Innovation nation? Searching for the plan to boost R&D
First published in the New Zealand Herald on Friday March 30, 2012
R&D – everyone knows we need more of it, so where’s the plan? asks Chris Barton.
The tropical downpour swamps gutters along Halsey St beside Auckland’s Viaduct Basin, turning the deserted industrial zone a bleaker grey. Guests arriving at the North Sails building on Pakenham St West, shoes sodden, shake out umbrellas and climb the stairs.
Stormy weather for research and development (R&D). The 150 or so attendees cram into Nextspace’s converted loft. The atmosphere is convivial – wine, canapés and humidity – the air conditioning unit working overtime.
The event is to show off Nextspace’s new premises and Visual City, its 3D digital imaging for town planning. It’s also a showcase for knowledge-driven innovation -the major vehicle for economic growth that New Zealand needs to get on board. Successive governments have been banging on about the idea for more than a decade. Remember the Knowledge Wave? Chief scientific adviser to the Prime Minister Sir Peter Gluckman is upbeat.
“It is the symbolism behind this move that excites me,” he says. “There is now a real determination to genuinely transform Auckland into an innovative city.”Nextspace is billed as the first tenant in the “Wynyard Innovation Precinct” – a block of land bounded by Pakenham West, Beaumont, Halsey and Madden streets.
The $9.2 million project, part of the Auckland Council’s Long Term (2012-22) Plan, calls for “a major innovation precinct that will create, attract and grow world-class research, talent and technology based ventures.”
A gathering place for geeks to develop their brilliant ideas on cheap rents. Why? Well, there’s always the hope that one of them will be a Mark Zuckerberg sitting on the next big thing. Or that maybe collectively they’ll generate enough new business to bring significant growth to Auckland’s economy. If it works, the innovation precinct is supposed to generate some 2250 jobs in the area, creating direct gross domestic product (GDP) of $303.2 million. At full capacity it’s supposed to create nearly 4300 jobs Auckland-wide and $612 million in GDP.
On paper it looks good. But start-up companies can’t afford the rents such a desirable central city location commands, so about $7.1 million is needed to create 30,000m2 of office space and cover the rental subsidy. The plan involves refurbishing the Lysaght and Total Marine Services buildings on the corner of Halsey and Pakenham streets. Waterfront Auckland and Auckland Tourism, Events and Economic Development would pick up the tab and are working with the Ministry of Science and Innovation (MSI).
Build it and they will come, apparently.
The idea that technology parks, hubs or precincts can generate economic growth isn’t new. It’s based on “cluster theory” developed by Harvard Business School’s Michael Porter and the idea that it must be possible to mimic San Francisco’s Silicon Valley. Governments all over the world have spent up large trying to do just that. Most fail, but that doesn’t seem to stop them trying.
Gluckman argues that none of this promised economic growth is going to happen unless a real innovation “ecosystem” develops in Auckland.
He cites Waterloo, part of Canada’s “Technology Triangle”. With a population of 500,000, the region has developed into the second largest generator of start-up companies – 250 a year – in North America and is home to numerous research-intensive multinationals and other companies.
Gluckman says the business community, leadership, the university and government support created the ecosystem. The key component, he says, is Communitech, a network of 40 groups that support tech companies in the region.
“The physical headquarters is a refurbished building right in the middle of town – exactly like what might be envisaged for Wynyard Quarter,” he says describing a building with meeting spaces and offices for about 50 start-ups, plus a mix of other technology companies and service providers.
What Gluckman rather glosses over is the importance of three key economic drivers. The region’s technology boom began about 50 years ago at the University of Waterloo, which is now one of the world’s leading computer-programming schools. Waterloo is also home to BlackBerry pioneer Research in Motion. And Canada’s Technology Triangle offers a massive range of R&D tax incentives.
No such luck for us. The word du jour, “innovation”, is very much centre stage in Economic Development Minister Steven Joyce’s new uber Ministry of Business Innovation and Employment (BIE), but R&D tax breaks are definitely off the table.
“I’m against anything that categorises spending which isn’t actually R&D,” says Joyce. “I’m aware of the potential for that to become a bit of a rort which is why we changed it and instead went for direct funding.”
He’s talking about the 15 per cent tax credit for R&D activities introduced by Labour in 2007 and repealed by National in 2009. It was intended to address New Zealand’s low levels of R&D investment relative to other countries in the Organisation for Economic Co-operation and Development (OECD).
New Zealand business spent just 0.54 per cent of GDP on R&D in 2010, compared with the OECD average of 1.5 per cent. Overall R&D expenditure, including government, was 1.30 per cent in 2010 compared with the OECD average of 2.33 per cent. Our government R&D expenditure ranked 25th out of 34 OECD countries in 2007, dropping to 28th in 2010.
At the time, the Manufacturers and Exporters Association described the repeal of the R&D tax credit as “a huge disappointment for those in the productive economy”. The government replaced the tax credit with Technology Transfer Vouchers and Technology Development Grants.
