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New Zealand’s innovation ecosystem –
       emerging conclusions


            November, 2009
           www.nzinstitute.org
SUMMARY


1. Lifting innovation ecosystem performance would provide valuable
   economic benefits


2. New Zealand is making efforts to lift innovation ecosystem
   performance but there is a long way to go


3. The New Zealand Institute proposes directions for development of
   the innovation ecosystem that would improve outcomes




                                                                      2
LIFTING INNOVATION ECOSYSTEM PERFORMANCE
WOULD PROVIDE VALUABLE ECONOMIC BENEFITS

New Zealand needs higher productivity and a stronger current account

Recent sources of economic growth should not be relied on


Innovation provides opportunities to lift productivity and exports


Innovation ecosystem performance is important for success of
advanced economies




                                                                       3
NEW ZEALAND’S INCOME IS LOW RELATIVE TO OTHER
      ADVANCED ECONOMIES
                       Real per Capita GDP (OECD average = 100)
      150
      140
      130
      120                                                         Australia
      110
      100                                                         OECD Average
       90                                                         New Zealand
       80
       70
       60
       50
        70



                  75



                         80



                                85



                                       90



                                              95



                                                     00



                                                             05
      19



                19



                       19



                              19



                                     19



                                            19



                                                   20



                                                           20

Source: OECD.                                                                 4
IMPROVING LABOUR PRODUCTIVITY IS A PRIORITY


                                                                                                                  Luxembourg
                       140
                                                       Iceland
                       130
                       120         New Zealand                    Switzerland
                                                                                          Ireland
                                                             Canada
                       110                         Japan
                                                                 Australia                          USA
                                              Greece               Finland      Denmark
      Hours            100                                                       Sweden
                                                                                                    Netherlands   Norway
    worked per          90                                 Spain
                                                                                     UK
                                                                                             Austria
   capita, 2008                                                         Italy                         Belgium
                                                                                Germany
                        80                                                            France

                        70
                        60
                               60         70        80             90        100 110 120 130 140 150 160
                                                                   Output per hour worked, 2008

Note: OECD average is 100.
Source: Groningen Growth and Development Centre and the Conference Board, Total Economy Database, April 2009.              5
NEW ZEALAND HAS NOT KEPT UP WITH OECD
       EXPORT GROWTH

                                                  Real Value of Goods and Services Exports,
             800                                              (Index 1971 = 100)

             700                                                                                                                                    OECD

             600
             500
                                                                                                                                                    New Zealand
             400
             300
             200
             100
                 0
                      1971
                             1973
                                    1975
                                           1977
                                                  1979
                                                         1981
                                                                1983
                                                                       1985
                                                                              1987
                                                                                     1989
                                                                                            1991
                                                                                                   1993
                                                                                                          1995
                                                                                                                 1997
                                                                                                                        1999
                                                                                                                               2001
                                                                                                                                      2003
                                                                                                                                             2005
Source: World Development Indicators                                                                                                                          6
RECENT SOURCES OF ECONOMIC GROWTH SHOULD
NOT BE RELIED ON

  Source           Potential   Comment
  Working harder       X       Working hours already 10% higher
                               than OECD average
  Property boom        X       Debt level high
  Agriculture          ?       Prices may increase again if/when
                               economy grows
                               Little available land and
                               environmental constraints
  Tourism              ?       Limited by emerging emissions
                               constraints and changing values
                               Local environmental pressure limits
                               also emerging




                                                                     7
INNOVATION LIFTS PRODUCTIVITY AND PROFITS


                                    Innovators                                   Non-Innovators

                                  0      20      40      60                      0   20     40    60


                 Increase in                                       Increase in
                                                       48                                   32
                productivity                                      productivity

             Higher
                                                        Higher productivity
         productivity than                     28                                      18
                                                         than competitors
           competitors

       Higher profitability                             Higher profitability
                                            20                                       12
        than competitors                                 than competitors




