Our turn: No such thing as a free knowledge economy

Innovation is the key to higher living standards.
SIMON COLLINS looks at how other nations foster new ideas and the companies that turn them into commercial reality.

Back in the late 1980s, Malka Lindner was out of a job. An industrial chemist, she had been part of a team at Israel Aircraft Industries (IAI) that was developing a new jet fighter code-named Young Lion.

But the country was spending far more than it was earning. The currency collapsed and inflation hit 400 per cent. The Government was forced to slash spending, and Young Lion was axed.

Sound familiar? If this was New Zealand, Dr Lindner might have left the country and taken with her the optical filter that she had developed. Instead, she stayed in Israel.

What made the difference was a Government scheme to create 24 business "incubators," where new entrepreneurs such as Dr Lindner could get help to commercialise their ideas, on condition that they gave jobs to some of the one million highly skilled Russian immigrants who poured into the country in the early 1990s.

"She found someone to invest 20 per cent of what we needed," says her husband, Pinhas Lindner, who is now sales manager for her company, Ofil. The company was accepted into Itek, the Incubator for Technological Entrepreneurship at Kiryat Weizmann Science Park, near the famous Weizmann Institute of Science. This meant it qualified for a Government grant of $US140,000 ($350,000) a year for two years, covering up to 85 per cent of its budget.

It has hired 11 staff, including eight Russians, and developed an optical filter camera, which it has successfully exported to American power companies, who use it to check for deterioration of their power lines.

"The potential market we estimate to be about $US500 million ($1.25 billion)," Dr Pinhas Lindner says. "We think we can take 10 to 20 per cent of that market."

Economic studies show that new ideas such as Dr Lindner's are the major source of higher living standards in the world - more important than bringing more people into the paid workforce, more important even than money saved and invested.

Many countries are investing billions in research and development (R&D), in the hope that researchers will come up with more ideas to create new or better products and find ways to produce existing products more efficiently.

New Zealand spends relatively little on R&D - only 0.6 per cent of our national income from public sources, including universities, plus a further 0.5 per cent from the private sector. Our total of just 1.1 per cent is half the average of the 29-country Organisation for Economic Cooperation and Development (OECD), which stands at 2.2 per cent.

But research is only one element of successful innovation. Indeed, as the table on the next page shows, there is no obvious connection between R&D spending and economic growth, with the fastest-growing country (Ireland) spending relatively little on research.

It would be nice if we could finance all New Zealand scientists to fulfil their dreams of answering every scientific question in which they take an interest. We can't. Inevitably there are limits, determined ultimately by how much taxpayers are prepared to pay for such research.

But we do need a system that ensures we develop good ideas, such as Dr Lindner's, which have good prospects of developing commercial products that will more than pay for the research.

Massey University economist Hans-Jurgen Engelbrecht suggests there are three preconditions to this: the potential to produce knowledge, measured by R&D spending and industry structure; technology inflows, measured by foreign investment, manufactured imports and payments for overseas technology; and a capacity to absorb technology, measured by science graduates and university graduates generally (which will be discussed in a later article in this series).

New Zealand came bottom on most of these measures when Dr Engelbrecht studied the subject in 1999. The table compares our record with the seven countries the Herald visited.

ISRAEL

Israel is second only to Sweden in R&D spending. According to the Israel Manufacturers' Association, since the table was compiled civilian R&D spending has risen to 3.5 per cent of the national income.

The Government contributes two-thirds of this - about 40 per cent through the Weizmann Institute and universities, 40 per cent through the Ministry of Industry, and 20 per cent through other agencies, such as the Israel Space Agency, five regional research centres, several local science museums, the Volcani Agricultural Research Institute, special genetic research programmes and a strategic research policy.

The Ministry of Industry provides huge subsidies to business R&D. Since 1984 the ministry has financed up to 50 per cent of the cost of developing new products or processes, and up to 66 per cent of new companies' R&D costs in their first two years. This spending is seen as an investment, and the state takes royalties on any profits.

In addition, the state pays $US340 million a year to business incubators such as Itek. The incubators usually take a one-fifth share in the businesses they incubate.

Professor Moshe Justman of Ben-Gurion University says that between 1987 and 1994, the state paid $US1.4 billion towards total business R&D spending. "It was the main source of venture capital at the time," he says.

The products developed with that money created 260,000 jobs - roughly 10 per cent of industrial employment. However, he suggests much of this research would have happened anyway.

Professor Justman believes it would be better to concentrate research grants on small businesses that could not afford to do research without the grants - exactly the kind of businesses, such as Dr Lindner's, that are helped by the incubator programme.

"The Israeli approach is to keep an open mind and let the entrepreneurs direct the industry where they take it. That is preferable to having someone dictate a line of attack," Professor Justman says.

