Catalysing Economic Growth Boosting Innovation Expertise in the Private Sector
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Catalysing Economic Growth Boosting Innovation Expertise in the Private Sector CONTENTS 1 EXECUTIVE SUMMARY PG 3 2 NEW ZEALAND’S ISSUE PG 5 3 HOW ECONOMISTS VIEW THE NEW ZEALAND SITUATION PG 7 4 CONVENTIONAL WISDOM THAT MIGHT BE HOLDING US BACK PG12 5 A START HAS BEEN MADE PG17 6 THE MISSING POLICIES PG17 7 WHAT WOULD SUCCESS FOR THIS POLICY LOOK LIKE? PG19 8 THE NEW PROPOSALS FOR POLICY TO BOOST INNOVATION EXPERTISE IN THE PRIVATE SECTOR AND INCREASE STICKINESS PG21 9 WHY WILL THESE NEW PROPOSALS ACHIEVE MORE THAN OTHERS? PG25 APPENDICES PG26 REFERENCES PG31 2 The Institution of Professional Engineers New Zealand EXECUTIVE SUMMARY New Zealand is languishing at about 25th place in the Organisation for Economic Co-operation and Development (OECD) league table. We need policies that will bring about a continued growth rate in labour productivity of over four per cent per annum, to obtain parity with Australia within a generation. This is two to three times the rate we have experienced in the last decade. New Zealand needs to identify economic opportunities and corresponding development policies that will make a real difference here, where we are small and geographically isolated but wanting first world living standards. Some changes have been made or are being made to improve our productivity. These include improvements to the regulatory environment, public sector efficacy, the tax system and infrastructure. However, these changes are insufficient. There are two issues that are poorly recognised and addressed in New Zealand. These are: • the need to boost expertise in our private sector to develop, adapt and adopt new technologies (innovation expertise) • the need to make the New Zealand economy more “sticky” to high technology companies so they remain here. IPENZ has developed two proposals to address these issues. • Proposal 1: Create an innovation expertise fund which is available for universities, Crown Research Institutes (CRIs) and potentially, institutes of technology and polytechnics (ITPs). This fund would require co-funding from a company or companies and would result in academics being strongly incentivised to go out into industry, build strategic partnerships with companies, and to transfer skilled people to the company at the end of the project. Clustering would be enhanced. • Proposal 2: Provide direct co-funding for the early years of employment of workers in new research and development (R&D) positions in industry. This would incentivise small private businesses to take on R&D staff, thereby having R&D expertise in-house and encouraging R&D to become part of business as usual. Catalysing Economic Growth: Boosting Innovation Expertise in the Private Sector 3 The two policy proposals will do better than other policies by: • focusing on building innovation expertise and a skills pool to make New Zealand “sticky” to high technology manufacturing. (The companies build local skills networks and want to keep close to their university and CRI collaborators. The smart university academic or CRI is incentivised so they continue their relationship into the future.) • incentivising research providers to shift their focus to developing innovation potential in industry • incentivising companies to increase their investment and grow their potential to adopt, adapt and use new technology for commercial benefit • making New Zealand a visibly smarter leading edge technology-based society. 4 The Institution of Professional Engineers New Zealand NEW ZEALAND’S ISSUE New Zealand is languishing at about 25th place in the OECD league table, well behind Australia. New Zealand needs policies that will bring about a continued growth rate in labour productivity of over four per cent per annum, to obtain parity with Australia within a generation. This is two to three times the rate we have experienced in the last decade. The labour productivity growth rate is unlikely to rise without a significant expansion of export value, primarily led by high productivity firms. Glaxo, which started at Bunnythorpe but became a global United Kingdom-based pharmaceutical company, was possibly New Zealand’s first high technology company. Since Glaxo’s loss New Zealand has struggled to retain the fledgling high technology businesses that would make a difference. At critical stages these businesses leave to be nearer markets, to obtain the capital to grow, or to access new skills. As a consequence New Zealand has become over-reliant on industries that are retained in this country because their raw materials are grown or sourced here. New Zealand needs to identify economic opportunities and corresponding development policies that will make a real difference to our small, geographically isolated country where the population wants first world