NZ firms innovate more with R&D grants but overall innovation commercialisation is down, report shows

Monday 29th June 2015

Research out today shows that while getting a government research and development grant almost doubles the likelihood a company will introduce a world first innovation, there’s also evidence Kiwi firms are not good at commercialising their clever ideas.

The government’s Business Growth Agenda targets increasing business expenditure on R&D, which is low by OECD standards, to 1 percent of gross domestic product by 2018. The ultimate goal is to lift New Zealand's woeful productivity record and for Kiwi companies to make more profits, hire more people, and help grow the wider economy.

However, the research shows while there has been a shift toward more Kiwi firms engaging in R&D activity, fewer are introducing new goods and services and they’re also earning a smaller share of their revenue from innovative products.

“We have a lot of good ideas, but our weakness is when it comes to turning those ideas into commercial products," said Productivity Commission director of economics and research Paul Conway. "This suggests the innovation process hasn’t been working as well as it could.”

One of two research papers released this morning by the Productivity Commission, Motu Economic, and Public Policy Research, used Statistics New Zealand’s Longitudinal Business Database to measure innovative activity in Kiwi companies. The other studied innovation levels among firms that get taxpayer-funded subsidies compared to those that don't.

Both stop short of saying whether the controversial taxpayer funded grants are money well spent or a wasted effort.

Motu’s Adam Jaffe, lead author of the research on R&D subsidies, said it shows firms that received R&D grants in the previous three years were more innovative than similar firms by every measure and increased the probability of them applying for a patent by 55 percent to 65 percent.

Government support for R&D ranged from $33 million to $90 million per year between 2009 and 2013. The study examined two forms of R&D grants - the average capability building grant was $14,500 per year and the average project grant was $326,500 per year in 2012. Project grants had a much larger impact on innovation outcomes than capability building grants, which seemed to only boost innovation when accompanied by the other, Jaffe said.

Although more innovative firms were likely to get grants, the findings are in line with research in Japan, Canada, and Italy, that found positive impacts of public R&D subsidies on patenting activity and the introduction of new products.

Jaffe said further research, now underway, was needed to say whether the increased innovation activity among grant recipients then led to the ultimate goal of increased economic and income growth in New Zealand.

“This is not like snake oil," Jaffe said. "The government is implementing a programme which a number of different countries have shown to be effective and, in that sense, it’s reasonable to keep doing what we do and a basis to think this will make a difference.”

The other paper by Simon Wakeman and Trinh Le showed while R&D expenditure and activity is increasing across kiwi firms, innovation rates are dropping.

No one has a clear answer on why, although the commission suggests there may be a time lag between innovation and commercial rewards or, alternatively, innovation is either not sufficiently important to determine a firm’s economic performance or those receiving grants may be simply justifying that money by saying they are innovating, even when they’re not.

This apparent weakening of the link between R&D activity and commercialisation reinforces the need to better understand the impact of the government’s R&D subsidies, the commission said.

There are a number of other factors beyond R&D expenditure that need to come together for a firm to successfully innovate, it said.

Conway said business innovation included how firms combine new ideas with those of others and how they translate ideas into new goods and services that customers want, ideally in international markets.

An OECD paper estimates as much as 40 percent of New Zealand’s productivity gap compared to the OECD average is arguably the result of low investment in knowledge based capital, including innovation.

That’s backed by international comparisons that show New Zealand ranks highly in generating ideas but Kiwi firms invest relatively little and perform poorly in commercialisation.

New Zealand slips down the OECD rankings the further it moves down the chain from idea generation to commercialisation. Wakeman and Le’s paper shows the share of New Zealand firms engaged in innovation can range from 0.2 percent to 40 percent, depending on which aspect is measured.

The research showed smaller firms had higher rates of innovation and generally younger firms were more likely to innovate than older ones. R&D and patenting activity was highest in the manufacturing industries while firms in the services sector were just as, or more likely, to introduce new organisational processes and marketing methods.

BusinessDesk.co.nz

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