March 28, 2023

Has COVID-19 changed how our businesses operate?

Insights on R&D, profits, wages, and ICT use

The 2022 Business Operations Survey provides insights into business operations, information and communications technology (ICT) use, price and wage setting behaviours of firms, and business finance.

Agriculture and construction sector businesses are the least innovative

In 2022 just eight percent of businesses, across all industries and sizes, said that they undertook or funded any research and development (R&D) activity, a share that has remained relatively unchanged over the past decade. Note that R&D includes any activity that has investigation as its primary objective and produces an outcome of gaining new knowledge, or developing new or improved materials, products, services, or processes. 

Unsurprisingly, the most innovative businesses tended to be clustered in the technology and services industries. Computer systems design (38 percent), machinery and equipment manufacturing (35 percent), and telecommunications (33 percent), were the top three industries funding R&D during the year. Our least innovative businesses were those in the agriculture and construction sectors. Firms were most likely to be constrained by internal factors such as the costs of introducing new ideas, time and skills of top management, and a shortage of appropriate personnel in the organisation. Our small domestic market and lack of competition in several industries were also factors that reduced the incentives for innovating. 

Firms increased the frequency of their price changes and reviews

The 2022 survey also asked questions on firms’ wage and price setting decisions over the year. Forty-three percent of all businesses said that they had increased the frequency of their price changes compared to 2019 (pre-COVID-19). And nearly a quarter said that they reviewed their prices daily, weekly, or monthly. Inflation over the previous year was rapid and broad-based, causing firms to reconsider their prices more frequently than before. Changes in labour and other input costs were the top two considerations in firms’ price setting decisions.

Source: Statistics New Zealand

Although firms in some industries (e.g., banking) have seen their profits soar, contrary to the current narrative, most businesses (particularly small businesses with many competitors) do not have the ability to routinely increase prices without substantially denting demand. Thirty-nine percent of businesses said that their profit margins had decreased, and an additional 36 percent said they had remained the same, compared to pre-COVID-19 (2019) levels.

Retaining specialised skills is the most important factor in wage setting decisions 

Over the past few months wage inflation has reached unprecedented highs, and annual growth in weekly earnings in the private sector (8.6 percent) surpassed general inflation (7.2 percent). This has been the result of a mix of factors: practically zero migration over the past two years; the jump in consumer demand post-COVID-19, which increased demand for workers to produce more outputs; and our small pool of domestic labour. Retaining people with specialised skills has been the most important factor in firms’ wage setting behaviours over the past two years; 75 percent of firms said that retaining hard to replace workers was ‘very important’. Competing with other firms for staff (45 percent), and changes in overall business conditions (44 percent) have also been important considerations. 

The shortage of skills has meant that employees have a higher bargaining power over both wage and non-wage conditions. Over the past two financial years, close to a quarter of firms said that they increased flexibility for employees in terms of location and/or hours of work. Over a fifth also said they had increased either annual or discretionary leave entitlements, and/or training opportunities available.

Firms’ reliance on digital sales has dropped as mobility restrictions have ended

To continue operating during lockdowns having a digital presence, particularly to receive orders from customers, was imperative for many businesses in order to stay afloat. In 2020, 60 percent of firms received orders over the internet. In 2018, only half of all businesses received orders through this channel. It seems, however, that this trend has not stuck around to the degree we would expect. In 2022 the share of businesses that received an order online fell back down to 53 percent, an indication that online sales were not the preferred channel for all firms and their customers. The drop was the largest in industries where networking, personal connections, and regular contact with customers play a huge role in securing sales. The only two industries where the share of online sales continued to increase were retail sales and accommodation and food services. Given the relatively small price per unit/sale, and time commitment required to finalise a purchase, we can expect this digital dominance to continue in these industries.

Source: Statistics New Zealand