New Zealand Policy Memo on Innovation

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A memo directed at the President of New Zealand on how to best foster innovation in the current business climate

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New Zealand Policy Memo on Innovation

  1. 1. Jeff Borenstein Dear Prime Minister; We are pleased to present to you the following policy memo on Innovation in New Zealand and the suggested action items for the administration in 2009-10. Our research draws on experience in innovation policy and the historical research done by the previous administration. Fostering a culture of innovation is a complex task, as you well know, but the memo outlines an argument for increased government involvement in innovation policy and legislation in key areas: education, urban planning, and sustainability. In today’s global marketplace, New Zealand must find ways to position itself as a nation that embraces innovation, provides business with the right conditions to develop products and services, and to encourage creative thinking from our best asset — New Zealanders. With strong support from the Prime Minister, we believe that New Zealand will overcome the challenges of the global recession and emerge as a market competitor in sectors like communication services, bio-technology and agriculture production. New Zealand has a great economy, a healthy and active population, environmentally conscious, and actively pursuing innovation in all areas of business. But we want the nation to look beyond our existing strengths. Second tier industries like accommodation, health and human services, and education can also benefit greatly from strong innovation policy. The following policy suggestions are the top four goals that the Prime Minister and his council should consider as he embarks on his first term. We understand the challenges in implementing sweeping reforms, but these action items do not require extensive political capital. Given the economic crisis, we believe that the administration is in a prime position to unveil major reforms. The recommendations range from broad
  2. 2. Jeff Borenstein incentives in urban planning, to creating an innovation institute under the ministry of finance, to strengthening post-secondary education in the 2010 budget. We hope that the empirical evidence gleaned from the latest innovation studies will provide a strong case. New Zealand is in a prime position to conduct business and be a nexus for innovation in a range of industries — from our long-standing agricultural sector to emerging markets in communications and healthcare. According to the World Bank, New Zealand is the world’s most liberalized economy and ranked second for doing business. We are the most transparent and least corrupt institutional frameworks. In addition to a healthy business environment, we have the third strongest property rights laws and the number one investor protection regulations in the entire world.1 However, we rank 23rd in trading across borders. Geography and a small population hinder our export abilities, but as the global economy enters a recession and our trade deficit rises, the country must find innovative solutions to combat the effects of a tight credit market and a slowdown in trade. But steps have been taken to position New Zealand for success in the coming decade. We applaud the previous administration’s reforms that included the removal of subsidies, tariffs and price controls; the floating of the exchange rate; the abolition of controls on capital movement; and the privatization of many state assets. However, in unprecedented times, policy must seek ways to capitalize on our existing assets and lay out the foundation for long-term growth. The biggest challenges New Zealand faces in economic growth and innovation is our small size and geographic location. However, studies have examined these two conditions and found that in the increasingly connected 1 “The Doing Business Project,” The World Bank. http://www.doingbusiness.org/EconomyRankings/
  3. 3. Jeff Borenstein world, location and size are less important than in previous eras. Unlike global financial centers such as New York or Singapore, Auckland — our largest city — does not even rank in the top 80 countries by the OECD and we are considered the 2nd most isolated market in the world.2 How can the government encourage firms to concentrate talent and foster a culture of innovation? According to a working paper entitled “Innovation in New Zealand: Issues of Firm Size, Local Market Size and Economic Geography” the researchers tested the notion that small firms concentrated in large cities are the most conducive for innovation, a common belief in global management research and appropriate for a country like NZ without highly-concentrated cities. The researchers found that “ that New Zealand firms generally do demonstrate best-practice and state-of-the-art thinking on innovation issues. Moreover, the local institutional environment for entrepreneurship and innovation in New Zealand is excellent. Yet, translating high levels of local entrepreneurship into innovation remains a problem.” The researchers also found that “that small firms in New Zealand are either no different to larger firms in their innovation performance or may actually be less likely to produce innovations than larger firms.”3 As a result, innovation policy should find ways to encourage concentrated firms with larger staff, located in major cities like Auckland and Wellington. The study supports innovation research done by the New Zealand government in 2007. The “Innovation in New Zealand: 2007” report found the top 3 barriers to innovation were: A lack of knowledge and management techniques; a lack of skilled 2 Hong Shangqin, et. all. “Innovation in New Zealand: Issues of Firm Size, Local Market Size and Economic Geography.” University of Canterbury. April, 2009., 6. 3 Ibid. 18.
