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This is worth a read:
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MAY 12

Hi-Tech awards showcase what NZ needs more of

I attended the Hi-Tech Awards recently which is always a good reminder of the sort of innovative firms that New Zealand consistently produces. Compaq Sorting Equipment who make fruit and vegetable sorting machines won the top award – the full list of winners is listed here.

The sort of companies running for these awards are high value add firms that are typical of New Zealand’s manufacturing sector, and exactly what New Zealand needs more of to increase growth, escape the debt trap and improve living standards. The problem is despite a list of individual successes the sector has shrunk overall for about the last decade.
The barriers to export success have moved ever higher over the past decade. There are always ‘star’ companies that will defy the odds to succeed anyway, but we need an environment where ‘good’ companies can also do well.

This graph from David Thomson’s book ‘Blueprint to a Billion’ demonstrates the time trajectories businesses take to move from an inflection point to the billion dollars in sales mark where a company is considered to be stable (based on equivalent GDP numbers NZ$50 or 100million dollars is a more appropriate figure here).

In New Zealand we have had trouble sustaining the companies on the six to twelve year trajectory as those firms have been unable to access growth capital or to anticipate solid returns from export activity.

Start-up capital is beginning to work; four out of six emerging companies, and one of the winners Invert Robotics, flowed from the PowerHouse Venture fund in an earthquake year – a great performance by all concerned. Growth capital is a bit more of a challenge than it needs to be - ten year funds with exits at five or six years miss a lot of opportunities. This fits nicely with companies on a four year rapid growth trajectory, but does not help the majority of businesses who will follow the longer trajectories. What is it about our economy that means sensible, smart people do not invest in these businesses, whereas in other economies, similarly smart people do invest?

This comes back to uncertain returns when macroeconomic policy ignores the exchange rate and leans solely on interest rates to curb inflation with the side effect that the real economy can’t function. Over a longer growth period a risk premium is charged on the capital – in New Zealand this is on top of interest rates generally higher than elsewhere and an exchange rate among the most volatile in the world. With these pressures venture capital cannot patiently wait and risk investing on a slower growth path.

This also helps to explain why many firms sell a fledging business rather than taking on the challenge of making it a globally successful and stable business.

The problem for New Zealand is that a lack of these businesses turns out slow growth and growing debt levels – and this problem pre dates the economic crisis. Clearly an environment that encourages high value add exporters is needed and that means taking on the exchange rate and interest rate paradigms.

tags: hi-tech awards, venture capital, value add, macroeconomic policy
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