Blog: Benefiting from innovation - what’s the secret sauce?

Date: 
18/04/2016

Paul Conway, Director, Economics and Research

Every day newspapers bring us stories of exciting new technologies: self-driving cars, universal programmable robots, data-driven expert systems, and the Internet of Things. These technologies are no longer just the subject of science fiction. Just the other day a car drove autonomously over the Auckland Harbour Bridge. But how well is New Zealand positioned to benefit from these technologies?

Commentators like Professor Tony Kettle (Dominion Post, March 21) have raised concerns about science funding in this country. But there is more to innovation than this. The evidence is that we are reasonably good at generating new ideas. Our big weakness is turning ideas into commercial products.

Weak commercialisation reflects low R&D spending by New Zealand businesses. Although there was a solid increase in 2015, this spending remains among the lowest in the OECD. This not only matters for leading firms working to push out the productivity frontier, but also for lagging firms wanting to adopt existing technology and improve their performance up towards the frontier.

High-productivity firms translate knowledge into growth. To do this successfully and benefit to the full from new technology, New Zealand firms need to reinvent many aspects of what they do. This goes beyond R&D spending to how well firms can absorb new ideas and tailor them to the market, or to create new markets. This puts a premium on nimble entrepreneurship, labour-market flexibility, re-training and resource reallocation.

So while lifting business R&D may be helpful, it is not the whole answer to improving innovation and productivity. Take firms in the services sector, which accounts for 70% of GDP and rising. R&D expenditure is only about 35% of total innovation spending by these firms. So part of the challenge is how to support forms of innovation that are not driven by R&D, such as organisational and marketing innovation.

A productivity symposium late last year brought together local and international experts to look at just these issues. The transcript of the symposium is now available, along with a summary of key points from the day.

While all government schemes to promote innovation have strengths and weaknesses, there is clearly a case for government to support R&D and innovation more generally. But in considering policy options to lift innovation, it is important to understand the constraints that make it difficult for Kiwi firms to innovate.

Small firms operating in small markets and sparse researcher networks are part of New Zealand’s innovation puzzle. Easy access to large markets increases the prospects of successful commercialisation while larger cities can support denser networks that bring together the specialised skills and capabilities of innovators. While New Zealand has traditionally struggled on both these counts, ICT is steadily reducing the costs of distance and increasing the visibility of ideas in some parts of our economy.

At the symposium, Professor Eric Bartelsman put forward a tentative strategy for improving New Zealand’s innovation performance. He argued we should focus on becoming global leaders in a subset of industries where New Zealand already has strengths, such as the primary sector, digital effects, health, and business software.

This would entail an active role for government, but would not mean picking winners at the individual firm level. Rather this could be achieved by be supporting thematic platforms, with associated investment in research and information dissemination, regulation, skills and world-class infrastructure. Consistent with Professor Kettle, greater clarity and focus in science funding could be part of this strategy.

Lifting innovation would help improve New Zealand’s productivity performance. Innovating firms grow and increase their productivity and pay higher wages than non-innovators. While the benefits are clear, there is debate around how to get there. The question we need to ask of any policy initiative is, is it going to lift innovation and ultimately productivity? As Professor Adam Jaffe said at the symposium: “what can we do that will make Kiwis better off in 2030?”

Productivity Symposium transcript 

Disclaimer: Blog posts are written by staff members and do not represent the official views of the Productivity Commission.

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