## 1. Young, High Growth Firms ## Source details **Canonical URL:** [1. Young, High Growth Firms](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025075.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025075.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025075.pdf.json) --- ### A. Productivity Growth and Factors of Production - Weak productivity growth is a significant challenge for New Zealand’s long-term prospects; drivers include structural factors (remote geography, small markets, large role of tourism and agriculture) and costs and incentives for investment and innovation shaped by the business environment and financing options. - Recent juncture (price pressures normalizing and an incipient economic recovery) presents an opportunity for a multi-pronged reform agenda. - Section coverage: trends in productivity growth (aggregate and sector), interplay of capital and labor inputs, business dynamism (young, high-growth firms), financing options, impediments from regulation, innovation diffusion, and infrastructure, and policy recommendations. Key findings on trends and inputs: - Over the past five decades, labor productivity growth in New Zealand has lagged that in peer advanced economies (AEs), producing a widening gap in GDP per hour worked; by 2022, GDP per hour worked was well below comparable economies (example: close to Scandinavian peers in 1970, on average 40 percent lower by 2022). - Growth in total hours worked in New Zealand over the last 30 years has been higher than in most AE peers, reflecting rapid expansion of the labor force via increased labor force participation and strong inward migration flows. - Capital intensity (real capital stock per hour worked) in New Zealand was already below most peers in 1970 and has grown more slowly, expanding the gap; by 2019, capital stock per hour worked in New Zealand was half of that in Australia and Finland, and 60 percent below levels in Denmark. - Proposed explanations for relative capital shallowness include higher long-term interest rates (higher cost of capital) and small, insular markets. - Capital productivity declined substantially in New Zealand in the twenty years prior to the COVID-19 pandemic; the total decline was higher than in most peer AEs (only Belgium and Australia saw larger drops). Unlike peers, this decline occurred without pronounced capital deepening—capital stock per hour worked grew slowly and the capital-stock-to-output ratio remained nearly flat between 2000 and 2019. Drivers of labor productivity growth decomposition: - Labor productivity = contributions from capital intensity, capital quality, and multifactor productivity (MFP). - Over the decade prior to COVID-19, New Zealand’s MFP growth was lower than in peers (except Norway), driving most of the difference in labor productivity growth. - Contribution of capital stock to labor productivity growth in New Zealand was small and negative over that decade (limited capital deepening). - Capital quality contributed positively to productivity growth in New Zealand and most AEs pre-pandemic. Historical pattern (1990–2019): - 1990–2000: labor productivity growth driven primarily by MFP growth with capital quality contributions. - 2010–2014: contributions of MFP turned negative. - 2015–2019: MFP contribution picked up but remained below pre-GFC levels. - Over 30 years pre-COVID, capital intensity generally acted as a drag on productivity due to labor force growth outpacing capital deepening. Note on post-pandemic measurement: - Unique pandemic dynamics (quarantine, migration changes) temporarily boosted measured labor productivity; extrapolation is likely inappropriate. Sector-level findings: - From 2010 to 2022, labor productivity growth in New Zealand was below the OECD peer average in agriculture, information and communication (ICT), and some services sectors. - New Zealand was in the bottom quartile among OECD peers for financial services, industry, manufacturing, and professional & technical services (2010–2022). - The only sector where New Zealand’s productivity growth exceeded the OECD average over this period was construction. - Employment reallocation 2010–2022: - Employment growth in New Zealand outpaced OECD peers in several low-productivity sectors (agriculture, construction, some service sectors including tourism-related). - Employment growth in ICT (high average labor productivity sector) was near the bottom quartile of peers. - Stronger expansion of employment in lower-productivity sectors reduced average labor productivity growth relative to peers. - Trade-off highlighted: deepening in tourism and agriculture (natural comparative advantages) could lower aggregate productivity prospects; diversification toward higher-productivity sectors could improve long-run productivity but faces challenges; labor reallocation alone insufficient—need to unlock continued productivity growth within higher-productivity sectors. ### B. In Search of New Zealand’s Gazelles (young, high-growth firms) - Data and scope: - Firm-level panel from Orbis for firms established 