Part II Benchmarking New Zealand Competitiveness

Introduction

Part 2 is focused on evaluating New Zealand’s wood processing industry compared with other selected countries in terms of its competitiveness, investment environment and a brief description of its market risks and issues for the immediate future.

Although there is some analysis of the role of the pulp and paper industry on competitiveness and investment, the main focus of the study was on processing products from solidwood, especially sawntimber and remanufactured products.

To evaluate New Zealand’s wood processing competitiveness a mainly qualitative approach was used, with the main objective to develop a competitiveness index model that could be further developed in the future if required. The value of the model is more in the discussion about the factors that affect competitiveness and how those factors can be adequately measured and compared, rather than the absolute values of the index as it is presented.

Finally, the analysis of the investment environment in some selected competitor countries may offer an insight into the key drivers that have influenced investment decisions in wood processing in each country during the last decade.

Benchmarking New Zealand competitiveness with other major producers

Basic concepts of competitiveness between nations

Defining competitiveness is a controversial issue. There are some authors who deny the importance of the concept of competitiveness, especially in a world of flexible currency regimes; others deny the importance of the concept in analysis and policy.

Even if it is considered as important, the concept of competitiveness lacks a universally accepted definition as well as a broad consensus on the appropriate empirical measures. International competitiveness generally refers to the ability of a country to expand its shares in domestic and world markets. For the purpose of this study we will use the official definition by the OECD of a nation’s competitiveness as "the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term". (Garelli, 2001)

Whatever definition is chosen, the factors underlying competitiveness fall into two parts. One part is the cost side, which if costs are low, means that a country can export goods. This component of competitiveness is called price or cost competitiveness in the literature. The other part of competitiveness is more difficult to explain: if products are innovative or consumer specific, if goods are of a high quality, if the exporting entity enjoys a good image, then a country can export goods even if they are not cheaper than rival goods. We could combine all non-price issues under the term "qualitative competitiveness". (OECD, 1998)

Why do countries compete? In short, to increase their standard of living. In a globalised world, companies and investors benefit from an enormous choice in selecting their business locations. Consequently, nations need to compete to attract or retain enterprises. (Garelli, 2001) These enterprises in turn will provide sources of income and employment for the host countries.

How can we measure competitiveness? There are numerous studies about competitiveness between countries. However, the complexity of the topic and the multiplicity of variables that need to be considered leave only a handful of rigorous sources of information. One of the most respected ones is the World Competitiveness Yearbook (WCY), published annually by the Swiss based International Institute for Management Development (IMD).

The WCY ranks and analyses the ability of nations to provide an environment in which enterprises can compete. It uses 286 valuable statistics for 49 industrialized and emerging economies. The statistics are grouped into four Input Factors: Economic Performance, Business Efficiency, Government Efficiency and Infrastructure. It obtains hard data from international, regional and national organizations. The remaining data is drawn from its Annual Executive Opinion Survey (3,678 respondents). The results are used by businesses for basic research on location decisions, while governments use it to compare their countries’ performances with their competitors. (Garelli, 2001)

Further information about competitiveness is provided in Appendices 1 and 2.

Competitiveness of the New Zealand forest industry

For the purposes of this study, we assume that the New Zealand wood processing industry is no different from any other business in general terms, so that its general basic competitiveness can be represented by the ranking determined in the WCY.

However, in addition to basic competitiveness, which applies to New Zealand as a whole, we need to determine the factors which differentiate New Zealand forestry from other countries, and which influence its competitiveness in the world compared with other countries specifically in terms of the wood processing industry.

The following graph shows the evolution in world competitiveness ranking positions for New Zealand and the five countries selected for this study as competitors to New Zealand in the wood processing industry.

Figure 9: World competitiveness ranking evolution for selected countries

Source: World Competitiveness Yearbook (IMD)

The results of the ranking for 2001 show that New Zealand has dropped three places to 21^st among the 49 economies analysed.

New Zealand’s strengths were identified as a lack of government price controls, scarcity of tax evasion, a lack of corruption in the public sector, the role of corporate boards in preventing improper business practices and the fact that the country’s infrastructure is not affected by serious pollution problems.