For those lucky enough to get them, such grants can provide much the same benefits as a tax credit. In 2010 Christchurch-based Tait Radio Communicationswas one of the first recipients – getting 20 per cent of eligible R&D expenditure reimbursed. Tait, which invests up to 12 per cent of revenue each year in R&D, received the maximum benefit of $7.2 million over three years. Chief marketing officer James Kyd says the support enables Tait to get solutions to market faster – in this case its P25 digital radios and network equipment. The downside is that it requires the government to pick winners rather than using a more broad brush policy in which all companies can participate.
So what other mechanisms might Joyce use to lift R&D investment? Even after almost four years in government, the minister insists it’s too early to say. Joyce does, however, give an idea of the direction he’s likely to pursue when he describes what innovation means to him. “Innovation is pretty core to every business, so if you want to have competitive businesses and pay people more, the ability to be innovative, the ability to introduce new ideas to develop systems and services which are valued in the market place is crucial.”
In short, innovation that pays its way. But as some like Eric Ries, entrepreneur and author of The Lean Startup, point out, the word innovation is so overused it has become almost meaningless. The McGuinness Institute, a think tank, makes the same point in Science Embraced: Government-funded Science under the Microscope. “Innovation is currently a fashionable word, rather as productivity was in the 1970s. Whereas the latter was about improving throughput, innovation is about anything that improves on an old idea.”
McGuinness says the term “innovation” in both the name of the recently formed Ministry of Science and Innovation (MSI) and its vision – “to create a high-performing science and innovation system – is problematic. “Innovation should not drive science unless it can be defined, because if we cannot define it we cannot measure it, and if we cannot measure it we cannot manage it.”
Take Air New Zealand, which has won accolades for its innovative approach to everything from technical engineering, to seating arrangements, ticketing deals, chef-designed menus, customer service and marketing. “These are clearly all innovations, but are they all science?” asks McGuiness. “Science is too important to be confused with other aspects of enterprise.”
The loss of a focus on science is a widespread concern, with many pointing to the dropping of the word “science” in the name of the new ministry. Those concerns began with the dropping of the word “research” in last year’s merger of the Ministry of Research, Science and Technology (MoRST) and the Foundation for Research Science and Technology (FRST) into the Ministry of Science and Innovation.
“I’m concerned about the Marsden Fund, whether its importance will be realised in this new ministry which has obviously been set up to have a very business facing focus,” says Professor Shaun Hendy, deputy director of the MacDiarmid Institute at Wellington’s Victoria University and also an Industrial Research scientist. “Marsden priorities are much longer term than most businesses will be interested in. We would be really concerned if there was influence from the business sector about the types of science that got funded by the Marsden Fund.”
The $47 million fund provides contestable research funding for investigator-initiated “blue skies” research which is not subject to the government’s socio-economic priorities. Hendy says the new ministry shows a desire for science in New Zealand to focus on the short-term bottom line. “We know that more scientific research is needed to grow industry, manufacturing and exports. But large components of the science system are concerned with the broader view, such as environmental and health science research – areas that do not often deliver an immediate payoff but which can be immensely valuable over longer time frames.”
Professor Peter Hunter, Director of the Auckland Bioengineering Institute at The University of Auckland, expresses similar concerns. “We do not adequately fund basic science – without which there are no ideas to feed the innovation pipeline,” he says, nothing that just 8 per cent of applications to the Marsden Fund and the Health Research Fund get funded. “Many excellent ideas with potential economic, health or social benefit outcomes therefore go unsupported.”
He points out that New Zealand’s total public spending on R&D is about half of what it is in most small, advanced economies. “For New Zealand to be really serious about pulling its economy up on the basis of science and technology, it needs to double its investment in comparison to other countries.”
Another who has concerns about the new ministry’s name is Dunedin-basedAnimation Research chief executive Ian Taylor. “I fear the government has removed the word ‘science’ because they think it comes under the word ‘innovation’ and it doesn’t.” Taylor says innovation is essentially “doing something today better than you did yesterday”.
But that’s quite different from the process that led to the formation of Animation Research in 1989 – the result of a joint venture between television production company Taylormade Productions and the Computer Science division of the University of Otago. It set out to explore the commercial possibilities of harnessing a 3D ray-tracing renderer developed by the university. The outcome has been an array of 3D animated graphics that transformed sports coverage, beginning with the America’s Cup Challenge in San Diego.
Taylor, who is on the MSI’s Innovation Board, says the number one criterion for government investment in innovation should be creating high value jobs in New Zealand for talented 18-25 year olds. “I think priority should be placed on companies that are really committed to staying here.”
