Paradise lost? The case of technology-based small firms in New Zealand in the post-global financial crisis economic environment

Abstract

In this paper, we draw on two studies that used face-to-face, qualitative interviews with technology-based small firms (TBSFs) and informal interviews with key informants. The interviews took place with two data-sets of TBSFs, the first with 20 firms in 2011 and the second with 34 agri-businesses in 2013. This study provides some temporal comparisons of the funding environment for TBSFs in New Zealand, but this is not a longitudinal study as the two data-sets were obtained from the recruitment of different firms. However, all the TBSFs were located in New Zealand, a small open economy with a limited domestic market, a population of 4.4 million, GDP per capita of US$32,260 (2010) and arguably an immature and limited financial infrastructure. This environment is complex for founding new businesses by technology-based entrepreneurs as developing and staying in New Zealand means accepting being a long distance from major overseas markets even though TBSFs have potential to be in global markets, in practice. Such TBSFs, therefore, face pressure to move overseas for markets and for finance and other resources; if successful they may make attractive takeover targets for overseas investors and MNCs. Despite these challenges, TBSFs have been promoted as key contributors to GDP and a way of filling the New Zealand productivity gap (compared with Australia and other developed nations). Although we find evidence of the development of embryonic regional and specialised business angel networks on the supply-side of finance, there is still a marked reluctance to undertake a search for external equity and evidence of discouraged borrowing and discouraged grant-based applications on the demand-side. New Zealand is sometimes described as ‘paradise’ (The use of this term often refers to a fondness for the high quality of life in New Zealand and its economic environment, not just the natural beauty of the country). due to its natural and outstanding beauty, but in our conclusions we suggest that the comparatively stable economic environment has not operated in favour of TBSFs.

Palabras claves::

• technology-based small firms
• New Zealand
• internationalisation

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

This paper was originally prepared for a seminar on Financing SME Growth in the UK: Meeting the Challenges after the Global Financial Crisis, Middlesex University, 3 June 2014.

^1. New Zealand had a GDP per capita of US$32,260 in 2010 compared to a GDP per capita for Australia of US$50.746 in 2010 (World Bank 2012).

^2. By comparison, for example, Scotland, with a population of just under 5.2 million, recorded fewer than 291,838 registered businesses in 2009 (http://www.scotland.gov.uk; 0.11 per head of the population in New Zealand compared to 0.06 in Scotland).

^3. As an economy in which to start a new business, New Zealand is even better ranked as the easiest nation (World Bank 2013).

^4. This is supported by the World Economic Forum's Global Competitiveness Index (Schwab 2009) which indicates that New Zealand has improved to 20th place overall for 2009, but still performs lower on business sophistication and innovation (36th).

^5. The agri-food sector is defined by the inclusion of all businesses involved in the food supply chain. However, for the purposes of this paper, we use agri-business to define the sector more broadly which includes food, fibre, forestry and related areas of production.

^6. Like Western economies, a small number of commercial banks dominate the financial credit markets, the ‘big four’ being ANZ, ASB, BNZ and Westpac (in 2013, the National bank was taken over by ANZ, further increasing the degree of concentration).

^7. This illustrates the difficulty of applying terms such as ‘early stage and “mature” to TBSFs as their stages of development can differ and are not necessarily correlated with the age of the business.’

^8. Six firms were totally reliant on internal funding; four firms mentioned bootstrapping techniques; eleven firms relied upon a combination of internal funds and private investors; six firms used internal funds and government grants; and only three firms were using either bank loans or overdrafts.

^9. Established in 1996 and the largest company by FTEs in our sample from Study 1.

^10. The SCIF Scheme is a und operated by New Zealand Venture Investment, an early-stage Co-Investment Scheme, which encourages early-stage business angel financing through matching co-investment partners (see http://www.nzvif.co.nz/seed-co-investment-overview.html).

^11. Technology vouchers require the business owner to commit ‘matched funding’ to R&D to qualify, whereas the former technology development grants were granted mainly on a technical assessment of the project and required no matching commitment by the business owner.

^12. In comparison to UK equivalents, such as SMART, the application process in New Zealand was much less rigorous. Once eligibility criteria had been met, technology grants and vouchers were awarded. This raises the issue of the risk of grant dependency in New Zealand, which may have an unintended effect of displacing private investors in an already narrow and immature early-stage VC market.

^13. That is low valuations on early-stage angel investor-funded companies due to the limited and fragmented VC market.