Opinion: NZ's R&D falling into "valley of death"

By Andrew Macdonald

Friday 4th June 2004

It's unlikely that poet, Alfred, Lord Tennyson, had business research and development (R&D) in mind when he penned his famous ode about the Battle of Balaclava.

His poem, Charge of the Light Brigade, 1864, set out the infamous cavalry charge in a Ukrainian "valley of death" during the Crimean War a decade earlier.

Now those evocative words are being used to describe an alarming gap between public and private sector R&D in New Zealand.

Who would have thought?

Institute of Professional Engineers (Ipenz) chief executive Andrew Cleland certainly did.

"Our problem is that private-sector investment is so low that the public sector must take on the role of developing the private sector's capability in market-led research," he says in an Ipenz report.

Dr Cleland isn't alone - Economic Development Ministry (MED) officials have expressed similar concerns.

The so-called "valley of death", they say, is one of the factors inhibiting New Zealand returning to the top ten OECD (Organisation for Economic Co-operation and Development) countries within 15 years.

Surprisingly, Finance Minister Michael Cullen didn't mention the top-ten OECD club of wealthy nations in his 2004 Budget, or the sustainable annual growth of 4% needed to join it.

He did, however, earmark $500 million for economic development initiatives over the next four years, including $212 million for research science and technology.

But, does that money address the underlying cause of low private sector R&D investment, and who cares if the public sector leads the way?

Berl senior economist Ganesh Nana says the concerns expressed by MED and Ipenz are nothing new.

"One would say it's not isolated to New Zealand," he says, noting other small economies face similar issues.

The public sector leads R&D funding because this country doesn't have enough big firms to do so, but he says the Government also has a "blue sky" research obligation.

Blue sky research is not tied to a specific application or industry and is aimed at increasing fundamental knowledge.

By contrast, R&D in the private sector is typically done to generate financial return, usually long-term.

"The returns are somewhat hit and miss and therefore... it falls on the public sector to fund some of that R&D, a fairly large proportion of it.

"For some firms that (R&D investment) is too risky and they don't want a bar of it - but as a nation we need it."

Nana says New Zealand has traditionally grappled with aligning public sector R&D with industry demand, a gap not easily bridged.

Foundation for Research, Science and Technology (FRST) investment operations boss Peter Benfell says there are more signs of public-private sector R&D co-operation.

FRST - the Government's arms-length research funding agency - has helped a growing number of research tie-ups between universities, crown research institutes (CRIs) and industry.

"We've been very strong on wanting that increased linkage between the research teams... and the people that will in the longer term use that research," he says.

"We're very pleased with the increased engagement that's going on... (and) I accept that it would be good if it improved more."

One way to achieve that, says Dr Cleland, is with an outcomes-specific national research priority list to ensure accurate targeting of Crown research funds.

Another option is making R&D more attractive to industry:

"It is probably more important to get the implementation of our tax treatment for R&D expenditure right, thereby avoiding black holes, than to create artificial incentives as happens in Australia," Dr Cleland says.

Then, says MED chief executive Geoff Dangerfield, there's touting private sector R&D success stories for others to emulate.

Nine-year-old Wellington outdoor clothing firm Icebreaker is an example, its managing director Jeremy Moon has a talent for turning R&D in to commercial success.

There are others, too.

Take Christchurch-based Tait Electronics, which has generated an economic payback of between $2.50 and $14 for each R&D dollar invested.

This week, Hortresearch announced that future benefits - new and novel pipfruit - of New Zealand's $20 million world-leading apple breeding research will be put into a joint venture partly owned by Australians and Americans.

Industry insiders say this will help fund government scientists wanting commercialise research, one of the problems faced.

Despite the good news, MED industry and regional development deputy secretary Lewis Holden says expenditure on R&D is still below OECD levels.

New Zealand's total expenditure on research, science and technology (RST) was 1.15% of GDP (against an OECD average of 2.25%).

Government expenditure on RST was 0.54% (0.64% for the OECD average), while the private sector's was 0.42% (1.44%).

Holden warns that these figures can only be taken so far.

"A huge proportion of R&D internationally is undertaken by a few large multi-national firms... (and) we don't have any of those firms," he says.

"You might find the private sector R&D spend in New Zealand isn't necessarily that different from that elsewhere in the OECD."

It may simply reflect that R&D is not the most sensible form of investment given New Zealand's industrial structure.

Both Holden and Nana say R&D is inextricably linked to long-term economic growth and lifting New Zealand's OECD standing.

The challenge lies in lifting spending in real terms, not just through creative accounting for tax benefits.

"The concern for me is not whether its public or private funded... (but to) keep going on getting that link between private sector and the R&D that is being done in the public sector," Nana says.

Wellington Chamber of Commerce boss Phil Lewin says establishing that link is a difficult yet essential task.

"This is about lifting the next generation's understanding about the links between innovation, economic growth and wellbeing."

It's is also about improving the communication between businesses, universities, and CRIs.

That dialogue occurs at a practical level at organisations like the former Wellington Polytechnic, now Massey University, where research is applied to practical micro economic businesses.

The issue starts and ends with funding, he says, commending the Government's fiscal focus on R&D in the budget.

But, Lewin says, the crux of the matter is producing quality research and commercialising it.

"We don't have money growing on trees (in New Zealand) and we have to be sure that it's going to have a practical effect."

Dr Cleland suggests improving the transfer of knowledge between the industry and research sectors, one of FRST's goals.

"We must develop a new breed of people who start in the research environment and then transfer to industry with their intellectual property, and progress in that industry to senior management."

That will improve the commercial benefits for industry while creating opportunities for new talent in CRIs and universities.

Dr Cleland also suggests that CRIs receive performance-based lump-sum funding, as opposed to the project or programme basis for universities.

"The researchers need to learn of the market issues and help the companies resolve them."

That means bridging the "valley of death", which is a complex two-way street.

For its part, the Government has stumped up with an increased investment in R&D, and also has its science policy analysts eyeing the issue.

But the question lingers, is the broader private sector willing to ante up as well? Until it does, the "valley of death" will remain.

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