2008–2018; approach mirrors recent IMF work on Europe. - Analysis limited by Orbis coverage; further work could use administrative data or longitudinal business surveys. Business dynamism context: - New Zealand has relatively high enterprise birth rates (12 percent in 2019) compared to European peers; over 80 percent of enterprise births in New Zealand are firms with no employees. - When restricted to firms with at least one employee, enterprise birth rates in New Zealand are closer to 6 percent, aligning with many European peers. - Employment share of micro firms (ten or fewer employees) is high in New Zealand (and Europe) relative to the US, indicating barriers to small-firm growth. Gazelle definition and prevalence: - Gazelles defined as firms that see 20 percent growth in sales (adjusted for inflation) over at least one three-year period when under ten years old, from a base of at least USD100,000 in 2015 real terms. - Since the GFC, gazelle birth rates in New Zealand (as a share of new firms established) have been below the median observed in peer AEs; around 13 percent in New Zealand. - At around 13 percent, gazelle birth rates were below Australia, Finland, and Sweden, but above Netherlands and Denmark. Sector concentration of gazelles (2008–2018): - New gazelles in New Zealand were primarily concentrated in the financial and real estate sector; the share in this sector was higher in New Zealand than in most peers. - Shares of new gazelles in ICT and professional and technical services were lower in New Zealand than in peers. - Implication: misaligned investment and innovation incentives across sectors; possible high propensity to save in real estate. Productivity potential of gazelles: - Average revenue product of capital (ARPK) for larger older firms in New Zealand showed a steady gradual downward trend between 2008 and 2021. - ARPK of New Zealand gazelles was on average two times higher than that of larger, older firms and did not show signs of decline—similar patterns in other AEs where gazelle ARPK averaged 1.6 times that of larger firms. Financing dynamics for gazelles: - Financing availability and affordability are essential for gazelle growth; financial constraints affect business dynamism and productivity. Leverage: - Gazelles tend to be more highly leveraged than larger older firms. - In the years immediately after establishment, New Zealand’s youngest gazelles were around 15 percentage points more leveraged (total debt to total assets) than older, larger firms. - In other AEs, young gazelles were about 6 percentage points more leveraged than older firms. - In New Zealand, leverage differences decline gradually and disappear as gazelles age; in other AEs, gazelles continue to rely on higher leverage than peers over time. - Interpretation: New Zealand gazelles appear to have adequate initial access to financing but face tightening access as they scale. Interest rates: - In the first three years after formation, New Zealand gazelles paid around one percentage point lower net effective interest rates on debt than larger older firms. - As New Zealand gazelles age, their net effective interest rates converge to and then exceed those of larger, older firms after ten years post-establishment. - In other AEs, gazelles typically face higher net effective interest rates than larger, older peers throughout the first 15 years. - Interpretation: favorable initial financing terms in New Zealand support gazelle emergence, but favorable terms do not persist as gazelles grow. Intangible assets: - In New Zealand, gazelles with higher intangible asset shares face disproportionate financing constraints: gazelles in the top tercile of intangible assets pay 0.75 percentage points higher net effective interest rates than larger, older firms with similar shares of intangible assets. - Gazelles with fewer intangible assets benefit from lower financing costs relative to larger, older firms with similarly low intangible asset reliance. - Implication: higher financing costs for firms with fewer tangible assets may limit emergence of gazelles in hi-tech sectors and constrain productivity improvements linked to these sectors. Overall interpretation: - New Zealand’s youngest gazelles experience better financing costs and leverage relative to older firms initially, unlike peers; however, these advantages fade as firms grow. - A high propensity of small firms to use real estate as collateral may enable initial high leverage at low cost but becomes limiting as firms scale and need more financing. - As gazelles grow, financing constraints strengthen, potentially limiting their ability to compete with established firms and to generate disruptive productivity gains. ### C. Financing Availability - (Section begins in source; detailed content for Section C beyond the opening sentence is not provided in the supplied content.) ### Equity and Debt Markets: current state and constraints Equity markets: - Stock market capitalization in New Zealand remains lower than for peers, with limited growth. - Trading volume and turnover ratios are significantly