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How R&D can turn our ponies into unicorns

open this image in new window: Research and Development at Callaghan Innovation

This article was published on 1 April 2019

This article was first published on 02 March 2019 via the NBR business news website. 

If you’re still in any doubt about the virtues of investing in research and development, look no further than the billion-dollar Kiwi companies that have emerged in the last decade, says Callaghan Innovation CEO Vic Crone.

From A2 Milk to Xero, Pushpay to Rocket Lab, some of New Zealand’s most exciting businesses are starting to make their mark on the world stage.

Some of our biggest companies are now some of our newest. And some of our smallest are also showing great promise. Angel investors injected $86 million into 111 companies in 2017 – a sure sign that our innovation ecosystem is starting to hum.

What many of these ventures have in common is a commitment to cutting-edge research and development.

Latest R&D stats

Throughout the OECD, the average expenditure by businesses on R&D is about 2.4 per cent of GDP. In New Zealand, we have traditionally spent much less than this. However, newly released figures from Statistics NZ show encouraging signs of growth.

Last year, Kiwi businesses spent more than $2.1 billion on R&D – an increase of more than half a billion dollars in just two years. It is the biggest increase in a decade, and at this rate, puts our R&D spending on track to hit the Government’s 2% of GDP target within the next decade.

Whether big or small, the evidence suggests that those companies that do prioritise investment in R&D reap the rewards. Private returns for R&D are around 20-30 per cent, much higher than the return on investment on physical capital.

So what is R&D?  At its most basic level it’s investigating how to more innovative. What that means is applying the type of disruptive technologies we’ve been hearing a lot about of late — like machine learning, automation, cloud computing, big data, and the genetic revolution — to our own businesses.

Yet many business owners still see R&D as something they’d love to do, but can’t afford. The truth is, they can’t afford not to.

R&D for survival

We need businesses to think about the product innovations that would allow them to take things to the next level in terms of the value of the business and its export-earning potential. Rocket Lab wouldn’t be closing in on its target of a rocket launch every week were it not for the investment it has put into the Rutherford rocket engine technology, which has paved the way for more frequent satellite launches at vastly reduced prices.

Xero’s development of its application programming interfaces made it easier for other app developers to plug into its world-class accounting software platform, giving customers greater flexibility and spawning new businesses in the process. It took a leap of faith from genius engineer Peter Beck and software guru Rod Drury to make those sustained R&D investments which have paid off so handsomely for their companies and for the country. 

R&D is also essential to prepare us for an increasingly uncertain future. We have an aging population, growing old in a warming world that faces monumental environmental challenges. Our core industries, which have traditionally been the engine room of growth, are being questioned by a new generation of consumers. And technology is changing so rapidly that we have to run faster just to keep up.

Our established businesses and start-ups need to focus on solutions for global problems,
by harnessing the great science and research going on in Aotearoa to go after high-value international markets. But despite investor enthusiasm for new, innovative companies, many of them still struggle to get all the funding they need, particularly as they reach their second phase of growth and seek to raise between $2 million and $20 million.

The latest data shows many businesses are getting the message. R&D in the services industries has increased by 64 per cent. And spend in the ICT, commercial and tourism services sectors has also increased significantly. 

However, we still have a lot of catching up to do to match our global competitors, and our own aspirations. In particular, the primary and manufacturing sectors need to step up.

What now?

The Government is implementing a 15 per cent R&D tax credit, which will act as a further incentive for businesses to invest in the innovations that will drive their future growth. Eligible businesses should now start preparing for the tax credit which is proposed to apply from the 2019/2020 income year. More information is available on MBIE's website.

We will shortly be publishing a report that highlights how successful sales of our fledgling companies have helped spawn many exciting new businesses, and made New Zealand a better place for all.

And within the next few months, we’ll be launching a new initiative that will help supercharge innovation in Aotearoa. Scale-Up NZ is a free online platform that will make it faster and easier for local people and organisations to find and connect with the people, capital and other help they need to innovate and grow, both here and offshore. 

For a small country, our efforts are still too fragmented and lacking in ability to scale. But Callaghan Innovation is well placed to accelerate that growth. Already, the businesses we work with account for about 60 per cent of the R&D being done by the private sector in this country.

Our work with them includes co-funding their research and development, helping them solve tricky scientific and technical challenges, improving their skills and capability building, connecting them with both local and global players, and nurturing their growth through our founder and tech incubator initiatives.

And our own data shows that extra help makes a significant difference.

While Aotearoa doesn’t yet match its peers internationally, we are starting to close the gap. And one thing’s for sure — it’s innovation that will power the next wave of billion-dollar Kiwi companies.

Vic Crone - Callaghan Innovation CEO
Vic Crone - Callaghan Innovation CEO