In 2008, Australian economist Keith Smith wrote a paper for New Zealand's Ministry of Economic Development. In it he argued that New Zealand needed to follow the example of the Scandinavian countries in growing its economy. Smith notes that "these countries have rested their development paths on resource-based sectors, and out of them have developed low and medium technology industries that have driven growth within these countries". Yet neither Finland nor Denmark drove their recent economic development solely off the back of primary-sector innovation. Both countries benefited from long-term strategies to diversify their R&D portfolios.
Finland worked over many decades to diversify its exports. Nokia began research and development in electronics in the late 1950s and as early as the mid-1960s derived 3 per cent of its revenues from electronics. None of the Scandinavian countries have focused on primary-sector research and development in order to diversify their economies. Rather, they have purposefully undertaken research that has enabled them to move away from dependence on their primary sectors. Unfortunately, New Zealand's public science system has never seen a serious contest of ideas at the strategic level that might have challenged its narrow focus on the primary sector. New Zealand has backed much the same set of priorities in its science and innovation system since the 1920s. Arguments for investment in other areas of science and innovation are often countered on the grounds that New Zealand is too small to support a broad portfolio of research. We must focus on areas of research where we have scale if we want our innovation spending to have any impact, the logic goes. Nonetheless when we look at other small countries, such as Finland or Israel, we see that their governments have made deliberate decisions to diversify their spending on research and development. It is the diversity of specialisations that a country has that are important for innovation. By bringing together complementary activities, a diverse innovation ecosystem promotes greater inter-industry knowledge spillovers and enhances innovation.
This is exactly the route that the New Zealand company Gallagher took as it moved from producing electric fences for farmers to security systems for prisons and governments. In 1999, Gallagher acquired PEC, the Marton electronics company that made its name by developing the world's first microprocessor-driven fuel pumps. This purchase enabled Gallagher to complement its electric fences with the Cardax electronic-access system to create a comprehensive security product. And despite its home in rural Manawatu, PEC did not come out of the primary sector; its origins were in manufacturing munitions in World War II.
While diversity is important for economic development, New Zealand will not be able to support activity across all fields in the way that larger countries like the United States or Germany might. Yet it does not follow that New Zealand should pick a single winner like a Fonterra or a Fisher & Paykel. Relying heavily on one company is very risky, and reliance on one industry sector is problematic from a macroeconomic viewpoint. Nonetheless, this is the situation we find ourselves in today with our picking winners
dependence on Fonterra and the export of dairy products. New Zealand's export basket is significantly less diverse than Finland's, despite the importance of Nokia to the Finnish economy. New Zealand's technology firms tend to export into niche international markets. In this case, some of the best opportunities for New Zealand likely complement the core technologies of particular firms, in niches that lie between easily identifiable industry sectors. Because of this, it would be very difficult for policy makers to identify these niches a priori - picking new winners for New Zealand would be exceedingly difficult. In these circumstances, we believe that the best approach for New Zealand's government is to use light-handed interventions that exploit the power of the market in determining what research gets done, such as tax incentives for research and development, and to foster a more diverse set of research activities, which will counteract the tendency of the market to focus on short-term, low-risk research and development. Denmark, like most OECD countries, has relied on a mixture of tax incentives and direct subsidies, and even Finland introduced tax incentives in 2012 in addition to its direct grants to business. These countries also support a much broader base of research in their public innovation systems than New Zealand. We argue that the New Zealand government must do likewise. It must avoid attempting to pick winners and develop a broader portfolio of research.
