Editorial: How smart places keep their edge

Innovation, the subject we survey in the Our Turn series today, occurs in a successful business all the time. Almost by definition, a successful product cannot be static. Competition for consumer tastes stimulates constant efforts to refine the item, smarten its marketing, develop new applications, brand, package and advertise it in fresh ways. Innovation in a national economy is probably not much different.

Just about all nations, like those we have visited, are striving these days to deepen their resources of new branches of knowledge, particularly in applications of high technology and biotechnology. Their methods at least are familiar: research institutes, university-based centres of excellence, business "incubators" for people with ideas but not much commercial savvy, research and development subsidies either by tax favours or direct grants, venture capital. New Zealand has cautiously dabbled in most of these ideas. Undoubtedly we must do more.

First we need an idea of what works and what does not. There is not a lot of money available here for experimentation and waste. This is a small economy with about a third of its GDP already in the public sector. From a state budget of $40 billion, about $30 billion is committed to health, education and social welfare, which constantly faces additional demands like paid parental leave. The remaining $10 billion has to pay for everything from arts and broadcasting to Waitangi settlements.

If the state is going to invest much more heavily in business assistance it has just four ways of finding the money. It can borrow, increase taxation, sell assets such as TVNZ and Meridian Energy or save on some less essential items of spending. Borrowing and increased taxation carry risks to the economy that would have to be weighed against the likelihood that the extra investment would pay off.

In looking for public investments that seem to have worked, we have gone mainly to economies of comparable size, such as Israel which spends 3.5 per cent of its GDP on research and development, financing up to half the cost of a new product or process. The assisted products are credited with providing about 10 per cent of the country's industrial employment today.

However, it is said that much of the research would have happened anyway. The difficulty is always to ensure that public finance does not simply displace private investment. It remains true that public agencies, immune to risk, do not make the most careful investment decisions. But don't tell that to Taiwan, where a public research institute appoints panels to choose the sectors likely to grow, buys the technology and farms out business to the private sector.

In Silicon Valley, the mother of all knowledge economies, the boundaries of public and private investment have all but disappeared. The leading universities draw half of their sustenance from private endowments and earnings and there is constant traffic in scientists between the academies and companies nearby. That is the hope harboured by more than one New Zealand university, too.

Of all the countries visited, Denmark probably most resembles New Zealand, not only in its public outlay on research and development but in its awe of a near neighbour, Sweden, which spends very much more. Australia allows tax deductions of 125 per cent, or 175 per cent for additional spending, on research and development. New Zealand now allows a 100 per cent deduction. Ireland offers very little research and development assistance but, with a company tax rate of 10 per cent, hardly needs to.

Public investment in innovation is likely to be concentrated on products and techniques of production because public accounting deals in tangible, measurable things. But a national economy, like a business, can also generate additional wealth with new ideas in marketing, branding and applications. Those forms of innovation can too easily be forgotten when public policy and finance is used to stimulate business efforts. Innovation in all forms may be encouraged by public policy but ultimately it is private enterprise that provides the edge.

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Simon Collins

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