182 World Review of Entrepreneurship, Management and Sust. Development, Vol. 5, No.

2, 2009

New Zealand wine industry: a study of changing

comparative advantage and competitiveness

Satya Gonuguntla
Manukau Business School,
Manukau Institute of Technology,
P.O. Box 94006, Manukau City – 2240,
Auckland, New Zealand
Fax: 0064-9-968 7709
E-mail: sgonugun@manukau.ac.nz

Abstract: New Zealand wine industry has been growing rapidly in the recent
years both in terms of wineries and exports which inter alia can be attributed to
rising industry excellence. Australia, with several similarities to New Zealand
in geography and climate, also recorded an impressive growth in the wine
sector. This implies that the export growth achieved is not unique to
New Zealand wine industry. This study examines the relative performance of
the New Zealand wine industry in comparison with the Australian wine
industry and concludes that the former outperformed the latter in terms of
comparative advantage and competitiveness.

Keywords: New Zealand wine industry; Australian wine industry;

comparative advantage; competitive advantage; IIT; intra-industry trade;
product differentiation.

Reference to this paper should be made as follows: Gonuguntla, S. (2009)

‘New Zealand wine industry: a study of changing comparative advantage
and competitiveness’, World Review of Entrepreneurship, Management and
Sustainable Development, Vol. 5, No. 2, pp.182–192.

Biographical notes: Satya Gonuguntla is a Principal Lecturer at Manukau

Business School, Manukau Institute of Technology, Auckland. He teaches
business economics, economic environment, and international trade and finance
at Degree and Diploma levels. He also teaches economics to MBA graduates of
Southern Cross University and is also an accredited DBA supervisor.
His research interests include international trade, and foreign direct investment.
He was presented with the Manukau Business School Excellence in Research
Award in 2006.

1 Introduction

New Zealand is heavily dependent on international trade. In the year 2005 trade
accounted for 29.1% of New Zealand’s GDP which is significantly higher compared with
other countries. In the case of Australia this ratio was 21%, for USA it was 13.4%, and
for Japan it stood at 13.6% (OECD, 2007). This can be attributed to the fact that large
countries need not have to depend on the external sector as much as the small countries
with a small market size. Small countries, on the other hand, tend to depend on the

Copyright © 2009 Inderscience Enterprises Ltd.

 New Zealand wine industry 183

external sector to achieve higher economic growth and maintain a higher standard
of living (OECD, 2007; Greenway, 1998; Baldauf et al., 2000). In a study of
New Zealand’s changing pattern of exports, the New Zealand Institute of Economic
Research (NZIER) concluded that New Zealand is dependent on export earnings to
achieve long-term sustainable growth, and to improve the standard of living by providing
goods and services it can not produce competitively in the domestic market (NZIER,
2005). Ken (2007), emphasised the role of exports in achieving higher economic growth
and securing a better future for New Zealand economy. Thus, being a small economy,
New Zealand’s economic well being is directly dependant on its international
competitiveness.
A distinguishing feature of New Zealand’s external trade is that a significant portion
of export income comes from bulk commodities such as meat and dairy products, wood
and pulp. Although there has been a change in the export structure over the years,
primary commodities still dominate New Zealand’s exports. In the 1960s the share
of primary commodities was over 85%. Currently, New Zealand’s land-based exports
of about 67%, is the highest in the developed world. This is against the trend in other
developed countries wherein the primary export share is decreasing as manufacturing and
services exports are rising (NZIER, 2005; Skilling and Boven, 2005). The export
structure is a reflection of New Zealand’s comparative advantage in the production
of primary commodities arising from its natural resource endowment. Ballingall and
Briggs (2002) analysed New Zealand’s comparative advantage in 706 commodities
and found that New Zealand gained comparative advantage in wine in addition to
50 other mostly primary sectors between 1985 and 1999. As can be expected, the study
found that New Zealand tends to export more in these sectors. In light of this a study
of the changing competitiveness of the New Zealand wine is highly appropriate. The rest
of the paper is organised as follows. Section 2 provides an overview of the New Zealand
wine industry. A theoretical background of comparative and competitive advantage is
provided in Section 3. Objectives and methodology are explained in Section 4. Section 5
consists of empirical analysis and discussion, and Section 6 concludes.

