Amatil New Zealand boss George Adams urged Kiwis to shed an anti-corporate mindset which he said was stifling growth. Adams, right, said our "love to hate" relationship, where corporate businesses are seen as nasty and untrustworthy, was stifling New Zealand's ability to create the larger, export-driven businesses we need. Auckland Chamber of Commerce chief executive Michael Barnett said he would extend Adams' complaint. "I think there is a real lack of understanding about where real wealth comes from," he said. "I don't think there is a good level of economic literacy for people to understand if businesses in their community do well, the community benefits." Barnett said there are then subsets of sentiment. People look at large businesses and judge them by one failing rather than their overall contribution. He said there is an "easy opt-in" to an anti-corporate generalisation in much the same way as the reputation of students can be tarnished as a whole by the misbehaviour of some.Government policy has always been about trying to work in that "imperfect world", he said, but it hasn't always been effective or well targeted.
Around 2007, he said, relatively small amounts of funding were being distributed to many small "mum and pop" companies to support activities such as attending trade shows, he said. Many of these companies were failing or not growing.
"The evidence was it was not the best way to spend taxpayers' money."
Now, such assistance from NZTE and the Ministry of Business, Innovation and Employment (MBIE) is much more targeted at a group of around 500 companies, some with scale, O'Reilly said. There is also a lot more assessment of excellence within companies before assistance is provided.
O'Reilly said there is a purist argument that we need many more big companies, and he agrees with that. But in an imperfect world, current policy is "more right than wrong".
"Because we have unique challenges you don't want to copy-and-paste from the World Bank. You have to look at our unique issues."
New Zealand Institute of Economic Research (NZIER) chief executive Jean-Pierre de Raad said the finding in the World Bank report is that big companies export because they are successful in a competitive global environment.
"They are not big because they export; they export because they are successful," he said.
"SMEs are really important in New Zealand, and most economies actually, and we should not demonise them. They are responsible for a lot of job creation, as well as job destruction. There is an enormous amount of churn in enterprises and jobs as entrepreneurs give it a go to become the next success story. Some succeed and grow, others don't."
De Raad said policy should make it more attractive for them to do business, and stay in New Zealand once they are successful.
"It is for that reason that the best thing a government can do for business success is to make sure the business environment is conducive to entrepreneurs: a first-class investment, tax and regulatory environment."
He said small enterprises find it hard to achieve the economies of scale that allows them to compete. But New Zealand SMEs also face the special problem of a small domestic market and being far from other markets.
"This makes it hard for businesses to grow and get stronger before they export. Contrary to firms in more populous countries, firms need to export to grow in scale. But distance from major markets makes that hard."
De Raad acknowledged there are a large number of schemes in place to support exporting, which was positive.
"But we do not know very much about the cost-effectiveness of all these programmes, or whether they are needed. There are virtually no robust economic evaluations of them. So it is impossible to tell whether more or less interventions are needed, or what they should be."
JOHN BANKS' VIEW
The Minister for Small Business, John Banks, said the World Bank research is consistent with local findings that New Zealand exporters tend to be larger, more productive and successful before they get into exporting. In other words, more successful firms go on to become exporters.
"The Government's role is to provide the best possible business environment for firms to flourish so that the most successful ones will then become exporters," Banks said.
"This is the focus of the Business Growth Agenda. The Government's target to increase the contribution of exports to the economy from 30 per cent to 40 per cent of GDP by 2025 is challenging.
"Committing to this ambitious goal means the Government will stay focused on supporting firms to grow their exports."
Banks said the Government still had to acknowledge the needs of SMEs.
"A number of small-to-medium-sized firms will go on to become larger firms and in the New Zealand context this can happen quickly given the growth required to service offshore
markets when this starts."
Banks said NZTE is focused on where it can have the greatest impact.
"The agency works one-to-one with a core group of around 500 companies, including SMEs. As well as this core group, NZTE also engages less intensively with another group of about 1500 exporting businesses.
"The focus of Government assistance is on providing the basic skills, information and advice that will give SMEs the best chance of harnessing their capabilities [in doing so increasing productivity] so that they are competitive once they start exporting."
EXPORT GROWTH OPTIONS
So what are New Zealand's export growth options?
O'Reilly said one effective model is the aggregation of small businesses into groups allowing them to in some ways act like and gain the advantages of large businesses.
Examples include the wine industry under NZ Wine, collective efforts to promote tourism and to export mussels to China.
"It seems clear, no matter what the World Bank says, if you can get a bunch of small companies to aggregate their efforts it does work occasionally," he said.
However, he added, you would struggle to find other examples of any significance and such efforts are complex and costly.
One hope is that the new Callaghan Advanced Technology Institute will help create new ways to aggregate small firms that do not sell the same products but that target the same international supply chains, such as in areas like transport and construction, he said.
NZIER's de Raad said the institute has suggested that one solution to overcoming New Zealand's scale problem is to promote quick population growth.
"Imagine a New Zealand with four or five cities the size of Melbourne or Sydney, say. That will overcome our scale problem."
Yet another approach is to tap into other nations' comparative advantage through offshoring. Although this will not produce an employment boon in local manufacturing, it is proving an effective strategy for the likes of Pumpkin Patch, Icebreaker and inflatable boat maker Aakron Marine.
21/1 - an earlier version of this story had an incorrect picture attached. Shown now is George Adams, Coca-Cola Amatil New Zealand boss George Adams.
Sunday Star Times