Thursday, February 28, 2013

Innovation - fixing the right problem

This comment first appeared as an op-ed article in the Dominion Post newspaper.

We hear the word innovation a lot lately.  Key multi-lateral economic agencies such as the International Monetary Fund or the OECD are telling policymakers, particularly in the major developed economies, that innovation is the key to solving the woes of weak economic growth in the wake of the global financial crisis (GFC). But any Government intervention in the innovation system must fix the bit that’s broken. The recent launch of the new Crown Entity, Callaghan Innovation is a step in the right direction.

Post GFC, economic growth in developed economies is subdued. In some countries, central banks have done most of the heavy lifting in terms of supporting demand.  But moving to a structurally higher level of growth is not just about monetary policy.  It is about structural reform including the regulatory environment, labour market, goods markets and access to trade.

It’s also about being more innovative.  That’s because in some countries the traditional sources of growth, such as exports in China and consumption in the US, need to change.  In fact they need to reverse:  The US needs to increase its exports and China needs to increase domestic consumption.

Economists will typically talk about a country's national innovation system to describe constituent parts of the system and, just as importantly, the linkages between the parts of that system.  In New Zealand, our national innovation system is made up of our universities, research institutions (including Crown Research Institutions or CRIs), the providers of skills, the stock of skills (or human capital) available in the economy at any given time, firms and entrepreneurs.

Describing it in this ways means we can start to think about where our strengths and weaknesses lie.  It also means that, assuming we agree we need more innovation, it helps us decide what we should do about it, and who should do it.

If the Government is going to invest in innovation, it needs to fix the right problem and contribute to higher economic growth, especially given the higher stakes in these straitened fiscal times.  We also need to ensure the fix better enables us to take advantage of the opportunities that are currently staring us in the face like our burgeoning economic relationship with China.

I think our universities, CRIs and a number of our firms do great research.  Think about biotechnology. New Zealand is a world leader and agriculture has been the driving force of productivity gains within the New Zealand economy.

Outside agriculture I think we have had only limited success in innovation, particularly in the commercialisation of innovation.  We've tended to always think of ourselves as being quite entrepreneurial.  I disagree.  Entrepreneurship goes beyond just simply having a great idea: it means having the capability to take that bright idea to market, thus turning it into a viable commercial enterprise.

To me, the link between research and firms, particularly entrepreneurs who can commercialise that research, is the greatest weakness in our innovation system.  To put it simply, it’s not the Research in R&D that’s the problem, it’s the Development.  That’s why I have always been against R&D tax credits.  They are expensive and aimed at research.  That doesn’t fix the fundamental problem.

The Government’s new Crown Entity, Callaghan Innovation, was launched to little fanfare, yet in my opinion, it could prove to be the most important economic development initiative in New Zealand in many years.  It has three areas of focus: to Motivate, to Connect and to Deliver.  It’s the building of connections between ideas, science and commercialisation that will create the greatest opportunity for a step-change in New Zealand’s economic performance. Should it prove successful, it will also prove that economic development is not just about how much money you spend on it.

The challenge now is for business to get in behind it.  Too often we look for Government to fix the problems of low growth, poor productivity growth and low wages.  The pathway to higher growth and higher wages requires a partnership between individuals with skills, businesses with aspirations and Government which creates the right environment for those aspirations to be fulfilled.  In launching Callaghan Innovation I think the Government has just taken a giant leap forward in creating a stronger environment for the commercialisation of innovation.

This is important because the commercialisation of innovation is critical to achieving higher economic growth. And higher economic growth is important in achieving better social services we expect the Government to provide us and the quality of life we aspire to, including our ability to afford the sorts of houses we want to live in and a comfortable retirement.