Dialogue: Small business must play key role in economic lift

By BARBARA SIMPSON*

Other small businesses, however, are struggling to realise their potential. PICTURE / PAUL ESTCOURT


Body1: Whither small business? There can be little doubt that small and medium-sized businesses play a key role in turning around any economy. This is undeniably true in developing countries, but equally so in New Zealand where our economy is hovering between its traditional commodity base and the tantalising potential of the knowledge economy.

One needs only to look at countries such as Hong Kong, Taiwan and Malaysia for confirmation of the vital role small business can play in economic transformation.

It is both their small size and their large numbers that account for this special role. In a rapidly changing environment, small businesses are often more flexible and more dynamic than larger companies. In addition, small businesses are numerically dominant in any economy. For instance, in New Zealand some 99 per cent of all businesses employ fewer than 50 people.

This creates a large and diverse pool for the generation of new and innovative ideas, some of which will ultimately bear fruit, thus creating new jobs and driving regional growth.

But if New Zealand already has such a large number of small businesses, why are we not seeing the benefits of long-term sustainable economic growth? The answer appears to be that our small businesses are not adequately equipped to engage with the new knowledge-based global environment. They lack the necessary capacity.

Interestingly, the term "capacity-building" has lately entered the Government vernacular. It was a key theme in the June Budget, particularly in the context of the Closing the Gaps programme. The Government has also declared its intention to rebuild capacity in the public service.

In fact, capacity-building appears to be a fundamental plank in the Government's political philosophy. It is, however, by no means a new concept.

Capacity-building has, for instance, been a major focus for Apec since at least 1995. After last year, when we hosted Apec, most New Zealanders could be excused for associating that organisation with huge disruption to their personal and working lives for little apparent gain. Those who follow the economic debates will, however, know that Apec has been a leader in the process of trade and investment liberalisation and, in particular, the removal of tariff and non-tariff trade barriers.

What is less well-known is that Apec has a second, complementary agenda that aims to build the internal capacities of member economies so that they can thrive in a deregulated marketplace.

New Zealand knows to its cost the consequences of focusing on removing trade barriers without simultaneously building capacity to compete in a more open market. This issue is once again under the spotlight as the Government considers ratifying a free-trade agreement with Singapore. The level playing field will inevitably remain an elusive myth until free-trade initiatives are appropriately balanced by effective capacity-building.

Apec addresses issues of capacity-building with its programme for economic and technical cooperation. Through this programme, the 21 member economies, which collectively account for 42 per cent of global trade, can learn from each other by sharing knowledge and experience of domestic policies and practices.

In particular, Apec's membership has chosen to target small and medium-sized businesses as a major focus for its capacity-building agenda. This is reflected in an integrated plan of action that was formulated in 1998.

This plan identified five priority areas where capacity-building was required. The first is human resource development, which necessarily underpins long-term competitiveness in any economy. In the context of small businesses, there are a number of specific issues.

The growth of small businesses depends on the effective harnessing of innovation. Although Kiwi ingenuity abounds, few small businesses have the managerial skills required to translate ideas into profit. In the absence of profit, few small businesses are willing to invest in training their staffs and it also becomes increasingly difficult to retain those staff who have been trained.

The second priority area identified by Apec is financing. Bankers are often reluctant to provide financing support for small businesses because of their lack of collateral and the perceived high risks associated with their size. This problem is exacerbated in knowledge-intensive businesses in which the primary assets are intangible and, therefore, difficult to value.

Although banks are by no means the only possible source of funds, small businesses are often unaware of alternatives that might be available from either public or private sources. This is particularly so in New Zealand, where until very recently it has been necessary to go overseas in search of venture capital or equity investors.

Technology is Apec's third priority for small business development. As with financing, the issue is lack of awareness of the facilities and capabilities available. Even when they have access to relevant information on technology, small businesses often lack the financial resources and skills that adoption would demand.

Market access, particularly export markets, is the fourth issue shared by small businesses. This is not just about barriers to trade, but about sourcing the necessary market information, such as the quality standards expected.

Finally, access to information is the fifth priority. Apec recognises not only issues of the relevance and accuracy of information made available, but also the effectiveness with which information is disseminated.

Apec thus acknowledges that capacity-building is not just about upskilling, but demands a coordinated approach to infrastructure development. Looking at the New Zealand situation, many support facilities are already available here and, indeed, the Industry New Zealand initiatives the Government has announced are an important policy innovation.

However, the overall effectiveness of these facilities is significantly diminished by the lack of an integrating vision for business development in New Zealand. Until such a strategic direction is defined and leadership is provided, my opening question might be more appropriately restated as "wither small business?"

* Barbara Simpson is a senior lecturer in management and employment relations at the University of Auckland.