An Innovation Agenda for Boosting New Zealand’s Growth Prospects

The Treasury has released a speech delivered by Struan Little, Acting Deputy Secretary to the Treasury, on Tuesday 30 June 2009 at the annual conference of the New Zealand  Institute of Agricultural and  Horticultural Science at Lincoln University, near Christchurch.

Good afternoon. It is a pleasure to be part of this distinguished assembly of scientists, researchers, students and observers who are here because of a shared awareness of the importance of scientific endeavour. Thank you for having me along. Can I acknowledge right at the outset the Queen’s Birthday honours that were recently bestowed upon two of the Institute’s members, your president John Lancashire and also Professor Alison Stewart from Lincoln University. It is heartening to see science getting the recognition it richly deserves.  I think I can safely say that the work that goes on in our science community is often painstaking, it is often far from glamorous, and it is seldom noticed let alone understood by the wider public.  But there’s no doubting the positive and profound impact that science has on our daily lives, and that’s not always appreciated. So well done to John and Alison for the distinction you have earned for yourselves, the Institute and all your fellow professionals.

Today I want to spend a bit of time discussing how science and innovation can change things for the better in New Zealand. I will canvass the role innovation plays in lifting productivity levels and living standards, and give an appraisal of New Zealand’s mixed performance in this area.  But I want to focus on possible solutions too. When John Lancashire wrote and invited Treasury to be part of this conference, he asked that we look at how the science system could be improved. So I will be sharing with you some of the ideas that we are working on at Treasury. And hopefully those ideas will help inform the discussions you are having later this afternoon.

It is impossible these days to begin any speech that traverses the economy without touching on the R word, meaning of course the recession. It is the topic that dominates so much of our daily conversation right now. But part of my mission today is to try and get you to look beyond all the gloom and doom for a moment, and think about this: while it is a time of big challenges for our country, it is also a time of incredible opportunities. We now have an opportunity to develop an agenda that ensures that innovation, and the improved productivity that it will give rise to, is at the core of our future prosperity. It sounds a bit off the wall to be looking for upsides in a recession, but perhaps one is that it serves as a reminder of the importance of science and innovation in driving economic growth, and social and environmental outcomes too. We have an opportunity to do things differently and look hard at the policy settings, so that when we come out of this recession we’re in the best possible shape to take advantage of the inevitably better times ahead, and to differentiate ourselves in a positive way from our international competitors. And one of the things we simply must do differently is get the productivity improvements that really drive growth.

Productivity is one of those words that gets bandied about a lot when New Zealand’s economic performance is being discussed. The reality is that we haven’t been particularly good at it. Self-respecting Kiwis don’t like comparisons with Australia when those comparisons don’t reflect favourably on us. But the grim truth is that an hour worked in New Zealand still produces about 30 per cent less value-added than an hour worked in Australia - despite the fact that the rate of productivity growth across the other side of the Tasman has been slowing in recent years. Let me assure you that at Treasury we certainly give considerable thought to the complex challenge of how to lift productivity. And it is not just because the Aussies are doing better than us.  It is because if we fail to do something about it, we're not going to achieve the standards of living and healthcare, and the sort of investments in education and science and research, that we all aspire to.

As the Treasury looks at ideas for improving productivity, we focus on five interlinked drivers which all have a part to play in providing the conditions that enable firms to thrive. Four of those drivers are enterprise, skills, investment and natural resources. The fifth driver, and the one I want to spend some time discussing today, is innovation, because it is probably the most critical driver of them all. It is certainly a critical component of a medium term economic strategy.

Perhaps I should take a moment to give you a thumbnail sketch of what I see innovation as being all about. Innovation is about more than simply R&D. In its simplest form it is about developing or coming across a new idea or a new way of doing things, and putting it into practice.  The case for innovation as one of the drivers of productivity rests on solid ground. It has been shown that most of the huge rise in living standards in the developed world over the last two centuries has come about through technological breakthroughs based on increased knowledge. Furthermore, the importance of innovation is borne out by OECD analysis which shows that between 25 and 45 per cent of productivity gains come from innovation. That is a compelling statistic. But given our small size and distance from markets, we have to do better at innovation than most in order to secure the gains we desire. In fact we need to be excellent at it.

Unfortunately, that is not the case.

The challenge for all of us is to find that crucial and competitive edge, whatever the level of sophistication of the product or service. And whatever the market you're targeting. The Economist magazine recently reported on a grassroots innovation project in India which produces, among other things, refrigerators built from clay. Apparently they use no electricity yet can help keep vegetables fresh for days. By developing a new idea for a standard household product, a huge market in impoverished India is being unlocked. I'm not suggesting for a minute that Fisher & Paykel might try its hand at the clay fridge business! My point is that New Zealand too needs to develop more ways of doing things smarter, of turning good ideas into profits, and of getting value for money. For a country like ours, being more innovative is the means to compete with countries that draw on low-cost labour, and that are producing a wider and wider range of goods and services at very competitive prices. What it comes down to in the end is that economic growth is about knowledge and ideas coming to fruition.

