Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Focus on better use of less research

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The 2025 Taskforce believes our chances of closing the income gap with Australia will be enhanced if there are no further increases in publicly funded research and development.

This unfashionable position is no doubt born partly of taskforce members' overarching view that making the economic boat go fast enough to catch the Aussies will require jettisoning a lot of public spending, and its associated tax burden.

They also advocate increased private provision of health and education, for similar reasons.

Nevertheless it seems odd to target research and development spending when it is already famously low in New Zealand.

It is about half the OECD average relative to the size of the economy, a third of what countries such as Japan, Sweden and Finland manage, and the lion's share of it is undertaken by the public sector.

The taskforce acknowledges the importance of innovation to lifting productivity and incomes.

But they think the Government's innovation policy is focused too narrowly on research and development - on publicly funded science in particular - on priorities set by politicians and officials and on attempting to use publicly funded research through the Crown research institutes to compensate for the modest level of private research and development spending.

Taskforce members see an increasing tendency for politicians and officials to assume that innovation rests on new discoveries in the fundamental sciences.

But the evidence, they say, is that productivity gains are at least as likely to come from improvements in how production is managed and organised.

The current direction of policy will be supported, they suggest, by those with a vested interest in it, including scientists, venture capitalists and officials. "But there is no evidence that it represents a viable strategy for increasing economic growth."

The taskforce recommends that government funding of research and development should not be increased.

They say it should be fully contestable, but they detect a bias towards CRIs rather than, say, universities. And the allocation of funding should not be determined by some "official vision" of the direction of New Zealand's economic development.

"If the Government requires that a proportion of the funding be focused on projects with direct application to business, they should determine the allocations based on offers of co-funding from the private sector, not official visions of the future of the economy."

Struan Little is a deputy secretary of the Treasury whose responsibilities include policy advice on science, research and innovation.

In a recent speech, he cited OECD research which found that between 25 and 45 per cent of productivity gains came from innovation.

"Firms that innovate do not necessarily conduct research and development," Little said.

Only 8 per cent of all businesses in New Zealand undertook research and development, compared with 46 per cent which undertook wider innovation.

A Statistics New Zealand survey asked innovating firms about what sources of information they had drawn on. Staff and customers were the main sources. Competitors, conferences, trade shows and industry bodies were also important.

But fewer than 10 per cent cited universities or CRIs as important sources of information for the purposes of innovation. In the primary sector, however, 23 per cent of firms credited the CRIs as important sources of information.

Nevertheless, research and development is an important part of the innovation system, Little says, so Government has to make the most of its public investment in science to yield benefits; especially now that fiscal conditions are tight.

By some measures New Zealand has a respectable, even strong, research base. We are well up the OECD rankings for the number of people engaged in research and development and the number of scientific and engineering papers published, relative to the size of our population.

The problem lies in both the economic relevance of that research and factors within firms that inhibit their taking commercial advantage of what new knowledge research produces.

From early next year there will be a new Ministry of Science and Innovation, formed from the merger of the Ministry of Research, Science and Technology (which deals with policy) and the Foundation for Research, Science and Technology (which doles out the money).

Little says for the new ministry to live up to its name and put innovation centre stage in science policy will probably mean some shift of focus and funding from blue skies, and applied research that is of relevance to firms.

This year's Budget included more than $200 million in new funding (spread over four years) for initiatives intended to support business spending on research and development, the bulk of it in the form of "technology development grants".

But this approach is wrong-headed, the 2025 taskforce argues. "The path of technical change is uncertain, so a pluralist approach to innovation, driven by the investment of firms themselves, makes much more sense than large [public] investment in micro-managing the supply chain of ideas and inventions and attempting to plan a science and innovation system.

"The private sector can be expected to invest heavily in research and development when it is under intense competitive pressure [and] expects there to be a large pay-off, and the firms doing the investment can capture enough of the gains to cover the cost and risk of undertaking the investment."

This sounds fine as a proposition but it begs the question of why private-sector research and development, at about 0.5 per cent of gross domestic product, has been so low by developed country standards.

A possible explanation lies in our business demographics: a large number of small enterprises, a small number of large ones (most of which are foreign-owned, farmer-owned or state-owned) and not much in between.

The Statistics NZ survey found, unsurprisingly, that larger firms are much more likely to undertake research and development than smaller ones, and that it represents a higher proportion of their product-development spending.

The branch office effect, whereby many of the commanding heights of the economy are occupied by subsidiaries of overseas multinationals, does not rule out their undertaking research and development here but it probably makes it less likely.

And our experience of privatisation has been a pretty brief interval between state ownership and foreign ownership.

If the taskforce is right about the importance of competitive pressure in spurring investment in research and development, then about all policymakers can do - given the small scale of the New Zealand economy - is ensure barriers to entry into markets are as low as possible.

The funding cap proposed by the taskforce looks likely to see the research and development spend as a share of GDP shrink steadily from already low levels.

That does not matter, they suggest. What matters is how good we are at commercialising discoveries made elsewhere. But they don't really identify what barriers there are that can be reduced.

- NZ Herald

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