Discovering the economic value of innovation

Between Bill English’s budget last May and John Key’s opening statement to Parliament on Tuesday the government lighted upon some rocket science: that innovation is critical to economic growth.

It’s not rocket science, of course. It’s commonsense. And it is a long way from the 2009 budget’s cut in research, science and technology (RS&T) funding. That was a puzzle, given that Key had contemplated taking the RS&T portfolio.

Instead he took tourism: photo-opportunities, doing things.

Key made up for that by enticing Sir Peter Gluckman to be his chief scientific adviser. Reticence is not Sir Peter’s dominant virtue. He has, one insider says, upset ministers with his directness. He is in effect a sort of second RS&T minister.

That has been helpful because the official minister, Wayne Mapp, took time to engage. His prime interest is in his defence portfolio. Frustrated scientists and science managers found him overtly uninterested at their early meetings.

To that add English’s sceptical attitude to spending money on RS&T: innovation was not one of the four mechanisms to boost productivity growth which he identified in the 2009 budget: infrastructure, regulatory improvement, literacy and numeracy and public sector productivity. That budget was not a flying start to Key’s ambition to lead this country up the global wealth ladder.

On Tuesday Key committed himself to address that omission in the 2010 budget.

Some of this is in policy change.

Mapp set out four priorities in August last year: enhancing migration from laboratory to marketplace, strategic investment in public good science, market-driven research and simplifying the system. A prime area for simplification is public funding: now researchers spend much time and money applying for funds, mostly in vain. Feedback on those priorities was sought in October and will feed into policy leading up to the budget.

A taskforce report on the government’s research companies, the Crown research institutes (CRIs), is to reach ministers next week. More research-savvy boards, relaxation of the 9 per cent dividend rule, some room for CRIs to reinvest profits, long-run and inflation-indexed funding for long-term projects and more funding for capability are said to be among the recommendations.

Key said on Tuesday that CRIs “can be more powerful engines of growth”. He wants to “get more research and knowledge out of CRIs and into firms”.

But policy change goes only so far if not accompanied by money, from taxpayers, business or foreigners. Key said on Tuesday: “We have made this a priority for new spending in this year’s budget, with a focus on boosting business research and science capability.” An example: ministers this week discussed expanding the $42 million Technology NZ fund of grants to private companies to get ideas to market.

But overall new public spending “can only be very modest”, Key said which suggests even a “priority” might not get much. By next morning on radio, however, he had grown more expansive: the government was “pouring” money into RS&T.

One person’s pour might be another’s trickle. Whether he will deliver enough to lift government RS&T spending to the OECD average — let alone get private sector spending up from its low levels, as officially measured — is moot.

A pointer is that English has become less sceptical.

The context is a sector-by-sector analysis by ministers and officials to identify growth opportunities and what the government could do — or stop doing — to help sectors realise those opportunities. This was led by Key and Gerry Brownlee: minerals, aquaculture, irrigated farming, high-tech manufacturing and services and export education have attracted initial attention.

This is a very different approach from that taken by Don Brash’s 2025 taskforce, though not inconsistent with it.

Brash’s report fell into a black hole after Key dismissed it in advance. That was less because of its content, though National ministers reckon some proposals are politically impossible, than because of its tone. Key is allergic to “ideology”. He likes “what works”.

Nevertheless, much of what determines what works or not are the “cross-cutting” factors built into the sectoral analysis, principally tax, regulation, infrastructure, education and skills — and innovation. Suboptimal settings could stall Key’s drive for growth.

But, whereas the Treasury used to argue that if these general “institutional” settings were got right innovation would follow and productivity growth would follow that, ministers now believe there are other things the government could and should do to prod development.

After all, Australian wages have a 30 per cent premium over New Zealand wages despite institutional settings here that are in most respects closer to world best practice than Australia’s.

Hence, among other shifts, the government’s belated conversion to promoting RS&T. The budget will tell us how deep into ministers’ political souls that conversion has gone.