More Work Is Needed To Shift The Productivity Dial Says Productivity Commission

The New Zealand Productivity Commission Te Kōmihana Whai Hua o Aotearoa (the Commission) has released its findings and recommendations in its follow-on review of its New Zealand firms: Reaching for the frontier (Frontier Firms) inquiry report.

A follow-on review was requested by Government in their response to the Frontier Firms inquiry report. The Commission was asked to undertake a follow-on review "to determine if New Zealand is progressing towards a more sustainable and inclusive economy, or whether more radical change is needed".

Productivity Commission Chair, Dr Ganesh Nana, summarised the finding of the follow-on review as: "The current course will not shift the productivity dial. However, the chances of success can be materially lifted by improving existing initiatives and programmes, building on the progress made in several areas."

Frontier firms - the most productive firms in the economy - are vital to lifting national productivity and wellbeing. Raising the performance of these firms closer to the global productivity frontier, as well as having them grow larger, and diffuse innovation through the rest of the economy can make an important contribution to lifting the wellbeing of all New Zealanders.

Focused innovation policy - for governments to work with industry, knowledge institutions, and other stakeholders to realise the potential for productivity growth and export success in chosen areas of the economy - was a key recommendation in the Frontier Firms inquiry. The development of innovation ecosystems enabling firms to innovate and export at scale requires government investment in focused innovation policy, in areas of existing or emerging economic strength and global competitive advantage.

Dr Nana acknowledged: "It has only been two years since the Commission completed the inquiry, and this is too short a period to expect to see outcomes in the form of better economic performance and improved wellbeing." "Our approach in the follow-on review has therefore been to observe initiatives undertaken, how far these have progressed, and the general direction of travel and consistency with our Frontier Firms recommendations," says Dr Nana.

The Commission’s follow-on review noted that while some aspects of existing government processes and initiatives are promising, key elements needed for a successful focused innovation policy are lacking. These include a collaborative process for selecting a small number of focus areas; two-tiered governance arrangements with appropriate membership and decision rights; and substantial funding for each focus area.

While some progress has been made, existing arrangements, including those for developing industry policy and the research, science and innovation strategy (Te Ara Paerangi: Future Pathways) fall short. Industry Transformation Plans lack sufficient resources, co-investment by business, connections with researchers, and enough focus and ambition to spark transformational change. In addition, material decision making for Industry Transformation Plans, National Research Priorities, and other processes remain largely centralised and top-down, rather than being collaborative and devolved.

In the follow-on review, the Commission recommends six key areas for action - a better process for selecting focus areas, improved governance arrangements, significant funding for each focus area, facilitating and resourcing Māori leadership and voice, alignment of efforts, and embedded monitoring and evaluation. These recommendations are a package - interlocking and interdependent, all of which must be in place for success.

The Commission found in its Frontier Firms inquiry that New Zealand’s innovation ecosystems are not currently working well for actual and potential frontier firms. The report recommended Government develop a clear innovation strategy and take deliberate policy steps to upgrade New Zealand’s innovation ecosystems.

The experience of the past couple of years - a global pandemic, rising geopolitical tensions, and increasingly stark challenges in tackling climate change has further reinforced the benefits of well-developed focused innovation ecosystems.

Dr Nana says: "Implementing all the recommendations in this follow-on review together will create conditions for successful innovation ecosystems that support high-performing frontier firms. This will require bolder efforts and a sustained long-term approach."

"The Commission will take the opportunity to build on the work of this inquiry in our current Improving Economic Resilience inquiry.

"Potential links between improved resilience and investment in vibrant and focused innovation ecosystems are not lost on us - industries can increase their resilience through such investment.

"We hope the findings and advice in this follow-on review will be helpful to policy and decision-makers as we continue to strive to lift the productivity of the New Zealand economy and improve wellbeing outcomes for all New Zealanders," says Dr Nana.

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