The trials of the past year illuminated the critical role SMEs play in our economy and society. As Gavin Lennox writes, the budget is the perfect opportunity for the government to give them the resources to compete in an increasingly innovative world.
Every week our team at The Icehouse works with small-to-medium business owners to expand their knowledge and expertise and grow their businesses. We know that journey is complex and multifaceted, but it’s critical in a country like New Zealand, where more than 96% of all businesses have less than 20 staff.
During the 2020 lockdowns, small to medium-sized enterprises (SMEs) were particularly hard hit. The government played its part, along with service providers, to soften the blow. But now is the time to leverage New Zealand’s well-managed Covid-19 response to accelerate the growth in 2021. Our international competitors, like Australia, are already pushing hard.
The government plays an important support role to small businesses, and the upcoming budget provides a great opportunity to consider what it can do to support SMEs continue to recover. There are three critical areas that deserve greater government action.
1. Expand the Regional Business Partner programme
Over the years, we have worked with New Zealand business leaders who demonstrate qualities that are best summed up by the term “dynamic capabilities” – that is, they can identify areas of competitive advantage and then seize opportunities by innovating while also effectively managing risks. Dynamic capabilities foster innovations that are the key to productivity. These are not just product offerings, but innovations in business models, structures and processes, distribution channels, branding and marketing.
Many dynamic capabilities are built through commercial experience rather than formal training. However, and here’s the rub, SMEs can improve and extend their capabilities when they get the right advice, at the right time, from trusted sources.
The government’s Regional Business Partner programme provides critical support for small businesses to get advice from reputable service providers, providing targeted up-skilling through capability building programmes, coaching and mentoring. We’d like to see this successful programme expanded in the budget.
2. Extend support for technology adoption
According to the just-released CPA Asia-Pacific Small Business Survey, businesses that grew strongly last year are much more likely to have invested in technology. What’s more, 81% of businesses that grew strongly found their investment in technology in 2020 had already paid for itself.
However, New Zealand is a relative technology laggard and the small investments that have been made have resulted in disappointing returns. Take Australia for comparison. A similar proportion of firms invested in technology last year and yet more than twice as many Australian companies reported “significantly profitable returns” from that investment.
New Zealand companies also report low investment in social media, with the number of firms not using social media for business remaining at a stubborn 40%, compared to under 15% for Asia equivalents. Yet investments in social media presence and selling online clearly accelerated in 2020 and show every sign of remaining high.
Now is the time to think more strategically about where technology can support continued growth.
A number of small businesses have taken advantage of the government-sponsored Digital Boost training programmes. These offer a good first step, but New Zealand business owners must think beyond just implementing a website and improving their social media presence.
We would like to see the government deepen and extend its investment in digital capability training for small businesses. Our experience is that small business owners lack knowledge and confidence in digital platforms and therefore are not investing in the transformational tools that are available. There’s clearly a market failure in this area that needs addressing.
3. Invest in innovation and export
The final area that demands greater government action is nurturing the growth of so-called frontier firms. The Productivity Commission released its final report this week on these globally competitive companies that drive employment and attract overseas earnings. The relative scarcity of frontier firms in New Zealand versus other small-advanced economies is a significant contributor to our low productivity, the report concludes.
The report’s findings are that the keys to unlock productivity are export and innovation. The CPA survey cited above indicates that astonishingly only 8.7% of New Zealand SMEs will introduce a new product, process or service that is unique to their market or the world in 2021, compared with the survey average of 23% across Asia. New Zealand ranks ninth out of the 11 countries surveyed. Such a small number gives the lie to the idea that we are an especially innovative country. The lack of innovation will impact our country’s relative prosperity.
The government’s investment in Callaghan Innovation R&D support grants and loans, plus NZTE’s help for exporters, remain key. However, we’d like to see more investment in value-capture rather than just value-creation (i.e. core science research) in this year’s budget. New Zealand has a strong and deserved reputation for blue sky science. Our track record on commercialisation and technology adoption remains relatively low.