2 New Zealand wine industry

Wine industry is one of the rapidly growing sectors in New Zealand. During the years
1996–2005 the number of manufacturing units grew at annual rate of 0.8% whereas wine
industry grew at annual rate of 12%. During the same period exports of merchandise
trade recorded an annul growth rate of 5.0% whereas wine exports recorded an annual
growth rate of 63.0%. An overview of the growth of New Zealand wine industry is
presented in Table 1.
The phenomenal growth of wine industry can be attributed to mainly two
factors viz., availability of natural resources and industry excellence. New Zealand’s
factor endowments such as geography, soil, climate and human resources are
suitable for the production of high quality wines (NZ Wine Institute, 2006;
Faulkner and Segal~Horn, 2004). Factor endowments give rise to comparative advantage.
184 S. Gonuguntla

The impressive performance of the wine industry is an indication of New Zealand’s

growing comparative advantage in this sector. Industry excellence which is a culmination
of business excellence of individual firms can arise inter alia from their ability
to differentiate their products and improve their competitiveness. The New Zealand
variety of Sauvignon Blanc has been making a significant contribution to the growth
of wine exports.

Table 1 Growth of New Zealand Wine Industry

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Wineries 238 262 293 334 358 382 398 421 463 516
Exports (ltrs m) 11.0 13.1 15.2 16.6 19.2 19.2 23.0 27.1 31.1 51.4
Exports ($ m) 60.3 75.9 97.6 125.3 168.6 198.1 246.4 281.9 302.6 434.9
Source: NZ Wine Institute (2006)

The growth of wine industry is not unique to New Zealand. Australian wine industry
has also been growing at a faster rate. In 1996, Australia accounted for 4% of the world
wine exports and by 2005, Australia’s share increased to 10% of world wine exports
(UNCOMTRADE, 2007). Australia is a strong competitor not only in major export
markets such as the USA but also in the domestic market as significant quantities of wine
are imported from Australia. Also Australia is one of the major export markets for
New Zealand wine. In the year 2005, Australia accounted for 20% of New Zealand’s
wine exports and 68% wine imports (NZ Wine Institute, 2006). Thus, in addition to being
a leading wine exporter in the global markets, Australia is also New Zealand’s important
trading partner for wine. Since New Zealand and Australia have so much in common in
terms of climate, geography, location, economic environment it is appropriate to compare
the New Zealand wine industry with the Australian wine industry to assess the former’s
relative performance. This comparative analysis may enable the New Zealand wine
industry to focus on improving its industry excellence in terms of competitiveness
leading to an increase in the market share in major export markets. This is achieved by
examining the changing trends in comparative advantage, competitiveness, intra-industry
trade and changing market shares in major export markets of both the New Zealand wine
industry and the Australian wine industry.

3 Comparative advantage and competitive advantage: a sine qua non

for trade

International trade occurs inter alia, due to differences in comparative advantage

and factor endowments. The Recordian theory states that the relative differences
in comparative advantage enable a country to produce certain goods in abundance at
a lower opportunity cost compared to other countries. If a country specialises in the
production of goods in which it has a comparative advantage and trades the surplus with
another country with comparative advantage in another product both countries will
benefit from such specialisation (Cypher and Dietz, 1998). The Heckscher – Ohlin
 New Zealand wine industry 185

theorem states that each country exports the commodity which requires for its production
relatively intensive use of the factor in relative abundance in that country (Mikic’, 1998).
Cho and Moon (2005) combined both these ideas and emphasised that comparative
advantage reveals the ability of a country to produce relatively at a lower cost due
to factor endowment. However, in reality factor endowment alone may not enable
a country to take maximum advantage of its comparative advantage associated with
the production of certain goods. Due to increasing mobility of resources such as capital
and labour trade can take place among countries with similar resources (Bernstein, 2004).
As a consequence, gaining competitive advantage is essential to survive and compete in
international markets. Competitive advantage reveals how successfully a country can sell
its products for reasons such as product differentiation (Trefler, 1995; Ruffin, 1999).
Porter (1990a; 1990b) also argued that a nation’s competitiveness does not exclusively
depend on its natural endowments but on the ability of its industry to innovate
and upgrade. He highlighted the importance of differentiated products as a source
of competitive advantage. This does not necessarily mean that the theory of comparative
advantage has lost all its relevance. Cypher and Dietz (1998) concluded that criticisms
of comparative advantage did not result in any substantial weakening of the theory.
Easton (2003), while elaborating what the New Zealand industries can learn from
new trade theory emphasised that the new trade theory does not discard the validity
of the theory of comparative advantage but says that it is incomplete given the
growing intra-industry trade among the countries. In a review of the theoretical
developments of comparative advantage, Deardorff (2005) found that the concept
of comparative advantage highlights something critical about the effects and determinants
of international trade. Thus, the export performance of a particular industry is influenced
by both comparative advantage and competitiveness.