Source: Statistics New Zealand, Innovation in New Zealand 2007.                                        8
SCIENCE PROVIDES AN IMPORTANT FOUNDATION
FOR INNOVATION

•   Scientific capacity provides graduates, contract research, discoveries, intellectual
    property and new businesses


•   “With science exerting a more important and direct influence on innovation, especially
    in fast-growing new industries, the intensity and quality of industry-science linkages
    play an increasing role in determining returns on investment”
                              -   OECD Work on Innovation: A stocktake of existing work
•   “Innovation is a key driver of economic growth. In the last couple of decades, new
    technologies, new industries and new business models have powered impressive
    gains in productivity and GDP growth”
                     -   OECD Making innovation strategy succeed in a globalised world
•   Many studies have round that R&D – the most narrow construct of innovation – has a
    significant effect on growth in real per capita GDP




                                                                                             9
GO-GLOBAL BUSINESSES PROVIDE THE GREATEST
BENEFIT

Go-global businesses are those that are formed to target international
markets

Go-global businesses provide valuable benefits
   • Value-added costs of the science and business development
      contributing to GDP
   • High value jobs
   • Export revenues and dividend income contribute to improve
      current account balance
   • Wealth from sale of stakes in the businesses
   • Networks and experienced talent for the next venture



                                                                         10
THE MORE INNOVATIVE ADVANCED ECONOMIES TEND
     TO PRODUCE HIGHER LEVELS OF INCOME




2008
GDP per
capita
US$PPP




                                Innovation and Sophistication GCI value 2009/10


Source: World Economic Forum Global Competitiveness Report 2009/10.               11
NEW ZEALAND HAS PUT INCREASED EFFORT INTO THE
INNOVATION ECOSYSTEM AND MADE PROGRESS

New Zealand has increased the resources applied to innovation
   • Increased the number of researchers
   • Increased the Gross Expenditure on Research and Development (GERD) by
     5% per annum for the decade to 2005, when GERD was $1.1 billion
There have been changes and adjustments made to how research is funded and
which organisations conduct the research
   • Business incubators
   • New Zealand Venture Investment Fund (NZVIF)
   • Seed Co-Investment Fund (SCIF)
   • Angel investment clubs
These efforts have had an impact
   • Trebled the number of researchers and maintained the patents per
      researcher
   • Increased the GERD per capita (PPP) from US$165 in 1995 to 290 in 2005


                                                                              12
NEW ZEALAND HAS INCREASED THE NUMBER OF
  RESEARCHERS
                                 Number of researchers per 1000 employees


                                                            New Zealand has nearly trebled the
                                                            number of researchers over the decade,
                                                            from 6,104 in 1995 to 17,235 in 2005.




Note: New Zealand values are for 1995 and 2005. Australia 2006 only.
Source: OECD Main Science and Technology Indicators, 2008.                                           13
NEW ZEALAND HAS ALMOST MAINTAINED LEVEL OF
       OUTPUT PER RESEARCHER
                                  Number of patent families per 1000 researchers




Note: New Zealand values are for 1995 and 2005. Australia 2006 only. The OECD tracks patent family unit ,which is defined as a set of patents taken
in various countries to protect a single invention or discovery.
Source: OECD Main Science and Technology Indicators, 2008.                                                                                          14
YET NEW ZEALAND REQUIRES FURTHER IMPROVEMENT
FROM THE INNOVATION ECOSYSTEM

The improvements have not been enough
   • New Zealand‟s GERD per capita remains low relative to other OECD
      countries, indicating that we are not investing as much as other countries
   • New Zealand‟s Business Expenditure on Research and Development
      (BERD) is particularly low
   • New Zealand achieves about half as many patents as the leading
      countries, per $ spent on R&D
One of the areas that has been identified as a challenge for New Zealand is the
  commercialisation process
   • A simplified typology of how to generate income from research and
     development activities presents three distinct forms of income
   • All three of these means of generating income are used in an effective
     innovation ecosystem, but a mature and highly productive system will
     include significant income from business formation

