Import-led growth and the productivity divide

Aaron Schiff writes about how the ratio of productivity between a 90th percentile firm and 10th percentile firm can be as much as 9.

This means that there are a lot of relatively unproductive firms that are surviving in New Zealand. Aaron argues that these firms are unlikely to bother going head-to-head with a firm selling a similar product from Denmark and thus New Zealand could be in a “low-competition, low-productivity, low-trade equilibrium”.

This is linked to the fact that most New Zealand firms do not have websites, use email or make online ordering easy for customers. These firms will die out because they are probably owned and operated by older people who have been able to tick along in an industry where they’re not facing ruthless global competition.

There are high returns to getting on a plane, renting a firm apartment in a target city and getting boots on the ground. Face-to-face is still how the world works, but I think we need to link both strategies together.

A firm at the 90th percentile of productivity in an exporting industry should not only have fully embraced the potential of doing business on the internet, but have a footprint in key export markets.

This means if you’re selling more than $1 million a year to a particular country, on say a 20% margin, you need to be building on that aggressively for the first few years you’re in that market.

It also means that language skills are becoming more valuable. English might be the language of business, but in 2013, knowing other languages simply makes doing business across borders even easier.

There are a lot of pieces to the puzzle but e-commerce and competition in whatever industry you’re working in is a good place to start.