Callaghan InCite

Niche guys finish first

open this image in new window: Niche guys finish first

 

  • Technological innovation is our only viable path to lifting earnings and productivity.
  • Our future lies in finding the unexplored niches in global technology.
  • R&D investment is proven to develop more new-to-world products and services.
  • Business expenditure on R&D in New Zealand is the lowest among comparable economies.
  • R&D grants encourage greater business investment.
  • Our tech sector is leading the way in R&D investment.

 

Now more than ever, New Zealand businesses must harness the power of innovation to ensure they’re in on the action and not left sitting on the sidelines, wondering what’s hit them. 

As more and more aspects of our daily lives are digitised — from driving to healthcare to food production − the speed of development will continue to increase exponentially, changing the face of economies and societies worldwide.

Self-driving vehicles are rapidly growing in sophistication, as data from the road miles driven each day is incorporated into machine learning — Tesla alone gets a million miles of new data every 10 hours. And the cost of mapping genomes has plunged, from US$1 billion in 2001 to about $1,000 in 2013 and $600 or less today. This puts personalised interventions such as medication formulated for just one person within easy reach.

To ride the changes and stay relevant — even to stay afloat — businesses will need to find the points of difference, the flashes of brilliance that can turn clever ideas into marketable products and services that are fit for the future.

We’ve examined the most current and authoritative data available to build a detailed picture of business innovation in New Zealand. Our sources include reports from the Organisation for Economic Cooperation and Development (OECD), Statistics NZ information releases and Longitudinal Business Database, the TIN100 report, and reports by MOTU Economic Public Policy and Research, the New Zealand Technology Industry Association (NZ Tech), New Zealand Institute of Economic Research (NZIER) and the Ministry of Business, Innovation and Employment (MBIE). 

Our future lies in the niches of a world economy 500 times bigger than our own.

Sir Paul Callaghan 

Innovation, according to the OECD, provides the foundation for economies to grow and progress. And it is through innovation and the advances it brings that New Zealand will be able to keep pace as the world changes. 

Despite the growing complexity and reach of the global marketplace, there remain countless as-yet-unrecognised opportunities. Celebrated New Zealand scientist Sir Paul Callaghan believed this country has a clear path to success. In a 2011 Dominion-Post opinion piece, he said, “Our future lies in the niches of a world economy 500 times bigger than our own.” He cautioned against trying to find success in obvious areas where the world’s innovation investment is biggest. “We will be good where we happen to be good. We will creep up on our competitors in the odd spots...”

He was right. Who would have guessed that Xero would make New Zealand a world leader in cloud-based accounting and another local firm, Rocket Lab, shoot for the stars in space transportation? 

Sir Paul also championed the importance of commercialising science to build a prosperous economy. He recognised that environmental constraints will prevent our biggest export earners — dairy farming and tourism — from scaling up to greater economic heights. The way ahead, he forecast, would be through technology. Knowledge-based exports could generate significant earnings without consuming energy, affecting the environment or needing complex regulation. “There is no limit to the numbers of such companies,” he said, “except to the degree that our brains and enterprise make such businesses possible. 

“Therein lies a future path for New Zealand. Our top 100 technology companies export $4 billion a year. We need 10 times that — a goal we are capable of achieving.”

Niche guys finish first - infographic

In its 2017 review of New Zealand’s economic performance, the OECD noted our strong financial position and forecast continuing robust growth. But it said our labour productivity, well below that of our global competitors, is holding us back by limiting our living standards and well-being. 

The report identifies low expenditure on R&D (1.3% of GDP, compared with the OECD average of 2.4%), particularly by businesses, as a key factor in our poor productivity. It urges increased innovation to lift performance right across the business sector: “Innovation, including through R&D, can boost firm productivity, but there can also be spillover benefits beyond individual firms.”

This is a model already being successfully applied in other parts of the world. OECD figures show businesses in many countries are spending as much on the knowledge-based assets that drive innovation as on physical capital such as buildings or equipment. But that’s not the case here. Government spending on R&D was highest among the OECD’s small advanced economies (SAEs) in 2014, but has since fallen behind. Our R&D expenditure by businesses (0.6% of GDP) remained the lowest of the SAEs, and well below the OECD average of 1.6%.

MBIE’s Science and Innovation System Performance Report 2016 attributes this to the most economically significant industry sectors in New Zealand having lower R&D intensity, and the country having fewer of the large businesses that tend to do and spend more on R&D.

As well as our low R&D activity, the OECD review refers to weaknesses in our international connections, capital investment and internal competition. It also factors in the effects of physical characteristics such as geographical location, and our small population and business size.

Almost all of New Zealand’s businesses have fewer than 50 employees, and more than two-thirds have no employees.

Working in isolation, without the benefits of agglomeration that occur in large cities, and being far distant from major world markets, businesses are less able to bounce off or share ideas with other people or organisations with complementary knowledge and skills, and can miss out on real opportunities for innovation.

For the first time, revenue growth for the TIN200 companies has exceeded NZ$1 billion.

To overcome these obstacles, the OECD encourages governments to help private businesses undertake basic research. It says as well as directly contributing to economic growth, grants and other support can lead to large spillovers of knowledge and are especially helpful to fledgling businesses. 

R&D grants are recognised as a good way to help businesses of any size explore risky ideas and develop them. A 2015 study of New Zealand businesses by Adam Jaffe and Trinh Le, The Impact of R&D Subsidy on Innovation, found that an R&D grant almost doubles the probability of a business developing products that are new to the world.

Grants administered by Callaghan Innovation are already driving an increase in New Zealand business expenditure on R&D (BERD). Statistics NZ survey data shows that across the country, BERD grew by 29% between 2014 and 2016. Over the same period, R&D spending by a sample of Callaghan Innovation customers increased 46%. Businesses that had a grant and used another Callaghan Innovation service increased their R&D investment by even more.

Analysis of the businesses receiving grants through Callaghan Innovation shows their increased R&D spend is not just the result of government funding — the grants are achieving their intended purpose of encouraging businesses to invest more of their own money in R&D.

Each year, the TIN report analyses the results of our biggest export-focused high-tech manufacturing, ICT and biotechnology businesses each year. In 2015–16, it reported that the best-performing companies — the TIN200 — earned $6 billion in export revenue, positioning the sector close behind dairy and tourism. 

The report said, “For the first time, revenue growth for the 200 companies has exceeded NZ$1 billion, as double-digit growth spreads across geographies, market sectors and company sizes.” 

Alongside this stunning growth, the tech businesses invested 8.8% of their total revenues on R&D, a 16% increase from the previous year. In this sector, at least, businesses are joining the dots between R&D spending, higher earnings and being primed for an uncertain future. 

Their experience sends a clear message to all New Zealand businesses: if you want to grow, sooner or later you’re going to need to do some R&D.

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Updated: 25 July 2017