                                                                                   15
NEW ZEALAND’S GERD EXPENDITURE ON RESEARCH
AND DEVELOPMENT IS WELL BELOW THE OECD AVERAGE

                                                        GERD per capita



                                                                                                                               OECD
                                                                                                                               average
                                                                                                                               2006




Note: Gross Expenditure on Research and Development (GERD). New Zealand, Mexico values are for 1995 and 2005. Australia 2006 only.
Source: OECD Main Science and Technology Indicators, 2008.                                                                               16
LACK OF BUSINESS INVESTMENT CREATES A
   SUBSTANTIAL GAP

      1,200
                Business Expenditure on Research and Development (BERD) per capita

      1,000
                                                                                                New Zealand‟s BERD, at 0.51% of GDP
         800                                                                                    in 2008 is about one-third of the OECD
                                                                                                average of 1.56% of GDP in 2006.
         600

         400

         200

            -
                              Japan




                                                                                                                                  UK
                                                                                                                        Ireland
                                      USA
                     Sweden




                                                                                                                                                                                    Mexico
                                                                  Korea
                                            Singapore




                                                                                                                                                   New Zealand
                                                                          Germany




                                                                                                                                       Czech Rep


                                                                                                                                                                 Hungary
                                                                                                                                                                           Poland
                                                                                                 Canada
                                                                                    Australia
                                                        Denmark




                                                                                                          Netherlands




Note: New Zealand values is for 2005.
Source: OECD Main Science and Technology Indicators, 2008.                                                                                                                                   17
OTHER COUNTRIES ACHIEVE MORE WITH EACH GERD
   DOLLAR
            120               Number of patent families per $B GERD, 2006

            100

              80

              60

              40

              20

                0




                                                                                                                                                                                                 Mexico
                                                                                                                                                                                        Turkey
                                                                                  NewZealand
                                                                                               Italy
                              Germany




                                                         Denmark




                                                                                                       Norway
                                                                                                                Canada
                      Japan




                                                                   Finland




                                                                                                                                   Australia
                                                                             UK




                                                                                                                         Ireland




                                                                                                                                                           Spain
                                                France




                                                                                                                                                                   Greece
                                        Korea




                                                                                                                                               Singapore




                                                                                                                                                                            Czech Rep
Note: Gross Expenditure on Research and Development (GERD). The OECD tracks patent family unit ,which is defined as a set of patents taken in
various countries to protect a single invention or discovery. New Zealand value is for 1995.
Source: OECD Main Science and Technology Indicators, 2008.                                                                                                                                                18
THREE WAYS TO COMMERCIALISE SCIENCE
Contract fees for specified research
   Existing Firm has                      Conduct                   Contract Fee
                       Agree Contract
    IP to Develop                       Development                   Income




License fees and (likely) contract fee income
                                                                      License
     Discovery          Develop IP       License
                                                                      Income


                                          Agree         Conduct     Contract Fee
                                         Contract     Development     Income



Business formation
                                          Form                      Business Value or
      Discovery         Develop IP
                                         Business                    Equity Income


                                          Agree         Conduct     Contract Fee
                                         Contract     Development     Income
                                                                                   19
BENEFITS DIFFER DEPENDING ON THE TYPE OF
INCOME

 Research income      Benefits
                      • Quick and relatively low investment cashflow
                      • Supports establishment of larger scale infrastructure
 Contract fees
                      • Provides experience


                      • Capture value from IP without additional investment
                      • Leverage business infrastructure and customer
 License fees          relationships of others


                      • Capture greater share of profit
                      • Develop customer relationships
 Business formation
                      • Control over IP application and extension




