'Incubators' rather than tax breaks

By SIMON COLLINS

Australian-style tax breaks for research and development still look out of the question in New Zealand - but action is expected quickly on venture capital and industry "incubators."

Science Minister Pete Hodgson told the world research and development conference in Wellington yesterday that Australia was almost alone in being preoccupied with allowing firms to deduct more than 100 per cent of R & D costs from their tax bills.

"If you come to New Zealand you will find that in my view we are preoccupied with grant systems as opposed to loans and as opposed to tax incentives," he said.

He confirmed his plan, initially signalled after a visit to Israel late last year, for the Government to start lending money to new business at the "seed capital" stage of high-tech investment.

"We are looking at partnering with the private sector here and overseas to create several new venture capital funds that will focus on the seed capital part of the spectrum," he said.

"I also want to support the development of incubators for new businesses. Some work on this was done by the previous Administration and some money has been set aside by this Government to support incubator development.

"Various incubators operate in New Zealand, with both universities and local authorities playing a role.

"I'm committed to helping this existing incubator base to expand. Policy development in this area is well under way."

Australian Prime Minister John Howard announced in an "innovation package" last week that Australia would put $3 billion into research and development over the next five years, including $30 million for a 175 per cent tax deduction for the labour component of additional R & D, over and above a 125 per cent deduction for existing R & D.

The head of New Zealand's Ministry of Research, Science and Technology, Dr James Buwalda, said that his ministry supported allowing a 100 per cent immediate deduction of R and D costs in the year in which they are incurred - but not a higher deduction.

"R & D is more like human capital. We don't really know what we've got when we invest in it, just as we don't know what use we'll make of a well-trained employee."

But he said the jury was still out on whether deductions of above 100 per cent were an effective use of public money. Submissions on an Inland Revenue discussion paper on the issue are now being considered.

Professor Ron Johnston of the Australian Centre for Innovation and International Competitiveness predicted this week that the 175 per cent tax break would attract multinational companies to Australia.

But the director of the Australian Expert Group in Industry Studies, Professor Jane Marceau, said yesterday that only a few thousand out of Australia's 56,000 manufacturing companies had ever used the R & D tax concession.

"Many innovations occur in small firms who do not have the resources and/or profits to benefit from the concession," she said.

"Australia's industrial structure is also very patchy so there is a problem if user linkages (customer connections) and supply chains lead rapidly out of the country."

She said the fact that R & D by Australian businesses dropped when the tax break was cut from 150 per cent to 125 per cent in 1996 showed that "R & D had not become embedded in company strategic planning."

She said her own group's work with various industries showed that R & D was more lasting and effective if it was planned collaboratively by the companies and research institutes in each industry, supported by both public and private investment.

An Israeli economist, Professor Moshe Justman, told the conference that state subsidies of $US1.4 billion ($3.19 billion) for private sector R & D spending of $US3.5 billion between 1987 and 1994 generated 30,000 new jobs and added 1.8 per cent to Israel's industrial output.

" It shows that if you want to have a Macroeconomic impact on the economy, you have to have a programme that has a macroeconomic size. A [small] 'catalyst' programme that has a big effect is very rare."