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Much more needs doing with R&D

By Phil O'Reilly, May 2017

For New Zealand's economy to grow, businesses need to diversify - and this means significantly increasing investment in Research & Development.

According to a recent Statistics New Zealand survey, business spend on R&D increased by 29 per cent (up $356 million) between 2014 and 2016 - reaching $1.6 billion. While this is welcome news, we came off a low base and despite total R&D (as a proportion of gross domestic product), increasing to 1.3 per cent in 2016, it was still behind the OECD average of 2.4 per cent .

If New Zealand is to be successful in the long term R&D spend needs to exceed the OECD average. However, achieving this may prove challenging. Since, despite the coming of the digital age, New Zealand is still small and a long way away.

In addition, part of the reason why New Zealand has a low R&D spend is the nature of our businesses themselves. For example, our larger firms tend to be dominated by agricultural concerns - and agricultural businesses are generally low R&D spenders, globally.

New Zealand is also dominated by micro and small enterprises and, again, globally these types of businesses don't spend much on R&D.

There has been intense debate over the years around how to change these lamentable metrics. Great effort has gone into designing 'fit for purpose' government grant schemes and other financial R&D incentives.

Generally, these schemes have been successful but more needs to be done. In particular, OECD research suggests that encouraging business leaders to talk directly to scientists is essential.

Typically, scientists and businesses in New Zealand tend not to speak to each other -- and the current grants system does not really promote this behaviour.

This is also an issue in other countries similar to New Zealand, such as Australia and the UK, but the size of their economies and the sophistication of some of their larger businesses tend to overcome this. For us, however, the solution lies in taking a dedicated approach to building better systems that will allow for good communication between scientists and businesses.

To some extent this is already happening with start-up companies. Some scientists are already engaging with start-ups, particularly where the start-up has originated from the same place of work, university or institution as the scientist.

It is interesting that because starts-ups are highly celebrated in some of the world's innovation hot spots - like Silicon Valley - there is a tendency in other countries to revere them for no reason other than that they are a start-up.

Creating start-ups is hugely important, they are often highly innovative, disruptive in their market and a bit trendy - however we do need to be careful we don't encourage the same obsession with them in New Zealand as some other major economies.

One very good reason for this is that existing business have many advantages over start-ups.

They are established, they have a balance sheet, a management team and, hopefully, effective governance strategies.

Yet, the problem with many existing firms is that they are often very conservative about R&D spending. Many are not sure whether or not R&D has real value for them and are not sure where to start. This is where organisations like Callaghan Innovation could play a much broader role.

One way to do this would be to unpackage the term R&D, which is a massive ball-park of possibilities. For example, research could be anything from sending a space rocket to Mars right through to improving a product because of a warranty claim.

I have studied New Zealand firms for many years and have found that the sweet spot for any existing New Zealand business is what I call 'Big D, Small R'. This is the kind of R&D which takes already existing ideas from here or overseas and modifies them in New Zealand, alongside the creation of some new knowledge, to create a suitable innovation.

It is the kind of move up the R&D ladder which existing companies are often more comfortable with. The payback is typically more short-term and the risk lower than it might be for long run, big research ideas. Yet, if we can encourage more companies to do 'Big D, Small R' innovation, then it is much more likely that these companies will be involved later on in bigger projects in the purer "Big R" research space. However, these sweet spots of New Zealand R&D innovation won't come by accident. Three key changes are needed:

  • First, R&D grant systems need to encourage and incentivise much more dialogue between business leaders and scientists in New Zealand and overseas.
  • Secondly, we need to make sure that Callaghan Innovation is reinvigorated to really put its stamp on New Zealand's style of R&D.
  • Finally, we need to inspire Kiwi business people with stories about people and firms who look like them.