Research and development, or R&D, is a foundation stone of any innovation framework. And there is little doubt that New Zealand does produce good science. The cutting-edge science happening at our universities, Crown Research Institutes and within corporate research teams is testament to that. Across the sectors you are linked into, such as dairy, meat, wool, horticulture and fertilizer, significant new scientific knowledge is constantly being generated. But as a country we still have some way to go when it comes to turning ideas into profits. In other words, we are doing a relatively poor job at the D end of the R&D equation.

There is no doubt that New Zealand has a strong research base. We are placed in ninth place among 23 OECD countries in terms of the number of science and engineering articles published per 1 million inhabitants. And we are ranked seventh in the world for the number of researchers per 1,000 people who are employed. But our innovation performance is suffering because of the low level of R&D being undertaken by New Zealand firms, and our substandard efforts when it comes to getting some of the good research the country does produce taken up and applied. One illustration of this is the low number of patents per 1 million people. In 2003 New Zealand was down at 21st place on an OECD table of 30 countries, which suggests that the commercialization of the research base is proving a challenge for us. While business R&D has been growing in recent years, it is still low by international standards, even taking into account our industry structures. It is currently around 0.49 per cent of GDP, compared to the OECD average of 1.49 per cent.

What can we do about that?

The most important and most effective way of doing something about it is to improve the policy settings that have a pervasive impact on economic performance. It is clear that government can play an important role by cutting back on poor regulation, by boosting competition, by addressing the taxes that are the most negative for growth, by investing in infrastructure, and by making the public sector more efficient. That provides us with the base, if you like, for more sector specific policies such as sharpening programmes that support business innovation, and to make sure that our significant public investment in R&D actually supports firms to innovate. I want to come back to some of those issues shortly when I set out the actions that I believe we need to take on several fronts.

But first, let me touch on the themes of some of the opportunities open to us. Some of these involve building off our strengths, for example by aligning policy with the economically vital primary sectors. There is evidence that some very successful economies such as Canada, Australia and Finland have built strong innovation around their traditional low and medium-tech resource base. There is a real opportunity for New Zealand to strengthen its innovation performance off our comparative advantage and past investment in the primary sector. In New Zealand of course the tight fiscal constraints that we are wrestling with now will continue to limit what the government can do.  But that is the thinking behind the Primary Growth Partnership or PGP, which was announced in the Budget. It is about building off this country’s strengths and boosting productivity across our traditional primary sectors. It is not about ‘business as usual’ but is quite explicitly targeted at transformational, ambitious and major projects.  PGP will be funded through appropriations to Vote Agriculture and Forestry, and the $190 million that is being made available over the next four years will have to be matched by industry investment. From 2013 onwards the partnership will see the government investing $70 million a year, and with the same level of investment by industry, there will be a total of up to $140 million a year.

The significance of this initiative is that it recognizes the continuing importance of the pastoral, horticultural, seafood, forestry and food sectors to the New Zealand economy. Those sectors are important first and foremost because of the export revenues they generate and the jobs they create. But they’re also important because our primary sector firms have the scale and global reach that support many domestic businesses. In addition to that, global demand for food is rising and it is likely that at least the food sector will prove more resilient in the current global economic crisis than other sectors that more reliant on discretionary consumer spending. What I am saying I guess is that global events right now remind us that, longer term, being a primary sector based economy may hold us in good stead.

But the message I want to leave with you today as far as the Primary Growth partnership is concerned is that you must get involved and make it a success. Given the significant fiscal challenges we are facing I imagine it will be the biggest new chunk of money that will be channeled into your industries' research and innovation needs for a while. We have to make the most of what we’ve got. Your sectors need to be realistic and make the most of this opportunity to develop effective programmes. The idea is that Crown and industry investments will be complementary and aligned. The investments that PGP makes will be demand-led, with the prioritization and delivery process led by a government-industry partnership. I stress the word partnership, because working together it is the key to making this opportunity really count.

I want to turn now to the actions that Treasury believes we need to take to underpin a long-term innovation agenda, an agenda that will position New Zealand to come out of the recession stronger and better able to generate higher living standards. As I have said that is the challenge in these uncertain times. While we have to manage the risks and constraints that we’ve been saddled with, we also need to keep a long-term perspective, particularly on growth and productivity improvement.

