Hon Trevor Mallard
Minister for Economic Development

1 November 2006 Speech Notes

Embargoed until:9am

Beyond the valley of death: making innovation work

Speech to Capitalising on Research conference, Sky City Convention Centre, Auckland

Good morning and welcome to today's session - you have a very productive day ahead of you, and I'm already looking forward to hearing the results of the various discussions and workshops dealing with the theme of connecting research with innovation and business.

Yesterday, this summit worked through a number of issues associated with investment in research and development. This morning, I want to kick on from that by making some comments from an economic development perspective about what else might be needed to secure a return on any investments that do take place.

Scientists - whether they are in the Crown Research Institutes, the Tertiary Education Institutions or commercial enterprises – do tend to have a predisposition to what I would call "discovery".

Discovery is good. It is what keeps humanity progressing. It is what scientists train for and it is why we employ them.

Increasingly though, the economic development literature is saying that discovering new things - new explanations, new products, or new processes – is necessary, but it is only the start of the journey.

The new word that is emerging in that literature is “mastery”. Mastering how to convert a new discovery into a commercially sustainable offering is not necessarily harder, but it takes a lot more time, burns a lot more money, and needs a lot more linkages if it is to be effective.

Phrases such as "the valley of death" or that the hardest bit of the process of commercialising an idea is "the last ten per cent", try and capture this feeling -that the front end doesn’t achieve much unless it is effectively connected to the back end.

This is not a case of science push versus market pull. It is not new ideas versus problem solving. It means that the effective commercialisation of R&D has to be seen as an integrated system in which markets ultimately prove the worth of a new discovery, in which the merits of the science are fundamental in establishing that worth, but ultimately in which the strength of the innovation system is determined by its weakest link.

That is old hat, but we ignore it not so much at our peril, but at the cost of wasted resource and huge frustration.

Often, when an apparently brilliant new idea fails to fire, there is a tendency to blame the fickleness of capital markets along the lines of: They are too risk averse. Their investment horizons are too short term. They are too protective of past investments and don’t want existing assets put at risk by replacement technologies and that sort of thing.

So we explain the low penetration rates of R&D away by shifting the blame.

Now there may be elements of the truth in all of those things, but here’s the uncomfortable bit: it is their money that the innovator is asking for!

The challenge for all of us here is to work out a way of getting the connections right so that we can sustain a good idea through the valley of death.

It just so happens that when we are launching from a small and distant economy, the valley of death is longer and hotter and drier.

That is life, and as has been said many times before, it isn’t meant to be easy and it doesn’t owe us a living.

The point I want to make today, is that many of our companies have in fact crossed the valley of death. So how did they do it? Can others learn from them?

What can the government, the CRIs the TEIs, and business organisations do differently to make sure that more of them do it, or that they do it less painfully, or that when they do do it, the benefits to New Zealand are more enduring?

Our biggest risk in being a successful front end commercialiser of R&D is that we then pass the benefits of the leveraging of the discovery over to those who master it.

We need to capture the benefits of mastery, and I am not yet convinced that we are looking in the right places in trying to do that.

Innovation essentially occurs whenever a firm introduces a new product, process or technique, but such a basic description fails to convey what makes innovation special, and commercially sustainable.

I want to use this opportunity to discuss with you some of the current thinking around innovation and how critical innovation can be as a contributor towards economic transformation.

I don’t pretend to have all the answers, or for a moment consider that the government can achieve economic transformation on its own.

It will take a co-ordinated effort from entrepreneurs, government and researchers if we’re to further develop the economy into one that is high value, high skill, innovative and export-led.

Why is innovation important in all of this?

A single innovation can enhance the competitiveness of a firm, but an innovation system can shape the direction and performance of an entire economy.

Innovation and economic transformation are often viewed as processes or outcomes, but they are probably better described as systems.

Innovation can only occur when the institutional and organisational frameworks, regulatory systems, infrastructure and processes for diffusion of technology are mutually supportive.

The economic transformation themes are similarly interdependent. In order to grow more globally competitive firms we need innovative and productive workplaces underpinned by world-class infrastructure, a sustainable natural environment, and an internationally competitive hub in the form of Auckland.

A systems approach to innovation recognises that there are certain characteristics to innovation.

It must be pervasive across all sectors of the economy, not just high-tech areas.

It must also be cumulative in the sense that knowledge builds on previous learnings, and a new innovation can be adopted, adapted and improved on by other businesses beyond the person who had the first bright idea.

Collaboration is another key factor as innovation often requires a combination of technical and market knowledge that can only be achieved through research or industry partnerships.

Innovation is also uncertain (in terms of unknown outcomes) and risky (in terms of variable results). This in turn imparts a bias against private investment in innovative activity unless the government shares or spreads some of the cost.

For these reasons a successful innovation system will require more than occasional breakthroughs.

