NZ should invest in startups, not houses

Richard MacManus looks at Xero's success and argues startups could provide better returns to NZ than the housing market

For New Zealand, a small country thousands of miles away from nearly everyone else, digital trade is critical to our future growth. Technology is already the third biggest export sector in this country, behind dairy and tourism. But there’s still a lot that needs to be done to help us compete in an increasingly protectionist world.

In a report by the Ministry of Foreign Affairs and Trade entitled New Zealand Trade Agenda 2030, digital trade is seen as a way to “reduce the enduring challenges of distance and small scale.” MFAT is talking about more than just the export of digital products and services. “Container ships, aircraft, trains and trucks still move goods to markets,” the report notes, “but customers can now purchase these goods on digital platforms, track their movement electronically, and pay for them via digital transactions.”

So how does New Zealand’s digital trade stack up?

First, the good news: our technology sector is growing fast. According to the Technology Investment Network’s 2016 TIN100 report, revenue for the top 200 technology companies last year was $9.42 billion, an annual increase of 12 percent. Of that figure, $6.87 billion was export revenue. ICT (Information and Communications Technology) companies had particularly strong growth of 17.3 percent, driven by continued opportunities on the Internet.

No other Kiwi startup illustrates this growth better than the online accounting firm Xero, which posted an annual revenue of $207 million in 2016. That was enough to rank it fifth on the TIN100 list.

I spoke to Xero’s founder and CEO, Rod Drury, about New Zealand’s trade prospects and the role digital technology has to play going forward.

Drury believes that New Zealand first needs to overcome its own protectionist tendencies. We have “an unresolved view of globalisation,” he told me. As an example, he brought up the protests against TPP (Trans-Pacific Partnership), a landmark trade agreement among twelve countries including the US and NZ. “No one really understood what was in TPP,” he said. “There were people protesting about TPP and then going down to BurgerFuel to eat afterwards.” The inference being that BurgerFuel, a kiwi company operating in seven countries and with expansion plans in the US, needs TPP in order to continue growing.

Drury is right that New Zealand must embrace globalisation to compete. But to do that, we’re going to have to overcome the nationalist policies of other countries. The MFAT report notes that “there has been a significant increase in protectionist sentiment in some major countries and we face a period of uncertainty in the external environment.” The primary concern for New Zealand, and many other smaller countries, is the United States under the Trump administration. Indeed, Trump promptly withdrew US support for TPP upon taking office in January.

Some in New Zealand see China as a potential trade saviour. Our government recently hosted Chinese Premier Li Keqiang, to butter him up before we attempt to upgrade our Free Trade Agreement (FTA) with China. However the issue with China, particularly with respect to digital trade, is the Great Firewall and other protectionist measures the Chinese government regularly invokes. There’s a reason China has been the only major country where Facebook and Google have yet to make an impression: Facebook has been blocked since 2008, Google since 2014. Why should New Zealand companies fare any differently?

Rod Drury acknowledges the challenges for us in China, but suggested that New Zealand at least has a good record with multi-cultural relations. Other countries “aren’t offended or scared by us and they tend to like us. People have a fantasy relationship with New Zealand.” He thinks New Zealand could use our good reputation to target high net worth individuals, for example with a “negotiated tax on your global income.” He didn’t mention him by name, but it’s worth noting that controversial US billionaire Peter Thiel was an early investor in Xero. Many people, including myself, acknowledge the usefulness of that capital injection – although we’re not so sure it deserved a citizenship.

But no matter how many billionaires we attract to our shores, the fact is that New Zealand is reliant on Free Trade Agreements (FTAs). Our small size and isolated geography make it imperative to continue sucking up to bigger, more connected countries. Which is why MFAT’s Trade Agenda 2030 has made it their number one priority to get more FTAs. It has set a target of “90% of New Zealand’s goods exports covered by free trade agreements (FTAs) by 2030.” Given that the United States just pulled out of TPP, and we don’t yet have FTAs with the European Union, Russia or India, that seems like a very ambitious target.

In addition to getting FTAs, we also need to make sure they cover the oddities of digital trade. As the Trade Agenda 2030 report put it, “while the digital economy is global, the rules governing the digital economy differ from one country or region to another.” China’s Great Firewall is the obvious example, but there has also been a worldwide increase in rules that require data to be stored within national borders. That’s the kind of protectionism that can make life very difficult for kiwi startups. Rod Drury told me that Xero migrated to Amazon’s platform for this reason, because it needed a data platform with a global footprint.

Ideally, Xero shouldn’t have to worry about where its data centres are located. And if TPP had been ratified, it wouldn’t have to. A US trade document from the previous administration states that “the cloud should be global, and you should be able to choose where you store your data.” Sign us up for that, please! Oh, but President Trump nixed it.

Then again, perhaps we should sort out our own back yard before complaining about others. For a start we should invest more in our local businesses, instead of pouring our money into housing. The more startups like Xero we can encourage to grow and prosper on the global stage, the better our trade will be – and the better off we’ll all be.

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