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Increasing Innovation - Areas for Focus


This Document is Archived


Overview - Advancing Economic Development

[ Last Updated 10 January 2006 ]


Distance from technology leaders and small size means that New Zealand policies need to be different in range and mix from those used in larger, less isolated economies.

  • To a significant extent, knowledge about new technologies is passed on through personal and particularly face-to-face contact and hands-on experience. Distance makes this more difficult and costly. Local R&D effort is crucial to adapting and using many of the innovations pioneered elsewhere.
  • Firms work within an interacting set of networks, institutions and policies. The quality of this "National Innovation System" will impact on the rate at which firms engage in innovation. Understanding how it works will help identify policy changes that will have the most positive effect on firms' innovation.
  • The Ministry, together with other departments, has commissioned a review of New Zealand's National Innovation System to identify its strengths and weaknesses and where adjustments and a shift in resourcing will have the most effect in stimulating innovation and productivity growth.

Domestic R&D plays a crucial role in the adoption of technologies from overseas. Business R&D is particularly important for its direct effects on economic growth. The wider benefits to the economy of business R&D gives a strong rationale for government support.

  • Businesses use R&D to increase their competitiveness, focusing on commercial applications. Countries that have higher rates of business R&D are also better at adapting foreign technologies to improve business performance.
  • There is good evidence that there are benefits to growth from business R&D beyond those which the firm captures.
  • The tax treatment of R&D expenditures has become more generous over recent years but, compared to many other OECD countries, little assistance is delivered through this means. The use of non-discretionary subsidies, usually delivered through the tax system, reflects the view that the acknowledged spillovers are unpredictable, and that a general raising of business R&D will have benefits.
  • The best evidence from recent international studies is that a dollar of government support for R&D will, over time, produce at least an extra dollar in private sector R&D expenditures.

Investment in physical capital is positive for firm profitability and in promoting economic growth more generally. Now that the labour market is tight, businesses can increase output and improve productivity by adding more value and investing in plant, machinery and equipment. Recent strong growth in business investment may be evidence that this is already occurring.

  • New Zealand's investment in fixed capital as a proportion of GDP has been below the OECD average for much of the last 15 years.
  • Australia has had above average investment in fixed capital, and this (after correcting for differences in sectoral composition) can explain much of why growth in labour productivity is higher in Australia than New Zealand.
  • New Zealand devotes a slightly higher proportion of investment to housing than other similar countries and has relatively low investment in ICT - which has been associated with productivity growth in the USA and Australia - relative to most other OECD countries. On the other hand, there is also an above average share of investment going towards productivity-positive machinery and metal products.
  • There is good evidence that investing in modern plant and equipment makes New Zealand firms more profitable. International evidence shows that investment in physical capital plays a significant role in promoting economic growth more generally, and that tax policy has a relatively strong impact on firm investment decisions.

Accelerating the use of ICT in New Zealand firms should raise productivity and increase their international competitiveness.

Evidence is mounting that ICT use explains much of the rapid productivity growth over the 1990s in both the US and Australia - two of the fastest growing OECD countries. ICT use made a strong contribution to multi-factor productivity growth (the ratio of outputs to all measured inputs) in the wholesale and retail trades, and in the finance industry in particular.

  • The more firms that invest in ICTs, the higher the rate of return to individual firms - because of the benefits of larger networks and the development of specialised skills.
  • Raising productivity through ICTs requires firms to make complementary investments in organisational change, skills and innovation - and for these to be complemented by the availability of suitably skilled employees and the provision of infrastructure.
  • While low labour costs over the 1990s added to employment growth, they reduced incentives for New Zealand firms to use ICTs to raise profitability.

Government can play a role in accelerating investment in productivity-enhancing ICT by:

  • providing a regulatory environment that supports broadband uptake and increases security in ICT use
  • contributing to network development through extending the range of services using ICTs
  • promoting knowledge of ICT and awareness of its benefits - for instance, by facilitating its use in education and in local communities
  • stimulating ICT development through procurement for its own service delivery - government is a large buyer.

The Broadband Challenge

Broadband Subscribers, 2004

Graphic of "Broadband Subscribers, 2004".

Source: OECD Telecommunications Database 2005

Many countries have identified broadband as a technology that will spur economic growth - through increased scope and speed of communications leading to new services (such as video conferencing), enhanced innovation and productivity. Broadband is expected to have a major impact at all levels, from residential and SME use through to major users such as multinationals, research organisations and government.

Strategies to enhance the take up of broadband vary internationally. Regulatory initiatives such as unbundling telecommunications companies' local loops increase competition in the residential and small business area. In a number of countries, governments have proactively invested vast sums, often with incumbent suppliers, to "wire the nation". Increasing demand through government procurement initiatives to provide broadband for schools, universities, hospitals and so on, reduces the technology and investment risks faced by operators and facilitates the roll out of broadband in areas where low levels of competition fail to provide sufficient incentive.

Some countries and regions have been able to benefit from alternative and competing infrastructure, such as cable television or power line companies, which have spurred competition and reduced prices to end users.

In New Zealand, a range of broadband initiatives are in train - in the regulatory environment the Telecommunications Commissioner has recommended a restricted form of unbundling.2 The government has, through Project Probe, ensured that medium speed3 broadband is available to almost all of New Zealand.

"Big business" use of very high speed broadband4 is inhibited by the high cost of services due to limited competition and the traditional business models of the incumbent operators.

The Advanced Research Network will make very high speed broadband services available to universities and research institutes nationwide. Other "commercial" users will eventually have access to the network for research purposes.

The Digital Strategy is proposing to part-fund local fibre rings in major urban centres, to enhance competition in very high speed broadband services and allow affordable access to major users.

2 The bitstream unbundling recommendation was restricted to a 128 kbps upstream service. MED's advice on the recommendation was that unrestricted access to the bitstream would spur competition and thus the quicker availability of advanced services.

3 Broadband is usually defined as speeds greater than 128 kbps. Probe has made available to all schools in New Zealand service at 512 kbps symmetrical and secondary schools up to 4 Mbps symmetrical.

4 Broadband between 1 Gbps and 10 Gbps is considered very high speed. The Advanced Research Network is set to provide this type of service to universities and CRIs.


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