Did you miss SME? What role for small businesses in the productivity mix?

Gavin Lennox, Group CEO at The Icehouse, reacts to The Productivity Commission’s updated report on frontier firms. This article first appeared on LinkedIn.

The Productivity Commission released its final report this week on frontier firms; the 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, concludes the report.

The Commission has taken extensive input from a variety of firms, the public and support organisations including The Icehouse. Broadly speaking we support the report’s findings that the keys to unlock productivity are export, innovation, and focus. 

But the report is also missing some important elements.

What about SMEs?

First, it glosses over the role of small-to-medium enterprises (SMEs). New Zealand is a country dominated by SMEs – more than 96% of all businesses are smaller than 20 staff. The report quite rightly points out that New Zealand has an insufficient number of frontier (which are typically large) firms. But that begs the question: where do big firms come from? The answer is not rocket science. They come from SMEs. At some point in their life our hero companies, such as Xero, Fisher & Paykel Healthcare and Rocketlab were start-ups, then SMEs, then high-growth firms. 

At The Icehouse we are interested in how to grow such SMEs. That journey is complex and multifaceted. The report does not offer much insight other than touching on the idea of innovation diffusion – that is, innovations trickling down from large to smaller companies. 

It’s true that clusters do emerge around large firms but there’s so much more required: encourage leaders with dynamic capabilities and ambition; specialist knowledge and skills; access to markets and investment capital. The report highlights how our firms are capital-shallow but we must solve the wider problems associated with growth if we are to see new frontier firms emerge.

Value-capture versus value-creation

The second element is the focus on value-capture versus value-creation. That is, there is still an imbalance of Government spending – too much on core R&D and not enough on supporting the commercialisation of intellectual property. We believe the Research, Science and Innovation strategy is not sufficiently focused on practical, strategic commercial variables at firm-level. We are not proposing a reduction in science spending, but an increase in funding other types of innovation critical for lifting productivity and capturing value.

Specifically, a greater part of the government policy funding should support capability building in SMEs. High quality management, leadership and governance are key for firm productivity.

Grit goes further together

The third element is the support for entrepreneurial SMEs as part of the innovation ecosystem. Our experience with running over 50 owner-manager programmes over the last 20 years is that business owners often feel isolated. They learn as much from one another as they do from the facilitators and programme content. So, we support a review of the suite of programmes designed directly to assist firms with innovation and export. Firms can be bewildered with the choices. A fundamental market-failure underlying a variety of the firm-level symptoms identified in the report is the reluctance of Kiwi business owners to reach out to each other or to professional advisors. This DIY spirit is an advantage in building a small business but can be a blocker to a company scaling to a global level. 

Finally, we agree that Te Ao Māori, having long-term horizons and managing multiple stakeholders and objectives, offers valuable lessons that can make all New Zealand businesses distinctive and competitive on a global basis. 

The Icehouse welcomes the Productivity Commission’s work on frontier firms. We’re committed to being part of solution, especially if that means nurturing, growing and expanding the number of firms that become our hero frontier companies. These firms won’t come from nowhere. 

Our plea: don’t forget the SMEs.

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For more business ownership and leadership advice, check out more of our blogs.