Discussion Brief for the Export Strategy-Maker

National trade support networks should be viewed like any significant infrastructural network. Across their various "axes", they provide links between diverse members of a community. These axes can cut across one another, just as telephone cables, roads or airline routes do, multiplying the possible connections within the community.

Two particular axes are critical to the national trade support network. They are:

1. those integrating the public sector and the private sector; and
2. those linking domestic business development agencies and trade support agencies.

How well the links across these axes are structured and managed can determine how well any small, young or tentative exporter grows. The nature of modern, diverse economies, where businesses face many choices for development, is such that formal structures will ensure more consistent results. But, the networks must be built with flexibility in mind. It is no use laying communication cable these days that is not broadband and able to be expanded to handle greater and greater volumes. Equally, trade support networks need to be formally structured, but flexible enough so as to allow members to adapt to today’s rapidly changing environment.

In the business community, the trade promotion organization (TPO) is but one end of an axis linking businesses along a continuum from domestic businesses to internationalized businesses. But it is also part of an axis linking public and private sectors in a partnership.

The role of the TPO itself can be summed up simply as "putting domestic capability in touch with external trade opportunities". While the core work of the TPO is properly focused externally, it cannot perform its promotional and facilitating role effectively without a thorough grounding in its economy’s capabilities. Equally, it cannot deliver optimal growth without a feedstock of businesses prepared to enter exporting. The feedstock will be delivered to it by the domestic business community, many of these firms assisted by public and private sector business development agencies.

If it were to focus purely on external representation and promotion, the TPO will be less than effective in promoting trade and growth. Certainly, through its presence offshore, a TPO can identify trade opportunities even if it does nothing more than passively receive inquiries from importers curious to know what they can source from its country.

However, to be more effective in focusing these inquiries into profitable trade opportunities, a TPO will be armed with a thorough knowledge of the current and potential capabilities of its country’s firms. How it informs itself of these capabilities is crucial to the structure of the trade support network.

New Zealand has experienced a variety of network structures, formal and informal, and there is a strong case for creating a formal structure around this network.

In many developed and developing economies – New Zealand is no exception – industries have often evolved over decades with heavy protection against competition from imports. New Zealand’s objective in doing so was to preserve scarce foreign exchange reserves and provide employment.

In these circumstances, there can be little need for firms to think of internationalizing.

During its own period of protectionism, trade in New Zealand grew around specific sectors that were heavily influenced by the country’s remoteness; its small, widely dispersed population; its temperate climate and fertile land. Traders were generally:

• small-scale businesses
• involved in primary products
• facing weak competitive pressure in the domestic economy
• but displaying a high level of improvisation and adaptiveness – to survive on the fringes of the world economy requires economic adroitness rather than muscle.

Trade growth was assisted by access arrangements seeking to overcome the disadvantages of distance (through guaranteed access to the United Kingdom for traditional farm produce until 1973) and scale (through a Closer Economic Relations agreement with Australia in the early 1980s, removing most trade barriers with New Zealand’s nearest large market).

However, New Zealand’s living standards, as measured by GDP per capita, started slipping down the OECD ladder in the late 1960s and 1970s due to declines in agricultural commodity export prices, the loss of key export markets and skyrocketing imported fuel costs.

A wide range of central Government’s strategies was developed to address New Zealand’s trade disadvantages over time. These included, among many other initiatives:

1. Public interventions

These interventions included statutory export marketing boards, tax-funded export subsidies and capability development support.

In the early stages of internationalization of New Zealand’s manufacturing sector through the 1960s and 1970s, successive Governments took the view that private sector firms nurtured on protected domestic markets needed public support to motivate them to engage in exporting.

In this initial period, the trade support network incorporated aspects of public and private sector activity in:

• domestic capability development – fostered by State-funded specialist business development support agencies, in particular a development bank and regional business development board
• offshore trade support – undertaken by the Government-owned NZ Trade Development Board (Tradenz)

Links between these two arms of development were largely informal in the sense that business development agencies and Tradenz could operate independently of one another and shared no common operational structure. However, some grants provided by the business development agencies were targeted at encouraging export activity, and therefore provided links with external market research and promotions through Tradenz.

But in one key area, Tradenz incorporated a formal structure linking both domestic development and external trade support. This was through its Joint Action Groups (JAGs).

In partnership with the private sector, Tradenz established JAGs, which supported the business and trade development of companies working together as sector groups to export or grow their exports. Sectoral strategies and activities, aimed at improving the export performance of sectors, were funded by Tradenz. From the mid-1980s to the late-1990s, there was a formal structure linking the capability development and the trade support activities of the JAGs.

Other initiatives were undertaken. In order to promote scale, business management disciplines and marketing strategies, Trade NZ began to develop Hard Business Networks – looser arrangements of exporting companies; and encouraged development of "clusters" – groups of companies, including suppliers, clustered around specialist exporting companies.

In the late 1990s, however, this strategy was challenged.

1. Market-led development

From the mid-1980s, New Zealand adopted a more free-market approach. This resulted in tariff reductions, privatisation, deregulation, and the dismantling of subsidies.

Competition policies are critical to the optimal development of a trading economy as competition helps to ensure that scarce resources are used efficiently. Equally with an eye on efficiency, Government agencies also stripped themselves back to "core" functions.

During this period, Tradenz – renamed Trade New Zealand (Trade NZ) – decided to focus on trade support, exiting from its business development role. While a number of the JAGs had been successful in lifting the export performance or a sector, it found that for other JAGs it was simply funding administrative assistance and little real export activity.

Trade NZ successfully moved its JAG funding into supporting only the export marketing activities of Export Networks, groups of at least three companies.

However, coincidentally and unrelatedly, regional business development boards closed, leaving a vacuum in business development services, that some thought might be filled by private sector consultancies in response to demand.

Unfortunately, consultancies did not fulfil this role for small enterprises, which still make up the bulk of New Zealand businesses. There were no economies of scale to allow major consultancies to bring fees down to affordable levels for small firms. And small companies found it difficult to afford consultancies, especially as returns were hit by both growing competition on the domestic market, and lower export returns due to a stronger currency.

Removing the network "axis" between domestic business development agencies and trade support diminished the co-ordination of their respective strategies and activities. This did not mean that exporting stalled or that new firms did not enter exporting. Far from it. But it did mean that the potential for developing more small and young firms into fully-fledged exporters was not fully realized, at a time when domestic-focused firms saw it as difficult and expensive to enter exporting.

2. Filling the gap

In 2001, Government moved to fill this gap, establishing a new development agency, Industry New Zealand, to provide domestic support for the development of management skills, high-growth industries and sectors, and export clusters.

Clearly, this domestic development agency, and the trade support agency, Trade NZ, could develop strategies and activities quite independently of each other. If both are to be active members of a trade support network, some formality would be useful to ensure co-ordination of both the design and implementation of strategy – just as a formal structure within the more successful JAGs helped to link capability development with trade development.

Government has therefore implemented and encouraged some formal co-ordination of strategies and activities of its business development and trade support agencies at board level. Management have set up forums to coordinate activities of the two agencies, along with a technology development agency, Technology NZ, with their respective business clients, providing an integrated service.

Each member of the trade support network has a specific role or specialty, whether it be management capability development, technology development or trade support. Where there is overlap, for instance in dealing with industry sectors, or in attracting investment at different stages of the business life cycle, roles are clarified along the way.

In New Zealand’s case, the formality of the structure of the trade support network is limited, creating what might be termed a "virtual team" approach to promoting trade.

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Posted 02 September 2008