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A National Innovation System for New Zealand

Thursday, 22 June 2000, 9:35am, Annual Meeting of Senior Executives of University Research Offices and University Companies, held at Massey University, Palmerston North.
Speech Notes

Weaving Together the Strands:
A National Innovation System for New Zealand

Researchers, in whatever discipline, know that any complex phenomenon is the product of a number of components, each with its own complex logic but nevertheless entwined with the others.

So it is with a national innovation system.

‘National innovation systems’ are the analytical constructs that analysts and practitioners of science policy have in recent years begun using in order to make sense of their area of study.

At the heart of this construct are three assumptions:
 that the conduct of science and research can be understood to connected by way of a ‘system’ with many inter-connected parts;
 that underpinning the workings of this system is a particular culture -- an ‘innovation’ culture, with its own inherent values; and
 that this system for a variety of reasons can be thought to exist in distinct forms – of varying levels of developments – from nation to nation.

The nationally specific aspect of ‘innovation system’ creates both opportunities and challenges. On the one hand, the emerging global economy provides New Zealand the opportunity to tap into the global knowledge base. We currently only carry out around 0.13% of the total global investment in science and technology. That means that there’s 99.87% that we don’t do!

On the other hand, to gain access to this global knowledge base we need to build our networks and develop collaboration opportunities. Studies show that those countries with the strongest performance in research and development themselves are also those who can most quickly and effectively assimilate overseas innovations. We need to improve the ability of our scientists and technologists to tap into the global knowledge base.

A strong and coherent national innovation system is therefore valuable not only in its own right but it also functions as our entry-point to an overarching global innovation super-system.

In speaking to you today I want to emphasise three strands of New Zealand’s national innovation system, all of which this Government aims to develop and enhance. These are:
 Private sector investment in research and development;
 The tertiary sector’s contribution to innovation; and
 The interface between these and other components of the system.

THE ROLE OF THE PRIVATE SECTOR

New Zealand’s total R&D expenditure as a percentage of gross domestic product is only half the average for countries in the OECD. This Government is doing its part to improve this by restoring the target of raising public funding of R&D to 0.8% of GDP by 2010.

But we also need to improve New Zealand's private sector investment in research and development, which is very low by international terms -- about one quarter or at best one third of the western world average. This Government has been determined to support business investment in R&D, rather than just complaining about the lack of it.

Labour's pre-election policy was to use tax deductions to stimulate R&D in the private sector. We proposed to allow full deductibility of R&D in the year of expenditure. But with the advice available to us in Government, and some feedback from innovators in the business community, we have decided a grants scheme is likely to be a somewhat more effective policy.

There has been a bit of criticism of that decision in the last week or so, much of it based on a poor understanding of the tax situation for R&D, both in New Zealand and internationally.

It is claimed has that Australia allows a 125% deduction of R&D spending and Britain 150%. Why can't New Zealand offer just 100%?

Well, we do. R&D costs on a company's revenue account are immediately 100% deductible. Scientific research costs on capital account are also immediately 100% deductible. The difference comes with some other capital expenditure on development, which is currently depreciated over the life of the asset rather than decuctible immediately. It is still, ultimately, 100% deductible, so the difference is one of timing.

We did consider allowing immediate deductibility of those R&D investments that are depreciated. But it became clear that a grants scheme has some significant advantages over that.

For a start, it allows us to help innovation-based businesses at the stage they most need help – at start-up. Tax breaks won't necessarily allow that. They're no use if you're still in a loss-making investment phase and you're not yet paying tax. Start-ups need cash now, not cash later.

Moreover, wity grants the Government knows that it's actually getting some new R&D for the taxpayers' money it's investing. With tax breaks, the overseas experience is that while you might well get some new R&D happening, you also get a lot of reclassification of existing business activity in pursuit of tax relief rather than innovation.

This in turn leads invariably to escalating compliance costs as tax regimes that allow more than 100% deductibility grow complex layers of tests and qualifications to combat creative reclassification of activities as R&D. To protect the integrity of the tax base, the hurdles on the path to a deduction can't be too easy to leap. So you end up with companies failing to pursue the higher deduction, even if they might be eligible, because of the compliance costs involved in securing it.

