Comment

Government innovation report ignores NZ tech

The way to grow our already burgeoning digital economy is to find and support innovative local entrepreneurs, but the recommendations in a new report from the Productivity Commission will not help, writes Richard MacManus.

A recent Government report into the digital economy has been criticised for focusing too much on global giants like Google and Uber, and barely mentioning New Zealand’s leading tech companies. 

The report, co-written by the New Zealand and Australian Productivity Commissions, claims that both NZ and Australia are minor players in the global innovation market. “The majority of [local] firms – with a few notable exceptions – are not at the forefront of digital innovation and production,” the report states. 

The report name-checks Google and Uber many times, but our most prominent internet companies get only a handful of mentions combined. I counted four mentions of Xero (in all cases in the same sentence as Australia’s MYOB), and zero mention of Vend, PushPay or Vista.

The way to grow the digital economy, the report concludes, is to “improve regulation, use digital technologies to improve government services, and strengthen aspects of trans-Tasman cooperation”.

Really? Adding chatbots to our Government websites and cosying up to Australia is going to improve our digital economy? I don’t think so.

In my view, the way to grow our digital economy is simple: find and support innovative local entrepreneurs. Yes, tweaking some regulations may help them, but ultimately it will be Kiwi entrepreneurs who take our digital economy to the next level – not bureaucrats.

NZ’s tech sector worth $11 billion

For a start, the Productivity Commission may want to take a look at the Technology Investment Network’s (TIN) recent report on our digital economy. That report concluded that NZ tech companies are already producing billions of dollars worth of digital exports.

I reviewed the 2018 TIN Report last November. It pegged total revenue for our top 200 technology companies (the TIN200) at $11.1 billion. That was an increase of 11 percent over the previous year, continuing several years of strong growth for New Zealand’s tech sector.

What’s more, most of that 2018 revenue – nearly $8 billion – was in exports, with North America and Australia the biggest markets. 

Granted, $11 billion pales into comparison with how much the global tech giants take in. Google alone earned nearly US$110 billion in revenue over 2017. But the point is, our high-growth tech companies are already producing billions of dollars worth of annual revenues. And that’s something we want to both recognise and encourage. 

Callaghan: don’t underestimate Kiwi companies

Callaghan Innovation takes a similar view on the growing strength of our tech sector.

According to Bruce Jarvis, Head of Digital sectors at Callaghan Innovation, “we should not underestimate the local digital sector in lifting our productivity”.

He thinks local companies like Vista, PushPay, Vend and Xero show that New Zealand tech companies have “a knack for uncovering a global market niche and going after it with tenacity”.

Jarvis does agree with the Productivity Commission report on one point: that New Zealand businesses “in general are slow when it comes to digital and innovation uptake”.  However, he says “the report doesn’t begin to cover the potential for digital exports from New Zealand”.

He noted that we have “a growing and well-connected software community here,” and highlighted agritech and blockchain as two areas where New Zealand could even be a global “centre of innovation.”

“Yes, our digital firms do need to grow and set up bases outside of New Zealand to be near the big export markets,” he continued, “but much of their high-value R&D activities stay here – which is key.”

Patently absurd

So what steered the Productivity Commissions wrong in their report?

Partly I think they focused on the wrong things. For example, one conclusion the report made is that “patents indicate where innovation is happening”. It goes on to state, “in Australia and New Zealand, ICT-related patents as a proportion of total country patents are below the OECD average”.

I’d argue that patents are a weak measure of innovation, especially on the internet. There are many large companies in countries like China and the US that spend large on filing thousands of patents a year. IBM, for example, was granted 9,100 patents in 2018 alone.

How many patents has our top internet company, Xero, got? I don’t know for sure, but I only found two attributed to Xero on the Justia Patents website. It may well have more, but even so not even a lawyer could argue that patents are the reason Xero is successful. 

Xero is successful because it built a great product and got millions of customers to pay for it. That’s the kind of activity that grows our digital economy, not filling out patent applications.

R&D does need improvement

The Productivity Commission report also points to “expenditure on research and development” as an indicator of innovation.

It states that New Zealand has “7.9 people on average working as researchers per thousand people employed.” While that’s similar to the United States (9.1), the report chides New Zealand for being “well behind the top group of Israel (17.4), Finland (15.0), Denmark (15.0), Korea (15.0) and Sweden (13.6).”

I do agree that R&D is something the Government should invest more in – and indeed it has committed to. 

As the report notes, New Zealand’s current expenditure on R&D as a percentage of Gross Domestic Product (GDP) is 1.3 percent. That’s low compared to Israel and Korea (4.3 percent and 4.2 percent respectively), and we’re also below Australia in this measure (2.1 percent).

Last October, the Government committed to raising New Zealand’s research and development (R&D) expenditure to 2 percent of GDP over 10 years. As Research, Science and Innovation Minister Megan Woods wrote at the time, “our spending on R&D lags behind many of our international competitors”.

The Government has budgeted $1 billion in total for this goal, most of which takes the form of a tax incentive scheme.

Whether tax incentives is the right method is an open question. The National Party believes that government grants are the way to go with R&D. Indeed, managing R&D grants was a big part of what Callaghan Innovation was responsible for until recently. “R&D Growth Grants will be phased out with the introduction of the R&D Tax Incentive,” Callaghan announced last October. 

It remains to be seen whether New Zealand’s R&D tax incentives will work, but regardless it won’t stop the likes of Xero, Vend, PushPay and other Kiwi tech companies from flying the innovation flag for our country. 

If only the Productivity Commission would take notice.

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