If we’re to capitalise on our successes and continue to progress to we need to nurture business growth, and strengthen research capability and industry-science links, but we also have to back that up with effective investment partnerships and market linkages. This is the missing back end that I have been talking about.

According to the recent Business Operations survey, innovation was widespread across all industries. It found that in every sector at least 40 per cent of businesses were innovative and that technological innovation was just as commonplace as non-technological.

There is no standard recipe for innovation; innovative ideas can arise from a diverse range of sources.

They can be high-tech and academic. Google started with an idea by two mathematicians to use "back-links" as a way of ranking the popularity or importance of a website.

They can be low-tech and market-inspired. For example, pre-paid mobile phones emerged unexpectedly in Ireland but like Google, quickly went on to have a huge international impact.

And they can occur when good science meets smart business. An idea from DSIR researchers about how to warm and humidify air as it’s pumped around the body enabled Fisher and Paykel to become a world-leader in human respirators.

These examples didn’t end with clever inventions or successful commercialisation, in each case the ‘breakthrough’ became a launching point for wider and more persistent innovations.

Google continues to introduce complementary services, other mobile networks soon replicated the success of pre-paid services in Ireland, and Fisher and Paykel Healthcare didn’t just add 20 more R&D staff last year, they sought to expand on the returns to research by spending an extra 25 per cent on their global sales network.

The cumulative and collaborative nature of these processes means that capitalising on success is just as important as making new breakthroughs.

Our innovation system needs to not only generate new ideas, but to also promote the development, uptake and expansion of our best ideas. To do this we’ll have to pursue three mutually supporting objectives.

We’ll need to scale-up the returns to innovation by fostering business growth and export penetration.

We’ll need to lift business R&D in order to encourage leading-edge innovations and the uptake of external knowledge.

And we’ll need to improve the flows of knowledge between universities, crown research institutes, industry bodies and firms.

Issues of scale and export penetration are critical as innovative businesses will need to reach larger markets if they’re to achieve higher and more durable returns on their investments in innovation. In many cases we will not scale up quickly enough if we rely on organic growth. The risk here is the foreign buy-out. A more proactive approach seeking in-market partnerships with foreign companies can be the catalyst that produces the win-win, the leveraging of the innovation, and the durability of the returns to that innovation.

Some key government initiatives in these areas are the Venture Investment Fund which provides capital for innovative and ambitious companies; and the beachheads programme which links New Zealand companies into global connections and supports them to establish and expand offshore operations. We have also expanded the market development assistance scheme to help more firms break into offshore markets.

Business R&D is a key driver of innovation within firms for two reasons. First of all, the knowledge gained from performing R&D can spark leading-edge innovations.

The discovery of this kind of ‘new-to-world’ or ‘new to industry’ innovation can generate significant spillover effects as more firms are in a position to adopt or improve on the initial application.

Secondly, the learning process involved in carrying out R&D can enhance the ability of a company to pick up on or contribute towards external knowledge and innovations such as those generated by public research institutes.

New Zealand’s business R&D intensity of 0.5 per cent of GDP places us a full percentage point below the OECD average.

New Zealand may be somewhat disadvantaged by our lack of R&D-intensive industries, but this doesn’t mean we can ignore the relationship between R&D, innovation and productivity growth.

The government is currently assessing the potential for an R&D tax credit as part of the business tax review, and possible changes to the existing suite of discretionary grants for business R&D. We have also been reviewing the suite of business assistance programmes.

Links between industry and science are critical as many forms of innovation require a combination of market knowledge and technical know-how which can’t be achieved by a business or research organisation working alone.

In some cases neither party may appreciate that an opportunity exists until they are able share this knowledge.

For this reason businesses and researchers will need to establish ongoing and long-term relationships, perhaps even before a research project is entered into.

Fortunately there are many channels for facilitating these flows of knowledge and expertise including joint ventures, spin-offs, licensing, research contracts, secondments, conferences, expos, informal contacts, and the supply of researchers and graduates.

These interactions are critical to economic transformation. Strengthening CRI-Uni-firm linkages is a key action towards achieving globally competitive firms, and is the reason why we organised today’s forum.

It is clear that today cannot be a one-off. We will need more than a shared agenda if we’re to capitalise on research.

This is the challenge which everyone here today must rise to - we have to create an ongoing culture of collaboration, appreciation and exchange.

We need to recognise we’re all part of the system, and though we all have different roles to play, we’re dependent on each other for success.

Innovation is pervasive, cumulative, collaborative and uncertain, but if we get the innovation system operating right, it can be a key driver of our economic success.

My final observation is that the system needs to be complete. A partial system will leave too many opportunities lost, and too much of the benefits gained to others.

I hope that today we can move towards filling in the gaps that might still exist, and identifying who has to do what to fill them.

My best wishes for your ongoing deliberations.

ENDS

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