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

Policy implications for innovation and productivity

To improve productivity performance, New Zealand – the government, entrepreneurs, firms and research organisations – needs to work to achieve a high-performing innovation system and ‘national system of learning’. The focus of the innovation system is to create and disseminate knowledge that is taken up by firms and turned into new profitable, higher value-added goods and services. This can be either product innovation or process innovation – both of which can raise productivity. The role of a national system of learning is to assist New Zealand firms become smart technological followers absorbing and applying relevant knowledge from wherever it is most productive to do so – domestically or internationally.

There have been a number of reviews in recent years of innovation in New Zealand and there is a large degree of overlap in their conclusions

In the past few years in New Zealand, a lot of policy thinking on innovation and some significant policy changes have taken place. In 2006 Treasury conducted an ‘In Depth Review’ of innovation policy and practice and the Ministry of Economic Development undertook a ‘National Innovation System’ project. Ministry of Research, Science and Technology policy work focused on a number of topics including ‘more stable funding’, ‘road maps’ to set clearer directions for public research, science and technology (RS&T), and human resources for RS&T. In 2007, an OECD review of innovation in New Zealand was released. While there was not complete unanimity in the conclusions from these reviews, there was a large degree of overlap. The directions for change recommended below are a Treasury view, but they also reflect this quite broad consensus that has emerged.

Recent changes such as the R&D tax credit and the appointment of a ‘Minister of Innovation’ are likely to have a significant positive impact over time

Some significant changes have already been implemented or are underway. Taken as a whole these are likely to have a significant positive impact over time on New Zealand’s innovation and productivity performance. These changes include:

  • introduction of a broadly available R&D tax credit for private firms from 1 April 2008;
  • introduction of ‘research application’ performance indicators for CRIs that increase their incentives to choose research projects and transfer the findings to users in ways that achieve strong economic impact;
  • switching a portion of FRST-funded research from a contestable bidding process to a more negotiated approach (a positive impact will depend on the new system generating strong applied research programmes, productive collaborations across research groups and close links to users);
  • appointment of a single Minister in November 2007 to the portfolios of Economic Development, RS&T and Tertiary Education creating in effect New Zealand’s first ‘Minister of Innovation’. Under this arrangement, the three policy and three delivery agencies within these portfolios are now working in a more cohesive and coordinated way to define and achieve a common set of priorities for the innovation system; and
  • a move to better align government investment across education and training; research, science and technology; and business and market development towards six ‘areas of focus’ in the economy (the proposed areas are pastoral systems, environmental solutions, advanced foods and derivatives, health solutions, smart materials, and digital content and tools).
Key areas for future policy to focus on include incentives, a supportive wider environment, further enriching links in the innovation system and  improving its governance, supporting firms to locate, adapt and absorb knowledge from abroad, and coordinating public investments to support ‘areas of focus’ in the economy

Given New Zealand’s current performance and these changes on the way, the key areas on which future policy should focus in order to achieve high-performing systems of innovation and learning (that will help raise productivity) are in our view:

  • Ensure as much as possible that incentives (both market ones and government-influenced ones, and both carrots and sticks) encourage entrepreneurship, and knowledge creation and dissemination. Examples of these are the terms the government sets when it funds research, effective evaluation and reviews of research programmes, and product-market and other forms of regulation that facilitate a dynamic economy.
  • Keep in mind that innovation occurs within a wider context, and that some factors could still present barriers, for example:
    • uncertainty about returns to innovation – for example through regulations or exchange-rate volatility;
    • innovators require a large market to gain good returns from the high fixed costs of innovation and this necessitates exporting (given New Zealand’s small size); but distance makes exporting so early in a firm’s life-cycle a big challenge;
    • strong competitive pressure that drives firms to innovate to survive may be lacking owing to small market size and New Zealand’s isolation;
    • capital-market underdevelopment is likely to make it difficult for young, innovative firms to access both funding and advisory services; and
    • inadequate broadband infrastructure may affect some firms and limit opportunities for innovation.
  • Further improve links in the innovation system to promote knowledge exchange between firms and public research organisations. Stronger links can be expected to improve research relevance, and the dissemination and take-up of research results. Mechanisms that help to achieve better links include funding mechanisms, research partnerships, co-funding arrangements, people mobility and effective intermediaries (for example industry associations and training organisations)
  • Develop ways to help firms to locate, identify, adapt and apply knowledge from overseas that will lift their productivity. While many international knowledge flows take place as a natural consequence of trade, investment and people mobility, evidence shows that they attenuate with distance i.e. New Zealand’s isolation puts it at a disadvantage. There is case for government to take a more active role. A current proposal is to use the international networks of NZTE and FRST, and their expertise in business support and technology transfer to develop a trial scheme. This should also draw on the experience of other countries that have deliberately pursued international knowledge transfer such as Finland and Chile.
  • Build on the recent move to appoint a single ‘Minister of Innovation’ by continuing to improve the joint governance of the central-government innovation agencies. Key areas for improvement include:
    • Joint priority setting;
    • More effective collaboration and joint working towards these priorities;
    • Reduced fragmentation in the system e.g. in the number of programmes (the ‘product clutter’ problem). The large number of small agencies, centres and establishments may also be a matter of concern in causing complexity, and lack of coordination and critical mass;
    • More effective use of programme appraisal and evaluation; and
    • Development of an ‘Innovation Policy Statement’ that would provide a clear over-arching description of the innovation system, clarify the roles of the various players, describe the various policies and programmes, and set out key priorities and targets for improvement over a medium-term horizon.
  • Continue to support recent efforts to identify areas of actual and potential strength in the economy so that public investments in R&D, education/skills and support for firms to innovate and internationalise is concentrated in these areas. The idea here is that these different investments will complement and reinforce each other in a virtuous circle of higher private investment, higher productivity, and higher returns.
  • Support firms to upgrade their capabilities to absorb and exploit knowledge, use more advanced skills and, where appropriate, to internationalise. This area includes helping lower-productivity firms lift their game by adopting best-practice (effective operating and dynamic routines within firms, using external sources of knowledge, adjusting production systems, improving supply chains and marketing, using more skilled workers to take up new technologies, and upskilling the existing workforce). In the end, in order to raise productivity by a significant margin, New Zealand needs a large number of firms to raise their performance through smart new product offerings, better technology, more skilled workers and improved organisational, knowledge-management, marketing and human-resource practices.
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