                                                                                20
GO-GLOBAL BUSINESS &                         IMPLICATIONS FOR
INNOVATION ECOSYSTEM                         ECOSYSTEM SUCCESS
CHARACTERISTICS                              REQUIREMENTS

 •   Diverse inputs required                 •   Each kind of resource must be
 •   Many steps from research to                 available in the required quantity,
     international commercial success            when needed
 •   High risk                               •   Highly skilled talent required
 •   Specialised skills required             •   Important to get product-market
                                                 strategy right first time
 •   Speed is important
                                             •   Strong governance needed with
 •   Many opportunity development options
                                                 appropriate performance metrics
 •   Increasing returns for the innovation
                                             •   Focus effort where critical mass can
     ecosystem
                                                 be achieved
                                             •   Invest sufficiently to be world-class




                                                                                   21
OPPORTUNITIES TO IMPROVE NEW ZEALAND’S
INNOVATION ECOSYSTEM – EMERGING CONCLUSIONS

•   Evolve towards at-scale research institutes
•   Aggregate commercialisation units so all are at-scale
•   Ensure effective links between research units and commercialisation units
•   Ensure performance incentives for commercialisation units and institutes
    provide sufficient incentive for go-global business formation
•   Ensure sufficient supply of talented people
•   Bring stronger voice-of-market to research and to business and offer
    development
•   Increase the availability of capital for expansion
•   Develop cultural attributes that will better support innovation ecosystem
    success



                                                                                22
EVOLVE TOWARDS AT-SCALE RESEARCH INSTITUTES

                   Why?                                       How?

 Larger organisations can better          Focus where New Zealand can have economic
 afford and retain world-class             strength
 leadership
                                          Base where New Zealand already has strength
 Stronger internal and external           Connect smaller, related units to access scale
 networks
                                          Target >200 people at maturity

 More sustainable based on                Build around or attract world-class leadership
 resources to address succession          Assess performance via international peer
 issues and establish positive internal    review teams
 cultures
                                          Fund for long term: 5 – 6 years

 Can attract and afford more              Adjust funding based on peer review and
 specialist support                        potential
                                          Expect institutes to develop revenue streams


                                                                                           23
AGGREGATE COMMERCIALISATION UNITS SO ALL
ARE AT-SCALE
                  Why?                                        How?

Diverse range of skills required for           Aggregate units to ensure all are at scale
success
    • Science                                  At-scale means at least 8 – 10 people
    • Commercialisation
    • Market understanding                     Larger units may be better but keep
                                               several New Zealand units
Critical mass needed for succession
without loss of key skills and relationships   Where possible, combine units in related
                                               fields to gain benefits from networking and
                                               specialisation




                                                                                             24
ENSURE EFFECTIVE LINKS BETWEEN RESEARCH UNITS
AND COMMERCIALISATION UNITS
                   Why?                                     How?
Scientists are not often interested in       Ensure local presence of
commercialisation, nor do they have the      commercialisation units at research units
required skills
                                             Use a hub-and-spoke structure when
Further development is usually required      research units served are not co-located
before research results can be considered
for commercialisation
                                             Ensure sufficient resources to develop
Relationships between researchers,           commercialisation opportunities with
commercialisation unit staff and potential   potential
commercial clients are important for
success                                      Describe research results in a standard
                                             way and make results available more
Strong relationships provide the             widely
foundation for effective networks




                                                                                         25
ENSURE PERFORMANCE INCENTIVES PROVIDE SUFFICIENT
INCENTIVE FOR GO-GLOBAL BUSINESS FORMATION
                  Why?                                       How?
Formal performance measures for               Ensure commercialisation units are
commercialisation units emphasise short       resourced sufficiently
term revenue and profitability but not long
term value creation                           People and funding to identify and develop
                                              research results so they are ready for
Therefore commercialisation units lack        commercialisation
incentives to form businesses that would
provide returns                               Capital for business formation