lower than peers. - Market concentration: the 50 largest stocks account for approximately 90 percent of total market capitalization and the top 10 stocks represent more than half. - Largest listed companies concentrated in utilities, healthcare, and services rather than technology. - Slowdown in IPOs in recent years; evidence of a “two-tier” market with retail investors concentrated in larger, more liquid stocks. - Implication: equity market plays a relatively limited role in supporting private sector development, especially for younger, smaller firms or in high-growth industries. Debt markets: - NZX debt exchange capitalization tripled in nominal terms over the last decade, to almost NZ$60 billion. - Corporate bonds markets are under 15 percent of GDP and are small relative to other advanced economies and smaller than in regional EMs including Thailand and Malaysia. - Retail debt predominates; less liquid wholesale securities are growing very slowly, reducing access to lower-cost sizable investments. ### Role of private capital and pension savings Private capital: - Venture capital investment activity picked up sharply in 2021 and remained strong, reaching a 10-year high in 2023, with over NZD380 million invested. - Venture capital heavily focused on IT/software and technology sectors over the past decade. - Venture capital investment remains low relative to peer AEs. - Top-end private equity investments declined in number and size in 2023 (Ernst & Young, 2024). - Mid-market investment boomed in 2020-2021, dropped in 2022, and has not fully recovered to previous peaks. - Mid-market investments continue to be funded primarily from Australian and New Zealand–domiciled funds; investments from the rest of the world remain limited. Private pension savings: - Assets earmarked for retirement were just under 50 percent of GDP in 2022 and remain well below levels in most peers. - Limited private pension savings pool has likely contributed to laggard capital market development. - KiwiSaver introduction and expansion helped create a pool of domestic savings and fueled some capital market growth. - KiwiSaver assets remain more heavily concentrated in equities and other liquid assets (cash and deposits) than in peers. - Rules allowing easy transfers between KiwiSaver managers and requirements around daily unit pricing may disincentivize investment in less liquid assets. ### Foreign investment and international openness - New Zealand’s foreign investment screening regime has historically been one of the most restrictive among AEs (OECD’s FDI Regulatory Restrictiveness Index). - Inward FDI has been lower than in many peer economies (as percent of GDP) despite an open trade account. - Historical overseas investment regime required investors to demonstrate substantial benefits to New Zealand; approval processes were lengthy but rejection rates were low. - Ongoing reforms to streamline approvals and move toward a risk-based screening regime in most investment categories could reduce administrative burdens for foreign investors and increase availability of financing and exposure to global ideas and practices. ### Innovation, R&D, and technology diffusion Innovation metrics: - Productivity Commission estimates: product innovation rate for businesses with over 100 employees fell from 33% in 2007 to 27% in 2021; for businesses with 50–99 employees fell from 27% to 22% over the same period (NZPC, 2024). - Total number of patents in New Zealand compares favorably to some peer European AEs but a large majority were issued to non-residents; patents issued to residents were low relative to peers. - R&D: - Total R&D investment lags peers, driven primarily by low business expenditure on R&D (BERD). - R&D tax incentives were introduced in New Zealand in 2019; spending remains below levels in peers. - The R&D implied tax subsidy is not higher for SMEs in New Zealand; administrative costs of applying can be large for SMEs. - Government spending on BERD increased slightly pre-pandemic but has since declined; focus shifted toward incentivizing firm R&D. - Public research typically yields high returns: “more than one additional dollar in total R&D per dollar of fiscal cost” (IMF 2024). - Technology diffusion: - Productivity of firms at the New Zealand frontier was less than 50% of the small-advanced economies frontier (based on data up to 2016; NZPC, 2021). - Under 10 percent: share of firms holding internationally-recognized quality certifications—much lower than peers—likely reflecting limited international exposure. - Low diffusion may reflect weak competition, few international connections, limited openness to foreign investment, and insufficient incentives for R&D investment. ### Competition, business dynamism, and infrastructure Competition and market structure: - New Zealand is predisposed to higher market concentration due to small size and geographic remoteness. - Share of firms reporting they are constrained by competition when setting prices is lower than in other AEs. - Historically more permissive competition policy framework with