4 Objectives

The objectives of this study are:

• to study the changing patterns of comparative advantage and competitiveness
of New Zealand wine industry in comparison with the Australian wine industry
• to examine the intra-industry trade trends in wine between New Zealand and
Australia
• to study the changing shares of New Zealand and Australian wine industries
in major export markets
• to examine the impact of product differentiation on the competitiveness of the
New Zealand wine industry.

5 Data and methodology

The data is sourced from the NZ Wine Institute and UNCOMTRADE data
bases. The comparative advantage of both the countries in wine industry is measured
using Balassa’s Index of Revealed Comparative Advantage (RCA) for a ten year
period from 1996 to 2005 for which comparable data is available. In addition,
186 S. Gonuguntla

Vollrath’s competitiveness indices are calculated to measure the competitiveness

of both the countries. Grubel-Lloyd’s Intra-industry trade indices are computed to study
the changing pattern of intra-industry trade in wine between the two countries.

5.1 Revealed Comparative Advantage

RCA reveals the extent of a country’s revealed comparative advantage in regards to a
particular industry on the basis of the industry’s export performance. Havrila and
Gunawardana (2003) used RCA to analyse Australia’s comparative advantage in Textile
and Clothing Industries. Some other studies which applied Balassa’s RCA to analyse a
county’s comparative advantage include Ballingall and Briggs (2002), Fertö and Hubbard
(2003), Bojnec (2001), Chow (1990), Peterson (1988) and Ariff and Hill (1985). In this
study the RCA index is estimated using the following formula:

Xk X 
RCA ik = 100 ×  ik ÷ i  (1)
 Xw Xw 
where
X: exports
k: commodity (wine)
I: country (New Zealand)
w: world.
If the ratio is greater than 100 New Zealand has a comparative advantage in the
production of wine i.e., New Zealand’s share of world exports for wine is greater than
the country’s share of total world exports.
Changes in RCA index have been calculated as:
 RCA1ik 
∆RCA ik = 100 ×  0
− 1 .
 RCA ik  (2)
(Ballingall and Briggs, 2002)

5.2 Relative competitiveness index

Vollrath (1991) evaluated ten alternative indexes of measuring comparative advantage
and concluded that in addition to Balassa’s RCA the following three were the most
satisfying alternative measures to measure comparative advantage as they consider
relative export shares and take into account both demand and supply effects.
Vollrath’s measures of comparative advantage are considered to be superior to
Balassa’s RCA as the former enables us to estimate the comparative advantage in a
global trade environment exposed to various degrees of distortions (Havrila and
Gunawardana, 2003).
 New Zealand wine industry 187

RCij = Ln(RXA ij ) − Ln(RMA ij )

RXA ij = (X ij / X nj ) /(X ir / X nr )
RMA ij = (M ij / M nj ) /(M ir / M nr )
RTA ij = RXA − RMA ij
(Vollrath, 1991)

where,
RCij: revealed competitiveness index of country j in commodity i
RXAij: relative export advantage of country j in commodity i
RMAij: relative import advantage of country j in commodity i
RTAij: relative trade advantage of country j in commodity i
X: exports
M: imports
n: rest of the commodities
r: rest of the world
Ln: natural logarithm.
Vollrath (1991) emphasised that all the above three indices identify countries that enjoy
a relative advantage in a particular commodity from those that do not. Positive value
of the index indicates the competitiveness of country j in commodity i.