I would also point out that the Australian and British schemes don't come without strings attached. The UK does not offer 150% deductibility of R&D across the board, as commentators have tended to suggest. In fact only a segment of companies are eligible, and then only for new and additional R&D.

The Government will be spending $11.8 million in 2000/01 on the new Grants for Private Sector Research and Development Scheme to assist firms with the costs of new research. The scheme will fund up to 33.3% of the R&D costs firms incur in carrying out R&D for a particular project. For some companies receiving grants that equates to a 150% tax write-off.

The aim is to increase the levels of research and development investment in small to medium size New Zealand firms. The focus will therefore be on firms that would otherwise have difficultly undertaking research and development.

For example, a food manufacturing company decides to automate some of its processes to overcome the scarcity of seasonal unskilled labour. The Grants scheme can assist this company to develop a research and development project to evaluate prototype options before commissioning the final plant.

The official launch of the Grants for Private Sector Research and Development Scheme will come from the Foundation for Research, Science and technology in September.

THE ROLE OF THE TERTIARY SECTOR

Alongside that however the Government is also committed to strengthening research endeavours in the public sector. This means more money but also a better-focussed approach.

The Public Good Science Fund is being split, with $36.7 million being transferred into the New Economy Research Fund and the remainder shared between five new research output classes that address the Government's economic, social and environmental goals:
 Research for Industry - increased by $2.1m over the amount invested through the PGSF last year;
 Mäori Knowledge and Development Research - increased by $500,000;
 Health Research - increased by $300,000;
 Social Research - increased by $600,000 – something that, with my background and my other portfolio, I'm particularly pleased to see; and
 Environmental Research - increased by $400,000 million.

The New Economy Research Fund gives researchers the opportunity to do some creative thinking about how tomorrow's wealth will be created differently from today's. This was a step in the right direction by the previous Government but with only $11 million dollars of new money going into this fund it is at the smaller end of the scale. This Government has increased NERF to $50.8 million, incorporating $8.5 million new money as well as the funds from the PGSF.
University research will be pleased to know that this Government is committed to growing the Marsden Fund over time. The Marsden Fund supports the curiosity of creative individuals who want to understand why and how things work in our natural, physical, social or cultural world. This type of curiosity-driven non-strategic research is a vital part of our overall set of science portfolio investments. We have increased the Marsden Fund by $3 million in 2000/01.

An extra $3.7m is also being distributed to ten Government departments to boost support for policy related research projects of cross-departmental interest.

The quest to ensure that this, and the other money we aim to invest as we head towards our target of 0.8% of GDP by 2010, is spent strategically will continue at the highest levels of policy development. We are currently establishing the Prime Minister's Science and Innovation Advisory Council to draw together the elements that combine to create innovation in New Zealand and identify how these can be best applied to create a future that benefits all.

Meanwhile, I will be shortly receiving the first initial report from the Tertiary Education Advisory Commission. This report will indicate the shape of their work programme of the next few years. High on that work programme will be the task of taking another look at the way Vote: Education funds research to ensure that this:
 Promotes excellence, and allows institutions to focus on their areas of greatest expertise;
 Fosters cooperation and collaboration within the sector, and with researchers and research-users beyond the sector; and
 Ensures that all degree-level programmes are built on strong foundation of an active research environment; and
 Gives Government and the public the assurance that the phenomenal research capacity of our tertiary sector is being used in ways that meet the needs of our society and economy.

Some researchers feel threatened by that last criterion. They ask, why can't you just leave us to decide these things for ourselves?

I tell them: because society has changed its mind.

Society has decided that we may have left research priorities predominantly in the hands of academics last century and that may have worked well on the whole. But times have changed.

Knowledge is now a very important item throughout our society. Research is now in many cases extraordinarily expensive. And the expansion and multiplication of knowledge areas means that no institution, or country, can be expert in all of them.

What we need therefore is a greater emphasis on reinforcing excellence and a more strategic approach to our research agendas. It is my intention that the funding system for tertiary research will promote both of these considerations.

I think we can be clear that this will entail a certain amount of concentration in Vote: Education funding for research. However there is a tension here between the need to concentrate on our strengths to ensure research excellence, and the need (which I have already stated) for a sufficiently strong research base to underpin all degree offerings to ensure teaching excellence.

