The New Zealand Institute
| Grade | NZ Rank | Trend | Latest Value | 2015 Target | |
|---|---|---|---|---|---|
| D | 21st of 34 | Good | 4.3 index value | 5.0 | Inventive, but not innovative enough |
The World Economic Forum (WEF) has identified Innovation and Business Sophistication as the most important drivers of the incomes of advanced economies. Countries are only able to sustain higher incomes and the associated standard of living if their businesses are able to compete by offering new and advantaged products and services. New Zealand’s income, efficiency and factor-driven performance places it in the category of an advanced economy so New Zealand must compete using innovation and sophisticated production processes.
Innovation increases the market value or reduces the costs of the products and services used domestically or exported. Higher value or lower costs mean New Zealanders can earn more and sell more. Business sophistication improves the ability to make use of inventions to lift productivity and profit.
New Zealand’s economic performance can be improved by lifting the innovative capacity and sophistication of New Zealand businesses. New Zealand needs to grow successful businesses that sell into international markets to lift exports, productivity and incomes.
Many countries are focusing on lifting innovation and business sophistication as an economic strategy. If New Zealand does not do better as an innovator it will not keep up economically with other advanced nations.
New Zealand’s performance on the WEF index of Innovation and business sophistication is below the average for the OECD, as shown in Figure 1. That is concerning given how important innovation and business sophistication are as determinants of productivity and GDP per capita. Significant attention and efforts have been made in this area, with formation of the new Ministry of Science and Innovation, a Crown Research Institute (CRI) Taskforce review and Budget 2010 allocation for new science and innovation initiatives over four years. Benefits from these recent initiatives will take time to be realised.
Figure 2 demonstrates the importance of innovation and business sophistication as a driver of GDP per capita. The OECD countries with the highest scores on innovation and business sophistication have incomes around twice as high as those with the lowest scores. OECD and WEF research concludes the relationship is causal; innovation influences incomes. New Zealand’s position on Figure 2 shows that low innovation and business sophistication performance is an important reason for low GDP per capita.
Figure 3 shows there has been a persistent gap in innovation performance between New Zealand and the average of 34 OECD countries in recent years. While New Zealand’s competitiveness performance on basic requirements and efficiency enhancers is better than the OECD average, it is much weaker in relation to innovation factors. New Zealand has held steady at 94% of the OECD average value. It is important to note that there are other countries like Singapore (not in the OECD) that have stronger and improving performances.
To better understand where New Zealand is disadvantaged, the fourth figure shows New Zealand’s rankings among 142 countries on the components of the innovation and business sophistication measure.
Performance is worst on the components that are most influenced by government actions such as state of cluster development, availability of scientists and engineers and government procurement of advanced technology products.
Performance is better but still poor on factors that are more in the control of businesses including presence across the value chain, competitive advantage through unique products and processes, company spending on R&D, control of international distribution, production process sophistication and capacity for innovation.
New Zealand performs best on factors that reflect the quality of suppliers and research capability: university-industry collaboration in R&D; quality of scientific research institutions; number of utility patents.
In March 2011 the Ministry of Economic Development, Treasury and Statistics New Zealand reported on key indicators of innovation and entrepreneurship comparing New Zealand with 29 other OECD countries. A mixed picture of performance emerged. New Zealand has less expenditure on R&D than other OECD countries and much less R&D focused on creating the commercial applications important for economic growth. New Zealand has the lowest share of high- and medium-high-tech manufactured exports and the sophistication of New Zealand’s exports overall is consistent with its per capita income i.e. good for a resource-based exporter but well below the most sophisticated exporters. Innovation linkages between CRIs and business are relatively strong but otherwise innovation linkages (e.g. with universities) are quite weak. Firm entry and exit rates give an indication of the availability and uptake of business opportunities. New Zealand is at the top end of a range of OECD countries for firm start-up and closure rates. However the proportion of high-growth enterprises in New Zealand declined between 2004 and 2009.