  4. 4. Jeff Borenstein workers; too costly.4 Even though studies show New Zealand has a higher rate of innovation than France, Australia, Portugal and Norway, we lag behind European countries such as Ireland. Firms reported increasing revenue and reducing cost were the main factors in innovation, but we believe the government can encourage less obvious benefits of innovation.5 In a country positioned far away from global commerce with a limited number of skilled workers, innovation can create new business processes and also expand access to new markets through product development and patent creation. These are just two alternative ways to frame innovation as a political priority. The study also highlighted a downward trend in innovation. The authors wrote, “innovation activity was reported by 47 percent of New Zealand businesses, a decrease from the 2005 innovation rate of 52 percent. The rate includes businesses with implemented innovations (42 percent), and businesses with ongoing or abandoned innovations (5 percent).”6 Therefore, it is necessary for the government to find ways to reverse the negative trend in business innovation. Even though New Zealand has a highly privatized market based economy, we argue that specific measures can be taken to benefit SMEs, global businesses, and the overall well being of the New Zealand people. Based on the “Growing an Innovative New Zealand”7 report done under the previous administration, here are the four goals that innovation policy reforms should s strive to meet. First: Enhance the existing innovation framework. 4 “Innovation in New Zealand: 2007.” Statistics New Zealand, Wellington, NZ. July 2008., 23. 5 Ibid. 12 6 Ibid. 3. 7 “Growing an Innovative New Zealand.” The Office of the Prime Minister
  5. 5. Jeff Borenstein New innovation policy will build on the World Bank rankings and the institutional frameworks that already position New Zealand as a world leader in business environment. In addition to excellent patent protection, investor security, and ease of doing business, the government must look at the deeper connections between cities, firm size, educational institutions, and the global marketplace. Second: Develop an educated, globally competitive marketplace. With just over 2 million people between the ages of 15-64, New Zealand is at a severe disadvantage to larger markets in Asia-Pacific, Europe and the Americas. However, investing heavily in post-secondary and technical schools, the country can develop an entire generation of workers who will be prepared for the 21st century marketplace. Schools must encourage a global curriculum so that when students enter the workforce they are prepared and ready to navigate a connected, multi-national world market. Third: Foster innovation between public-private partnerships. New Zealand must encourage better relationships between the ministries of finance, education, transportation, tourism, agriculture, science and technology -- with business leaders in these sectors. By leveraging the economic resources of the government, New Zealand could be an ideal place for global businesses to relocate and utilize our growing knowledge-based economy and advanced ICT infrastructure. With state-of-the-art technologies, distance is no longer a barrier to entry for many knowledge-based businesses. Public-private partnerships should capitalize on this trend. Fourth: Focus initiatives on areas that can have maximum impact. Despite leading the world in business environments, we are not as capitalized as other
  6. 6. Jeff Borenstein global powers. The government must carefully consider where and how much to invest in new policies and projects, and enhance our existing strengths, such as the agriculture, bio-technology, and communication sectors. However, the administration must not neglect emerging industries such as healthcare, accommodations, and education. To meet these goals we provide a brief list of policy ideas. The list aims to move New Zealand closer to meeting the aforementioned goals, and to the top half of the OECD rankings. 1. Create a government funded leadership, management and innovation institute. By establishing an innovation incubator for New Zealand businesses and academics, a central problem in innovation will be addressed: lack of knowledge and skilled workers. The country cannot rely on the private sector or academia to invest resources in generating innovation best practices. The institute would also support long- term projects that bridge research being done in Universities and the marketplace. In America, the IEEE-USA Innovation Institute “offers programs to advance the preparation of leaders responsible for the innovation of new products and services by sharing the experiences of successful innovators in a coordinated program of interaction, mentoring and networking.”8 By working off the IEEE-USA model, New Zealand could expand its mission to funding long-term projects being researched in state-run Universities. For example, investing additional funding into the University of Otago’s Centre for Innovation would allow for more businesses to partner with the University and provide 8 IEEE-USA Website. http://www.innovation-institute.org/about/default.asp
