• Ensuring that commercialisation units are at minimum sufficient scale,
• Ensuring sufficient talent is available,
• Listening more to voice-of-market   and
• Increasing the availability of domestic expansion capital

That’s an excellent start, but I feel they’ve missed two critical points:

• Improving relationships and communications between researchers and investors
• Motivating state-funded researchers (with carrot and stick) to commercialise their work

The paper and powerpoint summary are republished below, with permission.

What do you think?  Please comment at the end of this post or contact the New Zealand Institute directly.

Lifting innovation ecosystem performance
Dr Rick Boven

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The prosperity of advanced economies is driven by innovation performance, which is why there are several reviews of New Zealand’s R&D industry in progress. Actions resulting from these reviews will improve economic outcomes most effectively if they address the four important obstacles to success discussed below. Innovation contributes to improvement in productivity per hour worked and to the formation of new businesses that can improve New Zealand’s export performance and wealth. New Zealand’s innovation ecosystem is already contributing. The Technology Investment Network’s TIN100 to be released in two weeks estimates that the top 100 technology companies produced overall revenues of $6.6 billion in 2008/2009, with $5.1 billion exported. These companies contributed over 23,000 jobs with average revenue per job of $280,000. They are growing.

Research conducted by the New Zealand Institute shows that the innovation ecosystem could contribute much more. New Zealand’s R&D spending per capita is well below average for the OECD. Despite an increase in effort over the last decade, New Zealand has a relatively poorly performing innovation ecosystem and is not yet making as much effort as other small countries that are seeking advantage from innovation.

Science provides the foundation of an innovation ecosystem. Skilled graduates, research contracts, technology licenses and launch of new businesses all flow from an effective science infrastructure. A successful innovation ecosystem has two important parts: the research facilities that produce the scientific output, and the business organisations that develop products and services for launch in international markets. The performance of the whole is only as good as the performance of the weaker part. Increasing output from the research units will only be sufficient to deliver a large economic performance lift if commercialisation performance is world class.

In recent years, many institutions that support the commercialisation part of the innovation ecosystem have been established in New Zealand: for example research commercialisation units, incubators, angel networks, and venture funds. We now have an innovation ecosystem with all the required participants and at best, the commercialisation of our innovation ecosystem is working well. However, the average performance is not reliably at the standard required due to four obstacles.

First, the larger and longer established commercialisation units perform relatively well but smaller ones need to be aggregated to achieve the critical mass required to field the wide range of skills necessary. Further, performance measures and incentives do not provide sufficient encouragement to form businesses so New Zealand is not creating as many firms with potential to become substantial exporters as it could.

Second, go-global businesses, those targeting international markets from inception, require skilled and experienced leaders, international marketers and boards. But there has not been time yet to accumulate the required talent in sufficient quantities and not enough effort to address the shortfall. The opportunity is to accelerate talent growth so the talent is looking for research with commercial potential as it does in successful innovation ecosystems, not the other way around as frequently happens in New Zealand.

Third, voice-of-market needs to be louder. The markets for our innovations are physically distant from New Zealand and therefore expensive and time-consuming to visit. Research organisations and start-up businesses usually have limited funds and plenty to do so there is an understandable temptation to get on with completing the research and developing the offer so revenues can be secured sooner, and before funds run out.

Investors report seeing hundreds of proposals where a scientist or entrepreneur has developed a product but has done no research to confirm whether or not there is a market for that product. The result is that when we approach customers the offer is often not what they need so another round of development is required. The solution is simple; we need to hear the voice-of-market much earlier and more strongly in the development process.

Fourth, more domestic expansion capital is needed. When our companies have gained a toe-hold in international markets they usually need capital for expansion. It is almost taken for granted that the source of capital to grow go-global firms will be international capital markets. In some cases international equity sale is necessary to secure channels to market or high quality business guidance. However, these inputs would more often be available without equity sale if our local innovation ecosystem was larger, more skilled, better connected and better capitalised.

One important reason why businesses are sold is that there are insufficient sources of later stage capital available within New Zealand. There is nothing inherently wrong with overseas ownership of these firms but, all other things being equal, it is better for the ownership of a successful international business to remain in New Zealand hands. Policy adjustments are required to encourage investment in productive assets, especially those that can help improve the current account, and to reduce the risks that limit the flow of equity and debt capital to expanding go-global ventures.

Ensuring that commercialisation units are at minimum sufficient scale, ensuring sufficient talent is available, listening more to voice-of-market and increasing the availability of domestic expansion capital will improve New Zealand’s innovation ecosystem. The innovation ecosystem will then contribute more to higher productivity, a stronger current account and economic prosperity.

Related posts:

1. Wayne Mapp talks about innovation and commercialisation

My initial reaction to this from my favourite hometown of merely 250,000 souls (counted on a fine day going downhill with a southerly tailwind) was “oh no, we’re fux0r3d!”  All this talk of the Innovation Capital and Business Innovation Strategies will come to naught, because we just aren’t big enough to compete with the larger locations overseas.