5.3 Intra-industry trade

Intra-industry trade occurs when countries import and export similar goods. In other
words, countries with similar resources may trade with each other. This is possible due
to product differentiation in quality, style, and model (Grubel and Lloyd, 1971).
Intra-industry trade enhances a country’s competitiveness in a particular industry
and may result in increased exports.
Consumers’ preference for variety is one of the major reasons for countries to trade
in similar goods. Usually countries that are close to each other with similar economic
conditions are more likely to have a higher degree of intra-industry trade (Greenway,
1987; Hummels and Levinsohn, 1993). The advantages of intra-industry trade include
the gains associated with scale economies due to increased exports to the producers
and wider choice to the consumers in both the countries.
Intra-industry trade of New Zealand wine industry is measured using the widely used
Grubel-Lloyd index.
| Xi − M i |
IITi = 1 −
(Xi − Mi )
(Grubel and Lloyd, 1971)
188 S. Gonuguntla

where
IITi: intra-industry trade index
Xi: exports of the industry i
Mi: imports of the industry i.
The value of the index varies between 0 and 1
0: absence of intra-industry trade
1: intra-industry trade.

6 Analysis and discussion

New Zealand and Australia both have recorded an increase in the RCA as revealed
by Balassa’s RCA indices (Table 2(a) and (b)). This shows that the ratio of wine exports
to merchandise exports have increased at a higher rate than the world ratio. The trend
reinforces the growing importance of wine exports in these countries. However,
New Zealand achieved an average annual increase of 48% whereas in the case of
Australia the annual average growth rate is 23% i.e., in relative terms New Zealand’s
comparative advantage increased at twice the rate achieved by Australia during the period
of study.
An application of Vollrath’s global trade intensity measures viz., Relative Export
Advantage (RXA), Relative Trade Advantage (RTA), and Revealed Competitiveness
(VRC) suggests that New Zealand has recorded a higher rate of increase in all these
measures compared to Australia.
This confirms that in relative terms New Zealand wine industry outperformed
the Australian wine industry. Particularly, the VRC index of New Zealand wine industry
recorded a substantial growth during the period of the study i.e., the index increased at
an average rate of 94% pa compared to Australia’s 2.5% pa (Table 2(a) and (b)).
The growth in the competitiveness index of New Zealand wine industry suggests that
New Zealand has become internationally more competitive in wine exports during the
period of study.

Table 2(a) New Zealand wine industry – Revealed Comparative Advantage, competitive
advantage and Intra-Industry Trade Indices

Year RCA Percentage change RXA RTA VRC IIT

1996 127 0 1.27 –0.19 –0.14 0.93
1997 168 32 1.69 0.09 0.06 0.98
1998 190 13 1.91 0.14 0.08 0.93
1999 229 20 2.31 0.45 0.22 0.94
2000 326 42 3.29 1.14 0.43 0.81
2001 328 0.89 3.32 1.14 0.42 0.78
2002 387 18 3.92 1.74 0.59 0.74
2003 401 4 4.06 1.84 0.60 0.76
2004 538 34 5.49 3.27 0.91 0.59
2005 734 36 7.54 5.54 1.32 0.49
 New Zealand wine industry 189

Table 2(b) Australian Wine Industry – Revealed Comparative Advantage, competitive advantage
and Intra-Industry Trade Indices

Year RCA Percentage change RXA RTA VRC IIT

1996 291 0 3.00 2.68 2.22 0.20
1997 342 18 3.55 3.12 2.10 0.22
1998 398 16 4.15 3.76 2.35 0.20
1999 538 35 5.71 5.28 2.60 0.17
2000 680 26 7.33 6.88 2.79 0.14
2001 730 7 7.94 7.54 3.00 0.10
2002 858 17 9.48 9.03 3.06 0.11
2003 919 7 10.19 9.71 3.06 0.12
2004 1033 12 11.62 11.04 3.00 0.12
2005 957 –7 10.74 10.07 2.77 0.15
Source: Calculations based on UNCOMTRADE (2007) database