The actions that are needed are on several fronts. There have been previous attempts to get an effective business focus to public sector research, but they have been piecemeal and largely unsuccessful. And the cost of that is reflected in our poor productivity figures. I want to set out four ideas which Treasury thinks will make a real difference, and put New Zealand firmly on course towards an innovation system that is firing on all cylinders. Let me be clear: these are ideas and they are Treasury’s, not the Government's.  What I am keen to see is a public dialogue that will help New Zealand towards excellence in innovation policy.

First, I see a place for a clear, overarching statement of what the government priorities for innovation are. Some of you might be wondering how a statement from the government is going to make any meaningful difference to our efforts to find that crucial and competitive edge. But it is clear that the absence of such a statement means we all have different ideas about what we’re trying to achieve in our innovation system. We think everyone should be clear about what we are working towards. If we do it really well, a statement of priorities could present a picture of all the players, from both the public and private sectors; it could set out the government's aims in terms of productivity gains, boosting R&D and getting better collaboration between all the key players; it could make clear its priority areas for investment; and it could explain the actions needed to progress each of those priorities. It would certainly help give the innovation agenda some shape and direction if everyone knows what the big picture is.

Second, I think there is a need to address business concerns around the accessibility of business assistance programmes. Businesses have consistently told us that they have problems with the complexity of programmes offered by a number of different agencies.  This is a message that the OECD also gave us in its 2007 review of innovation policy when it pointed to a fragmented system of support to R&D and innovation in New Zealand. We haven’t got strong views on what the best approach is here and I don't want to say too much here as the business assistance portfolio is currently being reviewed. However, there are a variety of options in this area ranging from better coordination between delivery agencies and rationalisation of programmes, some form of physical or virtual single entry point where firms could go to for advice and assistance, or a more radical option of a single delivery agency.

Third, I would make a case for a sharpening of funding and other incentives, so that CRIs and universities are able to better support the innovation needs of firms. We spend more than $150 million each year on funding CRIs and universities to carry out research intended to support business.   acknowledge that there is a need for some funding certainty for them, and for a reduction in transaction costs. But industry should be having more of a say about the priorities for this funding, and how the research programmes are designed and put into effect. Part of this approach would be to better incentivise CRIs and universities to work with business, such as giving extra funding to projects that have attracted private sector funding, encouraging scientists to spend some time working in industry, and looking at how the PBRF can be fine-tuned so that excellence in business-related research is rewarded. It would also require a bigger focus on connections with firms and industries when CRI strategic plans are being assessed. By doing so we are likely to do better at getting our excellent research taken up and applied.

Fourth, and finally, there is a role for some more direct financial incentives available to R&D along the lines of what other countries in the OECD do. Even we at Treasury were persuaded over the last few years that instruments like an R&D tax credit could lift innovation. But even without a tax credit there are a suite of options to choose from, depending on what you want to target and the level of funds available, which of course is a burning issue in these fiscally restrained times. We could go down the path of innovation vouchers aimed at getting smaller firms better linked to public research organizations. We could put up prizes or advance purchase commitments to try to solve one-off New Zealand-specific problems. Or a new grant scheme could be considered. This could provide funding along the same lines as the old R&D tax credit but with revised parameters to reduce the cost. Again, the tight fiscal situation is going to limit what the government can do, so these perhaps are realistic options only if there is significant re-prioritisation of business assistance spending.

So that is the four-point plan I want to leave with you today. To sum up, it is about the government setting out its priorities and goals so that we all understand the big picture, it is about making the business assistance programmes easier to understand and access, it is about sharpening funding and other incentives so that the science happening in CRIs and universities is in sync with the innovation needs of firms, and fourthly we need to be looking at a greater range of financial incentive tools to really get R&D moving. And these specific policy areas need to be nested within a broader policy environment that supports innovation and growth.

In closing I want to say again how important it is that we are excellent at innovation. Some things, such as our small size and remoteness, put us at a disadvantage. But we can overcome that disadvantage. As a country we are very good at science, but not as good at turning it into profits, so the challenge is to progress the D side of the R&D equation. We all have an interest in getting the policy mix right so that we get the most out of the government’s investment, bearing in mind that investment will be difficult to grow in these financially troubled times. All of the scientific community needs to be involved in debating these issues and giving decision-makers a steer on what are choices about the future economic strength of New Zealand.

It has been said science is a collective activity that demands collaboration. And it is certainly clear that networking and collaboration play an important part in innovation. Commercially valuable innovations do not arise in isolation. They will develop out of the collaborations that you as researchers and scientists have with industry and their customers, and with decision-makers.

I wish you all the best with those collaborations, and for the rest of your conference.

Thank you.

ENDS