Does size matter? Lessons from other small economies

We keep hearing that New Zealand is a small country at the bottom of the world, with limited control over its destiny. Recent supply chain disruptions, exacerbated by geopolitical upheavals, pandemics, and natural disasters illustrate our vulnerability. Indeed, size has long been cited, along with distance, as driving our long-standing productivity challenges by the OECD, affecting “access to global markets, the scale and efficiency of domestic businesses, the level of competition, and the ability to benefit from innovation at the global frontier.”^[1] 

Given these limitations of size and isolation, is New Zealand doing all it can to bolster economic performance and build resilience? What lessons are offered by other small economies who have overcome the limitations of size?

Beyond small size and distance from markets, New Zealand is especially vulnerable to supply chain disruptions because of export concentration in few products and in few large markets. Technological change could render some primary export products uncompetitive. Why? Research suggests small economies, including New Zealand, are more vulnerable to economic shocks than larger economies due to their trade openness and degree of specialisation. While crucial for prosperity, these factors also increase exposure (and potential vulnerability) to economic shocks.

Even more than large countries, therefore, small countries need to develop strategies to build economic resilience – the capacity to anticipate, prepare, absorb, recover and learn from disruptions.

It's not like we don’t know what could be done. Denmark, Sweden, Finland, Singapore and the Netherlands have shown it is possible to overcome the disadvantage of size. Research by the Commission as part of the Frontier Firms Inquiry (2021) and the Improving Economic Resilience Inquiry (2024) found that compared to New Zealand, these economies export more specialised and distinctive goods and services at greater scale, with firms operating at the global innovation and productivity frontier. Besides increasing their general prosperity, they have developed successful strategies to mitigate vulnerabilities by raising their capability to respond to shocks.  

Collaborative networks have been instrumental to the success of many small economies. Small economies lack the scale to confront big challenges single-handedly, necessitating a confluence of efforts by the public and private sectors. These networks, tailored to various objectives such as export promotion, climate adaptation, and technological innovation, vary in form and type of government involvement. What ties them together regardless of the sector or industry is a pursuit of two broad goals: innovation and resilience.

For example, Denmark has developed national technology clusters. These initially operated with government funding but have been refined over time and are now membership-funded organisations. Their function is to promote networking and collaboration among members. Funding for specific projects is provided by the government and by private research foundations linked to successful multinationals, with the clusters administering programmes, providing transparent monitoring and evaluation.

Sweden and Canada use similar devolved arrangements and co-funding to support substantial decade-long, innovation programmes involving large companies, smaller enterprises, research organisations and other stakeholders.

To strengthen the entire innovation system, Finland’s government directly funds companies to undertake innovation programmes, with the requirement that they contract other smaller companies and research organisations to work with them. Singapore, on the other hand, capitalises on informal networks spanning government, industry, and research sectors to produce widely supported agendas for innovation policy as part of comprehensive economic strategies. 

Each country has developed an approach that builds on its own history, industry structure, culture of private-public collaboration and importantly, a willingness to learn from experience and to adapt. Their success as a way to coordinate a range of efforts and interests meant that Singapore, Canada and Denmark were able to use these networks to mount rapid responses to the COVID-19 pandemic.

The returns to investing in collaborative frameworks are substantial, albeit not immediate. They can take decades to reach their full potential. For instance, Finland’s Research and Innovation Council has been operating in some form since 1987.  

Unfortunately, New Zealand’s history of inconsistent government engagement with the business community has prevented any continuity over the years, eroding trust and undermining credibility. Countless business advisory groups have been formed by successive governments, particularly since the 90s, across various sectors of the economy and for different reasons. All of these groups meet the same fate, abandoned once they are no longer considered useful to the government of the day. The lack of persistent engagement and ongoing trust underscores the need for a different sort of investment that will foster enduring public-private collaboration, regardless of which government holds the purse strings.

New Zealand has underinvested in institutions that support the public and private sectors to collaborate. New Zealand doesn’t need to copy the specific strategies and policies of other countries. But it does need to recognise the advantages of creating a model that is suitable for New Zealand's circumstances and sticking to it.

The success of other small nations proves that while size does have a material impact, it is not an excuse for underperformance, or a reason not to try at all. On the contrary, our smallness means we need to try even harder.

[1] Home | OECD iLibrary (oecd-ilibrary.org)