KEY POINTS:
New Zealand is the most remote developed country in the world relative to international markets.
Our location means that the efficiency of New Zealand's supply chains - the ways in which Kiwi firms are able to transport their goods and services to offshore markets - is of significant economic importance.
Competitiveness is increasingly influenced by the speed, cost, and responsiveness with which companies can get goods and services to market. So the success with which companies can go global from a New Zealand base will be influenced by the quality of our connections with the rest of the world.
Compared with firms in most other developed countries, New Zealand companies are at a competitive disadvantage in terms of the quality of international supply chains.
This constrains the ability of companies here to go global, and goes some way to explaining why New Zealand's international economic engagement lags behind most other developed countries. Indeed, our international economic performance provides little indication that the tyranny of distance has reduced for New Zealand over the past few decades.
So what can be done to improve New Zealand's links to the rest of the world?
Improving air and shipping links
Some 84 per cent of New Zealand's merchandise trade by value is transported by sea, and so it is important to ensure that shipping lines have an incentive to service New Zealand well, that ports here have appropriate incentives to invest in the next generation of infrastructure to service larger ships, and that domestic road and rail infrastructure is aligned with the investments made at the ports.
In terms of improving New Zealand's air links, there are two actions that should be taken in addition to continuing to invest in airport infrastructure.
First, promoting inbound tourism should be an ongoing priority. As well as being a major export category in its own right, tourism flows are a major support for New Zealand's business travel and air cargo capacity.
And second, ensuring that New Zealand continues to be serviced by a national airline that is committed to connecting the country to the rest of the world.
These considerations should be central to any Government decision around its ownership stake in Air New Zealand.
Rethinking Location
One way for New Zealand companies to overcome constraints due to our supply chain links is to change the location of their production and distribution activity.
Investing overseas markets to establish a production presence closer to the end-consumer or to international transport infrastructure, or contracting production out to foreign firms, would give access to supply chains that are not subject to New Zealand's disadvantages.
In addition to supply chain benefits, this approach also offers growth options for New Zealand firms.
For example, contracting out production overseas may allow New Zealand companies to expand abroad in a relatively low cost and low risk manner, to access high quality, large scale production facilities, and overcome input constraints that exist in New Zealand such as the emerging skills shortage.
A growing number of New Zealand firms are involved in this type of activity. However, New Zealand's overall levels of foreign investment and overseas activity are much lower than other developed countries. Taking advantage of this potential will require changes in the capacity and aspirations of New Zealand firms and a more encouraging public policy environment which promotes savings and capital markets. International tax and the nature of New Zealand Trade and Enterprise's activities would also need to be addressed.
Virtual Supply Chains
Another way in which New Zealand could overcome distance is to invest in developing virtual supply chains to allow our companies to exploit strengths in the "weightless economy" - economic activity that can be exported through communications technology.
This could include activities such as the creative industries, call centres, financial services and business services such as advertising or consulting.
Placing greater reliance on virtual supply chains reduces the disadvantage of our physical remoteness while simultaneously playing to New Zealand's creative and innovative strengths. Producing high-value, low-weight goods and services is likely to be an area in which New Zealand could generate a real competitive advantage.
At the moment, only about 5 per cent of New Zealand's export base can be defined as weightless. But there is substantial growth potential. The ability for New Zealand firms to use virtual supply chains could be as defining as refrigerated shipping was for the economy over a century ago.
* This is an edited version of the executive summary of the New Zealand Institute's latest report, So far yet so close: Connecting New Zealand to the global economy.
A full copy of the report is available at nzinstitute.org.