Rereading Arbesman’s article however, size is only one factor enabling innovation.  Sure, given a sample of a large number of cities puts Wellington in the same league as cities such as Birmingham Alabama, Czestochowa Poland, and Pau France – none of which are particularly well known for their innovation policies.  But Wellington and Auckland are very culturally diverse cities, and I would argue that their relatively small size enables rich interconnection between communities, precisely because the interconnected communities themselves are so small.

In Wellington we joke that we’re a “village with skyscrapers”, and that there’s only a degree-and-a-half of separation. The number of people from different walks of life that I’d talk to on any given day is staggering.  I can have a breakfast meeting with Pākehā colleages, meet with Māori clients in the morning, lunch with Asian colleagues, afternoon meetings with constellations of immigrants from Europe, North America, the Indian subcontinent and Southern Africa that define the local IT scene, dinner with my own family (between us we have rellies living on six continents) and then go to an evening Interfaith meeting with people from all over the world.  There are no ethnic neighbourhoods here; the ethnic groups are just to small to sustain whole geographic regions.

So far from being a hindrance, our small size combined with the diversity of modern New Zealand can be a real advantage for breaking down barriers that are common elsewhere.

Superlinear scaling breaks down here, and long may we remain an outlier in Arbesman’s data set.

Update: In a personal communication from Arbesman, he says

… you’re definitely right that the variations and exceptions to the patterns observed are the ones that can give us the most insight into the innovation process in cities. And it sounds like New Zealand is chock full of these exceptions.

Former Intel NZ MD Scott Gilmour echoed my comments from last week’s nzangels.com podcast interview with Doug Woolerton, that ‘[y]ou can’t be a globally successful company based here, I don’t think … So let them go, encourage them to go – just like our kids go on their OE – but try and retain more and more significant ownership stakes so that as they succeed and generate a capital return to shareholders, those returns are invested into further companies, so that cycle keeps repeating.”

The rest of the article is well worth a read … good work, Simon!

ACT’s policies revolve around reducing government. It’s a simple message, easy to understand, and clear in its impact on investment and innovation. They want to reduce taxes, government expenditure, and the impact of government on our daily lives, leaving us to get on with the job in our selected spheres of expertise, and sinking or swimming on our own merits.

Rodney’s key points:

• Entrepreneurs drive the entire economy
• Governments are incapable of predicting which ideas are going to be great
• The main task is to grow the economy, and catch up to and surpass Australia
• Key policy areas:
  • Fiscal: reduce government spending – taxpayer rights bill would cap government spending at rate of inflation
  • Regulatory: reduce rules and regulations; they stifle innovation — regulatory responsibility bill protects property rights and freedom to contract
  • Education: Break state monopoly in education; fund students not schools – that would enable innovation to flourish
• The state should be right out of business; they should stick to core business of providing police force and critical infrastructure. Ministry of Economic Development would be disbanded; if state planning worked, the USSR and Korea would have been staggering successes.
• Taxes should be as low, flat, broad, and neutral as possible. In an ideal world you should be able to run the state on GST and get rid of income tax. If you have to have an income tax, it should be flat. The worst tax you can inflict on an economy is a capital gains tax, which is especially bad for entrepreneurs.
• Broadband: Rodney disagrees with unbundling and the pretend split of Telecom and the constant regulation of the Telecommunications sector. ACT would pare back regulation to a bare minimum, especially the Resource Manangement Act.

Rodney closes by saying, “Angel investors, innovators, and entrepreneurs are the heroes of our economy … I salute them!”

Listen to (or download) the audio:

The Greens, ACT, NZ First, Labour, and National all happily provided their best spokespeople on these subjects, which in some cases left us with with the impression that they were pretty thin on the ground in these areas. The Māori party were a no-show, despite numerous attempts to connect with Dr Pita Sharples.. The interviews are presented in the chronological order in which they were conducted.

We’ll be releasing one party interview each week over the next five weeks, so that you can contemplate how well each party grasps the core issues and engage in lively and informed discussions with your colleagues. This will be followed up with a summary podcast at the end of the series.

This week we start with Russel Norman, co-leader of The Greens. As you know, Russel is new to the leadership game, and the Greens being a small party with an agenda focussed on sustainability issues, they don’t have well-developed policies in this area. For all of that, I was struck by Russel’s openness and willingness to incorporate new thinking into the Green agenda. After the interview was over, he said that he was seeking assistance from interested investors to help The Greens with policy formulation.

Key positions:

To encourage innovation in the “right” areas:

• The right pricing structures need to be put in place
• The right tax incentives need to be in place
• Publicly funded science research should be shored up

The Green Revolution is where the future of business should be.

The broadband backbone should be publicly owned as a key piece of national infrastructure; National and Labour haven’t gone far enough with their current policies

The Greens support a capital gains tax, excluding the family home, and possibly investment into “higher risk R&D-type investments”.

Foreign Direct Investment is good, but not where it results merely in the extraction of dividends overseas. The Overseas Investment Office says “yes” too often now, and would be encouraged to look closely on the net benefit of each investment to the NZ economy.

Listen to (or download) the podcast: