Knowledge economy key to increasing productivity

Knowledge has become a key driver of competitiveness for advanced nations, signalling a shift from industrial capitalism towards a “knowledge-based economy.” Knowledge-intensive industries, in both production and services, will be leading the way in improving our productivity and standard of living.

The knowledge-intensive services sector, as defined by the OECD, covers a broad and diverse range of services with varying degrees of knowledge intensity. It includes firms providing telecommunications, finance, insurance, post, computer system design, and professional, scientific, and technical services.  

Since 2013, New Zealand’s knowledge-intensive services sector has grown by 54 percent ($31.5 billion), and by 2023, its contribution to the national gross domestic product (GDP) had reached $89.9 billion. This growth has outpaced the national economy, which grew by 34 percent over the same period. Knowledge-intensive service industries have grown from 19 percent of New Zealand’s GDP in 2013 to 23 percent in 2023.

Over the same period, full-time equivalent (FTE) employment in knowledge-intensive service industries increased by 35 percent compared to national employment, which increased by 32 percent. 

The knowledge-intensive services sector is a key driver of innovation. It fosters collaborative developments with customers to facilitate the transfer of knowledge across organisations, industries, and networks. Performance improvements in one firm or industry can lead to productivity or quality improvements in another as knowledge intensive output is implemented.  

A 2020 report by Koi Tū, The Centre for Informed Futures at the University of Auckland, identified four benefits from the creation of industry clusters that are focused on the production of knowledge: productivity, sustainability, value-added, and diversification.  

• Knowledge-intensive services support our major industries to increase productivity by benefiting from, and contributing to, technological advances that increase the value we receive from each unit of labour, capital, and materials used in production.
   
• A shift towards a knowledge-based economy, that leverages local research and development to enhance sustainability efforts and emissions reduction, would better help us meet our commitments under the Zero Carbon Act and the Sustainable Development Goals.
   
• Increasing value-add is essential to growing the value of New Zealand’s exports. Overseas markets have never been closer. Concentrating at the top end of the market, or niche products, offers one way to transition to a higher GDP contribution from exports. Primary production requires significant investment in research and development, and a range of technologies, to maintain its competitiveness and grow its value across future decades, while also protecting the environmental quality that is central to Brand New Zealand.  
   
• New Zealand’s economy relies on a small number of industries, which increases our susceptibility to global shocks. Diversifying our economy with knowledge-intensive service industries can develop additional sources of export revenue to mitigate these threats.

Knowledge-intensive service industry labour productivity ($210,538 GDP generated per full-time equivalent employee) has increased 14 percent since 2013, and is 57 percent greater than the national average ($134,298). Over the same period, national productivity increased by 11 percent, while primary sector and manufacturing productivity both fell by seven percent.  

Knowledge-intensive industries are vital to improving New Zealand’s productivity and living standards. However, these sectors have yet to reach a critical mass of labour, capital, and expertise to attract entrepreneurs and generate significant economic returns. Long-term solutions are required to build, grow, and maintain a knowledge economy. Foreign direct investment (FDI) could present an opportunity to increase the speed of reaching this critical mass. The government has focused on promoting New Zealand internationally as “open for business,” and FDI, if implemented well, provides an opportunity to supercharge the knowledge economy, which will increase productivity, improve living standards, and diversify our economy.