fewer restrictions and more exemptions; recently upgraded but gaps remain. - New Zealand remains one of only three AEs with a voluntary merger notification regime (others: Australia and the United Kingdom). - Countries with mandatory merger notification regimes have generally seen higher productivity growth than those with voluntary regimes. Land access and infrastructure gaps: - Firms report access to land as a major constraint at a significantly higher rate than firms in peer AEs (World Bank Enterprise survey). - Infrastructure gaps and maintenance shortfalls impede productivity; nearly half (47.3 percent) of firms in New Zealand report experiencing internet disruptions—a higher share than peer AEs. - Digital infrastructure quality amplifies gains from digitalization; better internet speeds and regional infrastructure increase benefits from advanced digital technologies. ### Policy recommendations Deepen capital markets: - Incentivize accumulation of private savings outside of real estate. - Consider making KiwiSaver compulsory, increasing the contribution rate (currently set at a 3 percent default minimum for both employer and employee), or both. - Remove the tax advantage associated with housing investment to incentivize private pension or other savings. - Reform pension asset allocation rules and liquidity management settings to allow and encourage investment in bonds and private capital (venture capital, mid-market investments, larger scale private equity). - Review and reduce administrative burdens and other obstacles to issuing equity or debt while retaining asset integrity and quality. - Note: ongoing Capital Markets Reforms and planned RBNZ analysis on capital market depth cited as supportive steps. Boost innovation and R&D: - Assess efficiency of R&D tax credits to ensure access across a broad range of firms. - Calibrate R&D tax incentives to encourage innovation for SMEs—consider larger incentives or reduced administrative burdens for smaller firms. - Maintain government investment in science and technology, focusing on research platforms where New Zealand firms have proven track records and global visibility. - Encourage increased international connections and openness to foreign investment to strengthen technological diffusion. Enhance competition and business dynamism: - Continue upgrading the Commerce Act and the competition policy framework in line with international best practices. - Provide the Commerce Commission with adequate tools to address changing markets in a digital age. - Review regulatory and governance arrangements with a competition lens to improve pro-competitiveness of market regulation. Reduce land-use barriers and improve infrastructure: - Continue efforts to replace the RMA to streamline planning and reduce impediments to land use. - Consider tax policy adjustments to incentivize efficient land use. - Move to a risk-based screening regime for overseas investment to reduce administrative burdens for foreign investors. - Bridge infrastructure gaps, maintain existing capital stock, fast-track approvals for critical projects, attract private sector investment for infrastructure, and develop a long-term stable pipeline. Support diffusion and digital adoption: - Public investments in education and physical and digital infrastructure. - Upgrade digital infrastructure and skills to share productivity gains from advanced digital technologies, including AI (OECD 2022). - Prioritize education quality and adaptability over spending levels (IMF, 2024). - Use targeted fiscal incentives, potentially revenue-neutral, to foster uptake of new technologies. ### Key findings and implementation guidance (final section) - An ambitious structural reform agenda is already underway in New Zealand to tackle the productivity challenge. - Policies should continue to be designed based on thorough cost-benefit analyses. - Broad buy-in around the most critical reform areas, and careful coordination between agencies, could help smooth implementation and ensure reforms deliver expected benefits. Policy guidance and design principles: - Design all policies based on thorough cost-benefit analyses. - Prioritize building broad buy-in around the most critical reform areas. - Ensure careful coordination between agencies to smooth implementation. Implementation considerations: - Emphasize stakeholder engagement to secure broad buy-in for priority reforms. - Strengthen inter-agency coordination mechanisms to align objectives and delivery. - Monitor implementation to verify that reforms deliver expected benefits and adjust as needed. *Source: IMF staff analysis in “Availability of financing is critical to enhance business dynamism and ultimately” (sipea2025075).