Six Key Issues for New Zealand to Address
What are the critical success factors for fostering the growth of the knowledge economy? We list some key issues that New Zealand must address if we are not to be left behind.
Education
Learning impacts on earnings
Thirty years ago, Singapore, Hong Kong, Taiwan and South Korea were all low-income economies. How have they managed to bridge the income gap that once separated them from New Zealand and the rest of the OECD? What has made the difference? Economists now believe it wasn't that these countries were working harder, they were working smarter. All four invested heavily in education and training. These were the countries where parents encouraged their children into science and technology. These are the countries giving living proof that high educational achievement leads to economic growth. But education is not enough in itself:
Education without openness to innovation and knowledge will not lead to economic development.
(World Bank, 1999)
Given our aging population, life long learning is a must
Education is vital not only for children and young people. Because of New Zealand's aging population (the baby boom phenomenon), 80 per cent of people who will be in the workforce over the next 10 years are in the workforce already. In the next decade the numbers of young people aged 15-24 in the labour force is projected to increase by only approximately 40,000 (Statistics New Zealand, 1998a). The proportion of young people in the population is projected to decline until at least the middle of next century - a trend that has been apparent since 1976 (Statistics New Zealand, 1997b). It is critical that middle-aged and older people in the workforce also have access to education and training.
One of the ways to ensure access to leading-edge knowledge is to train, retain, and attract the best people. The most significant lessons of the new economics in relation to education are:
- It is a lack of investment in human capital, not a lack of investment in physical capital, that prevents poor countries from catching up with rich ones. Educational attainment and public spending on education are correlated positively to economic growth (Barro and Sala-i-Martin, 1995; Benhabib and Spiegel, 1994).
- School quality measured, for example, by teacher pay, student-teacher ratio, and teacher education is positively correlated to future earnings of the students (Card and Krueger, 1992).
- Education is important in explaining the growth of national income. Life-long learning is also crucial (Aghion et al., 1998).
- People with human capital migrate from places where it is scarce to places where it is abundant (Lucas, 1988). "Human capital flight" or "brain drain" can lead to a permanent reduction in income and growth of the country of emigration relative to the country of immigration.
We need more technical graduates
In New Zealand, the proportion of technical graduates, especially at masters and doctorate level, seems to be low in proportion to the importance of the technology to the economy and society in general, as Table 4 shows.
In the field of information technology, this situation came to a head when the American software giant Motorola first considered whether to open a factory in New Zealand employing 400 highly skilled people to produce chip design, smart technology, and other software products. Desiring to hire 100 graduates a year, Motorola stated its intention to interview at least 1,000. But New Zealand produces a total of 1005 graduates per year in all relevant disciplines (NZ Vice Chancellors Committee, 1998). In other words, one corporation needed to interview the entire country's one-year's graduate output for its own needs. In their current deliberations, Motorola is placing emphasis not only on being able to hire sufficient graduates with requisite skills, but on there being an education system which can assist with their on-going development, as initial skills become obsolete.
The total number of graduates for 1997 was 21,493 (New Zealand Vice Chancellors Committee nd). New Zealand graduates in IT related disciplines were only 4.7 per cent of all graduates in 1997.
Table 4: New Zealand Graduates in IT-Related Disciplines in 1997
| Field of specialisation |
Annual graduates |
| Computer science |
390 |
| Information technology |
33 |
| Information systems |
366 |
| Electrical/electronic engineering |
180 |
| Information engineering |
21 |
| Electronics |
15 |
| Total |
1005 |
Source: Vice Chancellor's Committee
Such figures, however, only tell part of the story. Other academic studies such as mathematics provide students with significant computer skills. It is clear that many commerce students have substantial information systems/technology papers in their degrees. Often the "practical" IT skills taught by polytechnics are more sought after by industry than pure academic qualifications. To advance progress towards a knowledge economy, reliable information is needed on the number of tertiary education places in relevant disciplines and the relationship between labour market supply and demand. This way government investment in education can be directed to best effect, and investors and employers gain a more accurate idea of the potential labour force available for their areas of need.
Practical as well as academic skills
In October 1998 the Government published Interactive Education: An Information and Communication Technologies (ICT) Strategy for Schools (Ministry of Education 1998). By the year 2002, this strategy envisages that schools in New Zealand will be:
- improving learning outcomes for students by using ICT to support the aims and objectives of the New Zealand curriculum and by providing ICT professional development for teachers and principals
- using ICT to improve the efficiency and effectiveness of educational administration
- developing partnerships with their communities to enhance access to learning through ICT.