living standards. A brief summary of New Zealand’s performance compared to other countries is provided in Appendix 1. Catalysing Economic Growth: Boosting Innovation Expertise in the Private Sector 5 6 The Institution of Professional Engineers New Zealand HOW ECONOMISTS VIEW THE NEW ZEALAND SITUATION A wide variety of analyses of New Zealand’s economic performance have been undertaken. One completed relatively recently by the Treasury notes that “While many factors impact on productivity, evidence suggests that skills, innovation and investment are particularly important in determining productivity performance ... Ultimately, it is the entrepreneur who combines these factors of production, new ideas, skills and capital, in order to drive productivity growth”1. Consequently most studies highlight three key issues – capital markets, R&D investment and skills. 3.1 Capital Markets New Zealand has relatively shallow capital markets. This is regarded as a major reason why the New Zealand economy is not “sticky” to fledgling high technology businesses. As noted by the Capital Market Development Taskforce2, capital markets: • allow New Zealand businesses to obtain the capital they require from savers at home and abroad • make it easier for savers to achieve their financial goals and accumulate wealth • help savers and businesses better manage the risks they face. The Treasury notes that “Overall, a lack of development in certain parts of New Zealand’s financial system is likely to be imposing a moderate constraint on the growth and performance of New Zealand firms” 3. Further, the Treasury suggests that entrepreneurship be encouraged and there be a greater use of innovation to improve investment opportunities4. Policies that promote savings and reduce the volatility of the exchange rate cycle can lower the cost of capital. Catalysing Economic Growth: Boosting Innovation Expertise in the Private Sector 7 3.2 New Zealand has low R&D Investment Innovation comes in many forms – from breakthrough or disruptive change 5.0 to incremental improvement. 4.0 t 3.0 Breakthrough/disruptive change is more likely to come from basic research, r cen 2.0 and incremental improvement is often a development activity. Any country Pe needs a portfolio approach whereby its government plays a greater role for 1.0 longer term (often more basic) research and the private sector the greater 0.0 l n a a d y a s d n d y d es 27 rg ay ey Ital gary rk blic xico eden ance EU rw tuga Spai olan role in development. Japa Kore Fr strali or publicIrelan Tu P pu Me FinlandSw Austri Icelan Canada Belgium mbouNo P Hun Greece ed Stat Denmark Germantal OECD Au Re it xe w Zealan Switzerland To ed KingdomNetherlandLu ak Un Ne The OECD norm would be for a government to invest about 0.7 per cent Unit Czech Re Slov of gross domestic product (GDP) and the private sector 1.5 per cent. Figure 1 – Gross domestic expenditure on R&D as a percentage of GDP6 New Zealand has low R&D investment (see Figure 1). A large proportion of the investment that does occur is made by the Government (see Figure 2). Despite the Government’s comparatively large contribution, its expenditure United States on R&D equates to only 0.5 per cent of GDP, which is below that of the OECD average. OECD The Treasury notes in its document Putting Productivity First5 that: United Kingdom “New Zealand’s wider innovation framework is considered sound, such Australia as policies affecting competition and firm dynamics, and the infrastructure for public research investment. New Zealand has a strong research base”. New Zealand – 10 20 30 40 50 Figure 2 – Proportion of R&D funding provided by governments in New Zealand, Australia, the United Kingdom, the United States and the OECD overall7. 8 The Institution of Professional Engineers New Zealand t 0.8 0.7 New Zealand 0.6 Total OECD 1 0.5 Estimate 0.4 t 0.8 0.7 New Zealand The Treasury goes on to say: 0.3 0.2 0.6 Total OECD “Business R&D has been increasing rapidly; it grew at an annual rate of seven Estimate1 0.1 0.5 per cent from 1995 to 2004, much faster than Australia, the United Kingdom, 0.0 0.4 the United States and the OECD average, and 52 per cent of firms report some r cent of Gross Domestic Produc 4 6 0.3 0 2 4 -98 -0 -08 form of innovation, comparable to other OECD countries”. Pe 95-9 97 99-0 01 07 993-9 0.2 1 19 19 19 20 2003-0 2005-06 20 Despite this, at only 0.5 per cent of GDP, business involvement (funding) in R&D Source OECD (2009), Main Science0. 1and Technology Indicators, Volume 2009 Issue 1. 9 is still lower than other countries’ and the OECD average of 1.5 per cent1 Theof 20GDP07/08 .OECD figure noted0. is 0an estimate based on the 2006/07 OECD figure. No actual 2007/08 OECD figure is available to date. (See Figures 3 and 4) r cent of Gross Domestic Produc 4 6 0 2 4 -98 -0 -08 Pe 95-9 97 99-0 01 07 993-9 This suggests New Zealand needs deliberate change to make progress.