In contrast, the weaknesses included a lack of investment protection schemes for foreign partners, investment incentives not being attractive to foreign investors, the brain drain, and existing environmental protection laws hindering business. (Read, 2001)

According to Figure 9, New Zealand remains more competitive than Chile and Russia in general terms, but has lost competitiveness against Australia and Sweden in the past five years.

The United States remains firmly in first place despite the heavy slowdown in its economy this year. Australia and Sweden have improved substantially in the five year period analysed and Chile, despite a big fall in 1997, has remained stable and slowly recovering in the last three years. Russia has been consistently ranked among the poorest performing economies. New Zealand’s ranking shows a steady decline since 1996 when it was placed 11^th, to its current 21^st position in 2001.

The Wood Processing Competitiveness Index

Methodology

The latest index of competitiveness published by the WCY was used as a basis for the wood processing competitiveness index. This index represents all the general business factors of competitiveness. In addition, seven forestry – or wood processing – factors were identified. Each factor was sub-divided into specific variables that were easier to identify and evaluate. Where possible, quantitative evaluation was used, but due to time constraints and lack of availability of data, qualitative evaluation was used to evaluate most variables.

In the second stage, every variable was assigned a value between 1 and 10 (10 being most favorable to competitiveness and 1 being least favorable to competitiveness). Each factor was then averaged, and assigned a percentage of weight to contribute to the final index.

Table 10: World Competitiveness Yearbook results for 2001 and Converted Index

Country	WCY Index¹	Converted index
USA	100.0	10.0
Sweden	77.9	7.8
Australia	75.9	7.6
New Zealand	61.7	6.2
Chile	59.8	6.0
Russia	34.6	3.5

[¹] Source: World Competitiveness Yearbook (IMD)

Wood Processing Factors.

The following factors were used to ascertain wood processing competitiveness:

Wood Resources:

Resource availability (wood supply, sustainability)
Geographical dispersion (concentrated vs. dispersed)
Species composition (hardwoods, softwoods)
Species diversification (in planted area, in value of exports)
Resource type (natural vs. plantation)
Resource quality (for solid wood processing, for pulp and paper, for specific uses)
Rotation period (short, long)

Wood Processing Development:

Technology development (plant and equipment modernisation)
Industry diversification (sawmills, pulp mills, panels, chips, etc)

Market development

Value of forest exports
Importance of forestry sector in the economy (percentage of value of total exports, percentage of GDP)
Number of products exported
Number of destination countries of exports
Distribution of value (top 5 versus the rest)

Industry Knowledge

Labour skills
Education and training
Research & Development
Technology transfer
Export promotion

Investment Attractiveness

Wood costs (mainly sawlogs)
Processing costs (labour and process)
Forestry infrastructure
Exchange rate
Government incentives (taxes, direct subsidies, etc)
Return on investment (last 10 years)
Distance to ports

Energy

Electricity cost, availability
Fuel cost, importer/exporter

Environment

Forest industry public image
Environmental legislation (restrictive, permissive)
Environmental pressure
Forest Industry sustainability

Evaluation of factors:

Evaluation of the forestry factors was done in two stages. In the first stage, each factor was evaluated according to the availability of hard data or using a qualitative approach, using rates such as "high", "medium" or "low" to describe the effect of the variable on competitiveness.

Several different sources were used to evaluate the forestry factors in the first stage, including literature reviews, personal interviews with Forest Research staff members in addition to external interviews. The main sources for the literature review were the New Zealand Forest Industries Strategy Study (Edgar, Lee and Quinn, 1992), The New Zealand Forest Industry Sector review (DANA, 1998), the U.S. International Trade Commission report of Conditions of Competition in U.S. Forest Products Trade from 1999, plus several FAO and USDA reports.

In the second stage, a system of points was used to standardise every factor and to differentiate quantitatively the different countries selected using a scale of 1 to 10. Table 11 shows the initial evaluation of the forestry factors.

Contact for Enquiries

Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND

Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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