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.
The New Zealand Institute has issued its second installment of its series of papers on the implications of the global financial crisis for New Zealand, following on from its “End of the Golden Weather” paper released late last year.
Their key point is that New Zealand is very vulnerable to impacts through the credit channel on business activity and investment. The policy response required entails focus on maintaining the availability and stability of credit, rather than compensating for sluggish demand.
There is also a significant (but not large) risk that there will be an abrupt withdrawl of credit from overseas lenders, however this risk is mitigated by the relatively strong position of local banks compared to their overseas counterparts.
The institute also published a presentation outlining suggested remidies for this situation entitled Heavy Mountain Weather: Funding risks for New Zealand and proposed solutions, which concludes:
New Zealand is being impacted through the growth channel (especially commodity prices, tourism and other export markets). But it is the credit channel where the greatest risks remain.
New Zealand is different to the rest of the world. We have some advantages (a stronger banking system) but different vulnerabilities (dependence on offshore funding). New Zealand faces tighter fiscal constraints that limit options that involve increased government spending.
New Zealand’s response must include an ability to support strategic New Zealand businesses, should they face funding difficulties that threaten their viability or makes them vulnerable to foreign take-overs.
The response should leverage the Government balance sheet and create a conduit for Government strategic investment in companies, should this be required. The response should also include leveraging private sector investment through a government underwriting function and measures to attract overseas funds to invest in high return projects.
A range of options should be considered; including the creation of a New Zealand growth fund that would leverage SOE assets, invest in other companies and run on a clear commercial basis with transparent governance.
The rest of the response should contribute to a long term game plan for the country: to position New Zealand ahead of other countries in seizing opportunities as the world emerges from the global recession.
The long term game plan should also correct the policy mistakes that have left a legacy of very high indebtedness to the rest of the world and increased New Zealand‘s vulnerability in the present crisis.
Both papers are well worth a read.
You can also listen to or download the author Benedikte Jensen discussing the papers in a segment from this morning’s Morning Report programme on National Radio.
Two reports have come out in the last few days providing some interesting direction for angel investors, as well as the general NZ economy.
The US Angel Capital Association’s Angel Group Confidence Report shows that US angels are planning on reducing activity by about 10% in 2009. That’s not too bad, considering the backdrop of economic chaos.
Interesting factoids:
72% of angels expect a liquidity timeline of at least five years post-investment
In 2008, groups closed on average 4.82 deals worth USD 1.3M, or about USD 270K per deal
Roughly 50% expect deal quality to increase next year, with another 35% expecting it to stay the same
Syndication is common and becoming pervasive in the US, with 72% of groups co-investing with other angel groups in 2008, and 90% planning on doing so in 2009.
Some of the comments are also instructive:
“The ability to syndicate deals to fill out the round will become a competitive advantage, making angel groups a significantly more attractive source of funding than lone wolf angels (who therefore might decide to join groups).”
“Any portfolio company currently trying to raise money is having a hard time. We will need to have follow on money to protect our investments, yet members may decide to risk their initial investment rather than liquidate public market stock at current valuations. Portfolio companies must tighten their belts immediately.”
“Valuations are down; opportunities can be found in a variety of sectors (e.g., software, therapeutics, diagnostics) with seasoned mgt teams that have weathered similar recessionary periods. “Grey hair” around the Board tables will be more valuable than ever.”
As we know, angels tend to be optimists…
So moving from the microcosm of US angel investment to the Entire Economy of New Zealand (guess which is bigger), pour yourself a long drink before sitting down to read the The New Zealand Institute’s essay, “The end of the golden weather: The financial crisis, global recession, and what this means for New Zealand”.
The author, Benedikte Jensen, does an excellent job of of summarising recent global economic events from a New Zealand perspective, and teasing out some of the implications.
It is not a happy story. She says,
Overall, it is likely that this recession will be protracted and the recovery will be weak and subdued – an L shaped recession – both for the world, but also for New Zealand… The challenge for policy makers is to ensure that the problem is properly recognised (i.e. not seeing this as simply a business cycle) and that an appropriate set of policy responses is put in place to ensure that there is an appropriate pathway back to sustained growth.”
The specific risks for NZ are identified as:
The end of the commodity boom creating vulnerabilities due to NZ’s reliance on commodity exporting
NZ’s high external indebtedness makes us vulnerable to sudden shifts in the sentiment and risk profile of overseas investors
Difficulties in attracting foreign investment due to our insignificance and investors’ risk aversion
The resulting likely retrenchment of local investment nobbling our ability to grow when we need it most
Jensen also notes that “the US is looking increasingly like Japan in the 1990s and an alternative engine of growth for the global economy is not apparent”.
Ouch.
This paper is the first in a six-part series. Paper 2, due out in January will address the implications of the global crisis for New Zealand. Further papers will be released during the next few months, concluding with paper 6, “New Zealand’s place in the world”. We look forward with some trepedation to reading the whole series.