Increase ICT literacy for students and teachers
In 1998 school principals in New Zealand reported that 58 per cent of primary staff and 33 per cent of secondary staff attended some ICT training. Probing more deeply, the statistics reveal that the education sector is lagging behind others in its use of computers and the Internet. In 72 per cent of our secondary schools, less than a quarter of the teaching staff have access to the Internet, while 56 per cent of school principals use email once a week or less (Information Technology Advisory Group, 1998). The figures for 1998 show that there was one computer for every 14 students in primary schools and one per eight students in secondary schools. While 83 per cent of primary schools and 94 per cent of secondary schools have some kind of Internet connection, the majority of school connections are a single user account on a stand-alone computer, connected by modem to a dial-up telephone connection (March, 1999). About a quarter of these machines are "mixed breeds" such as Acorns, BBC Micros, or 286 PCs.
These statistics show that there is a low penetration of computers and networking connectivity in schools in New Zealand. The problem starts in the teachers colleges, where until recently large numbers of graduates have never worked with a keyboard. There is no requirement for teachers to be ICT-competent in order to be registered. Teachers lack access to telecommunications networks, and consequently lack ICT knowledge. It is imperative that teachers are able to access courses which enable them to come up to speed with ICT and are provided with technical resources and support for on-going development: to keep them up to date.
ICT courses needed at school to encourage university study
Information and communication technologies does not qualify as a subject for Bursary at Year 13 (Seventh Form), which may have an effect on subject choice at first-year university level. There are many occupations that require computer knowledge, and a range of tertiary subjects that involve ICT. Therefore care needs to be taken in defining the scope of such a course to avoid making it too narrow or rigid.
Maori Success in the Knowledge Economy
Maori success in the knowledge economy is central to honouring the principles of the Treaty of Waitangi, particularly in respect of intellectual property rights, and full participation in society. This success will enable Maori to improve their well being, and provides a more solid foundation for national well being.
National well being and Maori well being are inseparable
National well being and the well being of Maori are inseparable. The more youthful and fertile nature of the Maori population, and the older and less fertile nature of the Pakeha population, means that Maori will be an increasing proportion of young and working age New Zealanders in the twenty-first century. Maori culture is unique to New Zealand. Maori participation in the knowledge economy provides an opportunity for New Zealand not only to promote Maori enterprises in the global economy but also to explore how this uniqueness can be used to distinguish New Zealand from other "western" societies and economies.
For Maori it is the "group" who owns important aspects of knowledge
Maori Relationship with Knowledge
The relationship between Maori and knowledge is different to that between Pakeha and knowledge. For Maori, it is the group (iwi or hapu) which owns important aspects of knowledge. In the Pakeha tradition the individual or firm owns knowledge. Maori place great importance on the concept of cultural property. These are the rights of cultural and ethnic groups to control of the knowledge and information created over generations by the group, and which should not be vested in an individual, and which in many instances are ineligible for protection under conventional intellectual property mechanisms.
These differences may present challenges to Maori as they become increasingly involved in the knowledge economy, and to Pakeha who seek to unilaterally use Maori knowledge. Maori desire to protect their knowledge, particularly when it is used for the commercial profit of other parties, (such as the healing properties of certain plants) and when their cultural knowledge (including images) is reproduced. These are not new issues for Maori communities. However, today's ease of reproduction and dissemination, in particular through the Internet, and the increased value of knowledge and content, have highlighted the problems faced by Maori in seeking to protect their property.
In many ways there is a tension between the objectives of an intellectual property rights regime and the aspirations of Maori in this respect. Equally there are pressures to keep intellectual property laws "separate" and, if protection is to be given to cultural property, to enact sui generis (stand alone) legislation (AJ Park & Son, 1997). As the Government is currently examining ways in which the existing regime could be adapted to meet some of the concerns of Maori, it is hoped that progress will be made in advancing appropriate use of Maori knowledge for both Maori and general economic well being.
Maori culture is very important for New Zealand branding
Unique Branding for Maori and for New Zealand
The more that Maori engage in discussions and debate around the knowledge economy, the more likely it is that some of the tensions between differences in the treatment of knowledge will be resolved. This is particularly important because, in addition to the commercial potential of particular aspects of Maori knowledge, Maori culture as a whole brands New Zealand as a distinctive South Pacific nation with a unique indigenous tradition. In global economies, and in Internet commerce, nation-based brand distinctiveness is a significant asset.
Branding through Maori imagery can take place only with Maori agreement
Maori music, art and drama are already used to brand non-Maori New Zealand enterprises - the All Blacks' use of haka, and Air New Zealand's use of the koru, Maori waiata and people. However, Maori have deep concerns over cultural misappropriation, and are of the view that any branding of New Zealand through Maori imagery must take place only with the active agreement of Maori.
Current Employment Situation a Recent Phenomenon
Traditionally Maori employment was concentrated in commodity-based (primarily agriculture) and manufacturing industries. The restructuring of these industries has led to the situation of the last decade where Maori unemployment has been over three times that of non-Maori unemployment. Maori are now concentrated in the community service and wholesale/retail sectors, as Figure 4 highlights.
Figure 4: Maori and Non-Maori Representation by Industry
As a result, between 1986 and 1996 the inflation-adjusted median income of Maori men fell more than the rate for non-Maori, from $16,300 to $12,900; from 88.7 per cent of the median income of non-Maori, to 79.3 per cent. (Statistics New Zealand 1997c). This explains in part why Maori families spend less money than Pakeha families on information-gathering activities, such as publications, computers and the Internet. Less too is spent on private education and the rate of participation in tertiary education is lower. (Te Puni Kokiri, 1998b). Hence increasing Maori participation in the knowledge economy is critical to reducing their economic and social disadvantage.
The knowledge economy offers opportunities to redress Maori disadvantage
The importance of upskilling Maori to participate in a knowledge economy is already recognised by iwi use of Treaty of Waitangi settlement funds to provide tertiary education for their people.
Maori have a history of early technology adoption
In this context it is important to remember that in the initial decades of European settlement Maori readily adopted diverse forms of European technology, ranging from guns to books. Maori responded actively to trading opportunities, firstly within New Zealand, and then to New South Wales. (Sinclair, 1959; Dell, 1987; Walker, 1986). In addition, the decline in Maori labour market participation has been a relatively recent phenomenon as until the late 1980s, Maori had a higher rate of labour force participation than non-Maori (Te Puni Kokiri 1999). Hence the issue now is clearly one of lack of access to relevant skill development and employment opportunities.
Needs to Change for Nation's Well Being
Maori and Pakeha population patterns make redressing the above problems absolutely imperative. The median age of the New Zealand population is 33.0 years, but for Maori it is a youthful 21.6 years. Between 1991-2011 the proportion of people in the labour force aged between 45-65 will increase by 73 per cent. (Statistics New Zealand 1995). Children under 15 constitute 37 per cent of the Maori population but only 23 per cent of the total New Zealand population (Statistics New Zealand, 1997c).
Maori participation vital for capability of New Zealand's future knowledge economy workforce
Given this, if continued disparities in educational achievement and rates of employment between Maori and non-Maori continue, they will have a marked effect on the level of capability in New Zealand's future knowledge economy workforce. Currently, in terms of key indicators such as income, educational achievement, labour market attachment, and consumption, Maori appear less likely to be able to participate in an emerging knowledge economy. As Figure 5 shows, at present only 6 per cent of people working in the IT field are Maori, only 1 per cent of Maori work in that field (March 1996), and only around 6 per cent of New Zealand's Internet users are Maori (AGB McNair). While more and more Maori information is appearing on the Web, indications are that it is accessed mainly by non-Maori middle-class academics and researchers.
Figure 5: Maori Participation in IT Occupations
It is clear that our future national well being is dependent on the rapid upskilling and empowering of Maori so that they can participate fully in building the knowledge economy. This is underlined by the fact that Maori culture and knowledge is important to the success of New Zealand as a distinctive brand in a crowded global market place.
Immigration and the "Brain Drain"
There must be no impediments to attracting knowledge workers
Immigration provides New Zealand with an opportunity to attract high calibre people with the skills and qualifications to contribute to the development of a knowledge economy. Given this, it is important that immigration policy does not present impediments to attracting the skilled people we require, or to being a desirable destination within the global labour market for skilled people. While immigration policies have attempted to address the country's economic and labour market needs, there is some evidence that they are not working as well as they might. Recent political debates on immigration policy have created more heat than light, and may have had the effect of turning away potential immigrants. There is anecdotal evidence that the points system may be too coarse-grained to attract the right kind of people to New Zealand and too slow to respond to changing market conditions.
New Zealand experienced a rapid growth in the number of immigrants from Asian countries in the early 1990s. But since 1996 immigration has declined sharply from countries that have been supplying New Zealand with knowledge workers, such as Hong Kong, Taiwan, and South Korea.
