Paucity of talent and capital restricts growth

New Zealand must emphasise growth in high value exports to achieve GDP per capita with Australia by 2025.

That statement formed the crux of a recently released report, titled, Plugging the Gap: An Internationalisation Strategy by the New Zealand Institute.

The Report focuses on one element, namely, how to “improve the performance of internationalising businesses.”

It identifies two barriers to the progress of New Zealand businesses internationally: a lack of access to capital; and a lack of people with the sort of unique talents required to run an internationalised business.

Tax Credits Regime

The Report argues that access to capital be increased primarily (but not solely) through tax credits, such as giving a deduction on capital invested in eligible, internationalising businesses.

Tax credits have a practical effect.

Investment in internationalising businesses would increase if incentivised.

However, it is important that the potential ill effects of a tax credit be considered alongside the benefits. Tax credits can distort the market.

Capital invested in one business cannot be invested in another. If a tax credit is offered to an investor in an eligible internationalising business, this may result in capital not invested in a more beneficial, non-eligible activity.

We need to ask if using tax credits to favour particular parts of the economy is really a long-term solution. It seems to be a case of shifting the problem rather than solving it.

The problems identified by the Report are important and some of the solutions are worthy of serious consideration. But when it comes to tax breaks, there is a risk of capital being reallocated from equally, or more deserving ventures that the market has already chosen to support. This unintended outcome ought to make us cautious.

High Value Exports

Many other small advanced economies succeed by exporting high value differentiated goods and services and New Zealand should do the same.

Commodity agriculture and tourism, the mainstays of our export economy, do not have high enough productivity or growth potential to allow New Zealand to rejoin the ranks of the world’s most prosperous nations.

Information, communications, technology, niche manufacturing and value-added goods and services based on primary production are high productivity sectors where differentiated exports can be grown.

Many internationalising businesses find it difficult to obtain the capital required for expansion and struggle to assemble the talent needed to be successful.

Three core Proposals

Three proposals aim to increase the availability of capital for international expansion. The first is to revitalise the developing venture capital industry by establishing tax-based incentives to encourage investment and by requiring co-investment by international partners to access skills and connections.

The second is to extend those tax incentives to angels and others, and establish a fund to allow more New Zealanders to invest in new ventures targeting international markets.

The third is to establish a loan guarantee facility that will lead to greater bank lending to internationalising businesses and encourage banks to put in place specialised lending capability.

Launching a new product into a new and distant market is very difficult and hence specialised skills and knowledge are required. However, most New Zealanders who are leading and managing internationalising businesses learn on the job. Several proposals aim to lift the quantity and quality of available talent.

While New Zealand puts a huge amount of effort into training and recruiting doctors, nurses, teachers, and others whose skills are essential to economic and societal success, it is less systematic about supporting training in international entrepreneurship, despite the importance of talent and the potential to lift prosperity.

Entrepreneurial Quality

Entrepreneurship, especially international entrepreneurship, has been relatively neglected in New Zealand. Unlike many other countries, we do not have a national entrepreneurship strategy to encourage and develop entrepreneurs.

Management competences are also important for internationalising businesses.

The proposal to address talent shortages for management roles is to establish world-class institutes to conduct research on what works, to train specialist managers, and to offer subsidised internships. The institutes should also provide content that can be delivered to people who require training but do not attend the institutes, for delivery by others. They should be established with a purpose to lift the quantity and quality of management in their specialisations throughout New Zealand.

The shortage of well-qualified directors should be addressed by requiring directors of companies receiving government assistance to have completed specific training in governance of internationalising businesses, or demonstrate relevant experience that provides them with that competence.

Sourced from Maxim Institute and New Zealand Institute Report

Source: New Zealand Institute Report, “Plugging the Gap: An Internationalisation Strategy”

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