* ### 1. Young, High Growth Firms _________________________________________________________ 10 ### 1. Young, High Growth Firms ### A. Productivity Growth and Factors of Production - Weak productivity growth poses a significant challenge for New Zealand’s long-term economic prospects; low productivity growth reflects structural factors (remote geography, small markets, large role of tourism and agriculture) and costs and incentives for investment and innovation shaped by business environment and financing options. - Recent juncture (price pressures normalizing and an incipient economic recovery) presents an opportunity for a multi-pronged reform agenda. - Section coverage: trends in productivity growth (aggregate and sector), interplay of capital and labor inputs, business dynamism (young, high-growth firms), financing options, impediments from regulation, innovation diffusion, and infrastructure, and policy recommendations. Key findings on trends and inputs: - Over the past five decades, labor productivity growth in New Zealand has lagged that in peer advanced economies (AEs), producing a widening gap in GDP per hour worked; by 2022, GDP per hour worked was well below comparable economies (example: close to Scandinavian peers in 1970, on average 40 percent lower by 2022). - Growth in total hours worked in New Zealand over the last 30 years has been higher than in most AE peers, reflecting rapid expansion of the labor force via increased labor force participation and strong inward migration flows. - Capital intensity (real capital stock per hour worked) in New Zealand was already below most peers in 1970 and has grown more slowly, expanding the gap; by 2019, capital stock per hour worked in New Zealand was half of that in Australia and Finland, and 60 percent below levels in Denmark. - Proposed explanations for relative capital shallowness include higher long-term interest rates (higher cost of capital) and small, insular markets. - Capital productivity declined substantially in New Zealand in the twenty years prior to the COVID-19 pandemic; the total decline was higher than in most peer AEs (only Belgium and Australia saw larger drops). Unlike peers, this decline occurred without pronounced capital deepening—capital stock per hour worked grew slowly and the capital-stock-to-output ratio remained nearly flat between 2000 and 2019. - Drivers of labor productivity growth decomposition: - Labor productivity = contributions from capital intensity, capital quality, and multifactor productivity (MFP). - Over the decade prior to COVID-19, New Zealand’s MFP growth was lower than in peers (except Norway), driving most of the difference in labor productivity growth. - Contribution of capital stock to labor productivity growth in New Zealand was small and negative over that decade (limited capital deepening). - Capital quality contributed positively to productivity growth in New Zealand and most AEs pre-pandemic. - Historical pattern (1990–2019): - 1990–2000: labor productivity growth driven primarily by MFP growth with capital quality contributions. - 2010–2014: contributions of MFP turned negative. - 2015–2019: MFP contribution picked up but remained below pre-GFC levels. - Over 30 years pre-COVID, capital intensity generally acted as a drag on productivity due to labor force growth outpacing capital deepening. - Note on post-pandemic measurement: unique pandemic dynamics (quarantine, migration changes) temporarily boosted measured labor productivity; extrapolation is likely inappropriate. Sector-level findings: - From 2010 to 2022, labor productivity growth in New Zealand was below the OECD peer average in agriculture, information and communication (ICT), and some services sectors. - New Zealand was in the bottom quartile among OECD peers for financial services, industry, manufacturing, and professional & technical services (2010–2022). - The only sector where New Zealand’s productivity growth exceeded the OECD average over this period was construction. - Employment reallocation 2010–2022: - Employment growth in New Zealand outpaced OECD peers in several low-productivity sectors (agriculture, construction, some service sectors including tourism-related). - Employment growth in ICT (high average labor productivity sector) was near the bottom quartile of peers. - Stronger expansion of employment in lower-productivity sectors reduced average labor productivity growth relative to peers. - Trade-off highlighted: deepening in tourism and agriculture (natural comparative advantages) could lower aggregate productivity prospects; diversification toward higher-productivity sectors could improve long-run productivity but faces challenges; labor reallocation alone insufficient—need to unlock continued productivity growth within higher-productivity sectors. ### B. In Search of New Zealand’s Gazelles (young, high-growth firms) - Focus: firm-level panel from Orbis for firms established 2008–2018; approach mirrors recent IMF work on Europe. - Data limitations: analysis limited by Orbis coverage; further work could use administrative data or longitudinal business surveys. - Business dynamism context: - New Zealand has relatively high enterprise birth rates (12 percent in 2019) compared to European peers; over 80 percent of enterprise births in New Zealand are firms with no employees. - When restricted to firms with at least one employee, enterprise birth rates in New Zealand are closer to 6 