We need to strike the right balance, and here the evolutionary approach that this Government have chosen to take to tertiary education is the right one. Initially I would envisage that concentrating research funding on the development of centres of excellence would focus whatever additional money we are able to deliver for Vote: Education research. We want to avoid unnecessary disruption to existing degree programmes by having departments lose funding because departments at other institutions are seen as the premiere research centre for a given discipline.

However, the very practice of seeing departments as the primary site of consideration may also need to change, and this too offers to solutions to the perceived trade-off between research concentration and a comprehensive research underpinning.

Increasingly the focus of evaluations of research performance is going not on academic departments but on the research team – a group of specialists working together in a sub-field of their discipline. These research teams are more likely than entire departments to perform as "centres of excellence." This is particularly the case in the sciences and engineering, but it also hold true in other disciplines.

And, excitingly, there is no need for the composition of a research team to be confined to a single department or even a single institution. If we can recognise this, and indeed use technological and other resources to facilitate its occurrence, then we will be well on the way to a situation where centres of excellence do not contradict with a strong research presence across all degree-level departments.

Reviews of research funding currently underway in other countries like the United Kingdom and Australia are very aware of the need for funding arrangements to encourage, rather than discourage, research collaboration across institutions. Consideration is being given to assigning greater weight to research proposals that draw on the strengths of researchers across institutions.

I believe we need to consider how this could be done in New Zealand. In this, I look to our research community for assistance. The Tertiary Education Advisory Commission is very clear that they are open for submissions at any time and I urge the university research offices to participate energetically in this process.

I have told the Commission I want to be in a position later this year to take to my Cabinet colleagues some initial measures for research funding for tertiary education in Budget 2001 (for implementation in the 2002 academic year) that will orient the sector towards a system based on cooperation and collaboration, and diversity with excellence. I want you to help me achieve that.

INTERFACE WITHIN THE SYSTEM

Government involvement in the national innovation system is not just simply about pouring money into the system, or about Pete Hodgson and I working in our different silos to ensure the best possible performance from the organisations that report to us. As I suggested when I started speaking this morning, it many ways it is the linkages between areas of research effort which are most important to our success.

I have already indicated that TEAC will be focussed on creating a climate within our universities of positive engagement with one another, with business and with CRIs. However, there is also a need to help firms to make connections with overseas markets, with universities and CRIs and with other firms with similar or complementary interests.

A key element of this in creating the right framework for effective technology transfer.

One of the most successful existing schemes to assist technology transfer has been Technology New Zealand. This agency works to increase the ability of firms to adopt new technology and apply this for business growth. It co-funds qualifying businesses to assess their technology needs, investigate new technology and place research graduates in industry. The Technology for Business Growth part of Technology New Zealand encourages firms that are good at technological innovation to move towards high-value, high technology markets.

For example, an engineering company is well known for its prefabricated steel work. It sees an opportunity to enter a new market that requires light, high tensile steel. It needs a new cutting method and Technology New Zealand can assist this company to develop an innovative, non-heat, and non-abrasive method with the help of an external partner.

This Government is increasing expenditure on Technology New Zealand by $8.5 million in 2000/01, taking its budget to $24.7 million. This will assist New Zealand companies to enter new hi-tech, high-value markets, and it will also provide the basis for valuable linkages between researchers and business.

CONCLUSION

In speaking to you today I have wanted to emphasise the different strands of research effort in this country and how they come together. We need to start thinking very consciously in terms of operating in a national innovation system.

I believe the Science and Innovation Advisory Council will help to foster that way of thinking.

I believe work of the Tertiary Education Advisory Commission will also help to foster that way of thinking.

As will the investment an extra $43.6m in research, science and technology, one of the largest increases in a decade.

As will the unprecedented injection of $20.3m to encourage and partner private sector research and development

The Government's renewed commitment to a target of 0.8% of GDP invested in R&D by 2010 will certainly contribute.

This is government that really believes we can be an effective knowledge society, but one that also believes this will require active investment and engagement by the government.

I want to thank the university research offices and crown companies senior executives for inviting me here today, and I urge you to work with us as we seek to turn that vision into a reality.

ENDS

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