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Transforming the Economy - Hodgson Speech

Pete Hodgson, Minister Research, Science & Technology
Speech Notes
5.00 pm
Future Sectors conference, Sky City, Auckland.

Transforming the Economy

Thankyou for your invitation to speak. I accepted without a second thought.
It's good to be here, for two separate reasons.

The first is that it is good to be with people who have their eyes focused well forward. People who think well ahead. People who try to make sense of the future.

The second reason is it's good to be here is that someone thought of this in the first place. I think this conference is about strategic economic development. Delegates have been asked to explore - and reach consensus, what's more - on what sectors are best for New Zealand's future. Your website asks whether biotech, infotech and new materials research offer real business opportunities or whether they are "just good science".

I get a sense that this conference will grapple with such questions rather than just navel-gaze. I hope I'm right. I hope you will offer informed foresight. I hope you reach consensus, or something like it. I hope your message is cogent. Good luck to you: it's nearly half-time and by this time tomorrow it will all be over.

I'm here to explain the Government's approach to research, science and technology, or more broadly to stuff that comes under the heading of innovation.

We're thinking in terms of what you might call an innovation system, a set of policy measures and agencies that promotes the development of new ideas into new wealth. Those ideas might be about improving existing products or processes, or they might about creating entirely new ones. In terms of the theme of this conference, that means taking our existing productive sectors into the future, or discovering the genuine future sectors.

Initiatives to support research, science and technology are part of that, as you'd expect, but they're not the whole story. If you think for a second about what else is required to turn ideas into assets you'll appreciate that infrastructure, the national skills base, access to finance, international relationships, transaction and compliance costs, intellectual property protection and even our identity and confidence as a nation are all part of the picture. Brilliance and invention in the lab or the field are just the beginning.

The Government has been looking at what it can do to lower barriers and lift performance in all these areas. You will have seen in last week's Budget a range of relevant investments in areas like tertiary education, the modern apprenticeship scheme, industry and regional development, transport and e-commerce.

Last month the Prime Minister announced an arts funding package with significant economic development implications. The month before, Jim Anderton announced the incubator support programme. Next month it will be a grants programme for small business and a local economic assistance fund. The month after we may be close to announcing some detail on assistance for exporters, and on it goes.

In this speech, I'll be zeroing in on the Budget changes to research, science and technology spending, but I'm asking you to bear in mind that wider context – because in Government, that's what we're doing.

I'm releasing a document at this conference titled “Transforming the Economy: Challenges and opportunities for research, science and technology”. Please have a look at it. It sets out this Government’s vision for research, science and technology and explains the changes to RS&T spending in the Budget, because this year they're significant. We've increased spending overall, but we've also changed the way we manage it. Those changes are designed to relate spending more clearly to our goals for public investment in RS&T, so I want to take this chance to explain where we're heading.

Many of you, I think, will have heard me say before that the ultimate aim is the transformation of the national economy. That means moving on from our basic reliance on primary production to more added-value and knowledge-based production. We're very good at primary production and we need to maintain our expertise there. I'll come back to that later. For now I will simply say that primary production an essential component of our economy but not a sufficient one. Transformation is necessary and this Government believes that research and development has a pivotal role in that transformation.

So if transformation is what's required, and if the innovation system is a key driver of that change – perhaps the key driver – then what state do we find that innovation system in? Is it open, strong, supportive and interactive? Or is it insular, limited, myopic and riddled with barriers?

My best guess is that it can be described as rapidly developing off a low base. Why? Well, the evidence of a low base is not hard to find. We have a low level of high-tech exports, a low level of private sector R&D (even allowing for any errors in measurement ), a sense that universities operate behind closed doors and no Nobel Prize winners since Rutherford.

Fortunately that is not the whole story. Such an analysis, along with "brain drain" and "warehouse economy" stories is too dismal.

My sense is that our high-tech exports are poised to grow, possibly rapidly. I also think that the level of private sector R&D will grow. Another Nobel Prize winner may be ten years away, but universities are already starting to open their doors, quite a lot by historical comparison, as evidenced by the number of new or planned innovation centres and incubators springing up on campuses around the country.