Despite this, commercialisation units do      Ensure commercialisation units have long
form businesses, but they should have         term value-growth metrics that encourage
explicit incentives to encourage them to      the go-global option when it has
develop equity participation opportunities    worthwhile potential




                                                                                           26
ENSURE SUFFICIENT SUPPLY OF TALENTED PEOPLE –
GENERAL SKILLS
                 Why?                                       How?
                                             Monitor key skills demand and supply via
                                             linkages with go-global leaders and
The market does not supply sufficient
                                             agencies and continue to add supply until
skilled talent for go-global business
                                             gap is closed
because the innovation ecosystem is
growing                                      Review immigration strategy and policy to
                                             encourage world-class scientists,
Entrepreneurship/leadership, international
                                             entrepreneurs and marketers to move to
market entry and go-global governance
                                             New Zealand
skills are in short supply
                                             Systematically connect successful New
Efforts have been made to increase the
                                             Zealand based and returning
supply but these have not yet been
                                             entrepreneurs with networks that can
sufficient to overcome the shortage
                                             leverage their skills
                                             Expand internship opportunities for
                                             science and business students to work in
                                             go-global companies




                                                                                         27
ENSURE SUFFICIENT SUPPLY OF TALENTED PEOPLE –
SPECIFIC SKILLS
 Skill area            How
 Scientist skills      Accelerate the inclusion of business studies opportunities in science
                       courses; subjects and joint degrees
                       Provide structured opportunities for scientists to learn business
                       formation, offer development and market entry
 Director skills       Establish formal learning opportunities for go-global directors

                       Establish a broking activity to connect aspiring go-global directors with
                       companies that need them
 Entrepreneur and      Increase training opportunities for current and aspiring entrepreneurs
 go-global leader      and go-global business leaders
 skills                     Ensure focus on practical aspects
 Marketing and         Develop and disseminate understanding of go-global go-to-market
 market entry skills   strategy
                       Establish specialised opportunities for business leaders and marketing
                       and sales professionals to learn about launching new products into new
                       markets
                                                                                                   28
BRING STRONGER VOICE-OF-MARKET TO RESEARCH
AND TO BUSINESS AND OFFER DEVELOPMENT
           Why?                                             How?
Understanding market needs       Ensure participants in the innovation ecosystem in
is critical for success of go-   New Zealand understand the importance of voice-of-
global ventures                  market early in research and development

Newly formed ventures            Require governance sign-off that a market opportunity
usually have limited cash,       has been identified before committing funds
production-oriented staff, and   Research projects with a commercial purpose
want to get to market quickly
                                 Ensure governance of public funding includes input
Many develop their offers        from practitioners bringing the market perspective
without sufficient voice-of-     Refocus NZTE efforts so international connections
market
                                 are made earlier to guide offer development and
                                 channel identification
The result is the offer does
not fit with market needs and    Build networks with overseas New Zealanders,
the business needs to            including via KEA, to allow commercialisation units to
complete another round of        extend their voice-of-market reach
development
                                 Develop for market input and as source of
                                 international directors

                                                                                          29
INCREASE THE AVAILABILITY OF CAPITAL FOR EXPANSION

                    Why?                                        How?
New Zealanders have relatively low         Ensure macroeconomic settings encourage
wealth overall and it is concentrated in      investment in productive assets
housing investments                        Consider further encouraging investment in go-
                                              global opportunities
There is limited supply of expansion       Focus on reducing the losses from failure; the
capital for go-global ventures                upside is already there
    • Equity investors usually limited     Facilitate expansion of equity investment funds
      to a few million dollars maximum        that allow individual investors to invest in the
    • Debt funding is hard to source          go-global sector
      given high risk of the sector and    Create opportunities for unskilled passive
      security available                      investors to co-invest with skilled investors
                                              who have skin in the game
The result is that the investment          Encourage financial institutions to offer working
opportunity is not retained in New            capital funding products for expanding
Zealand                                       businesses
                                           Consider sharing risk if the line-of-business is
                                              not viable on a standalone basis