Recently, changes have been made to New Zealand's residency requirements that will recognise the experience of IT specialists and put less emphasis on their formal qualifications (Wells, 1999). This is certainly progress in the right direction but it is not sufficient to attract all the highly skilled immigrants that New Zealand needs.
Need to market New Zealand's desirable features
Because New Zealand pays knowledge economy workers relatively poorly compared to most knowledge-driven economies, knowledge workers from other countries intending to migrate or work here must trade off high earnings against other factors. There are many reasons why New Zealand might be attractive to knowledge workers:
- No capital gains tax. In the US, an American citizen can expect to pay 28 per cent federal tax and up to 5-10 per cent state capital gains tax when a business is sold.
- No estate duty.
- Telecommunications technology. As the test bed for many new technologies, New Zealand has an advanced telecommunications network that permits New Zealanders to do business anywhere in the world with high-speed links.
- "Most beautiful country in the world". People living in New Zealand are able to enjoy a lifestyle that is the prerogative of only the very rich in other countries. In an environment where a person can live and work anywhere connected to a telecommunications network, New Zealand represents an excellent environment to enjoy life while at work.
Developing knowledge industries is a way of retaining and attracting back bright New Zealanders
The loss of highly educated and highly skilled New Zealanders to jobs overseas is the other side of the migration problem. Well-educated people in New Zealand are twice as likely to emigrate as their counterparts in the United States and nearly twice as likely as those in Chile, according to the 1999 World Competitiveness Report. New Zealand's ability to retain skilled workers is similar to that of China and Venezuela, while countries such as the Czech Republic and Thailand are better able to retain their knowledge workers than we are (The Economist, 1999c).
In the year ended June 1999, permanent and long-term departures exceeded arrivals by 11,370. This contrasts with previous years' net gains of 16,770 and 450, for 1997 and 1998 respectively. While New Zealand only experienced a net migration loss in March 1997, the trend has been downwards since November 1995: a combination of reductions in immigrants, immigrants not settling as planned, and more New Zealanders travelling overseas long term and fewer returning. Permanent and long-term arrivals are down by 8.0 per cent in the year to June 1999. Permanent and long-term departures have increased 11.0 per cent in the same period (Statistics New Zealand, 1999b). It is likely that both the reduction in immigrants and the increase in emigrants are because of the attractions of employment opportunities in other countries that New Zealand cannot match. A consequence of these migration trends is a reduction in the number of people with the skills and knowledge to develop the knowledge economy.
There is an urgent need to rectify the imbalance caused by the loss of those educated New Zealanders, and to find ways of retaining and attracting back our graduates. India and Ireland are working actively to attract their high-tech expatriates back from Berkeley and London. Consideration should be given to an emigrant repatriation programme that would encourage highly skilled New Zealanders to return home. Rectifying this is the more urgent because of our aging population and our declining birth rate: now 10 per cent below replacement level.
Make New Zealand a desirable destination in the global labour market
New sources of economic growth and a strong base are necessary if New Zealand is to be competitive in a global economy. New Zealand needs to retain highly skilled people. We also need to attract people who are educated and who are willing to be resident here, people who will start businesses which employ others and to whom skills can be passed on to. Our immigration policy should ensure that it does not contain any impediments to attracting the skilled people we require to enhance development of the knowledge economy, regardless of whether or not they want to settle here permanently. To attract more skilled workers, Government needs to worry less about residency status, the nature of which can be decided later, and together with business, identify how to make New Zealand a key destination in the global labour market.
Research and Development
Ability to innovate a key competitive advantage
One of the most important determining factors in the knowledge-intensive economy is the speed of science and technology innovation. The world places a high value on the ability to innovate quickly. News of innovation and research is communicated around the globe in a split second. But how do we measure the production of new ideas? One approach is to look at a country's expenditure on research and development (R&D).
R&D affects the rate of innovation and provides a multiplier effect for an economy
Recent research reports show that the economic benefits from basic research are both real and substantial (Salter and Martin, 1999). Domestic R&D affects the rate of innovation and the quantity of knowledge that can be absorbed from others (Cameron, 1996). R&D funding explains why the United States leads Britain and Germany in manufacturing productivity (UK Department of Trade and Industry, 1998). Publicly-funded R&D can be viewed as an investment in a society's learning capabilities. From Finland to America and from Australia to Canada, every dollar invested in research has a multiplier effect on the macro-economy.
No nation can "free-ride" on the world scientific system. In order to participate in the system, a nation … needs the capability to understand the knowledge produced by others and that understanding can only be developed through performing research
(Salter and Martin, 1999).
In New Zealand, the Public Good Science Fund represents an investment in research, science and technology of about $300 million per annum. Some $20 million of public investment flowed through Technology New Zealand into the advanced technology arena, but of the nation's total R&D, only 1.3 per cent went into information technology (Braddell, 1999). According to the latest R&D survey, only 0.61 per cent of our GDP goes into government-funded R&D. This is less than the average for the OECD (0.76 per cent) but private sector investment is also very low. In 1995/6, New Zealand's total government expenditure on research was NZ$451 million, and private sector investment in research that year totalled NZ$250 million. However, when the IT sector alone is considered, the ratio of public to private investment in research was 1:3. Government expenditure on IT research in 1995/6 was NZ$4.6 million, while private-sector investment in IT research amounted to $15 million (MORST, 1997). In terms of total expenditure on R&D (both public and private), New Zealand is more than halfway down the OECD league table, with only 0.981 per cent of GDP going into R&D, as Table 5 reveals.
Table 5: Total Expenditure on R&D (as a Percentage of GDP) 1997
| Country |
% of GDP spent on R&D |
| Sweden |
3.594 |
| Japan |
2.829 |
| Korea |
2.791 |
| Finland |
2.711 |
| United States |
2.546 |
| France |
2.259 |
| United Kingdom |
1.900 |
| Slovenia |
1.695 |
| Australia |
1.672 |
| Canada |
1.555 |
| Ireland |
1.523 |
| Singapore |
1.489 |
| New Zealand |
0.981 |
| South Africa |
0.746 |
| Hungary |
0.723 |
| Brazil |
0.568 |
| Greece |
0.476 |
| Argentina |
0.368 |
| Mexico |
0.309 |
| Malaysia |
0.199 |
| Thailand |
0.180 |
| Indonesia |
0.092 |
| Venezuela |
0.006 |
Source: The World Competitiveness Yearbook, 1999
Government invests a lot in R&D … but not in key areas. Private sector investment lagging behind.
A point to note is that not all our private sector R&D expenditure may be captured in such figures, partly because of the lack of tax incentives, and partly because small businesses (which dominate our economy) may record their R&D as other expenditure, or do it more informally.
Government funded R&D drove America's economic growth
Recent US research shows that government R&D funding of the IT sector led to the most explosive economic growth the world has ever known (PITAC, 1999). It has given rise to dozens of billion-dollar industries (including the Internet itself). Businesses that got their original funding from US government R&D now produce computers, semi-conductors, software, and communications equipment that account for a third of the total growth in US economic production since 1992, creating millions of high-paying new jobs. Government-funded university research has trained most of America's leading IT researchers.
In the long run, [tax cuts] penalise efficient firms that can manage without them. That said, short-term tax-breaks can help kick-start an economic recovery or change in government policy
(The Economist, 1999b).
Many overseas jurisdictions allow expensing of R&D expenditure and some provide tax incentives allowing for additional offsets for R&D against income, including accelerated capital write-offs and other special allowances. The OECD (1997) found that Australia and Canada offered the most generous fiscal incentives for R&D, whereas New Zealand offered the least favourable R&D tax treatment. Table 6 shows that, after calculating post-tax and compliance costs, for every dollar that a private firm invested in R&D, the net cost in Canada was $0.71 for large firms and $0.50 for small firms. For Australia, it was $0.89 for both categories. By contrast, the comparable figure given for New Zealand was $1.13; however, it is not clear how the figure for New Zealand was derived.
Must be no tax impediments to R&D
Our low taxes overall may balance out those taxation incentives around R&D offered by countries such as Australia. For example, there have been recent reports that the presence of Capital Gains Tax in Australia is a major disincentive to investment. By contrast, New Zealand does not have such a tax and this should be more widely promoted to potential investors. Rather than move towards picking winners or supporting losers through the tax system, the principle of neutrality should be retained. However, Government needs to ensure two things, that the tax system is not creating any impediments to investing in R&D and that accurate data on investment in R&D is provided in order to decide whether the current system is in fact doing this.
