“Exporting knowledge, not nature” Patrick O’Meara

Get off the Grass: Kickstarting New Zealand’s Innovation Economy
Shaun Hendy and Paul Callaghan
Auckland University Press, $35.00,
ISBN 9781869407629

New Zealand is well-known internationally for its digital visual effects expertise, underpinning the success of blockbuster films like Lord of the Rings, King Kong, Avatar and The Hobbit. What’s perhaps less well-known is the fact that the astonishingly lifelike digital characters created in these films were based on research carried out by former medical researcher Dr Mark Sagar at the University of Auckland Bioengineering Institute. His pioneering work in computer-generated faces was recognised with Oscars in 2010 and 2011.

This example from Get off the Grass encapsulates what its authors, physicists Shaun Hendy and the late Sir Paul Callaghan, think New Zealand needs to do more of if we’re to succeed economically: take the research we do in one field and apply it to completely new areas. Get off the Grass is a spirited and heartfelt plea for New Zealand to place a greater focus on creating high-tech industries, and to move away from the country’s traditional agricultural export base.

And the prize for doing this?  Greater prosperity, and the chance to close the yawning gap with the other rich nations with which we like to compare ourselves.

It’s a similar argument to the one that Callaghan, who died nearly two years ago when the book was being written, used in his previous book, Wool to Weta. Get off the Grass picks up from there, folding in Hendy’s work on innovation systems to underline the importance of science to an economy and its success.

The authors claim the income gap between New Zealand and other OECD nations, including Australia, is due to a knowledge gap. That is, New Zealand is generating fewer new ideas, unique products and services, and developing fewer new fields of knowledge, than these other countries.  According to the authors, that gap is evidenced by New Zealand’s relatively low output of intellectual property. For example, Finland, with five million people, produces five times the number of patents as New Zealand per capita, Switzerland produces nearly 10 times more, and Australia a third more.

The authors put this difference down largely to a greater commitment by these governments to spend on research and development (R&D). They also see this lack of public spending compounded by a culture within New Zealand’s more innovative firms that values exclusive control over those firms’ own R&D – rather than working in partnership with other organisations. This restricts opportunities for research to be picked up and used in unexpected ways elsewhere.

It could be argued that – while New Zealand is indeed a laggard by OECD standards – robust global demand for dairy products, which New Zealand produces very well, is expected to help deliver growth of about three-and-a-half per cent this year, a level few other rich nations are likely to experience.  Driven by China’s growing appetite for “white gold”, our economic future may appear to be bright.

But Hendy and Callaghan disagree, arguing that New Zealand should be “exporting knowledge, not nature”. According to Get off the Grass, more milk won’t close the income gap with other advanced nations – estimated to be around 40 billion dollars a year in relation to Australia – because of physical limitations and the risk of environmental degradation. That is also true for other land- and sea-based activities. New Zealand has also focused on exporting low value commodities, with foreign firms making much higher profits from the products we sell them by adding value. Even where knowledge has been built up in agriculture, the authors point to research that indicates commodities use highly specialised knowledge that does not readily lead to new industries – unlike the fields of electronics, machinery, pharmaceuticals and construction materials.

For those reasons, Hendy and Callaghan believe the development of the high-tech sector offers better odds. Using what they themselves admit is a simplistic model to bring the country’s GDP up to the OECD average, they estimate New Zealand would need to start 75 million-dollar technology firms to catch up in 30 years. To do this in 20 years, almost 300 new high-tech firms would need to emerge.

This is daunting stuff, particularly given the high risk of failures in starting such companies. But the authors argue the pay-off is worth it, with average revenue per worker more than double that of those employed in the tourism sector, for instance.

And what groundwork needs to be in place to achieve this outcome?

Hendy and Callaghan argue that the government needs to invest more in R&D. They estimate lifting R&D spending to 0.8 per cent of GDP (compared with 0.58 per cent of GDP in 2009) to ensure the innovation ecosystem doesn’t struggle. Finland boosted its R&D markedly from the mid 1990s (it now spends 0.95 per cent of GDP on R&D), which helped it lift itself back into the top half of the OECD.

The authors also argue that the government’s current R&D spending is skewed far too much toward agriculture, instead of focusing on developing information technology and sophisticated manufacturing and service activities, where the potential benefits are greater. However, they eschew a “picking winners” approach, instead recommending the government invest more in untargeted basic research, with funding available to researchers for longer. They also support tax breaks for firms conducting R&D – an approach many other nations have adopted, but which has already been rejected by this government. More broadly, Hendy and Callaghan urge firms and research organisations to connect, collaborate and open up, particularly in a nation of only four million people. This spread of research and ideas could spark new developments.

Get off the Grass is an intelligent and interesting book, wrestling with the economics of growth, with theories of the advantages of big cities in capturing and harnessing disparate ideas and turning them into commercial opportunities, and with the fortunate beginnings that underpinned the US tech powerhouse, Silicon Valley. It’s not afraid to move beyond diagnosis to provide advice on how governments and firms should do things differently to boost the high-tech sector – although the current government could point to initiatives, such as the establishment of Callaghan Innovation to connect researchers and the manufacturing sector, and the National Science Challenges initiative, as areas where it has moved to boost the economic contribution made by R&D.

Some economists may take issue with the book’s central tenet that a knowledge gap explains the economy’s comparatively poor performance. For instance, Auckland University professor Tim Hazledine contends that income variations between countries cannot be explained by differences in R&D or patents alone. The authors themselves acknowledge that there’s no guarantee that policies to make it easier for firms to acquire patents would make a country wealthier, though it might increase the chance of doing so.

The agricultural sector has also taken umbrage at the authors’ dismissal of it as a valuable knowledge sector. The industry body, DairyNZ, points to Lincoln’s AgriHub and Palmerston North’s food hub in building up related industries, while Waikato firms that built their expertise in steel manufacturing for the dairying industry are now using that in other sectors, such as aviation. Massey University’s vice-chancellor, Steve Maharey, has also pointed out that there are plenty of areas in agriculture that could add further value.

Nevertheless, Get off the Grass mounts a powerful argument for how science can potentially transform economies and help lift prosperity. That may be food for thought in an election year.

 

Patrick O’Meara is economics correspondent for Radio New Zealand News.

 

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