World Bank urges NZ thibnk IG to

A World Bank report suggests New Zealand needs to embrace large corporations to succeed, writes Rob O’neill.

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 fastgrowing 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 supported by 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

‘‘Stimulating trade growth and diversification largely depends on creating an environment where large firms can thrive.’’

The ‘‘superstars’’ research summarises other recent research on SMEs that indicates smallscale 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, 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.

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