We need more skilled workers and more support for R&D, writes Phil O'Reilly.

Businesses are looking for new ways to transform themselves to be successful in a fiercely competitive future. New research* shows successful New Zealand manufacturers are achieving advantage through innovation.

There are insights for all businesses in this study of manufacturing success. Surveying the manufacturing sector and 15 high performing firms, our research highlights the critical part played by research and development and skills.

New Zealand manufacturers share characteristics with those in other developed countries - their drivers of competitiveness are talent-driven innovation, the environment for business (the economic, trade, financial and tax system of the country in which they operate), cost and availability of materials, and the ability of their suppliers to innovate in products and processes.

Like successful manufacturers elsewhere, they are showing a noticeable shift away from pure manufacturing towards a bundling together of manufacturing and services, and a blurring of the boundary between products and services offered.

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A particular characteristic of the New Zealand manufacturing sector is its strong interdependence with other sectors of the economy.

And a common feature of high growth firms is their high degree of vertical integration in both domestic and offshore markets.

An important characteristic of successful manufacturing firms is their propensity to engage in research, design and provision of services.

Manufacturers tend to invest significant funds into research and development - much more so than other businesses.

Although manufacturing makes up 11 per cent of economic output, manufacturing businesses account for 68 per cent of R&D spending.

In the most recent survey of R&D expenditure, manufacturing businesses spent more than those in the primary and service industries.

Approximately $1.2 billion was spent on R&D by New Zealand businesses in 2012, with $536 million of that contributed by manufacturing.

R&D success and the ability to achieve talent-driven innovation are highly dependent on having the right skills.

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Our research shows most manufacturing jobs in New Zealand are relatively skilled, and fast-growing firms in particular have a highly skilled, specialised workforce.

Manufacturing generally employs a mix of high-skill and low-skill workers - the mix is important for providing avenues for on-job training and advancement.

The high growth firms in our survey provide sector and product-specific training, as well as at least some training in technical skills, product design and development, basic or advanced computer skills, team and problem-solving skills, quality, lean manufacturing, or basic numeracy and literacy skills.

The firms in our survey were asked what changes they needed in the general environment for business.

The two big needs are for more skilled workers and more support for R&D.

Despite New Zealand's highly educated workforce, many manufacturing firms are finding it hard to get employees with the right skills, in particular engineering and industry specific skills.

They want the education system to focus on providing more technical and trade skills applicable to manufacturing, more "work ready" young people, and more engineering graduates who want to work in New Zealand.

They also want more lenient work permits to attract foreign workers to ease their skills shortage.

They would like to see a more focused form of R&D support. Comments in the survey included requests for more R&D funding for late-stage development costs and for R&D incentives for manufacturing in areas that contribute strategically to New Zealand's growth.

One area where there could be fruitful development is in fostering collaboration with research institutions and companies internationally.

Though successful manufacturers are innovating through significant investment in R&D, few have collaboration arrangements in place.

There is strong evidence to show industry collaboration networks can advance innovation and competitiveness through knowledge-sharing, benchmarking and global partnering.

The world is becoming a more fiercely competitive place to do business. Focusing on innovation will help our manufacturing and other businesses achieve the competitiveness they need.

Phil O'Reilly is Chief Executive BusinessNZ

*NZ Manufacturing Sector: its Dynamics and Competitiveness by Castalia Advisory group is on businessnz.org.nz.