Why is investment in Asia a low priority?

Trade and investment are a means by which to engage in Asian markets.

New Zealand has always aspired to attain an exports-to-GDP ratio of 40 per cent.

Thanks largely to that drive, less attention has been focused on outward direct investment (ODI), and in the process we have neglected the potential that Asia offers beyond export markets.

The latest UNCTAD report on global investment trends shows the decline of NZ ODI. As a percentage of our GDP, it has become almost non-existent.

Trade and investment fight for the limited resources that most New Zealand companies have. Being smaller size than their Asian counterparts means that New Zealand companies must make every dollar count.

Exports and trade are cheaper overall than investment, if you look into the short, and medium term.

Nonetheless, the text books on international business engagements tell us that exporting is a primitive way of engaging with markets, especially in the long-term.

The key pitfall of exporting is how much you actually know about your customers.

When I compare the exports and ODI ratios to GDP of countries, it is evident that some countries, like New Zealand may have an exports-to-GDP ratio below the global average of 40-plus per cent, but they are also above global average when it comes to ODI ratio to GDP!

Needless to say, there are countries that are doing well in both areas.

The bottom line here would be to ask if we want to substitute all ODI with exports.

Again, if New Zealand continues along its current trend, it will be going against conventional wisdom about how markets actually grow.

Naturally, as a market matures, investment tends to displace exporting to enhance learning and engagement. Just look at the flood of investments coming out of Asia in the last few years.

To some extent, a lot of companies around the globe do both at the same time depending on how well they understand each market.

Limited knowledge and connections in a country often results in a decision to export.

But as we know, the margins are only so big around exports of existing products and services. Increasing the price of these same products and services is a risky move and is hard to justify to customers.

Put simply, without value-add to existing products and services, a price increase is a no-go unless your customers are loyalists at all costs.

An alternative to investing in value-add exports is to engaging more deeply, which necessarily means investing in a form of ODI.

ODI is usually not a good option for companies with very limited resources, limited knowledge of the market of interest, and when the market is uncertain. One big plus is to be able to get closer to your customers.

Not understanding your customers well can be resolved by ODI, but at some cost.

The cost of not knowing your customers at all, which can occur with some hand-off exporting strategies, will be significantly higher.

When it comes to engaging in Asia, New Zealand companies should rethink their use of exporting strategies and try not totally stay away from the hassle of understanding and dealing directly with customers, especially if you already have some experience with Asian markets.

In the grand scheme of things, New Zealand's capacity to deal with Asian demands is limited, so exporting can't be the best strategy to engage with Asia, at least not in the mid to long term.

Published on stuff.co.nz