New Zealand is likely to lose more home-grown companies as head offices follow manufacturing facilities overseas, warns a Treasury report, but ministry officials say there may be little the government can, or should, do about it. The research was part of a wide array of work at government level assessing the risks of a "hollowing out" of the economy as jobs, firms and ownership go overseas.
Consultants Andrew Sweet and Murray Nash reported to the Treasury in September that New Zealand firms with global ambitions soon encountered the almost irresistible pull of large masses of consumers and bigger manufacturing bases overseas. Once production left New Zealand, they said, sales and marketing soon followed, with head office and R&D usually left last.
"Once a company has begun relocating key components of its supply chain offshore, a self-reinforcing process often begins, with the relocated components acting as `magnets' of attraction for components remaining in New Zealand," the study, based on confidential interviews with 15 firms with substantial overseas sales, said. Head office functions tended to be "stickiest", or most resistant to uprooting, often because key staff wanted to stay in New Zealand. However in the long run, even this was not always compelling.
The report also found that companies, once purchased by foreign owners, were more likely to have their local offices shut down and moved overseas. Other than to access New Zealand's natural resources, "firms see few compelling benefits from locating activity here".
Although the Sweet/Nash report highlights the risks of corporate exodus, Treasury's position, revealed in papers released to the Sunday Star-Times under the Official Information Act, appears to have shifted in the past 12 months.
A December 2006 Treasury internal discussion paper on "hollowing out" says the loss of head office type functions and high-skill, high-wage jobs overseas poses risks to the economy because of spillover effects. These include loss of income for New Zealand; loss of job opportunities and career progression; loss of international connections; and loss of expertise that could encourage the emergence of a cluster of industries. Prime Minister Helen Clark was briefed by Treasury on the issue in March, a month before Fisher & Paykel announced 350 job losses due to shifting production to Thailand.
But by October this year officials were telling ministers there was no hard evidence any "hollowing out" was under way, and that there was little the government could do about persuading firms to stay in New Zealand.
It pointed to the fact that total manufacturing jobs have grown by 14% between 2000 and 2006, even as manufacturing declined in relative terms compared to other sectors of the economy. Treasury said even the loss of entire firms overseas was not necessarily a problem, as long as skilled individuals and capital switched to new ventures in New Zealand. There was already evidence, for example, that ex-Navman staff and management had been re-employed. "In practical terms this means there is probably only a limited role for policies directly aimed at holding firms in New Zealand, given the fiscal and economic risks of the government targeting support and assistance toward narrowly defined sectors or firms," it said.
Finance Minister Michael Cullen told a law firm's business breakfast meeting last month that firms would succeed by focusing on their strengths. "If New Zealand can determine which elements in the value chain we can realistically seek to achieve some level of dominance, we can go one step further in improving our competitiveness and in securing greater gains from globalisation," said Cullen. He pointed to the introduction of a new research and development tax credit from April 1 and said the new research showed policies such as KiwiSaver helped retain local ownership.
