Almost half our top 200 enterprises are now overseas owned and controlled. New Zealand has become branch office economy. What does the transition mean for managers and for enterprise? Does it, as some believe, provide greater opportunities for growth and management careers? Or, does it mean we’ll progressively lose the infrastructure and supporting industries needed to staunch the flight of our remaining big-caps and most talented people offshore? How should we respond to the branch office evolution?
Like it or not, New Zealand and its CER counterpart, Australia, are becoming branch office economies. An increasing percentage of our large enterprises report through Sydney and Melbourne or direct to foreign-owned and operated multinational head offices in cities like Singapore, San Francisco, New York, London and Paris.
Corporate colonisation of New Zealand began generations ago but deregulation of our economy in the 1980s with its associated dismantling of trade barriers and sale of state-owned enterprises accelerated the process.
To survive in today’s more competitive global economy business leaders and economists alike think we need to attract more foreign direct investment (FDI). The reality, however, is that New Zealand hardly shows up on the international investment radar screen. The Overseas Investment Commission approved just $1.2 billion of net FDI last year, the lowest level since 1993.
According to ANZ Bank managing director Murray Horn, New Zealand’s poor economic performance highlights the direct correlation between New Zealand’s economic growth and its ability to attract FDI.
And FDI, according to Horn, has gone off the boil because of our bad policy environment. New Zealand’s high corporate tax rate and onerous regulatory environment scares foreign investors away.
Equally scary, says Horn, is the likelihood that our tax system and unwillingness to embrace business friendly policies and regulations will prompt even more Kiwi commercial icons, like Telecom, to follow others offshore. Major wealth producers, like Fernz for instance, have already relocated overseas in recent years.
The branch office game
There’s little hope that rules governing our policy environment will change in the short-term so, argues Horn, local enterprise must get better at “playing the branch office game” and management should make the most of the transition. Industry only damages itself when it tries to erect barriers that thwart the branch office syndrome. “The trick for local managers is in learning how to leverage opportunities off the parent company. Companies must be smart about where they position themselves and create an environment that attracts the next generation of leaders.”
Horn cites the banking industry as an example of establishing big scale economies (of given technology) by running things from Australia. Instead of bemoaning the loss of local bank ownership, Horn says trans-Tasman integration should be seen as an opportunity to reduce operating costs – especially in areas where there’s no competitive advantage.
Companies need to react in the right way to make the branch office syndrome work, says Horn. “It means capitalising on broadband technology that allows quick and cheap data transfer. In our case, that means identifying opportunities to piggy-back off deals via Australia. For example, developing big supply deals by using local leverage.”
Horn also argues that intelligent recruitment and retention policies provide tactical counter to any de-skilling that the branch office transition may have on the country’s talent pool. The trick is to find the young Turks and provide the opportunity to fast-track their career development quicker than had they stayed within head-office environment. “At ANZ we attract strong performers by giving them greater profit and loss responsibility earlier in their careers. We don’t hold them forever, nor should we try to. There’s always continuum of new people coming through who will see ANZ in New Zealand as an important stepping stone in their career development.”
Attracting quality FDI
While not dismissing the tactical relevance entirely, Scott Perkins, co-head of Deutsche Bank (Global Corporate Finance Australia and New Zealand) believes the branch office debate should focus on boosting investment from offshore. “The quality of the policy environment – as the recent OECD study on NZ highlighted – is critical and interrelated component. We need to be constantly benchmarking New Zealand’s policy environment with our trading partners. This is what companies are doing as they chose which countries offer the best prospects for investment.”
“Greenfields” FDI needed
Instead of trying to roll back the branch office syndrome, Perkins thinks New Zealand needs to attract better quality greenfields FDI.
“That means FDI based on sustainable competitive advantage, rather than short-term factors such as labour costs and currencies. These can and do change over time.”
An FDI strategy should target areas that directly increase activity, exports and skilled employment. What makes greenfield investment appealing, is its ability to create new business or expand current businesses through reinvestment. “It will not only displace low-wage jobs in the domestic market with other low paying opportunities, it will shift certain areas and whole sectors into higher gear – with more competition, innovation and transfer of skills and knowledge,” says Perkins.
The Government, according to Perkins, should take much more active role in securing quality branch participation in our economy. The recent budget made some tentative steps in this regard with the formation of one Independent Promotional Agency (IPA) and increased funding.
Harmonisation – no panacea
If New Zealand organisations are increasingly branch offices reporting to Australia, does that mean greater harmonisation with Australian fiscal, commercial and political policies is also inevitable? Harmonisation is theoretically global phenomenon ostensibly designed to lower the costs of doing business. But Perkins thinks New Zealand should cherry-pick the best policies and apply them to local circumstances, instead of slavishly following any one market. Like Horn, he argues that New Zealand needs even better policies than Australia to make up for the fact it’s small and distant from global markets.
Blindly adopting Australian regulations won’t guarantee success. If it did, Tasmania wouldn’t be Cinderella to mainland Australia’s success story.
Perkins suspects that local business is not as aware of the need for excellent policies as it should be. “There is cultural factor that we need to work on. We should be educating people from an early age that excellence is what we should be striving for and that business success is noble pursuit. New Zealand would be lonely and backward place without the so-called branches. No Vodafone, no Heinz Wattie’s, no Comalco. These companies’ products, services, know-how, people, capital and market access – all add up to what we take for granted in our standard of living,” says Perkins.
“Had handful of leading biotechnology, creative industry, or specialty manufacturing companies been prepared to set up branches with scale locally, New Zealanders would not have living standards materially less than our peer countries.”
Global respect fading
What policies have to change to make difference?
Recommendations for improving New Zealand’s FDI performance made in recent Boston Consulting Group study included: lower taxes and regulatory framework focused on removing impediments to business. Roger Kerr, executive director Business Roundtable, believes the country’s more recent policy modifications, re-regulation of the labour market and increased regulation in other areas, plus changes in political leadership have seen the respect the world once had for New Zealand fade into distant memory