Pete Hodgson Speech

Transforming The NZ Economy

Good afternoon. It's good to be here in such a hive of business activity.

I'm here to tell you about the Government's goal of transforming the New Zealand economy. But I'm also hoping to hear some of your ideas about how we can help that process. So I'd like you to think about that, and any questions you have. Hopefully we can make this a conversation, not a lecture.

Briefly, economic transformation means building on our primary production strengths and moving into more value-added and knowledge-based production. It means increasing the technological capability of business and improving the conditions for innovation. It means a greater emphasis on exports and the internationalisation of our economy.

Why do we need to transform? Because we're slipping. From the 1950s to the 1990s we slipped in GDP per capita from 9th in the OECD to 19th. Our economic performance is lagging the developed countries we like to compare ourselves with, while we still want a comparable standard of living and public services.

The difference is knowledge and technology. The growth rates of technology rich and technology poor nations are diverging. In the past six to eight years, the growth of knowledge-based industries has outstripped the growth of GDP in the countries where they are based.

Increasingly, resources are being poured into the production of knowledge rather than stuff. Productivity and job growth depend more and more on the conditions for the spread of knowledge and technology throughout an economy.

One way of thinking about where we're heading is to ask whether we have an economy and society that promotes innovation.

Let's be clear what innovation means. It's research and development, for sure. But it's not just R&D. It's much wider than that. New Zealand's innovation system is our R&D effort, plus everything else: an education system that promotes lateral thinking, the supply of venture and seed capital, our attitude towards entrepreneurship, the way our universities interact, the strength of our international connections, how well our business incubators work, how well our intellectual property is protected, whether our sharemarket offers the right products.

Innovation isn't easy. It's complex, because it usually involves a combination of businesses, institutions and technologies. It's often expensive. It's risky, because only a small proportion of new products succeed. And it's unpredictable. But more than ever, it is the difference between survival and extinction in business.

International competition, dynamic markets and the speed at which ideas and products can be reproduced and distributed in a modern economy are what make innovation so important for commercial survival. That applies to businesses large and small.

Luckily, for a nation of small businesses like New Zealand, even the smallest firm can innovate. In fact small firms are often better at it. And traditional industries can transform themselves and their products through innovation. That's good news for our commodity industries, and the dairy industry is in some respects an example of how it can be done.

So if transformation is what's required, and a productive innovation system is the key driver of change, what state do we find New Zealand's innovation system in? Is it open, strong, supportive and interactive? Or is it insular, limited, myopic and cluttered with barriers?

My best guess is that it can be described as rapidly developing off a low base.

Why? Well, the evidence of a low base is not hard to find. We have a low level of high-tech exports, a low level of private sector R&D (even allowing for any errors in measurement ), a sense that universities operate behind closed doors and no Nobel Prize winners since Rutherford.

Fortunately that is not the whole story. Such an analysis, along with "brain drain" and "warehouse economy" stories is too dismal.

My sense is that our high-tech exports are poised to grow, possibly rapidly. I also think that the level of private sector R&D will grow. Another Nobel Prize winner may be ten years away, but universities are already starting to open their doors, quite a lot by historical comparison, as evidenced by the number of new or planned innovation centres and incubators springing up on campuses around the country.

Moreover the venture capital void of a year or so ago is starting to fill quite rapidly, even though venture capital is a label that some newcomers use a bit liberally.

The Technology for Business Growth scheme, which a year ago was undersubscribed and had reserves in hand, ran out of money two months ago and needed a pre-Budget top-up.

The Great New Zealand Business Venture, launched a few months ago, has been a highly successful competition-cum-learning experience for entrepreneurs that has far exceeded its organisers' expectations.

The America's Cup, a relatively buoyant economy, a low exchange rate and perhaps even the change of Government have all contributed to a rapidly emergent innovation system off a low base.

The Government's task is to increase the momentum. That's why this Government is committed to a more positive, hands-on role in providing assistance to New Zealand businesses.

International experience shows that Governments can stimulate the growth of knowledge-based industries. They can also hinder it. So smart Government means both removing the roadblocks and giving enterprise a little push where it helps.