percent, aligning with many European peers. - Employment share of micro firms (ten or fewer employees) is high in New Zealand (and Europe) relative to the US, indicating barriers to small-firm growth. - Gazelle definition and prevalence: - Gazelles defined as firms that see 20 percent growth in sales (adjusted for inflation) over at least one three-year period when under ten years old, from a base of at least USD100,000 in 2015 real terms. - Since the GFC, gazelle birth rates in New Zealand (as a share of new firms established) have been below the median observed in peer AEs; around 13 percent in New Zealand. - At around 13 percent, gazelle birth rates were below Australia, Finland, and Sweden, but above Netherlands and Denmark. - Sector concentration of gazelles (2008–2018): - New gazelles in New Zealand were primarily concentrated in the financial and real estate sector; the share in this sector was higher in New Zealand than in most peers. - Shares of new gazelles in ICT and professional and technical services were lower in New Zealand than in peers. - Implication: misaligned investment and innovation incentives across sectors; possible high propensity to save in real estate. - Productivity potential of gazelles: - Average revenue product of capital (ARPK) for larger older firms in New Zealand showed a steady gradual downward trend between 2008 and 2021. - ARPK of New Zealand gazelles was on average two times higher than that of larger, older firms and did not show signs of decline—similar patterns in other AEs where gazelle ARPK averaged 1.6 times that of larger firms. - Financing dynamics for gazelles: - Financing availability and affordability are essential for gazelle growth; financial constraints affect business dynamism and productivity. - Leverage: - Gazelles tend to be more highly leveraged than larger older firms. - In the years immediately after establishment, New Zealand’s youngest gazelles were around 15 percentage points more leveraged (total debt to total assets) than older, larger firms. - In other AEs, young gazelles were about 6 percentage points more leveraged than older firms. - In New Zealand, leverage differences decline gradually and disappear as gazelles age; in other AEs, gazelles continue to rely on higher leverage than peers over time. - Interpretation: New Zealand gazelles appear to have adequate initial access to financing but face tightening access as they scale. - Interest rates: - In the first three years after formation, New Zealand gazelles paid around one percentage point lower net effective interest rates on debt than larger older firms. - As New Zealand gazelles age, their net effective interest rates converge to and then exceed those of larger, older firms after ten years post-establishment. - In other AEs, gazelles typically face higher net effective interest rates than larger, older peers throughout the first 15 years. - Interpretation: favorable initial financing terms in New Zealand support gazelle emergence, but favorable terms do not persist as gazelles grow. - Intangible assets: - In New Zealand, gazelles with higher intangible asset shares face disproportionate financing constraints: gazelles in the top tercile of intangible assets pay 0.75 percentage points higher net effective interest rates than larger, older firms with similar shares of intangible assets. - Gazelles with fewer intangible assets benefit from lower financing costs relative to larger, older firms with similarly low intangible asset reliance. - Implication: higher financing costs for firms with fewer tangible assets may limit emergence of gazelles in hi-tech sectors and constrain productivity improvements linked to these sectors. - Overall interpretation: - New Zealand’s youngest gazelles experience better financing costs and leverage relative to older firms initially, unlike peers; however, these advantages fade as firms grow. - A high propensity of small firms to use real estate as collateral may enable initial high leverage at low cost but becomes limiting as firms scale and need more financing. - As gazelles grow, financing constraints strengthen, potentially limiting their ability to compete with established firms and to generate disruptive productivity gains. ### C. Financing Availability - (Section begins in source; detailed content for Section C beyond the opening sentence is not provided in the supplied content.) *Prepared by Monica Petrescu with contributions from Dan Zheng; analysis uses OECD, Orbis, Stats NZ, CompNet, and IMF staff calculations.