UNITED STATES

American businesses invest a higher share of their income in R&D than those in any other country, although Government-financed R&D is only slightly above average.

Right up until the mid-1990s, a majority of public R&D spending - and hence a big chunk of business R&D - went on defence, space and aircraft.

But great universities such as Silicon Valley's Stanford and the University of California at Berkeley have always depended as much on private contracts and donors as they have on the state: Professor David Teece, a New Zealander at Berkeley, says the private Stanford earns 60 per cent of its income, and state-owned Berkeley 40 per cent, from the private sector.

In both cases, there are very strong links between the universities' research and business. Both encourage academics to win industry research contracts, and both encourage industry to set up in technology parks alongside them.

Universities have been encouraged to make profits out of their discoveries through a 1980 law that allows public researchers to file patents preventing anyone else from copying their work.

Since 1980, the number of patents filed by universities has trebled from 0.04 for every $1 million in research spending to 0.12.

The proportion of university research financed by businesses, either individually or through cooperative research agreements involving several companies, has soared. There has also been an increase in cooperative research since a law was passed in 1984 allowing companies to collaborate on generic, "pre-competitive" research.

TAIWAN

Taiwan's huge R&D investment is a central element in the "Taiwan Inc" approach to economic development.

Alex Fan of Taiwan's 6000-strong Industrial Technology Research Institute (Itri) says Itri coordinates 20 to 30 consortiums of local companies making products such as notebook computers, semi-conductors and DVDs.

In the notebook computers consortium, for example, Itri chose companies to make the keyboard, the software and each of the other parts.

"Each company has its strengths. It chooses one of the parts, and Itri has the mission to integrate all the parts," Mr Fan says. "We set up the standard for the notebook specifications and every company, based on that standard, develops its part."

Itri has contracts with each company, and any patents developed by the consortium are jointly owned by all its members.

Itri can help with finance through its venture capital company, runs an incubator for new businesses, and rents an "open laboratory" to the public. In March, 1000 people from 63 companies used the laboratory.

Eric Lean of Itri's Opto-Electronics Laboratories says Itri uses panels of local and overseas experts - many of them expatriate Chinese scientists in the United States - to choose the sectors that are likely to grow and which suit Taiwan's capabilities.

"We always do the technology outlook looking five to seven years from now," he says. "We also consider what will be good for Taiwan industry, look back at our core technology in Itri, then come back and put our resources into it.

"If we don't have the technology, we ask how we can get it, such as research abroad, joint programmes and research in universities."

In many areas, Itri's role is to buy the technology from overseas, master it and then pass it on to the companies in its consortiums. In other cases, it develops new technologies itself, then, says Ling Yuan Chen of Itri's Energy and Resources Laboratories, "we will shop around for someone to use the technology.

"If there is no company to use the technology, we can sell the technology overseas, or help to set up a company here. The integrated circuit manufacturing industry was set up by Itri in the very beginning."

The Government also nurtures more than 600 new businesses in 55 business incubators, mostly attached to universities.

Another 289 companies, ranging from electronics manufacturers to software firms, have leased land in the Hsinchu Science-based Industrial Park, which was established alongside Itri's main laboratories in 1980.

Thirty companies are on a waiting list to get into the science park and strengthen their links with Itri and two adjoining universities. To accommodate them, the Government is opening several new science parks, including one specialising in biotechnology.

The Government also lends money to companies for R&D, and provides a tax deduction of 25 per cent of R&D costs.

DENMARK

Denmark's public R&D spending is comparable with New Zealand's as a proportion of national income. Roughly equal halves of it go to universities and to public research institutes in fields such as information technology, food and biotechnology.

Although its companies spend 1.2 per cent of the national income on research, more than twice as much as their New Zealand counterparts, Danish economists complain that this is far behind neighbouring Sweden, whose companies spend almost 3 per cent of the national income on research.

"Sweden's industrial tradition is in larger, more international companies that have a stronger tradition of selling world-class commodities around the world: Volvo, Ericsson, Electrolux and so on," says Danske Bank's Jorgen Christensen.

"On average Danish companies are much smaller."

The Government established six technology incubators in 1998 offering initial capital, courses and help to get advice in management, financing, patenting and business management.

SINGAPORE

Singapore's R&D spending looks low in the table, but has risen significantly since 1997. Spending rose from 0.8 per cent of national income in 1990 to 1.8 per cent in 1999, and is planned to pass 2 per cent about now.

Thirteen public research institutes have been established since the 1980s, employing 5000 scientists and engineers in areas such as computing, microelectronics, wireless communications, materials engineering, biotechnology and environmental science.

In 1999, the Government launched the $US1 billion Technopreneurship Investment Fund - an early-stage venture capital fund that invests in new businesses alongside private investors. In 1999 it took part in total investments of $US5.4 billion.