The Research and Development Survey 2010 (Statistics New Zealand and Ministry of Science and Innovation, May 2011) revealed that total R&D expenditure for the 2010 reference period was almost $2.5 billion, up 13% from the $2.2 billion reported in 2008. In 2010, the business sector was responsible for 41% of all R&D expenditure in New Zealand, the government sector contributed 26% and the university sector 33%. Spending on R&D in the business sector grew 10% to $1,013 million over the past two years, the government sector grew 8% to $629 million and the university sector grew 23% to $802 million. R&D shifted away from basic research toward applied research in 2010 compared with 2008. As a percentage of GDP, R&D spending was 1.3% in 2010 compared to 1.19% in 2008, still low compared to other OECD countries where the average in 2008 was 2.33% and the best performers are targeting 3 or 4%.
Over the last decade New Zealand has established many of the institutions required to nurture the innovation ecosystem such as incubators, venture funds and commercialisation units. There have been efforts to develop entrepreneurs and there is increasing recognition of entrepreneurship and its importance, particularly in the technology sector.
Innovation has been identified by Government as one of the six priority sources of economic improvement. The Ministry of Science and Innovation (MSI) was established on 1 February 2011. The Ministry merged the former Foundation for Science, Research and Technology and the Ministry of Science, Research and Technology. MSI’s roles include advising Government on New Zealand’s science and innovation system, overseeing science and innovation investment and supporting infrastructure, fostering commercialisation, enhancing productivity and achieving wider benefits for the country through the application of research results.
The restructure occurred in parallel with several other Government innovation initiatives including the introduction of technology development grants and vouchers, other business assistance changes and additional funding over four years announced in Budget 2010. Two rounds of technology grants have now been announced. The first round in December 2010 allocated $92.6 million to 26 businesses. The second round in August 2011 allocated $50 million to 19 businesses over a three year period.
No new money was allocated in Budget 2011 but $36 million was reprioritised for business R&D, commercialisation and earthquake research. From 1 July 2011 businesses with limited R&D have been able to redeem a Technology Transfer Voucher with fourteen R&D scientific research organisations. The voucher matches dollar-for-dollar a business’s contribution to its R&D project.
In June 2011 the National eScience Infrastructure (NeSI) network of linked supercomputers and associated services was launched. It uses the high capacity Kiwi Advanced Research and Education Network (KAREN) to support research into complex science problems.
Government is funding up to 50 internships for post-graduate students to undertake R&D in businesses for at least six months in the 2011/12 financial year. Over the 2011/12 university summer holidays the government is investing $1.28 million so about 200 scientific, engineering and technology undergraduates will be able to undertake research and development projects for high-tech businesses.
Over the past three years Government increased the Marsden Fund for research by $42 million, an increase of 31% on the three years prior. This enables post-graduate students, post-doctoral researchers and the most eminent scientists in New Zealand to further cutting edge research.
The Kiwi Innovation Network was launched in July 2011. KiwiNet is a consortium of Universities and Crown Research Institutes dedicated to taking a national approach to research commercialisation. It will act as a focal point for all participants in New Zealand’s innovation system to collaborate and share knowledge, expertise and networks. The aim is to overcome fragmentation of effort and leverage best practice to ensure investments made are high quality and contribute to building wealth for the country.
In August 2011 the government announced it will invest $2.8 million over four years to support up to 20 entrepreneurs to grow high-value, globally-focused high-tech businesses. It will also invest US$300,000 to set up the Kiwi Landing Pad, a hub for New Zealand high-tech businesses in San Francisco, supported by leading entrepreneurs. The Kiwi Landing Pad will enable businesses to physically be together, tap into each other’s networks and connections, and improve access to the US market.
A national health innovation hub to help grow the health technology sector is to be established within four District Health Boards. The hub will assist in developing health technology ideas generated by clinicians and companies into business propositions, products and services. The government committed $3 million in September 2011 to the $24 million project with the balance to come from a mix of public and private sources over five years.
