Business strategies and employees

23/05/2012 § Leave a comment

MED recently published some research I did for them with a few co-researchers. The work is a little old but it’s nice to see it on the MED website.

The research was part of a larger programme investigating the interaction between businesses’ strategies and their job vacancies. The programme was based on work by Geoff Mason in the UK on business growth, innovation, and employment.

Here is the blurb from the MED website:

This research explored the interaction between strategy and employees’ skills, and differences between high value-add (HVA) and medium value-add (MVA) firms, through interviews with firms and analysis of the 2008 New Zealand Business Operations Survey.

We were trying to understand how businesspeople thought about their business plans or strategies and link that to the success of their firms. A critical part of running a business — and implementing a plan — is having the people to do it. So, we focused in particular on key employees and skill gaps.

Two interesting findings:

  1. Most firms had trouble recruiting key employees. They reacted by recruiting from overseas, training an existing employee, relaxing the criteria, or simply leaving the position unfilled.
  2. MVA firms focused more on production methods, technical skills, and margins over costs. HVA firms focused more on the business skills of a few, professional core employees, as well as the marketing aspects of their products.

The first finding underlined that there are skill shortages in New Zealand. It may seem a trivial finding to economists, but it is important to remember the matching problem. Available workers may not match the available openings. In addition, most domestic firms are small, so a poor hiring decision can really hurt them. Throw in a bit of risk aversion, and firms are willing to let positions sit unfilled for years and work around the gap.

The second finding was, in a general sense, about the difference between cost-plus pricing and value pricing. MVA firms tended to be more cost-plus — they figured their cost of production and added a margin. As a result, they couldn’t really be high value-add firms unless they added a high margin, which they were loath to do. The HVA firms tended to work more on the basis of ‘value to customers’, and then charge accordingly. Of course, in a Walrasian equilibrium, cost-plus and value pricing would yield the same results. In the non-equilibrium world of actual firms, value pricing leads to higher value-add.

Always interesting to get out in the economy and talk to people in it, rather than just sitting at my desk teasing something out of the numbers.

GEN talk: Procter on economic development

04/05/2012 § 4 Comments

Yesterday afternoon, the Government Economics Network (GEN) had another in its series of lectures. Roger Procter, Chief Economist of the Ministry of Economic Development, gave this one. He presented from his continuing work on what leads to economic development generally and how to apply those lessons to New Zealand. The main reference is his MED occasional paper from last year, ‘Enhancing productivity’.

Building a consistent theoretical framework is difficult, so kudos to Roger for putting this together. He brings a lot of theoretical and empirical literature to bear on the problem of how to help New Zealand develop. He also explains why there is a role for government, such as overcoming market failures that arise from innovation and information spillovers.

I talked with him after the lecture (the GEN series is intended for networking, too — please join in if you are in town!). I’m not able to comment comprehensively on the whole framework — there’s a lot to it — but here are some thoughts:

  • I’m not sure what the right scale of analysis is. We can look at the macro policy frameworks, which tend to be pretty good in New Zealand. At the micro level, my research tends to find that what people and firms actually do isn’t as neat and tidy as we like to believe. And that means that policy may need to be more flexible/specialised/nuanced. Tyler Cowen’s comments (h/t Offsetting Behaviour) on the state of his industry are instructive (and not unusual):

what I see around me is a total, total mess.

  •  It’s really hard to see how to keep good intentions from becoming bad policy. Paul Walker over at Anti-Dismal often takes this on, for example on policy around exports. A good policy, as Roger shows, might help by increasing scale and agglomeration. In particular, increasing exports so that New Zealand firms can take advantage of economies of scale would improve economic efficiency. But, how do you keep that policy from becoming simply mercantilism — exporting for its own sake?
  • Two key parts of Roger’s suggestions are greater national savings and macro conditions supportive of exporters. We can turn those around. Greater savings is the same as less consumption, and conditions that support exporters harm importers. It’s important to consider both sides. This was the origin of my post and subsequent discussion in comments with Roger earlier on the Briefing to the Incoming Minister. In a nutshell, the plan is to consume less and have more left over for production and investment.

Judging from the seminar, Roger’s report is worth a read. It will provide good material for thought and discussion, whether you agree with it or not.

New policy: take your money and give it to exporters

03/02/2012 § 6 Comments

Here we go again. The NZD/USD exchange rate is up over 0.83. The exporters are complaining and rightly so, because their business is now harder. MED is complaining on their behalf, which is a bit less ‘rightly so’.

When we first moved to New Zealand, the NZD/USD exchange rate was about 0.42. Great for exporters! Sell milk powder in US dollars, and then exchange them two-for-one for the home currency. Sweet.

But…the university library had to stop buying journals and books because they were too expensive. Several years later, they were still trying to repair the damage to the collection. And what was true for knowledge resources must have been true for physical ones. Companies must have been making do with old equipment rather than buying new overseas technology.

Now the situation is reversed. The high exchange rate makes it harder to export successfully. On the other hand, petrol is cheaper, computers are cheaper, overseas holidays are cheaper, etc., etc. Whether to use the high exchange rate to buy capital goods or consumer goods is a decision being made in millions of households and businesses. But, the favourable rate is good for lots of us in lots of ways.

When the NZ dollar went up, you as consumer got a raise.

So, has MED in its Briefing to the Incoming Minister pointed out that the high exchange rate means we are all a little bit richer? Don’t be silly. ‘Cause, see, it’s all about the exports. The opening sentence:

The Government’s aim of building a stronger economy will require a substantial increase in the share of exports in the economy.

The analysis, though, is incoherent. Try this passage:

Although the boom in commodity prices has protected commodity producers, it has also supported the exchange rate, resulting in continuing pressure on non-commodity exporters.

Let’s try that again. There has been a boom in commodity prices. As a result, there is strong demand for NZ exports. As a direct result of strong demand for NZ exports, we have a higher exchange rate. That’s what MED is saying. People want our stuff and they are willing to pay for it. Thus, the currency is strong. Thus, and they don’t say this, all those imported goodies are cheaper. Yay!

So what’s the problem? MED continues:

These [non-commodity] exporters cite the persistently high exchange rate as the most significant obstacle to their growth (excluding food and beverage exporters).

Translation: we have successful businesses in some sectors of the economy. They face good market conditions with high demand. They have also figured out their production processes and are profitable. They are making money. Other sectors aren’t doing so well. For whatever reason, they aren’t making money. They haven’t figured out the market, they have made production efficient enough, whatever.

What is MED’s plan? To make you poorer. To take away your raise. To make petrol and TVs and computers and travel more expensive for everyone in New Zealand, to benefit a few:

Measures which help to increase household savings and reduce public and household debt – among others – will help rebalance the economy and reduce exchange rate pressures. This will therefore continue to be a government priority.

At least we’ve been warned.

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