Table 6: R&D Tax Treatment in OECD Countries, 1996 Incentive Potential (B-Index) (1)
| For every dollar invested it costs… |
Large firms |
SMEs |
| New Zealand |
$1.13 |
$1.13 |
| Germany |
$1.05 |
$1.05 |
| Iceland |
$1.03 |
$1.03 |
| Norway |
$1.02 |
$1.02 |
| Portugal |
$1.02 |
$1.02 |
| Mexico |
$1.02 |
$1.02 |
| Sweden |
$1.02 |
$1.02 |
| Greece |
$1.01 |
$1.01 |
| Belgium |
$1.00 |
$1.01 |
| Finland |
$1.01 |
$1.01 |
| Switzerland |
$1.00 |
$1.00 |
| United Kingdom |
$1.00 |
$1.00 |
| Denmark |
$1.00 |
$1.00 |
| Ireland |
$1.00 |
$1.00 |
| Turkey |
$1.00 |
$1.00 |
| Japan |
$1.01 |
$0.94 |
| Austria |
$0.93 |
$0.93 |
| France |
$0.92 |
$0.92 |
| United States |
$0.89 |
$0.89 |
| Australia |
$0.89 |
$0.89 |
| Korea |
$0.89 |
$0.81 |
| Spain |
$0.66 |
$0.66 |
| Netherlands |
$0.91 |
$0.61 |
| Canada |
$0.71 |
$0.50 |
| Italy |
$1.05 |
$0.41 |
Generally, information available suggests that New Zealand's R&D investment from the private sector is very low. A possible explanation with respect to tax is that, unlike other OECD countries, private investment in R&D in New Zealand is generally viewed as building capital assets for future income generation. As a capital investment, R&D in respect of information technology in the form of software can be depreciated over three years, while other forms of intangible property can be depreciated only if they come within certain specified categories of fixed life intangible property. However, full deduction for R&D expenditure is allowed for scientific research or where it can be demonstrated that development is directed towards ongoing modification of an existing product. The requirement to capitalise R&D investment may have a distorting effect and lead to under-reporting of R&D, or it may act as a disincentive to such investments. While this may have no effect in some industries, it may have a strongly negative effect on the software industry where there can be long lead times with some software development. If so, it will be a matter of some urgency to remedy it as part of New Zealand's advancement as a knowledge economy.
A survey of the world's top 300 international companies carried out for the UK Department of Trade and Industry revealed wide variations between countries in the amount spent on private R&D. The average investment was 4.6 per cent of sales. Denmark led the league table at 16.3 per cent, with Canada in second place at 10.8 per cent and Finland third at 10.4 per cent. US firms averaged 4.9 per cent, Japanese firms 4.8 per cent, with Italy at the bottom of the table on 2 per cent (The Economist, 1999a).
We must get the highest return from our R&D
Although the reforms in the science sector of the early 1990s have done much to improve the rate of return on New Zealand's investment in R&D, there is more that can be done. Are we spending our R&D dollars on the right things? New Zealand's approach, to create partnerships between public and private organisations to invest in R&D, has not so far been very successful. Is this the best approach to take? What can be done to increase the level of private investment in, and rate of return on, R&D?
A Culture of Innovation
Innovation needs a receptive culture
What makes some places of the world more conducive to innovation and job-creation than others? No amount of R&D and education will suffice unless there is a receptive culture. Culture does matter. Change-oriented, risk-loving cultures such as New Zealand would seem to have an advantage over conservative, risk-averse cultures such as Germany. The uptake of new technologies in New Zealand is more rapid and extensive than in conservative cultures. Yet, as The Economist noted in a special edition on innovation:
English culture has had a strong influence in America, Canada, Australia, New Zealand and even Hong Kong as well as in the British Isles themselves. Yet these countries have vastly different track records in innovation - with America top and New Zealand probably bottom.
(The Economist, 1999b)
Our natural innovation hampered by low R&D
New Zealand thinks of itself as having an innovative culture and is certainly a nation of early adopters. But as we have seen, our desire to innovate is hampered by our low level of research and development expenditure.
Part of the cultural question is how we regard entrepreneurs. Economist Joseph Schumpeter viewed the entrepreneur as an "innovator', a person who brings a new idea to fruition (Schumpeter and Opie, 1936; Lee, nd). By introducing an innovation, the entrepreneur can temporarily capture most of the potential profits that exist in that market. But entrepreneurship involves taking risks. Schumpeter described an entrepreneur of a new type as someone who:
- operates well when markets are not clearly defined
- can discover economic opportunities and information
- can translate these into new markets
- builds new markets and expands old markets
- connects different markets
- is an "input completer".
Our firms are too conservative about new technologies
In Ernst & Young's 1998 survey of New Zealand's 500 largest companies, nearly 70 per cent said they tended to be conservative about adopting new technologies; that is, they adopted them late or went without them altogether. A startling 86 per cent of the chief executives surveyed admitted they did not know what percentage of their customers would prefer to do business electronically. In response to one question, "In terms of new technologies, including Electronic Commerce, how do you see your organisation?" only 7 per cent said that they saw themselves as "innovators" (Ernst & Young, 1999).