                                                                                                 30
DEVELOP CULTURAL ATTRIBUTES THAT WILL BETTER
  SUPPORT INNOVATION ECOSYSTEM SUCCESS
                  Why?                                        How?
Culture has a powerful effect on           Create excitement around go-global
economic development                       companies and motivate talented people to
                                           join the sector
Some New Zealand cultural                  Ensure participants in the innovation
characteristics impede the success of      ecosystem understand the importance of early
our go-global companies                    voice of market and of marketing, and are
  • Lack of aspiration and sizzle around   encouraged to improve our performance
    entrepreneurship                       Renew effort and increase investment in
  • Production mindset prevents us from    building networks
    being customer oriented
                                           Emphasise focused commercial introductions,
  • Poor preparation and presentation of
                                           not meet and greet
    our proposals
  • Independent style preference that      Expand opportunities for go-global leaders to
    inhibits working together and          learn how to develop and present commercial
    networking                             proposals
                                           Test of sufficiency based on skill levels of
                                           leaders making their first international foray

                                                                                            31
REQUIREMENTS FOR INNOVATION ECOSYSTEM
STRATEGY SUCCESS

•   Ensure the institutional structure provides for a single agency responsible for
    managing the innovation ecosystem as a whole
•   Improve performance and grow the innovation ecosystem
•   Pay as much attention to ensuring sufficient resources for commercialisation as to
    increasing the availability and flow of science that can be commercialised
•   Measure and manage the quantity and quality of supply of key inputs, especially skills
    and capital
•   Review innovation ecosystem measurement more generally and ensure appropriate
    measures are defined, collected and monitored
•   Close gaps between desired and actual performance; avoid a „tick-the-boxes‟
    approach
•   Deploy a long term strategy, recognise that success will take time and be patient
•   Invest sufficiently to move New Zealand, over time, from disadvantaged to at lease
    world class




                                                                                             32

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New Zealand's Innovation Ecosystem - Emerging Conclusions