* ### 17. Availability of financing is critical to enhance business dynamism and ultimately ### 17. Availability of financing is critical to enhance business dynamism and ultimately ### Equity and Debt Markets: current state and constraints - Equity markets - Stock market capitalization in New Zealand remains lower than for peers, with limited growth. - Trading volume and turnover ratios are significantly lower than peers (Figure 2, panels 1, 2, and 3). - Market concentration: the 50 largest stocks account for approximately 90 percent of total market capitalization and the top 10 stocks represent more than half. - Largest listed companies concentrated in utilities, healthcare, and services rather than technology. - Slowdown in IPOs in recent years; evidence of a “two-tier” market with retail investors concentrated in larger, more liquid stocks. - Implication: equity market plays a relatively limited role in supporting private sector development, especially for younger, smaller firms or in high-growth industries. - Debt markets - NZX debt exchange capitalization tripled in nominal terms over the last decade, to almost NZ$60 billion (Figure 2, panel 4). - Corporate bonds markets are under 15 percent of GDP and are small relative to other advanced economies and smaller than in regional EMs including Thailand and Malaysia. - Retail debt predominates; less liquid wholesale securities are growing very slowly, reducing access to lower-cost sizable investments. ### Role of private capital and pension savings - Private capital - Venture capital investment activity picked up sharply in 2021 and remained strong, reaching a 10-year high in 2023, with over NZD380 million invested. - Venture capital heavily focused on IT/software and technology sectors over the past decade. - Venture capital investment remains low relative to peer AEs. - Top-end private equity investments declined in number and size in 2023 (Ernst & Young, 2024). - Mid-market investment boomed in 2020-2021, dropped in 2022, and has not fully recovered to previous peaks. - Mid-market investments continue to be funded primarily from Australian and New Zealand–domiciled funds; investments from the rest of the world remain limited. - Private pension savings - Assets earmarked for retirement were just under 50 percent of GDP in 2022 and remain well below levels in most peers. - Limited private pension savings pool has likely contributed to laggard capital market development. - KiwiSaver introduction and expansion helped create a pool of domestic savings and fueled some capital market growth. - KiwiSaver assets remain more heavily concentrated in equities and other liquid assets (cash and deposits) than in peers (Figure 2, panel 6). - Rules allowing easy transfers between KiwiSaver managers and requirements around daily unit pricing may disincentivize investment in less liquid assets. ### Foreign investment and international openness - New Zealand’s foreign investment screening regime has historically been one of the most restrictive among AEs (OECD’s FDI Regulatory Restrictiveness Index). - Inward FDI has been lower than in many peer economies (as percent of GDP) despite an open trade account. - Historical overseas investment regime required investors to demonstrate substantial benefits to New Zealand; approval processes were lengthy but rejection rates were low. - Ongoing reforms to streamline approvals and move toward a risk-based screening regime in most investment categories could reduce administrative burdens for foreign investors and increase availability of financing and exposure to global ideas and practices. ### Innovation, R&D, and technology diffusion - Innovation metrics - Productivity Commission estimates: product innovation rate for businesses with over 100 employees fell from 33% in 2007 to 27% in 2021; for businesses with 50–99 employees fell from 27% to 22% over the same period (NZPC, 2024). - Total number of patents in New Zealand compares favorably to some peer European AEs but a large majority were issued to non-residents; patents issued to residents were low relative to peers (Figure 3, panel 1). - R&D - Total R&D investment lags peers, driven primarily by low business expenditure on R&D (BERD; Figure 4, panel 2). - R&D tax incentives were introduced in New Zealand in 2019; spending remains below levels in peers (Figure 4, panel 3). - The R&D implied tax subsidy is not higher for SMEs in New Zealand (Figure 4, panel 4); administrative costs of applying can be large for SMEs. - Government spending on BERD increased slightly pre-pandemic but has since declined; focus shifted toward incentivizing firm R&D. - Public research typically yields high returns: “more than one additional dollar in total R&D per dollar of fiscal cost” (IMF 2024). - Technology diffusion - Productivity of firms at the New Zealand frontier was less than 50% of the small-advanced economies frontier (based on data up to 2016; NZPC, 2021). - Under 10 percent: share of firms holding internationally-recognized quality certifications—much lower than peers—likely reflecting limited international exposure. - Low diffusion may reflect weak competition, few international connections, limited openness to foreign investment, and insufficient incentives for R&D investment. ### Competition, business dynamism, and infrastructure - Competition and market structure - New Zealand is predisposed to higher market concentration due to small size and geographic remoteness. - Share of firms reporting they are constrained by competition when setting prices is lower than in other AEs (Figure 4, panel 1). - Historically more permissive competition