The intra-industry trade indices IIT are in the positive region for both the countries.
This indicates that both countries export wine to and import wine from other countries
that have comparative advantage in wine production. As shown in Table 2(a) and (b), the
intensity of IIT for both countries has declined. In the case of New Zealand, the IIT index
decreased from 0.93 in 1996 to 0.49 by the year 2005. Due to the inherent nature of the
formula, the value of the index may decrease due to an increase in exports or in imports.
During the period of the study, wine exports from New Zealand to Australia increased
at an average rate of 88% per annum while imports increased by 7% per annum with
a net increase in exports of 81% per year and hence a decrease in the value of IIT.
In addition to comparative advantage and competitiveness indices, the changing value
of IIT indices confirm the relatively superior performance of New Zealand wine industry
compared to the Australian wine industry i.e., product differentiation did enhance the
New Zealand wine industry excellence. As shown in Table 3 a major contributor to
the growth of wine exports is the New Zealand variety of Sauvignon Blanc. Exports
of Sauvignon Blanc rose from 44.4% in 2000 to 70.9% by 2005 accounting for the largest
variety wine exported from New Zealand. Another variety that registered an impressive
growth rate is Pinot Noir from 1.6% in 2000 to 5.2% by 2005. The decreasing share
of other major varieties viz., Chardonnay, and Sparkling is another indication of the
success of the differentiation strategy.
The question now is whether the positive results of the above three measures translate
into an increasing market share in the major export markets for the New Zealand wine
industry.
The UK and the USA are the two major common export markets for both
New Zealand and Australia. In the year 2005 they accounted for 67% of New Zealand’s
and 66% Australia’s wine exports (UNCOMTRADE, 2007). As shown in Table 4
the wine imports from New Zealand and Australia by these two countries as a percent
of total wine imports shows that in the UK both the countries recorded a similar growth
rate during the period of the study. However, New Zealand outperformed Australia in
the US market i.e., by the year 2005 US imports of New Zealand wine increased at an
average rate of 185% per annum compared to 24% per annum from Australia.
190 S. Gonuguntla

Table 3 NZ wine exports – major varieties (%)

Year Sauvignon Blanc Chardonnay Pinot noir Sparkling

2000 44.4 17.5 1.6 10.00
2001 48.6 16.1 2.7 5.40
2002 54.8 13.8 3.8 6.60
2003 62.5 10.2 4.6 6.00
2004 63.1 11.5 5.3 6.10
2005 70.9 8.9 5.2 5.00
Source: NZ Wine Institute (2006)

Table 4 Wine imports by UK and USA (%)

UK USA
Year NZ Australia NZ Australia
1996 1.56 9.50 0.13 6.00
1997 1.50 9.90 0.27 7.00
1998 1.50 10.00 0.40 8.00
1999 1.63 13.60 0.56 9.25
2000 1.80 16.50 0.81 12.60
2001 2.00 19.00 0.93 15.50
2002 2.14 20.70 1.18 17.50
2003 2.42 18.50 1.40 19.50
2004 2.71 20.50 1.82 21.67
2005 3.35 20.50 2.56 20.60
Source: Calculations based on UNCOMTRADE (2007) database

7 Conclusions

Over the years, New Zealand wine industry has achieved an impressive growth in terms
of exports i.e., from 0.4% of world exports in 1996 to 1.6% by the year 2005. However,
this growth was not unique to New Zealand. A comparison with the Australian wine
industry shows that the latter also recorded a strong growth in exports in the recent past.
In the year 1996, Australia was the 6th largest exporter of wine in the world and
accounted for four percent of global wine exports. By the year 2005, Australia’s position
was elevated to third largest exporter of wine and accounted for 10% of global wine
exports. However, a comparison of the performance of New Zealand wine industry with
that of Australian wine industry reveals that, in relative terms the former has
outperformed the latter in almost all the parameters applied. New Zealand’s comparative
advantage and competitiveness in wine sector increased at a higher rate compared
to the Australian wine industry indicating that in relative terms New Zealand wine
industry has become more competitive in the global markets. This is reflected in the
increasing share of New Zealand wine in the total wine imports of major export markets
such as the UK and the USA. A study of the intra-industry trade indices also reveals
 New Zealand wine industry 191

that exports of wine to Australia increased at a far higher rate than imports of wine
from Australia into New Zealand confirming the earlier conclusion of increasing
competitiveness of the New Zealand wine industry. Product differentiation appears
to be the major contributing factor to the industry excellence of the New Zealand
wine industry. An analysis of the exports of different varieties of wine shows that
New Zealand variety of Sauvignon Blanc is the lead performer. Overall, the study reveals
that in relative terms New Zealand wine industry recorded a superior performance
compared to the Australian wine industry. Further research needs to be done comparing
the performance of the New Zealand wine industry with other leading wine exporters
such as France and Italy to determine whether the former is on par with the latter in terms
of industry excellence.

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Glossary of abbreviations
RCA Balassa’s Revealed Comparative Advantage Index
RXAij Relative Export Advantage of country j in commodity i
RMAij Relative Import Advantage of Country j in commodity i
RTAij Relative Trade Advantage of country j in commodity i
VRC Vollrath’s Revealed Competitiveness Index
IIT Intra-Industry Trade Index