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Decisions, decisions…

Principal Advisor, Productivity Commission
5 February 2020

In my last post, I talked about how the rough and tumble of reallocation led to productivity growth, and how technology contributed to this shift of resources. A key theme of that post (and of the Commission’s fifth and last draft report) was that decisions about technology adoption are taken by individual firms.

So what affects these firm decisions, and how might firms be encouraged to adopt technology? As is so often the case in real life, the answer is: “it’s complicated”. Each firm faces its own set of challenges, pressures, opportunities and risks.

But at a very simple level, firm decisions can be boiled down into some key factors – relative prices, risks, rewards and management capability.

  • ‘Relative prices’ is the price of one good or service in terms of another. A firm making an investment decision has choices: if it wants to grow, should it spend money on new machinery and technology, a bigger site, or more staff? Changes in the price of one option (capital, land, people) relative to another will affect the ultimate choices the firm makes.
  • Rewards are the possible benefits that the firm could gain from acting – eg, higher profits, greater market share.
  • Risks are the possible costs or uncertainties facing a firm. Higher perceived risk tends to discourage firms from taking on new technologies.
  • Management capability is the skill and effectiveness of a firm’s managers. More capable managers are more likely to successfully implement new technologies.

These factors change over time, meaning that a firm’s set of decisions at one point may no longer be suitable at a later period. In dynamic business environments, this change can be rapid, forcing a firm to re-evaluate its choices frequently. Having a dynamic business environment matters a lot for technology adoption. In a dynamic environment firms face more pressure to change the way they operate (including by adopting technology).

So policies that support a dynamic business environment are important for any government efforts to push more technology adoption. This includes:

  • Keeping the environment open to flows of goods, services, capital, skills, data, ideas and technologies. New Zealand is generally pretty good on this (with a few notable exceptions), but maintaining openness requires ongoing vigilance.
  • Helping workers to make smooth transitions between jobs, but not trying to stop firms from going under or laying off staff. The best protection for workers is to have a vibrant labour market with lots of employment opportunities.
  • Keeping an eye on the many policy areas that affect the business environment and be conscious of unexpected and unintended consequences when setting new policies.

And there are some specific areas where we think government action could help encourage more firms to take up or develop new technologies:

  • Increase emissions prices: as we discussed in our Low-emissions economy report, higher prices are needed to encourage investment in carbon-reducing technology
  • Strengthen the national innovation system, so that firms have a better shot at finding the right technology and implementing it successfully
  • Have another look at the current limits on the use of genetic modification technologies, to make sure they are keeping pace with evolving knowledge
  • Refresh competition laws for the digital age
  • Speed up open banking and consumer data right regulatory reforms (the Commission touched on these in our joint report on the trans-Tasman digital economy)
  • Adopt less restrictive land-use regulation: something the Commission has explored several times in the past.

Want to know more? Have a read of our fifth draft report.

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