policy framework with fewer restrictions and more exemptions; recently upgraded but gaps remain. - New Zealand remains one of only three AEs with a voluntary merger notification regime (others: Australia and the United Kingdom). - Countries with mandatory merger notification regimes have generally seen higher productivity growth than those with voluntary regimes. - Land access and infrastructure gaps - Firms report access to land as a major constraint at a significantly higher rate than firms in peer AEs (World Bank Enterprise survey). - Infrastructure gaps and maintenance shortfalls impede productivity; nearly half (47.3 percent) of firms in New Zealand report experiencing internet disruptions—a higher share than peer AEs. - Digital infrastructure quality amplifies gains from digitalization; better internet speeds and regional infrastructure increase benefits from advanced digital technologies. ### Policy recommendations - Deepen capital markets - Incentivize accumulation of private savings outside of real estate. - Consider making KiwiSaver compulsory, increasing the contribution rate (currently set at a 3 percent default minimum for both employer and employee), or both. - Remove the tax advantage associated with housing investment to incentivize private pension or other savings. - Reform pension asset allocation rules and liquidity management settings to allow and encourage investment in bonds and private capital (venture capital, mid-market investments, larger scale private equity). - Review and reduce administrative burdens and other obstacles to issuing equity or debt while retaining asset integrity and quality. - Note: ongoing Capital Markets Reforms and planned RBNZ analysis on capital market depth cited as supportive steps. - Boost innovation and R&D - Assess efficiency of R&D tax credits to ensure access across a broad range of firms. - Calibrate R&D tax incentives to encourage innovation for SMEs—consider larger incentives or reduced administrative burdens for smaller firms. - Maintain government investment in science and technology, focusing on research platforms where New Zealand firms have proven track records and global visibility. - Encourage increased international connections and openness to foreign investment to strengthen technological diffusion. - Enhance competition and business dynamism - Continue upgrading the Commerce Act and the competition policy framework in line with international best practices. - Provide the Commerce Commission with adequate tools to address changing markets in a digital age. - Review regulatory and governance arrangements with a competition lens to improve pro-competitiveness of market regulation. - Reduce land-use barriers and improve infrastructure - Continue efforts to replace the RMA to streamline planning and reduce impediments to land use. - Consider tax policy adjustments to incentivize efficient land use. - Move to a risk-based screening regime for overseas investment to reduce administrative burdens for foreign investors. - Bridge infrastructure gaps, maintain existing capital stock, fast-track approvals for critical projects, attract private sector investment for infrastructure, and develop a long-term stable pipeline. - Support diffusion and digital adoption - Public investments in education and physical and digital infrastructure. - Upgrade digital infrastructure and skills to share productivity gains from advanced digital technologies, including AI (OECD 2022). - Prioritize education quality and adaptability over spending levels (IMF, 2024). - Use targeted fiscal incentives, potentially revenue-neutral, to foster uptake of new technologies. *Source: IMF staff analysis in “Availability of financing is critical to enhance business dynamism and ultimately” (sipea2025075).* ### 31. An ambitious structural reform agenda is already underway in New Zealand to tackle ### 31. An ambitious structural reform agenda is already underway in New Zealand to tackle the productivity challenge ### Key findings - An ambitious structural reform agenda is already underway in New Zealand to tackle the productivity challenge. - Policies should continue to be designed based on thorough cost-benefit analyses. - Broad buy-in around the most critical reform areas, and careful coordination between agencies, could help smooth implementation and ensure reforms deliver expected benefits. ### Policy guidance and design principles - Design all policies based on thorough cost-benefit analyses. - Prioritize building broad buy-in around the most critical reform areas. - Ensure careful coordination between agencies to smooth implementation. ### Implementation considerations - Emphasize stakeholder engagement to secure broad buy-in for priority reforms. - Strengthen inter-agency coordination mechanisms to align objectives and delivery. - Monitor implementation to verify that reforms deliver expected benefits and adjust as needed. *sipea2025075 - 31. An ambitious structural reform agenda is already underway in New Zealand to tackle* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025075.pdf_