The New Zealand productivity puzzle: A paradox or an issue of 'firm governance'

New Zealand’s productivity under-performance, despite its good quality institutions, has remained a puzzling phenomenon. This topic has generated spirited debates among academia and public policy experts seeking to provide an answer to this age-old paradox. Solving ‘The New Zealand Productivity Puzzle’ is not a straightforward proposition. Previous studies in this area attempted to pin down the main determinants behind the extent to which New Zealand’s actual GDP per capita growth has undershot its predicted rates based on policy settings (Barnes et al., 2013). The recent New Zealand Productivity Commission (2014a) report shows the three key determinants accounting for such a gap are New Zealand’s weak international connections, low innovation and low managerial quality. This paper seeks to go further than merely highlighting the determinants (symptoms) of poor productivity performance in New Zealand, to the cause(s) of the problem by asking ‘why’ these key determinants (symptoms) of poor productivity performance occur. The analytical process of piecing together key results and findings (from available data, literature, and empirical studies) enables one to build a richer picture of New Zealand’s relatively poor productivity performance, to better understand the mechanism behind this puzzling phenomenon. The findings unraveled in this paper verify that this phenomenon is not paradoxical but simply an issue of firm/corporate governance. The sort of issues uncovered here is neither one of poor corporate governance in a conventional manner or an issue of managerial competency alone. Rather problems arise largely as a consequence of inappropriate incentives unintentionally generated by a certain ownership structure. This paper discusses how high ownership concentration associated with lower firm performance in New Zealand negatively affects managerial effectiveness by exacerbating the agency costs associated with managerial entrenchment. The paper shows that together New Zealand’s relatively lower managerial competency and managerial effectiveness associated with lower firm performance, can account for New Zealand’s lack of international connections, low innovation and low managerial quality, and thus potentially explain ‘The New Zealand Productivity Puzzle’.