NZ’s low productivity is often blamed on businesses staying small. That could be a strength in 2026, Rod McNaughton says

By Rod McNaughton*

For decades, we have heard a familiar story about why New Zealand’s firms choose to stay small. Business owners prefer comfort, control and lifestyle over ambition, summed up in the old notion of the “bach, boat and BMW” being the height of aspiration.

The statistics show this pattern clearly. New Zealand’s productivity has lagged other advanced economies for years, with output per hour worked sitting below the OECD average.

This gap is often blamed on the fact that nearly 97% of local businesses employ fewer than 20 people and many stay small their entire life cycle. Yet a fast emerging global trend suggests smallness is no longer a drawback.

Across software, design, digital media and specialist manufacturing, a growing number of international firms are choosing to stay small. Their aim is not to avoid ambition, but to preserve quality, identity and resilience in a transformed economic environment.

This year, that shift may offer important lessons – and opportunities – for tackling New Zealand’s productivity challenge.

When scaling up stops being the default

After the global surge in venture capital in 2021, investment contracted sharply. Startup funding fell in both 2022 and 2023, with the latter being the weakest since 2018.

While signs suggest activity has stabilised at a lower level, capital is now far more selective, prompting questions about the sustainability of the traditional “growth-at-all-costs” model. Strategies that depend on continual boosts in external funding today face a more challenging environment.

Artificial intelligence (AI) is also reshaping what small teams can achieve. AI systems can now automate or accelerate tasks across coding, design, analysis, writing and administration.

A small team equipped with advanced tools can generate output once associated with much larger organisations. This has expanded the viability of small, highly productive firms focused on specialised software, creative content or digital services.

These AI-enabled small firms can reach international markets with minimal headcount, often profitably. At the same time, climate disruptions and supply chain fragility have exposed the weaknesses of centralised, high-volume business models.

Events from the COVID pandemic to recent extreme weather have highlighted the risks of tightly optimised global logistics, while nimbler, modular operations with shorter supply chains can be more adaptable.

For these firms, staying small is proving a strategy for resilience in the face of environmental and geopolitical volatility.

Taken together, these trends point to an emerging form of entrepreneurship that diverges sharply from our traditional lifestyle-oriented businesses that serve a local market, employ a handful of staff and rarely invest in technology.

Instead of avoiding ambition, these new “anti-scale” entrepreneurs are redefining it, building firms that maximise productivity, specialisation and resilience rather than staff numbers.

Why strategic smallness suits NZ

Smallness can be a strategic choice that protects quality, speeds up innovation, reduces overheads and fosters closer relationships with customers. In digital markets especially, depth of expertise and precision often matter more than organisational size.

This matters for New Zealand because the country’s productivity problem does not stem from being small, but from being small without specialisation or technological leverage.

Many of its firms operate as generalist service providers in a thin domestic market, face limited incentives to innovate and remain focused on local clientele.

Productivity, however, is measured per worker, not per firm. A two-person, AI-enabled venture serving global customers can, in principle, generate far more value than a 20-person domestic service firm competing in a crowded local market.

International comparisons reinforce this point. Small but highly productive economies such as Denmark, Finland and the Netherlands thrive by specialising in what they do best, integrating into global value chains and developing capabilities that compete internationally.

This is an encouraging pattern for New Zealand, which faces similar structural constraints. Anti-scale entrepreneurship aligns far more closely with the success of these small economies than with Silicon Valley’s emphasis on rapid organisational expansion. It represents a form of ambition that suits small countries.

Rethinking how we support ambitious small firms

Research on entrepreneurial ecosystems also suggests ventures perform best when their strategies match the realities of their environment. New Zealand’s conditions can favour small, highly productive firms that rely on expertise, identity and digital reach.

If these ventures adopt AI early, stay export oriented and build distinctive capabilities, they can compete internationally without becoming organisationally large.

To realise this potential, New Zealand’s institutions will need to adjust some long-standing assumptions. Policies that treat firm size as the primary marker of entrepreneurial success risk overlooking ventures that are small yet highly productive.

Export programmes, innovation grants and skills initiatives could be better aligned with small firms that specialise deeply and use technology to amplify their output. Education, likewise, could focus on helping entrepreneurs design firms for an optimal size.

Ultimately, New Zealand’s productivity challenge will not be solved by any single idea. But the rise of anti-scale entrepreneurship suggests ambition may take a different form from the one policymakers expect.

Some of the most innovative and resilient firms of 2026 may be those that remain deliberately small, use AI to expand their capabilities and build reputations in tightly defined global niches.

The question for New Zealand is not whether its firms can grow larger, but whether they can grow better.

*Rod McNaughton, Professor of Entrepreneurship, University of Auckland, Waipapa Taumata Rau. This article is republished from The Conversation under a Creative Commons license. Read the original article.