John McMillan: Creative destruction thrives

It has been said that New Zealanders by nature are unenterprising - that the ambitions of the typical small business owner stretch no further than retiring to a beachfront property. And it has been said in the media that the concept of "entrepreneur seems somehow un-Kiwi".

This view, I suggest, is plainly wrong. In today's New Zealand, entrepreneurship is thriving. Entrepreneurs are not only creating firms prolifically but also developing them.

The stereotype persists nevertheless. "Joe and Jill Entrepreneur typically operate a six-person lifestyle firm," a Unitec study says. "They are inwardly focused with low horizons."

New Zealanders are not "daring to be self-reliant and free", says Australian economist Wolfgang Kasper, because "benevolent state paternalism" imposes "unjustified barriers to entrepreneurial activity", resulting in "poor growth and a stifling, though comforting, serfdom".

The economy is "half-full, half-empty", says leading executive Chris Liddell. "There's a general air of complacency about the need to keep driving structural change."

Let's stop worrying about yesterday's problem. The evidence, when you look at it, presents a picture quite different from the stereotype.

Enterprise is flourishing. Barriers to entry being low, new firms start up at a rapid clip. One in nine adult New Zealanders runs a firm with five or fewer employees.

Those firms that have a marketable product and are well managed are able to expand. There seems to be no undue barrier to firm growth. There are healthy rates of transition from small to medium-sized.

New Zealand has proportionately as much employment in medium-sized firms - with 20 to 99 employees - as Australia and more than the UK and the US.

Among firms with nine or fewer employees in 1995, about 7000 grew to more than 20 employees by 2002, creating new jobs at a rate of roughly 20,000 a year.

The flip side of successful firms' expansion is unsuccessful firms' shrinkage. Each year, a sizeable number of medium-sized firms become small.

At start-up, a firm has a mere 50-50 chance of surviving beyond four years. Ruthless as this winnowing is, it frees up the unpromising firms' labour and capital for other, perhaps more productive, uses.

The vigorous turnover of firms suggests that government regulation is not burdensome for the typical firm, and surveys corroborate this. An Otago University survey of small firms found that compliance costs average just one hour a week of the manager's time.

Two other surveys found New Zealand's red tape to be less onerous than Australia's. A World Bank survey concluded that New Zealand's business rules and regulations were the least intrusive in the world.

New Zealand firms are quick to take advantage of new technologies. Online business-to-business exchanges were set up in the 1990s, early in the e-commerce revolution, to run services such as banking, procurement and transportation, as well as to match sellers with buyers in export industries such as timber.

Internet usage (measured by the percentage who have access to it and by websites and domain names per capita) is higher in New Zealand than Australia.

Three-quarters of New Zealand's rich are self-made. Entrepreneurs succeed by their own efforts, without having to rely on inherited wealth. The belief that those from modest backgrounds can succeed by their own hard work, the creed of "strive and succeed" associated with the writer Horatio Alger, is central to the American self-image. It is more a reality in New Zealand than in the United States.

The ebb and flow of firms is one of the most fundamental of market processes and it is occurring energetically. This is not to say that the business world has no room for improvement.

Too few companies, arguably, make the move into exporting. The largest companies, too often, seem to underperform.

The stock market appears undersized, being one-third as large, relative to the economy, as the UK's, the US's and Australia's.

These issues deserve analysis and debate - but in the context of a recognition of how much is going right.

The payoff is already being seen. Productivity growth was sluggish through most of the 1990s but recently it has been growing healthily.

Creative destruction "revolutionises the economic structure from within", Joseph Schumpeter famously said, "incessantly destroying the old one, incessantly creating a new one." New Zealand's entrepreneurs are doing plenty of creative destruction.

* John McMillan, a New Zealander, is professor of economics in Stanford University's business school. This is adapted from his article in the latest issue of New Zealand Economic Papers.