Taylor also sees a need to reduce red tape in applying for government funding – especially in the early stages of development. “We need to develop a funding area that is not risk averse. ”
Taylor speaks from direct experience. In the early development of Virtual Spectator for the America’s Cup, the company’s first $100,000 of funding came not from New Zealand but from Louis Vuitton’s Bruno Trouble. “It was a Frenchman on his boat on the Seine in Paris who said: ‘I love it. How much do you need and when do you want it?”‘ That’s the sort of agility Taylor says is needed to give New Zealand technology companies a leg up. What he’d like to see is a part of the new ministry, with a relatively small amount of startup funding at its disposal, given the authority and the power to be innovative.
Joyce is quick to allay concerns about the place of science in the new ministry and its business friendly stance. The Minister of Science and Innovation portfolio will not change. The ministry’s new name, BIE, is a working title and he’s considering whether there should be changes. There is “every likelihood” a key branch of the new ministry would be science and innovation “that wouldn’t look unlike the current MSI”. There are no plans to change the Marsden Fund.
Joyce maintains there has been a significant increase in government funding for R&D, rising from $912 million in 2008 to $1.117 billion in 2010, counting all R&D across all government departments.
The figures come from Statistics New Zealand’s biennial survey that asks researchers where their funding comes from. Research funding allocations in 2010 by department produce a slightly lower – $1.069 billion – total: comprising $664m from Vote Science and Innovation; $280m from Vote Education (Tertiary); and $125m from other government budgets (including $30m from the Ministry of Agriculture and Fisheries’ Primary Growth Partnership).
The significant change for the $773.7 million Science and Innovation budget for 2011-12 is the way in which the funds are now allocated by industry – biological, energy, environment, hazards and infrastructure etc – and core funding of $215 million for the eight Crown Research Institutes. What it means is the universities – whose relationship with the CRIs has been described as being like the Cold War – are bidding for a smaller chunk of the funding pie.
Joyce is also seeking Budget approval for two additional R&D projects. The “grand science challenges”, costing $60 million over four years, would involve multi-disciplinary groups researching problems of national significance.
The new ministry also wants $80 million capital and $20-$30 million a year in operating funding from the Future Investment Fund for the restructuring of Industrial Research. The plan, still in the design phase, is to create an Advanced Technology Institute in Auckland, Wellington and Christchurch focussing on high-tech manufacturing and services. The Auckland Council would like IRL’s Auckland head office to be in the Wynyard Innovation Precinct. Joyce isn’t opposed to the idea.
Joyce also wants to allay concerns that the new ministry’s innovation policy is focussed on short term returns. “The reality is you have got to have a strong science ecosystem to do these things and that means actually having a longer term view,” he says. “I completely understand the importance of the investment in basic science to ensure we have a good grounding for the rest to flow.”
Will it? Joyce clearly has a busy work programme ahead to build his innovation ecosystem. But some fundamentals – funding and a mechanism to increase our woeful level of R&D investment – still appear to be missing. It’s also not clear whether enough is being done to nurture young talent and whether the new business-facing ministry is paying enough attention to the engines of innovation, our universities.
“Our universities are funded at around half the income per student of Australian universities and at about one tenth that of the world’s top research universities,” says Hunter.
The real problem, however, may be expectation. “We need to accept that economic return on investment in R&D does not happen overnight,” he says. A good example is Fisher and Paykel Healthcare, which has taken three decades to reach annual operating revenue of $500 million since it started developing respiratory humidifiers in the 1970s.
“You can see things slowly improving. Our high technology exports are growing and you can see collaboration in New Zealand is increasing. They’re just not happening at rate they could,” says Hendy. Our biggest problem, he says, is one of scale. “As a country of 4 million people we don’t make best use of connections between people to put ideas together. We need to think like a city of four million people.”
Back at Nextspace, there’s an elephant in the room. The company was formed as a result of a “Spillover Agreement” attached to an interest-free $14 million government loan to 3D graphics company Right Hemisphere in 2006. The idea was to develop a New Zealand graphics software hub, but last year Right Hemisphere was bought by German software giant SAP. It’s a further reminder that creating economic benefits from technology takes time, picking winners isn’t easy, and that there is always a larger animal in the innovation ecosystem that can take those benefits offshore.
NZ spending on R&D (2010)
- Govt (excluding higher education): $629m, 0.34 per cent of GDP
- Higher Education: $802m, 0.43 per cent of GDP
- Business: $1.01b, 0.54 per cent of GDP
- Total: $2.44b, 1.3 per cent of GDP
- $7 billion: 2011 revenues of the Technology Investment Network 100 companies
- $5 billion: 2011 exports by Technology Investment Network 100 companies
- Technology Development Grants: for firms that conduct significant amounts of R&D. Grants cover 20 per cent of project costs to a maximum of $2.4m. Grants are for three years and are not tied to a particular project.
- TechNZ Project and TechNZ Capability: Provide 1:1 matching funding for defined projects and capability development.
- Technology Transfer Vouchers: To give firms access to research organisations. Provides 50 per cent matching funding, with a minimum total contract value of $60,000.