Moreover the venture capital void of a year or so ago is starting to fill quite rapidly, even though venture capital is a label that some newcomers use a bit liberally.

The Technology for Business Growth scheme, which a year ago was undersubscribed and had reserves in hand, ran out of money two months ago and needed a pre-Budget top-up.

The Great New Zealand Business Venture, launched a couple of months ago, has been a highly successful competition-cum-learning experience that has far exceeded its organisers' expectations.

The America's Cup, a relatively buoyant economy, a low exchange rate, the Foresight process and perhaps even the change of Government have all contributed to a rapidly emergent innovation system off a low base.

Now let me add one more piece of evidence, arriving tomorrow afternoon when the Prime Minister announces the membership of the Science and Innovation Advisory Council.

SIAC, which reports to the Prime Minister, is a first for New Zealand. It is the first time such a body has been formed, but more importantly the first time a New Zealand Prime Minister has asked for a direct reporting line on science and innovation.

SIAC has detailed terms of reference but I want to tell you a quick story instead about the process of putting the council together. We advertised for nominations. We received over 300 of them.

Those 300 names included some stunners. Many of those who represent the best of our innovation system allowed their names to go forward. We had an embarrassment of riches.

We picked nine of them. Some are well known, others not. Some are innovators, some are scientists, some both. All of them have this single attribute: experience or knowledge of how an innovation system works and how it may be extended, deepened, broadened.

After the PM and I picked them, I phoned them. All of them, no exception, said yes. Some on the spot, some after thinking about it over the weekend. Many didn’t know they had been nominated. All of them, without exception, are very busy people.

I’m grateful to them, and to the other nominees. But the point of the story is that New Zealanders are keen to engage and commit to science and innovation.


I want to go back to the Budget now and point out that this Government has put money where its mouth is.

This year the total public invest in research, science and technology increases by $43.6m, or more than 10 percent. Total Government expenditure up by less than 5 percent; R&D expenditure up by more than 10 percent. I'm proud of that. It gets us back on track towards raising public investment in RS&T to 0.8 percent of GDP by 2010.

The thick end of that extra funding goes into the largest ever increase in Government support for private sector R&D. There is $11.8m for a new grants scheme for that, and another $8.5 million for the business assistance schemes already run by Technology New Zealand. Technology New Zealand’s budget has more than doubled.

Technology New Zealand was established to build partnerships between science and business. With the arrival of the new grants scheme, the Technology for Business Growth scheme is being refocused towards helping firms that are already good at technological innovation to move towards high-value, high technology markets. It will remain a dollar-for-dollar scheme.

The grants scheme will focus on increasing the general level of private sector investment in research and development in New Zealand. It can help firms that have basic competencies in technological innovation, particularly small, medium and start-up businesses. It’s a one dollar-for-two scheme. The Government will grant one third.

We’ve come in for some stick over this. I want to explain our decision as follows.

In New Zealand all research, or science as the tax law cutely labels it, is immediately expensible. But only development in the revenue account is treated that way. Development on the capital account must be depreciated. So the tax break still arrives, but later. It is there that New Zealand is different, and that is what led to our pre-election policy.

The problem that officials have is deciding how to both draw and enforce the line between development and the rest of business. Australia has 46 pages of law and a special board to manage that. If we mismanage that, the cost to the Crown could be high indeed. More importantly, the cost comes without any certainty that the money goes where it's needed. You can't be sure how much of the "development" being expensed is genuine. It is therefore low quality spending (or tax breaks), not high quality.

Hence the grants scheme, capped at $100,000 per business, for new expenditure only, but open to all enterprises. If the money gets spent, we’ll increase it. But if the money gets spent then private sector expenditure on R&D will have increased by 10 percent. And we will have reached young companies who couldn't get an immediate tax break because they are not yet in profit.

If a business receives a grant, the effect is the same as a tax break for capital account development of 100 percent. For all other R&D expenditure it rises to 150 percent. Please think on that.

