Lessons for NZ in US success

ROGER KERR* looks at the culture and economic environment of Silicon Valley, and concludes that New Zealand is heading down the wrong track.

The "Next Wave" series in the Business Herald has featured some exciting stories about innovative businesses.

Our economic future depends on this wave and future ones, and on continuous innovation in established industries. All should prosper in a sound business environment.

Sound economic rules of the game are the same for new and old industries alike. The so-called "knowledge economy" is not new: knowledge is what hunters and gatherers needed to survive.

In the case of technology industries, the lessons of Silicon Valley have been around for 30 years.

As T. J. Rodgers, chief executive of high-performance integrated circuits manufacturer Cypress Semiconductor, put it: "Silicon Valley is a successful and dynamic example of the prosperous basic American values at work: private property, intellectual property ownership, free trade and free markets."

It owes nothing to Government industrial policy and little to Washington in general. As Rodgers puts it: "Capitalism is what people do when they're left alone."

Certainly top universities, particularly Stanford, a private institution, have been important in producing engineers and computer scientists for Silicon Valley firms. US higher education is widely regarded as the best in the world.

Major reasons for its pre-eminence include fierce competition between institutions, the large number of private universities and the incentives that students paying significant fees have to be demanding consumers.

There is also much to be learned from the United States about the commercialisation of research and other linkages between universities and the private sector.

Yet US strengths in higher education are clearly not the dominant explanation for Silicon Valley's vitality.

Many other US regions with strong science and engineering schools do not have many high-tech companies. Moreover, the two wealthiest high-tech industrialists in the United States, Bill Gates and Larry Ellison, are college drop-outs, like Craig Meek of Virtual Spectator.

The critical success factor seems to be entrepreneurship and an environment that sustains it.

A feature of entrepreneurship is that many companies fail: three out of four start-ups in Silicon Valley do not make it.

But as Rodgers says, when a start-up company fails in Silicon Valley, "no one wails about the unfairness of foreign competition or the need for Government intervention."

Nobel laureate in economics Gary Becker has written that nations that want to encourage high-tech industries should make it easy to hire and lay off workers.

What this highlights is that the near full employment position of the US economy owes much to flexible labour markets that benefit all industries. Some Governments have tried to foster "next wave" industries through industrial policies, but such models have been no match for the innovative vigour of Silicon Valley.

Although their proponents try to deny it, selective assistance schemes always involve politicians and bureaucrats "picking winners," and their record is notoriously poor.

That some Governments adopt foolish policies is no reason for New Zealand to do the same.

Hence to encourage the "next wave" of firms in new and old industries in New Zealand, the lesson from Silicon Valley and the United States generally is not that businesses should be helped by Governments.

To the contrary, as Becker says, "first kill all the subsidies." The current charter of the US Semiconductor Industry Association calls for "free and open markets" and the association's board of directors is on record as saying that it will not lobby for Government subsidies.

The lesson is to remove unnecessary regulations and red tape that stifle entrepreneurship and push our best young people overseas, unlock enterprise in Government and producer board-controlled industries, create flexible labour and capital markets, reduce the 40 per cent share of national income spent by central and local government, lower taxes and upgrade a dumbed-down education system.

Because a small and remote country has natural disadvantages relative to huge markets such as the US, New Zealand must do those things better than the countries it competes with just to match their achievements.

In addition, New Zealand needs to develop a culture that values entrepreneurial success, self-reliance and hard work.

Right now, New Zealand is ignoring many of the lessons of Silicon Valley and going in the opposite direction to what is required.

It is reducing competition and reimposing controls in an already state-dominated education system. The labour market is being re-regulated, reinforcing existing obstacles to hiring and laying off workers.

The Government is spending more and imposing higher taxes on talented people.

Instead of reducing interventions and freeing up markets, the Government's programme involves the re-nationalisation of ACC, tighter regulation of electricity, telecommunications and takeovers, industry subsidies and a "people's bank."

The outcome will be fewer of the "next wave" companies that New Zealand desperately needs.

*Roger Kerr is executive director of the Business Roundtable.