New Zealand needs to grow entrepreneurs, and encourage risk takers.
We need to encourage entrepreneurs and risk takers
New Zealand has been working actively to foster industry clusters as a way of promoting and focusing new business activity. A cluster is a group of companies with close trading relationships who have recognised the benefits of working together to overcome industry-wide problems or to take advantage of opportunities overseas (Nolan, 1999). Even as they compete for market share, businesses learn from one another through joint research ventures and shared best practices. Producers learn from their suppliers how to reduce lead times and eliminate costs. Each successful start-up attracts other start-ups, which in turn attract more capital and skills and yet more start-ups. Clustering fosters the law of increasing returns and creates virtuous circles of growth and prosperity.
Industry clusters support innovation
This has become increasingly apparent in the clustering initiatives in New Zealand. Wellington's telecommunications, film, multimedia design, and earthquake engineering clusters have set the standard. Dunedin now has a cluster for advanced imaging and video editing. Christchurch's electronics manufacturing and software cluster attracts brain-power and creates synergies. Palmerston North has its education and research cluster and Auckland its Silicon Bay on the North Shore. A strong set of clusters will grow around sources of competitive advantage in biotechnology, information, electronics and communications, materials and intelligent technologies, and will attract companies and people to New Zealand from all over the world (Industrial Research Limited, 1999). There is a positive correlation between competition and productivity growth among sub-groups of the economy, such as business clusters (Blundell, Griffith, and Van Reenen, 1995; Nickell, 1996).
Creating a Venture Capital Market
Innovation helps attract global capital
Capital continually circulates in search of the best investment opportunities. Smaller, flexible economies such as New Zealand can attract capital seeking innovative business locations. Idea-driven innovation cycles in the knowledge economy determine an economy's position in the global hierarchy. The more innovative and intelligent a business location is, the higher its rank in the ladder of global investment. The ability to be on the leading edge of idea-driven innovation cycles determines one's rung in the global ladder of business locations.
Hi-tech innovation needs to be better supported by venture capital
New Zealand does not have well-developed venture capital and public capital raising markets, particularly for technology ventures. High-tech innovation has languished and ventures with excellent potential have been lost due to lack of business skills and properly applied capital. New Zealand is an innovation-rich but capital-poor country. "Good ideas can stumble because nobody is prepared to provide finance or venture capital" (Bradford, 1999).
Few people in New Zealand are experienced in managing portfolios of IT venture capital investments. Our sharemarket and our banks do not value technology companies highly. According to John Blackham, NZ Intellectual Capital Foundation, "The VC scene in New Zealand looks a bit like the Kalahari Desert. If there's risk involved, there are no reliable capital sources in New Zealand" (Sole, 1999). However, recent initiatives such as the No 8 Venture capital fund, managed by Morel & Co, and the New Zealand Stock Exchange's Hi-Tech venture capital market suggest a developing market is emerging. This market needs to mature quickly to make any significant difference to the current situation.
Some countries, such as Australia and the US, provide tax incentives to venture capitalists, such as being able to write off venture investment losses. Since 1981, Ireland's low corporate tax rate for all manufacturing companies and many export-oriented service companies, guaranteed until 2010, has attracted inward investment: 40 per cent of U.S. electronics investment in Europe since 1988 has gone to Ireland. Ireland now supplies 40 per cent of Europe's packaged software.
A private-sector solution, known as "Innovation Market" or IM, has been pioneered in Sweden. In simple terms, IM allows the public to trade in venture capital projects over the Internet. In Sweden, IM Managers help bridge the gap between innovation and finance, and embrace the entire business development process from the first business steps to listing. IM navigates growth companies around the failure/reconstruction cycle too often experienced in a traditional financing environment.
New Zealand's approach is to give overseas investors the very best business conditions, a sound fiscal and economic policy, and a flexible labour force. We must also provide the best conditions for venture capital to find innovative Kiwi companies.
Entrepreneurs must better understand the needs of investors
What else do we have to do to encourage a venture capital industry in New Zealand? Those who have capital to invest complain that would-be entrepreneurs seeking to borrow lack the necessary business skills, and expect to get loans without collateral and investment without having to give up equity. This suggests that local entrepreneurs need to have a better understanding of the venture capital system, while some kind of local conduit such as the IM is needed for small investors who want to put their money into new ventures.
