Academics, technology and business analysts are welcoming a new survey which has found New Zealand's research and development spending has increased 20 per cent since 2014.
Total R&D expenditure hit $3.2 billion in 2016, bolstered by a 29 per cent increase in the amount businesses spent on R&D, according to the Statistics New Zealand survey, which is conducted every two years.
But with total R&D as a proportion of gross domestic product at 1.3 per cent (up from 1.2 per cent on 2014), it still lags behind the OECD average of 2.4 per cent.
University of Auckland physicist professor Shaun Hendy said New Zealand's business R&D spending had been "anaemic for decades", with productivity lagging as a result.
"Business R&D spending is the primary driver of long-run productivity growth or how much value we add per hour worked," he said.
"Unlike most of the developed world, we have been growing our economy by working harder not smarter. The latest business R&D figures suggest that this might finally be changing, with strong growth in investment by both the manufacturing and services sector."
Innovation is seen as one of the ways to lift New Zealand's productivity levels, which has been more difficult to achieve given the nation's relatively small economy and distance from other markets.
Last year, then Innovation Minister Steven Joyce flagged an extra $410.5 million to fund science projects over the following four years as part of a drive to grow business investment in R&D to more than 1 per cent of the economy.
In 2016, businesses spent a total of $1.6b on R&D, up $356m from 2014. This change was driven by the services and manufacturing sectors, up 32 per cent and 29 per cent, respectively.
The computer services industry, which includes businesses involved in software production or web design, had the largest growth in R&D spend, up 40 per cent from 2014.
In contrast, the government and higher education sectors showed more modest growth in R&D spend -- $32m and $143m, respectively.
Twenty per cent of all R&D was to improve or develop manufacturing processes in 2016, Stats NZ said. Government spending on R&D was largely for primary industries and environment, and higher education expenditure was focused on health research.
Meanwhile, businesses remained upbeat about future spending. In 2016, 85 per cent of businesses undertaking R&D activity expected their future R&D spending to stay the same or increase, up from 81 per cent in 2014. Only 9 per cent of businesses expected R&D spending to decrease in the future, down from 13 per cent in 2014.
In 2016, 54,500 people were involved in R&D, up from 51,600 in 2014. The increase was mainly driven by more researchers in the business sector.
NZTech chief executive Graeme Muller said R&D expenditure was strongly correlated to the strength of an economy and economic growth.
"The news is good, fundamentally, and if we continue increasing the R&D spend it's going to help," he said.
"In theory, if you invest in R&D you're investing in new products and services, which in time you can take to market and sell for a value. If you keep selling the same product its premium and value goes down and it becomes commoditised over time, or the market's needs shifts and you don't have a customer base. So R&D is essential to the constant development of new products and services that can be consumed," he said.
"If you've got this constant level of development it means you're constantly creating new products and you're constantly growing the economic pie."
Muller questioned why New Zealand was still so far below the OECD average, and suspected it was because we don't have as many large corporations spending on R&D.
He said there may be a need in the future to support further R&D spending in the higher education sector: "The real, true R&D -- coming up with new products which then stimulate business."
Technology Investment Network managing director Greg Shanahan said the growth was in large part due to investment in R&D by high-growth tech companies.
"One of the reasons R & D spending is so important is that New Zealand companies have had to become leaders in their markets ... so they can have enough margin to sustain the fluctuation in New Zealand's currency," he said.
"These companies now are getting significant investment from within and outside New Zealand so people are funding them to pursue a growth strategy and that growth strategy means more investment in R & D."
He said it had long been a concern that New Zealand's businesses were not spending enough on R&D and this survey indicated things were changing.
"I think what you'll see now is that with more investment coming into the sector the spend is less encumbered by revenue as investors support the growth."
Callaghan Innovation chief executive Vic Crone said the figures showed that businesses were embracing innovation as the key to international success.
"For decades we have been saying we need to diversify our economy and produce higher-value products, but at the same time our investment in R&D remained stubbornly low," she said.
"The good news is that these figures show the message is getting through: R&D is crucial in creating premiums for exporters and therefore higher wages for Kiwi workers. The rise in R&D investment in areas such as the digital and manufacturing sectors in particular tell a very encouraging story."
Anna Curzon, chief partner officer for Xero, said New Zealand was one of the most digitally-connected countries in the world, which put it in the unique position of being able to launch and develop products anywhere.
"Which is why development in the sector is so incredibly important; not just for us, but for the small businesses we service too."
- additional reporting BusinessDesk