It is now recognised that performance at producing research and inventions is stronger than performance at converting those inventions into international business success. The most important challenge is to lift the innovation and business performance of new and established businesses. Improving needed skills and talent for internationalising businesses and providing greater access to expansion capital are an important part of lifting innovation. Three discussion papers by the New Zealand Institute canvass these issues more fully: Standing on the shoulders of science, A goal is not a strategy, Plugging the gap (available at http://www.nzinstitute.org/index.php/publications/view/discussion_papers/).
New Zealand is a relatively weak performer on innovation and business sophistication (21st out of 34 OECD countries) but the economic importance of innovation and internationalisation of high value differentiated goods and services is now more widely recognised, improvement plans are being developed and investment is increasing.
The March 2010 NZahead report card noted that if sufficient resources are committed through current activities in ways that will make a positive difference, the grade could increase to a C. While there is now increased attention and focus on innovation, results will not be immediate and it is uncertain whether sufficient resources are being applied. While actions being taken are positive, stronger policies or improved results are needed for a change in grade from D.
New Zealand’s position on the curve in Figure 2 indicates that improved performance in innovation and business sophistication would contribute to improved economic performance. A score of 5.0 would lift New Zealand’s performance to the level where diminishing returns begin.
Each year the World Economic Forum conducts an Executive Opinion Survey. In the 2010-11 year 13,600 business leaders across 139 economies were included. The report is comprised of 12 pillars grouped into three sub-indices. Soft data gathered through the survey provides a qualitative, timely snapshot of each nation’s economic, business and regulatory environment. Hard data is also collected from various international and national sources and forms part of the report.
The importance of each pillar depends on the development level of the country: factor-driven, efficiency-driven, or innovation driven. As countries move into the innovation-driven stage, they are only able to sustain higher wages and the associated standard of living if their businesses are able to compete with new and unique products. New Zealand’s income, efficiency and factor-driven performance places it in this category, so it must use innovation and the most sophisticated business production processes in order to compete effectively. For innovation-driven economies, these items determine 30% of the overall competitiveness score.
Note the information in the opinion survey can be skewed by perception and by small samples (e.g. New Zealand has a sample size less than 50) and therefore can have substantial error ranges, so analysis should be confirmed with supporting logic and evidence.
Figure 1: World Economic Forum: The Global Competitiveness Report 2011-12, from http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm, 11th and 12th pillar data, p.22, retrieved 7 September 2011.
Figure 2: World Economic Forum: The Global Competitiveness Report 2011-12, from http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm, 11th and 12th pillar data, p.22, retrieved 7 September 2011. Luxembourg not included.
GDP per capita data from The Conference Board Total Economy Database (September, 2011), retrieved 27 September 2011 from http://www.conference-board.org/data/economydatabase/. $US data converted to 2010 $NZ using the exchange rate of 0.7215 from Reserve Bank New Zealand historical series, last updated 27 September 2011, retrieved from http://www.rbnz.govt.nz/statistics/exandint/b1/.
Figure 3: World Economic Forum: The Global Competitiveness Report, Innovation and sophistication index from 2007-08 hardcopy report, Table 8 and 2011-12 report, Table 7. Sub-indexes from 2011-12 report, Table 4, retrieved 7 September 2011 from http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm.
Figure 4: World Economic Forum: The Global Competitiveness Report 2011-12, from http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm, 11th and 12th pillar data, p.277, retrieved 7 September 2011.
Further information links for innovation and business sophistication
Ministry of Economic Development, The Treasury & Statistics New Zealand (2011, March) Economic Development Indicators 2011, Chapter 4, section 4.1 Innovation and Entrepreneurship, available at http://www.med.govt.nz/templates/ContentTopicSummary____45708.aspx.
Statistics New Zealand (2011, May) Research and Development Survey 2010. Report is available at http://www.stats.govt.nz/browse_for_stats/businesses/research_and_development/research-development-in-new-zealand-2010.aspx.
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