Blog: Innovation – how do Kiwi firms stack up?
We like to think of ourselves as an innovative bunch with a history of solving difficult problems with No. 8 fencing wire. As kiwis, we are proud of the fact that – among other things – we invented the first flying machine, were the first to use whistles in sports games and, of course, taught Australians how to make pavlova.
Innovation is important not just for giving us bragging rights over our neighbours across the ditch. The international evidence suggests that innovation is a major driver of economic productivity and performance, so can help us achieve goals like higher incomes, having more time to spend with our kids or on our favourite pastimes, and using environmental resources more sustainably.
International evidence also tells us that we are very good at some aspects of innovation but not so good at others. We rank top in the OECD in the number of top-500 universities as a proportion of GDP and 6th in academic publishing rates. But as our standing deteriorates as we move downstream from science to commercialisation. We are only 19th in the OECD in patent (per capita) and 31st in business expenditure on R&D (as % of GDP). However, all these statistics are at the aggregate/macro level and do not tell us much about which types of firms perform innovation.
This is why the Productivity Commission has teamed up with Motu Economic and Public Policy Research to find out what we could about the innovative performance of Kiwi firms. Specifically, what does the rich firm-level data that Statistics New Zealand puts together – from tax records, patenting and trademark filings, and the Business Operations Survey – tell us about innovative activity?
The good news is that our business R&D expenditure – a key input into innovation – has been growing for most of the past decade. The bad news is that over the same time period our rates of innovation output – especially the proportion of firms introducing new goods and services and the share of firm sales that comes from new goods and services – appear to have been dropping steadily. So despite efforts to invest more in R&D, New Zealand industry is not seeing the returns.
Turning ideas into innovation is not a mechanical process. It involves the complex interaction of elements from within and outside the firm. To be successful, innovating firms not only need to generate ideas from internal R&D, but also to absorb ideas and knowledge from outside the firm – from universities, customers, suppliers, and even competitors. They also need to match their products to market need and then convince others to buy them.
This requires not only R&D capability, but also the expertise within management to orientate the organisation towards both absorbing new ideas and tailoring them to the market. Often the most valuable innovations are not new goods and services, but new organisational processes that make the firm more effective or new marketing approaches that enable it to exploit them.
We found varying rates of these different types of innovation by industry. R&D and patenting activity is highest among firms in the manufacturing industries, and those firms are more likely to introduce new goods and services and operational processes. By comparison, firms in the services sector were just as if not more likely to introduce new organisational processes and marketing methods.
Our research actually revealed quite a weak relationship between increasing R&D expenditure and generating more innovation. Even in those industries and among the types of firms for which we would expect R&D to matter the most, higher R&D intensity does not necessarily correspond to higher innovation output. We also saw that younger firms appear to be more innovative, even though they are not spending any more of their money on R&D.
This does not mean that R&D expenditure does not matter for innovation, but we need to look beyond business expenditure on R&D, not just in measuring innovation but also as we search for the best way to encourage it. Right now there is a lot of attention on increasing R&D, with the Government – led by MBIE and Callaghan Innovation – aiming to double business R&D expenditure by 1% by 2018. But on its own that is unlikely to be enough.
One of the biggest challenges Kiwi firms face is building the team of executives that can turn good ideas into successful products. It is hard to find people in New Zealand with the combination of technological expertise, market knowledge, and management capability necessary to launch new products in international markets. Until we fix that problem, many of our great ideas are likely to turn into stories about ‘the one that got away’.
The two papers produced from this work have now been released, but this is just the beginning of our work on the link between innovation and firm performance. Under the Productivity Hub’s research agenda, we are now examining the link between innovation (as measured) and performance variables such as revenue growth, profitability and productivity. We are also looking at the impact of R&D grants on these measures. Our goal in this research is to provide the Government with guidance as it ramps up its R&D support programmes and refines its innovation policy to help drive the economic performance of New Zealand firms.
- Simon Wakeman is a Principal Advisor at the New Zealand Productivity Commission. This research was conducted under the Productivity Hub partnership, which includes the Ministry of Business, Innovation and Employment, the Productivity Commission, Statistics New Zealand and the Treasury.
Disclaimer: Blog posts are written by staff members and do not represent the official views of the Productivity Commission.
A version of this blog was published in the New Zealand Herald and in the National Business Review.