Two more things. The first is that we don’t believe we have the franchise on wisdom on this. The grants scheme will be kept under review – permanently. Work on what we might do in the future on tax deductibility, or accelerated depreciation, continues. Your feedback, to me, to Michael Cullen, to the Deputy Prime Minister, or to the Prime Minister, is welcome, as is any advice you wish to offer SIAC.

Last point. This policy is about R&D, not taxation. The taxation issues of this country will be addressed in a separate review, the results of which will be taken to the 2002 election. This policy was to answer the question “how can the Government best support and increase private sector R&D investment”. It’s the first time any Government has seriously asked that question. We did. We are engaged. Our answer is the grants scheme. It starts on 1 September. We have our own R&D to do on this issue, and we will do it as the months go by.

Let me leave that issue aside and await questions.

Let me talk about the opposite end of R&D - the public sector, not the private sector. Basic and strategic research, not pre-commercial development.

The Budget increased funding for basic research. That comes through in two areas:

The New Economy Research Fund has increased by $8.5 million and now totals $50.8 million - much of it redirected from the old Public Good Science Fund. NERF was created under the former National Government last year, as a product of the Foresight Project, to fund basic research that may in time contribute to the emergence of new industries. It recognises that some basic research in some modern technologies might lead to some commercial outcomes in years rather than decades. That is, some technologies now fast-track themselves into business.

There's some exciting stuff being funded through NERF, which had its first investment round earlier this year. There were more than 200 applications, asking for almost ten times the $11 million that was available. But that money is now going into 27 projects that have the potential for substantial returns to our economy. I'll give you one example, this one from the private sector.

XSol, a software company, is working on a database environment to give Internet-based businesses simultaneous access to a large number of databases. The need for this comes up because e-commerce enterprises are operating in a database environment designed for one-to-one communication. These businesses need to talk in real time to the databases of a large number of customers and suppliers - potentially thousands of them – without having to re-enter information all the time. XSol Ltd hopes to sort this out by creating a virtual database. The potential value of that is kind of obvious.

Basic research funding has also been increased through an extra $3 million for the Marsden Fund, which now has $25.8 million to invest. This will go into investigator-initiated research at the frontiers of knowledge that has the potential to be of international significance. There's exciting stuff going on here too, such as some pioneering early childhood learning research going on in my home town at Otago University. The Marsden Fund helps plug career gaps, so our best and brightest are not forced to leave the country. It also says that basic research is a basic tenet of a civilised society. Serendipity and curiosity have an important place.

Now to strategic research, where all the money is. The PGSF is no more. It has been split into several funds, so that we can have a bit more transparency. Overall funding has been increased here too, but only slightly.

Let me surprise you by saying that strategic research is the engine room of our innovation system, and will remain so.

Let me surprise you a second time and say that research into primary production is the engine room of our innovation system and will remain so.

The reason is three-fold.

Firstly it is in the area of applied biology that New Zealand has international leadership. That means, amongst other things, that that is where our recognition comes from, where international consultancies comes from and so on.

Secondly it is the area that supports what is still the basis of the economy. Primary production is where the big productivity increases come from. Primary production is where the big job growth numbers are coming from – forestry, horticulture, aquaculture.

Thirdly and most importantly primary production is where a significant part of New Zealand’s new economy will come from. Pharmacists, nutraceuticals, the gourmet economy, environmental remediation, marine jewellery – all of these frontiers have their origins in primary production. All of them can be grouped under that catch-all label of biotechnology and all have potential of consequence.

I need to say immediately that strategic research is not just about primary production. It is also about industrial processes, new materials, some service sector research, some social research and a heap of environmental research.

But I’m starting to run out of time, so I won’t go there beyond a mention. It’s time to wrap up.

You’ve set yourself the task of mapping our nation’s economic future. No minor task. My task has been to give you a feel for where the Government is coming from. I hope I have.

I hope you have gathered that you are dealing with a Government, a Cabinet, a Prime Minister who are focussed on innovation, focussed on transformation.

We have a role as leaders. We have a role as facilitators, partners, brokers and funders. We are keen to play those roles well.

Contact: Graeme Speden, press secretary, 04 471 9707 or 025 270 9055

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