  • 1. New Zealand’s innovation ecosystem – emerging conclusions November, 2009 www.nzinstitute.org
  • 2. SUMMARY 1. Lifting innovation ecosystem performance would provide valuable economic benefits 2. New Zealand is making efforts to lift innovation ecosystem performance but there is a long way to go 3. The New Zealand Institute proposes directions for development of the innovation ecosystem that would improve outcomes 2
  • 3. LIFTING INNOVATION ECOSYSTEM PERFORMANCE WOULD PROVIDE VALUABLE ECONOMIC BENEFITS New Zealand needs higher productivity and a stronger current account Recent sources of economic growth should not be relied on Innovation provides opportunities to lift productivity and exports Innovation ecosystem performance is important for success of advanced economies 3
  • 4. NEW ZEALAND’S INCOME IS LOW RELATIVE TO OTHER ADVANCED ECONOMIES Real per Capita GDP (OECD average = 100) 150 140 130 120 Australia 110 100 OECD Average 90 New Zealand 80 70 60 50 70 75 80 85 90 95 00 05 19 19 19 19 19 19 20 20 Source: OECD. 4
  • 5. IMPROVING LABOUR PRODUCTIVITY IS A PRIORITY Luxembourg 140 Iceland 130 120 New Zealand Switzerland Ireland Canada 110 Japan Australia USA Greece Finland Denmark Hours 100 Sweden Netherlands Norway worked per 90 Spain UK Austria capita, 2008 Italy Belgium Germany 80 France 70 60 60 70 80 90 100 110 120 130 140 150 160 Output per hour worked, 2008 Note: OECD average is 100. Source: Groningen Growth and Development Centre and the Conference Board, Total Economy Database, April 2009. 5
  • 6. NEW ZEALAND HAS NOT KEPT UP WITH OECD EXPORT GROWTH Real Value of Goods and Services Exports, 800 (Index 1971 = 100) 700 OECD 600 500 New Zealand 400 300 200 100 0 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Source: World Development Indicators 6
  • 7. RECENT SOURCES OF ECONOMIC GROWTH SHOULD NOT BE RELIED ON Source Potential Comment Working harder X Working hours already 10% higher than OECD average Property boom X Debt level high Agriculture ? Prices may increase again if/when economy grows Little available land and environmental constraints Tourism ? Limited by emerging emissions constraints and changing values Local environmental pressure limits also emerging 7
  • 8. INNOVATION LIFTS PRODUCTIVITY AND PROFITS Innovators Non-Innovators 0 20 40 60 0 20 40 60 Increase in Increase in 48 32 productivity productivity Higher Higher productivity productivity than 28 18 than competitors competitors Higher profitability Higher profitability 20 12 than competitors than competitors Source: Statistics New Zealand, Innovation in New Zealand 2007. 8
  • 9. SCIENCE PROVIDES AN IMPORTANT FOUNDATION FOR INNOVATION • Scientific capacity provides graduates, contract research, discoveries, intellectual property and new businesses • “With science exerting a more important and direct influence on innovation, especially in fast-growing new industries, the intensity and quality of industry-science linkages play an increasing role in determining returns on investment” - OECD Work on Innovation: A stocktake of existing work • “Innovation is a key driver of economic growth. In the last couple of decades, new technologies, new industries and new business models have powered impressive gains in productivity and GDP growth” - OECD Making innovation strategy succeed in a globalised world • Many studies have round that R&D – the most narrow construct of innovation – has a significant effect on growth in real per capita GDP 9
  • 10. GO-GLOBAL BUSINESSES PROVIDE THE GREATEST BENEFIT Go-global businesses are those that are formed to target international markets Go-global businesses provide valuable benefits • Value-added costs of the science and business development contributing to GDP • High value jobs • Export revenues and dividend income contribute to improve current account balance • Wealth from sale of stakes in the businesses • Networks and experienced talent for the next venture 10
  • 11. THE MORE INNOVATIVE ADVANCED ECONOMIES TEND TO PRODUCE HIGHER LEVELS OF INCOME 2008 GDP per capita US$PPP Innovation and Sophistication GCI value 2009/10 Source: World Economic Forum Global Competitiveness Report 2009/10. 11
  • 12. NEW ZEALAND HAS PUT INCREASED EFFORT INTO THE INNOVATION ECOSYSTEM AND MADE PROGRESS New Zealand has increased the resources applied to innovation • Increased the number of researchers • Increased the Gross Expenditure on Research and Development (GERD) by 5% per annum for the decade to 2005, when GERD was $1.1 billion There have been changes and adjustments made to how research is funded and which organisations conduct the research • Business incubators • New Zealand Venture Investment Fund (NZVIF) • Seed Co-Investment Fund (SCIF) • Angel investment clubs These efforts have had an impact • Trebled the number of researchers and maintained the patents per researcher • Increased the GERD per capita (PPP) from US$165 in 1995 to 290 in 2005 12
