R&D tax credits aren’t enough to boost productivity
Research and development tax credits are a “weak lever” for improving New Zealand’s poor levels of productivity and innovation, according to local experts, including at the Productivity Commission.
The government today announced its R&D tax incentive plan, which will allow firms to get a 15 percent credit for annual spending over $50,000 on “eligible” R&D.
The tax credits are the lynchpin of the government’s stated objective of creating a “more productive economy”, and the newly-announced initiative has been beefed up from the original proposal to allow more organisations to be eligible.
The government says around 2,000 New Zealand companies should be able to apply for the grant and it has set aside $1 billion for the tax incentives. New Zealand has around 500,000 businesses.
However, some experts, including researchers at the Productivity Commission, suggest R&D tax credits play only a small part in improving productivity and innovation.
New Zealand’s GDP per capita - a key measure of productivity - has fallen from around 125 percent of the OECD average in the 1950s, to nearer 60 percent today.
The government seems to be focusing on a particular tool and it may not be the strongest lever for what they want to achieve.
Professor Rod McNaughton, deputy dean at the University of Auckland School of Business, argues R&D tax incentives are “just one lever and a weak lever”.
“The government seems to be focusing on a particular tool and it may not be the strongest lever for what they want to achieve,” he says.
Initiatives like putting introducing artificial intelligence into a workplace, or upgrading to more efficient technology on a production line, can bring about significant improvements in a company’s productivity, he says. But they don’t involve any research and development.
“If you want to make a difference to productivity, particularly in the short term, you want innovation that gets adopted quickly and helps companies grow quickly.”
And one of the worst sectors in terms of productivity is the services sector, but McNaughton says the R&D tax initiative “appears designed to exclude research in this area”.
A Productivity Commission paper from 2015 came to a similar conclusion about the benefits of R&D in producing more innovative and productive companies.
“Business innovation is about more than just R&D expenditure or activity,” the commission’s director of economics and research Paul Conway said. “There is a loose connection between business spending on R&D and new innovations or the share of sales from new goods and services. We see this even in the industries where we would expect R&D to matter the most. Some younger firms are more innovative, even though they are not spending any more of their money on R&D.”
Lots of little businesses doing their own thing with R&D and selling locally, that’s not going to move the dial.
Mark Hargreaves, principal at IP and patent lawyers AJ Park, says R&D tax credits are helpful, but aren’t the answer to New Zealand’s productivity and innovation problems. The solution is getting more companies selling their products into big overseas markets.
“Handing out tax credits isn’t necessarily going to mean we have more successful exporters. We have to have businesses that can sell a lot to big markets. That’s where we will get earnings per capita up. Lots of little businesses doing their own thing with R&D and selling locally, that’s not going to move the dial.
“Our first focus should be selling beyond New Zealand, and then working out the best way to do that.”
Other strands to the government’s strategy for improving productivity and innovation include signing more free trade deals, refocusing the Reserve Bank, bringing in more skilled workers, and a $100 million Green Investment Fund.
Newsroom is powered by the generosity of readers like you, who support our mission to produce fearless, independent and provocative journalism.