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Innovation and Productivity: Using Bright Ideas to Work Smarter - TPRP 08/05

Recent innovation performance presents a mixed picture

Many New Zealand firms and industries lag their counterparts in other countries in productivity

In a study for the New Zealand Treasury, Mason and Osborne (2007), gathered information on productivity levels and growth rates in 21 specific industry sectors and compared them with corresponding sectors in the UK. In turn it is possible to make comparisons with a wider set of countries by drawing on a separate study comparing similar sectors in the UK, France, Germany and the United States (Mason et al, 2006).

From an innovation perspective, we are interested in multi-factor productivity (MFP) not only because it is a rough proxy for innovation but also because our analysis leads us to the view that levels of MFP are critical to the level of investment in capital equipment. And we know not only that low capital intensity is a secondary cause of lower output per worker but also that New Zealand firms are comparatively capital shallow.

While there are some measurement concerns in the study (particularly for the agriculture, forestry and fishing sector), there is a reasonably clear general picture: New Zealand is ahead of the UK in MFP levels in 7 sectors but behind in 14, sometimes substantially so (e.g. by more than 50% in a number of manufacturing sectors). Figure 2 shows the ahead and behind sectors over recent time periods.  It should be noted that the UK is itself a middling productivity performer within the OECD.

This mixed picture of sectors fits with the overall statistic of New Zealand’s low aggregate MFP compared with most OECD countries. Moreover, Osborne and Mason estimate that only a quarter of the overall difference in aggregate labour productivity compared to the UK arises from New Zealand’s employment composition being weighted towards sectors with comparatively low value-added per employee such as agriculture. The other three-quarters of the gap is accounted for by lower within-sector productivity differences mostly driven by lower MFP within these sectors.

Figure 2 – Relative multi-factor productivity (MFP) levels in market sectors, New Zealand/UK, 1995-97, 1998-2000, 2002-04 (Index numbers: UK=100, Three-year averages)
Figure 2 – Relative multi-factor productivity (MFP) levels  in market sectors, New Zealand/UK.

When it comes to statistics focused more specifically on knowledge and innovation, the mixed picture continues - with a bias towards plenty of room for improvement particularly in the successful commercialisation of good ideas.

While New Zealand has a good science and research base its record on business R&D and successful commercialisation is much weaker

New Zealand’s wider innovation framework is considered sound,such as policies around competition and firm dynamics, and the infrastructure for public research investment[9]. New Zealand has a strong research base: it is ranked 9th out of 23 OECD countries for the number of science and engineering articles per million inhabitants (figure 3) and is ranked 7th in the number of researchers per 1000 people employed. Business R&D has been increasing rapidly; it grew at an annual rate of 7% from 1995 to 2004, much faster than Australia, the UK, the US and the OECD average (figure 4), and 52 per cent of firms report some form of innovation, comparable to other OECD countries.

Figure 3 – Science and engineering articles per million inhabitants, 2003
Figure 3 – Science and engineering articles per million inhabitants, 2003.
Source: OECD Science, Technology and Industry Outlook 2006, Table 38
Figure 4 – Average annual growth of GERD and BERD (selected OECD countries 1995-2004, or latest year available)
Figure 4 – Average annual growth of GERD and BERD (selected OECD countries 1995-2004, or latest year available).
Source: OECD Science, Technology and Industry Outlook 2006, Table 38; NZ data from Ministry of Research, Science and Technology, A Decade in Review

However, despite recent growth, business R&D is still very low by international standards at 0.49 per cent of GDP compared to the OECD average of 1.49 per cent (see BERD in figure 5) and the number of patents per million inhabitants is low (figure 6), suggesting that commercialisation of the research base is a challenge.

Figure 5 – Research & Development as a percentage of GDP, 2004
Figure 5 – Research & Development as a percentage of GDP, 2004.
Source: OECD in Figures 2006–07, page 40
Figure 6 – Patents per million population, 2003
Figure 6 – Patents per million population, 2003.
Source: OECD Science, Technology and Industry Outlook 2006, Table 30; NZ Treasury database; MED calculation

A corollary of low business investment in R&D is that New Zealand’s public R&D expenditure is a high proportion of total R&D spending. It is therefore important to get good returns from that investment. This will depend on the effectiveness of public research institutions and knowledge exchange with the private sector. It also requires the alignment and prioritisation of investments made in research by government agencies and consistency in business assistance to firms.

Networking and collaboration play an important part in innovation. Commercially valuable innovations often do not arise in isolation, but develop out of collaborations between firms, customers, suppliers, employees, universities, government research institutes and other players. The quantity and quality of such linkages are vitally important to the effective functioning of the innovation system as a whole.

Linkages within the innovation system are hard to measure but are vital to its effective functioning

Linkages within the innovation system are difficult to measure accurately. One measure is the level of R&D financed across sectors and borders. On this measure, the private sector funded 17.5 per cent of CRI’s research in 2005 – this is a high figure by OECD standards but does not tell us how well the bulk of CRI research is meeting industry needs. The level of R&D financed from overseas is low compared with the OECD average, and businesses finance only a low percentage of R&D carried out by universities.

Notes

  • [9]OECD Reviews of Innovation Policy: New Zealand, 2007.
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