  7. 7. Jeff Borenstein added incentive for companies to relocate.9 We believe that the Otago model could be expanded to twice as many partner countries through a competitive selection process. 2. Appropriate extensive funding for tertiary education and polytechnics. In 2008 the previous administration passed the “Economic Transformation Package” in which “investments of $1.1 billion operating and $747.3 million in capital funding are designed to boost New Zealand’s productivity through innovation involving research, a quality tertiary sector and practical support for globally competitive firms.” In the package, $95 million of capital was appropriated to “co-invest with tertiary institutions in new capital undertakings, to create a more systematic approach to capital investment.”10 The Prime Minister and the National Party must push heavily for a similar package in the next budget. The administration must also support education programs in the sciences and boost teacher pay at the secondary level. New Zealand’s greatest asset is its vibrant, healthy work force and continuing to support their educational development is essential to an innovative, growing economy. As the Ministry of Education unveils its 2010 universal curriculum document, we believe that science and technology studies should feature prominently throughout the disciplines, including English, mathematics, and the social sciences. Integrating 21st century teaching into classic education is imperative in today’s schools.11 3. Establish a national institute for sustainable innovation, under the ministry of science and technology 9 University Otago Centre for Innovation. http://www.otago.ac.nz/centreforinnovation/ 10 “Step Change in New Zealand Innovation.” Scoop Independent News. May 22, 2008. 11 Ministry of Education 2010 Curriculum Guidelines. http://www.minedu.govt.nz/educationSectors/Schools/CurriculumAndNCEA/Nati onalCurriculum.aspx
  8. 8. Jeff Borenstein By creating an institute that builds on public-private partnerships that focus on sustainable energy and food production, New Zealand will become a nation that prioritizes the environment and encourages innovation in sectors such as energy, bio- technology, and agriculture. A national institute would be a multi-disciplinary, multi- industry think tank and research center that would grant long-term projects that focus on environmental sustainability. For example, reducing carbon footprints in dairy and meat production, or testing the latest in sustainable materials for product design. Our economy is so heavily dependent on agriculture, we need to lead the world in creative, sustainable solutions for production as well as softer industries such as communications, health and human services. Public-private partnerships are a logical step for the government to ensure future success in global competitiveness and to build on the healthy business environment in the country. Isolated and ecologically diverse, we must be world leaders in innovation with a conscience. 4. Develop public policy and economic incentives for larger firms and concentrated cities According to the working paper on city size and innovation, larger firms are more aware of innovation and may produce more products than smaller firms, in contrast to conventional wisdom. Without interfering with the market, the administration could find creative incentives for companies to relocate to Auckland, Wellington or Christchurch. In addition, the administration could push for legislation that creates even more attractive tax structures for foreign companies to move their headquarters or Asia-Pacific regional offices within the country. Incentives might include a drastic reduction in property taxes if a company pledges to develop a LEED certified building or tax credits for using
  9. 9. Jeff Borenstein recycled materials. Active cities with a highly educated workforce are two conditions for an innovative nation. With high-speed communication eroding our biggest challenge — isolation — New Zealand can lobby to investors that our green, affordable, and connected cities are attractive options in today’s global economy. Education + Incubation = Innovation. The goals for innovation policy are clear: build on New Zealand’s strengths and focus where our impact can be the greatest. With an educated workforce and effective long-term policies, we can move back to the top half of the OECD rankings. Educational institutions should be the foundation for the Prime Minister’s new innovation plan, but with a focus on public-private partnerships and ways to attract global businesses. Unlike certain countries in the OECD, New Zealand has a healthy environment for doing business. Multi-national companies such as Symantec, Roche and Genentech have employed our world-class researchers in their product development cycle and incorporated patents discovered in New Zealand.12 New Zealand can compete with larger, more capitalized nations due to our friendly business environment, but liberalized economic policies and will not be enough to foster innovation and growth. The challenge to build a technically advanced educated work force, a healthy relationship between cities and the state governments, and to grow our economy with sustainable and innovative mandates is complex, but within the reach of the current administration. We hope the Prime Minister and his administration considers our four goals and four recommendations as the country moves forward in 2009-10. –Jeff Borenstein 12 “Invest In New Zealand: ICT and Biotechnology” http://www.investmentnz.govt.nz/section/14246.aspx

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