In the latest in our State of the Nation series, Kenneth Husted identifies ways to keep our innovations here in New Zealand and reap the benefits.
Innovation and entrepreneurship are the engines of profitability for firms and economic growth in developed societies. High-tech and innovative businesses are especially important because they not only create value internally, but also initiate value, work and innovation outside their own boundaries, such as within their suppliers and other stakeholders.
These firms also invest in developing a strong research and development competence which enables them to use public-funded research from universities and crown research institutes. R&D investments often result in local spillover of knowledge and ideas, and this is very important for economic growth, as ideas and opportunities can flow to other activities and firms where they can create most value.
This model for value creation works really well for small countries like Denmark, Sweden, Finland and Singapore.
So far, however, that success has not been mirrored in New Zealand, despite significant progress in turning a larger number of Kiwi inventions into new ventures.
Instead - more than anywhere else in the world - we see these potential growth locomotives relocated overseas as soon as they pass their first, more vulnerable stage of establishment, if not sooner.
The important issue here is not merely ownership. Foreign ownership can have many positive benefits, but the key issue from a sustainable value creation perspective is where these businesses think their current and future economic activities created from innovation will be anchored - in New Zealand or abroad.
The simple answer to this challenge is to embed these value-creating firms here at home. To do this, we have to support and develop start-ups and innovative firms in a way that provides them with long-term competitive advantages by staying here.
Part of the solution could be providing a development-oriented home market. From an innovation perspective, partnering with customers at early stages provides outstanding and often crucial opportunities for getting the products/services and associated business models right.
Large firms are ideal test customers because they often have needs ahead of the market and can absorb the uncertainty associated with testing. But New Zealand doesn't have the benefit of an industry structure of large firms employing more than 1000 people that could drive demand for new and innovative products.
Consequently, many high-tech and innovating firms are forced to test and mature their products overseas in close collaboration with overseas customers.
The trouble is, start-up firms or those without a recognised track record find it difficult to establish customer connections across national borders. And those that succeed often feel more associated with the "new home market", as they are forced to a certain degree to "go native" in order to access and become legitimate in that market.
To create a similar testing bed here, the public sector has to assume more responsibility for supporting local industries and ventures in their innovation, development and testing of new products/services.
An example is the rebuilding of Christchurch, where we can pick problems and opportunities to be addressed and funnel money towards supporting local industry in creating and testing innovative solutions, which can then be introduced to the global market.
Using public procurement to boost innovation and value creation is a low-cost and very efficient way of embedding the activity locally.
Another part of the solution is enabling firms to grow through "bootstrapping" - using cash flows to fund growth - rather than having to raise outside capital. Bootstrapping firms are much more likely to use the resources around them and to embed their activities in the local environment. The ability to create cash flow from selling products and services locally is crucial.
A final part of the solution is to reinforce strong local networks with no-nonsense collaboration across disciplines, institutions, competencies and positions in value chains.
However, managing collaborations in knowledge-based innovation is extremely demanding because of the high level of uncertainty involved. This is easier if all stakeholders involved share knowledge about, and work with, similar models to transform advanced knowledge into dollars.
This is a potentially very powerful model for value creation, which has to be mastered by all players in the innovation system. The better training in innovation and high-tech start-ups is co-ordinated across different levels of education, the more efficient the local network becomes.
The first wave of activities to lift the innovation levels and knowledge-based innovations among Kiwi entrepreneurs has been successful in terms of activity, interaction between universities and industry, and entrepreneurial ecosystems.
The next wave of initiatives should be aimed at embedding these value-creating firms and the related activities in New Zealand, which would retain the growth here.
This article is one of a series of follow-ups to issues raised by Professor Greg Whittred on the Herald op-ed page in February. Read the original article here.
Kenneth Husted is professor of innovation and research management and director of the Centre for Entrepreneurial Learning at the University of Auckland Business School.