Last year a second $US1 billion investment fund was launched purely for life sciences or biotechnology.

Singapore has followed Taiwan's example of appointing international advisory panels, drawn particularly from the United States, to advise on priority sectors for investing money from both funds.

The National Science and Technology Board also runs technology incubators with local companies Corporate Brokers International, Ginosko Management and Plan-B Technologies, the company that invested in Hamilton's Deep Video Imaging. The main engineering campus, Nanyang Technological University, runs its own incubator for 12 companies, all of which use technology developed at the university or work with its academics and students. The university usually takes a 5 to 10 per cent stake in each company.

Unlike Taiwan and Australia, Singapore does not give tax breaks for R&D, apart from allowing individual investors in new high-tech companies to write off their losses against their personal incomes.

AUSTRALIA

For 15 years Australia has put a huge effort into promoting private sector spending on research and development. It has achieved one of the world's fastest growth rates in business R&D - but from a low base, which leaves it still below the world average.

A study by New Zealand economist Ralph Lattimore, now working for the Industry Commission in Canberra, says Australia's tax deduction of 125 per cent of the cost of R&D is the third most generous tax treatment of R&D in the OECD.

Since the deduction was introduced in 1985-86, initially at 150 per cent, Australia's R&D spending has climbed from 1.1 per cent to 1.7 per cent of its national income. Dr Lattimore estimates that this investment has not only paid dividends for the companies concerned but has had a 70 per cent "spillover" of extra benefits to Australia, which is not captured by the companies.

In addition to the tax concession, the Federal Government spent $A550 million ($687 million) last year on R&D grants and loans, technology incubators and venture capital for small technology-based companies.

In January, Prime Minister John Howard unveiled an "innovation action plan" adding a further $A2.9 billion to all this over the next five years, including extra money for universities and research institutes, creating centres of excellence in information technology and biotech, more grants for the private sector, and boosting the tax deduction to 175 per cent for companies that increase their R&D spending.

On top of that, state Governments have their own programmes. Queensland now calls itself the "Smart State" on official letters and car number plates.

In his victory speech after his landslide re-election in February, Labor Premier Peter Beattie said his message was: "Innovation, innovation, innovation!"

Laurie Hammond, a former chief executive of New Zealand's Foundation for Research, Science and Technology, now running an incubator at the Gold Coast's Bond University, says Mr Beattie "is the personal champion within Government of the push for biotechnology and innovation.

"The secret of innovative culture is creating new technology-based environments," Dr Hammond adds.

"It's that ferment of new ideas, forming new businesses that grow quickly."

Queensland is developing and promoting technology parks, coordinating a network of "business angels," establishing a business incubator, starting a pre-seed venture capital fund for ideas generated by public research institutes, and promoting enterprise education in schools.

Since 1993 it has provided a product development and technology diffusion service called the Queensland Manufacturing Institute.

Fisher & Paykel and other New Zealand companies have used the institute to make prototype products and the institute has run workshops in Auckland and Christchurch.

IRELAND

The rich world's fastest-growing economy, Ireland, spends very little on R&D. Instead, its strategy has been to buy jobs with big inducement grants and ready-made facilities in technology parks and industrial estates.

It has had some success as a result. Multinational companies that have built factories in Ireland have also pushed up business R&D spending from below 0.5 per cent of national income in 1987 to 1.1 per cent a decade later. By then, two-thirds of all business R&D in Ireland was being carried out by foreign firms, by far the highest proportion in the OECD.

However, the current national development plan proposes to raise public R&D spending to an average of 0.65 per cent of national income during the period 2001-2006, including big increases for the universities, subsidies to small businesses of up to 35 per cent of R&D costs, and public-business partnerships.

Technology parks developed by Enterprise Ireland and its associate, Shannon Development, have attracted foreign and local businesses in fields such as software and pharmaceuticals.

With a company tax rate of only 10 per cent, rising to 12.5 per cent in 2003, Ireland does not see a need to offer any extra tax breaks for R&D.

NEW ZEALAND

Dr Engelbrecht concluded in his 1999 paper that if New Zealand wanted to raise its living standards more rapidly it should invest more in basic public research, encourage more public-business research partnerships, help business to increase its R&D and encourage more people to train as scientists and technicians.

Two years on, Dr Engelbrecht feels that Australia has done what he recommended, but says: "I don't think the priorities in this country have shifted enough.

"I can't see that the policies of either major party in this country will be changing things a lot," he says. "I have lots of questions."

Lessons

1. There are many different models for encouraging people to come up with new ideas and new ways of doing things.

2. Business incubators and technology parks can help connect the people who have developed new ideas and processes to new businesses that can use them

Links

Ofil Ltd

ITEK

Israel's Ministry of Industry and Trade

Public Sector Research

National Science and Technology Board

Innovation Australia

Queensland Manufacturing Institute

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