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

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/

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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 MarketSize and Economic Geography.” University of Canterbury. April, 2009., 6.

3 Ibid. 18.

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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

strive to meet.

First: Enhance the existing innovation framework.

4 “Innovation in New Zealand: 2007.” Statistics New Zealand, Wellington, NZ. July2008., 23.

5 Ibid. 126 Ibid. 3.7 “Growing an Innovative New Zealand.” The Office of the Prime Minister

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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

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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

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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/NationalCurriculum.aspx

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

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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