Changing the Export Mix
Production and distribution of knowledge drives major OECD economies. We must know how NZ is doing
The economies of OECD countries are more heavily dependent than ever before on the production, distribution, and use of knowledge. Output and employment are expanding fastest in high-technology industries, such as computers, electronics and aerospace. In the past decade, the high-technology share of OECD manufacturing production and exports has more than doubled, reaching 20 to 25 per cent. Knowledge-intensive service sectors, such as education, communications, and information, are growing even faster.
Indeed, it is estimated that more than 50 per cent of Gross Domestic Product (GDP) in the major OECD economies is now based on the production and distribution of knowledge (OECD, 1996). Unfortunately it is not possible to get comparative New Zealand statistics in this regard. There needs to be an improvement of data captured in relation to the export value of knowledge-based goods in order for New Zealand to understand fully the present situation, and set goals for improvement.
We have too few hi-tech exports
Through the last decade the New Zealand economy has performed nearly on par with other OECD countries in terms of growth and productivity increases. But the export sector has failed to develop a high-tech segment similar to that of Australia, Ireland, and Finland. We continue to rely on commodity goods, such as agricultural products, for exports. In 1998 commodities made up nearly 50 per cent ($11.0 billion) of New Zealand's total exports of $22.3 billion, with agricultural commodities comprising around 30 per cent ($6.7 billion) of this (Statistics New Zealand,1999c). In contrast, New Zealand's IT hardware exports totalled $281 million (1.3 percent of total exports) while our exports of software and computer services amounted to $198 million, less than one per cent of all exports (March, 1999).
Primary sector products have relatively low rates of return for innovation. No matter how innovative our primary producers become, by competing in commodity markets, they will be unlikely to realise a high rate of return for their investment in innovation. In addition, commodity products are very vulnerable to changes in climatic conditions, the exchange rate and recessions in key markets. The value of our trade in commodities from December to February 1999, compared with December to February 1998, declined precipitously: wool by 22 per cent, paper and board by 24 per cent, meat by 10 per cent, and dairy products by 3 per cent (Statistics New Zealand, 1999c). For the managers of NZ Co., the issue is not how do we make this business more competitive, but rather how to reposition the company out of mature, declining markets into high-growth, sunrise markets. How can we create and foster our own equivalent to Nokia?
Internet will give our small firms access to international markets
New Zealand is a country of small firms: 85 percent of firms employ fewer than five full-time equivalents, 96 per cent fewer than nineteen (Statistics New Zealand, 1998b). The Internet is especially important in giving smaller firms access to international markets. It is the only cost-effective way for many such firms to engage in trade across borders. It is also important for larger firms, many of which now integrate on-line technology into their older proprietary electronic data interchange systems.
Electronic commerce increases market reach and decreases costs of maintaining customer contact
The evidence consistently points to some New Zealand firms using the Internet to increase exports. Some key conclusions of their experience are:
- electronic commerce applications are used far more intensively by exporting firms than firms supplying national markets
- these applications are the main way micro firms and most small firms can access overseas markets
- many small on-line firms export to several countries
- firms expect to export more, the more they use electronic commerce applications in their export activities because of increased market outreach and improved service standards
- no substitute exists for person-to-person contact in building a presence in overseas markets, but once established these interpersonal links are intensified and cultivated through on-line links.
Electronic commerce influences the direction of exports
Evidence is growing that electronic commerce influences the direction of exports. New Zealand's on-line links with Scandinavia are particularly strong, given its small population and relatively low historical importance to New Zealand firms and organisations. Links also are strong with other electronically enabled regions like North America and the UK. On the other hand, on-line links are much weaker with key trading partners in Asia, such as Japan and South Korea, which are not as electronically enabled as North America and northern Europe.
We still face particular challenges
Small, innovative companies in New Zealand face particular challenges that
restrict their ability to grow internationally and to remain based in New Zealand. These include restricted access to venture capital, lack of funds to invest in research and development, and insufficiently skilled management. The New Zealand market is small, and international markets do not perceive New Zealand as a credible source of high-tech products.
Aspiring high-tech companies must focus on and understand the US market
Aspiring high-tech companies must focus on the US market to make an impact on any aspect of the global industry. But there are major challenges for New Zealand companies intent on achieving and sustaining success in the US market. It is important to recognise the central role that the US plays in the IT industries. The industries are centred there, as are the main markets, distribution channels, and strategic players. The US market is highly diverse and expensive to reach. Competition is intense, with most of the world's leading companies having a significant US business unit. The market is fast moving, and the business environment is more litigious than that of any other country. In considering their most appropriate strategy for approaching the US market, innovative New Zealand businesses need to appreciate these basic truths if they are to be successful.
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