Is promoting R&D New Zealand’s path to prosperity?

Michael Reddell was right to run his sceptical eye over the enthusiasm of the New Zealand government for promoting local R&D. Politicians are obsessed with boffins in lab coats who invent thing rather than the entrepreneurs who risk import technologies and adapt them to local markets.

New Zealand is a technology follow-up. 99% of global R&D is undertaken abroad. The key innovation policy question for New Zealand is how to adopt those technologies rather than how to invent them.

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Appropriate institutions and distance for the global technological frontier

As technology followers such as New Zealand approach the global technological frontier, the institutions appropriate for continued productivity growth change.

As a country moves closer to the global technological frontier, the impact of each successive technology import will decline. The latest imported technology is usually a smaller and smaller upgrade on before. A more skilled workforce and greater entrepreneurship is needed to squeeze out all of the available productivity and product quality gains from the latest imported technologies.

The institutions appropriate to further growth are context-dependent

The political, tax and regulatory institutions that favour the more ready-made implementation of more standardised imported technologies do not necessarily favour the growing demand for the domestic innovations in New Zealand as the global technological frontier nears. There is a growing demand for more highly skilled workers to master and adapt the leading-edge technologies to the distinctive circumstances of each New Zealand workplace to stay ahead in rapidly changing competitive environments and meet the changing needs of customers.

Productivity growth is not manna from heaven. Every increase in productivity and in product quality and variety are the sum of many inventions that must be first discovered by prospective innovators building on past ideas and developed, tested, adopted and adapted by profit-minded entrepreneurs and workers. Investments in R&D, in human capital and in on-the job learning and in the entrepreneurial judgments about risking investments in the new technologies that all underpin further growth in productivity are all influenced by public policies.

Moving from implementation-based to innovation-based policy regimes

As a country approaches the global technology frontier, continued technological imitation is no longer enough to keep productivity growing at the trend rate of two per cent per year. There must be an institutional switch from a technology implementation-based policy regime to an innovation-based policy regime.

The end by 1990 of the EU’s productivity convergence on the USA has been partly attributed to not making the policy shift from technology implementation enhancing institutions to innovation enhancing institutions. EU members invested far less than the USA in R&D and tertiary education had more rigid labour and product markets, had less entry and exit of firms, and much higher taxes.

Institutions must adapt to distance from the technological frontier

As a country approaches the global technology frontier, there must be younger firms, fewer incumbents, better educated workers, more R&D, more entry and exit, more flexible product and labour markets and lower taxes. These dynamic entrepreneurial features were not common-place in pre-1984 New Zealand.

New Zealand too had to switch to institutions that enhanced innovation and entrepreneurial entry just to return to growing at the global trend rate of 2 per cent per year. The political, tax and regulatory institutions appropriate prior to 1973 when New Zealand was a colonial farm for the UK are different to the institutions that are growth-enhancing in a less sheltered economic environment. There is no reason to suppose that the rising burden of knowledge and product proliferation has in any way ebbed to lighten the pressure for continued reform.

The institutional foundations of prosperity and stagnation

Questions about greater prosperity of New Zealand must be correctly posed and should focus on the fundamental causes of productivity growth rather than the proximate causes. The proximate causes of productivity and prosperity are the accumulation of more human and physical capital and technological progress.

Institutions are the fundamental cause of prosperity and cross-country differences in per capita incomes. Institutions determine the incentives and constraints on working, learning and investing, and influence, in a profound way, investments in physical and human capital and R&D and the importing of new technologies. It is premature to conclude that the national institutions and policies of OECD member countries are fairly similar and that the institutional differences that they do have are minor in their impact on respective national productivity and income levels.

There have been periods of prosperity, divergence, depression, recovery, catch-up and no catch-up at difference times in OECD member countries and usually for country-specific reasons. These large changes in fortune are not by chance. The differences in policy that gave rise to these divergences in income levels and extended periods of prosperity and stagnation should be open to analysis so that policy improvements can be discovered for possible application in New Zealand.

croaking cassandra

The Productivity Hub is a partnership of agencies which aims to improve how policy can contribute to the productivity performance of the New Zealand economy and the wellbeing of New Zealanders. The Hub Board is made up of representatives from the Productivity Commission, the Ministry of Business, Innovation and Employment, Statistics New Zealand and the Treasury

The Productivity Hub yesterday hosted a symposium in Wellington with the title “Growing more innovative and productive Kiwi firms”. “Growing” things is usually something gardeners do – people doing stuff to things. So the title perhaps carried somewhat unfortunate connotations of successful firms being the products of government action. That probably wasn’t their intention, at least not wholly, but then again it wasn’t entirely out of line with the list of attendees – 161 names, of whom at least 150 would have been bureaucrats, academics, and the like. There appeared to be only a very…

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