We've launched a range of business assistance programmes to stimulate the high-value, innovation-based end of the economy and we're developing more. But this is not just about judicious fillips for successful applicants. It's a big-picture exercise.

The level of skill and education in our workforce, for example, is crucial. The quality of the human resources in an economy is the major factor in its production and use of technology.

So we've revived and modernised apprenticeships. They could be about crunching computer code as well as metal. We're negotiating with the universities about the development of centres of excellence. We've moved to make tertiary education cheaper for students by changing the loans scheme. And we're looking at how we can help more effective cooperation between businesses, research institutions and universities.

We're open to top-quality advice, and we've set up a powerful new think-tank to give us some. The Science and Innovation Advisory Council, which reports to the Prime Minister, is a first for New Zealand. It is the first time such a body has been formed, but more importantly it's the first time a New Zealand Prime Minister has asked for a direct reporting line on science and innovation.

There are nine people on the council, some well known, like Sir Angus Tait, others less prominent. Some are innovators, some are scientists, most are both. All of them have this single attribute: experience or knowledge of how an innovation system works and how it may be extended, deepened, broadened. They demonstrate the ability of New Zealanders to grapple and succeed with the new economy.

We're learning by doing, but we've started with the obvious. We've increased the total public investment in research, science and technology this year by almost $44 million. Total Government expenditure is up by less than 5 percent, but R&D expenditure is up by more than 10 percent. As Science Minister I'm proud of that. Investing in R&D is what smart economies do.

The thick end of that money goes into the largest ever increase in Government support for private sector R&D. We need to support private sector R&D because frankly there isn't enough of it going on. So there is a new grants scheme for it, and more money for the business assistance schemes already run by Technology New Zealand.

We said before the election that we would enable a 100% write-off of R&D spending for tax purposes in the year of investment. We're still looking at whether tax breaks can be engineered to avoid a black hole in the revenue base. But we created the grants scheme as a more certain way to turn taxpayer dollars into actual research and development.

There's $12 million available for grants, with firms being asked to put up two dolllars for every one from the Government. If that's fully subscribed we will have increased private sector expenditure on R&D by 10 percent in a year. I'll be pretty happy with that. We will also have helped some young companies who wouldn't be eligible for an immediate tax break, because they're not yet making a profit.

Foreign direct investment remains vital, so we almost tripled funding for Trade New Zealand's foreign direct investment activities in our first Budget. . We've got a new, proactive strategy to attract overseas investment, particularly investment that creates new businesses. The right kind of foreign direct investment can do that, and often provide new market access, new technology and management expertise as well.

We're developing a corresponding domestic investment initiative, the Strategic Investor Programme. On a smaller scale there will be an Angel Network, matching up small and medium businesses with suitable investors.

By way of direct assistance to new and innovative businesses we've put $2 million into an early-stage financing scheme, which provides grants to help business projects in the start-up phase.

There's also $2.5 million going into the new Incubator Development Programme, which helps individuals and small businesses develop their ideas to the point where others can invest in them. They get help through workshops, seminars, ideas brokers and deal making services. And the programme also offers support for new and existing incubators, such as Victoria University's Innovation Greenhouse here in Wellington.

Over the next year we'll be building up the capacity of Industry New Zealand, which will deliver most of the Government's business assistance programmes. More new stuff is already on the drawing board.

An example is a programme presently labelled Industry Specialist Support, which will provide expertise to help firms with high growth possibilities to realise their potential. It will probably give access to specialists contracted by Industry New Zealand, as well as grants to help firms employ their own advisers. That's different from most existing advisory services, which tend to target small, struggling firms rather than those with high growth potential.

I've given you a bit of detail on a few programmes and schemes we're running, but I hope I've also given you an idea of the larger purpose we're pursuing. Only a high-skill, high-quality, technology-rich and innovative economy will deliver New Zealand the standard of living we want. We're not there yet, by any means, but we're taking some new and essential steps towards the transformation our economy must undergo.

We're putting our ideas into practice. Now let's hear yours.

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