  • 13. NEW ZEALAND HAS INCREASED THE NUMBER OF RESEARCHERS Number of researchers per 1000 employees New Zealand has nearly trebled the number of researchers over the decade, from 6,104 in 1995 to 17,235 in 2005. Note: New Zealand values are for 1995 and 2005. Australia 2006 only. Source: OECD Main Science and Technology Indicators, 2008. 13
  • 14. NEW ZEALAND HAS ALMOST MAINTAINED LEVEL OF OUTPUT PER RESEARCHER Number of patent families per 1000 researchers Note: New Zealand values are for 1995 and 2005. Australia 2006 only. The OECD tracks patent family unit ,which is defined as a set of patents taken in various countries to protect a single invention or discovery. Source: OECD Main Science and Technology Indicators, 2008. 14
  • 15. YET NEW ZEALAND REQUIRES FURTHER IMPROVEMENT FROM THE INNOVATION ECOSYSTEM The improvements have not been enough • New Zealand‟s GERD per capita remains low relative to other OECD countries, indicating that we are not investing as much as other countries • New Zealand‟s Business Expenditure on Research and Development (BERD) is particularly low • New Zealand achieves about half as many patents as the leading countries, per $ spent on R&D One of the areas that has been identified as a challenge for New Zealand is the commercialisation process • A simplified typology of how to generate income from research and development activities presents three distinct forms of income • All three of these means of generating income are used in an effective innovation ecosystem, but a mature and highly productive system will include significant income from business formation 15
  • 16. NEW ZEALAND’S GERD EXPENDITURE ON RESEARCH AND DEVELOPMENT IS WELL BELOW THE OECD AVERAGE GERD per capita OECD average 2006 Note: Gross Expenditure on Research and Development (GERD). New Zealand, Mexico values are for 1995 and 2005. Australia 2006 only. Source: OECD Main Science and Technology Indicators, 2008. 16
  • 17. LACK OF BUSINESS INVESTMENT CREATES A SUBSTANTIAL GAP 1,200 Business Expenditure on Research and Development (BERD) per capita 1,000 New Zealand‟s BERD, at 0.51% of GDP 800 in 2008 is about one-third of the OECD average of 1.56% of GDP in 2006. 600 400 200 - Japan UK Ireland USA Sweden Mexico Korea Singapore New Zealand Germany Czech Rep Hungary Poland Canada Australia Denmark Netherlands Note: New Zealand values is for 2005. Source: OECD Main Science and Technology Indicators, 2008. 17
  • 18. OTHER COUNTRIES ACHIEVE MORE WITH EACH GERD DOLLAR 120 Number of patent families per $B GERD, 2006 100 80 60 40 20 0 Mexico Turkey NewZealand Italy Germany Denmark Norway Canada Japan Finland Australia UK Ireland Spain France Greece Korea Singapore Czech Rep Note: Gross Expenditure on Research and Development (GERD). The OECD tracks patent family unit ,which is defined as a set of patents taken in various countries to protect a single invention or discovery. New Zealand value is for 1995. Source: OECD Main Science and Technology Indicators, 2008. 18
  • 19. THREE WAYS TO COMMERCIALISE SCIENCE Contract fees for specified research Existing Firm has Conduct Contract Fee Agree Contract IP to Develop Development Income License fees and (likely) contract fee income License Discovery Develop IP License Income Agree Conduct Contract Fee Contract Development Income Business formation Form Business Value or Discovery Develop IP Business Equity Income Agree Conduct Contract Fee Contract Development Income 19
  • 20. BENEFITS DIFFER DEPENDING ON THE TYPE OF INCOME Research income Benefits • Quick and relatively low investment cashflow • Supports establishment of larger scale infrastructure Contract fees • Provides experience • Capture value from IP without additional investment • Leverage business infrastructure and customer License fees relationships of others • Capture greater share of profit • Develop customer relationships Business formation • Control over IP application and extension 20
  • 21. GO-GLOBAL BUSINESS & IMPLICATIONS FOR INNOVATION ECOSYSTEM ECOSYSTEM SUCCESS CHARACTERISTICS REQUIREMENTS • Diverse inputs required • Each kind of resource must be • Many steps from research to available in the required quantity, international commercial success when needed • High risk • Highly skilled talent required • Specialised skills required • Important to get product-market strategy right first time • Speed is important • Strong governance needed with • Many opportunity development options appropriate performance metrics • Increasing returns for the innovation • Focus effort where critical mass can ecosystem be achieved • Invest sufficiently to be world-class 21
  • 22. OPPORTUNITIES TO IMPROVE NEW ZEALAND’S INNOVATION ECOSYSTEM – EMERGING CONCLUSIONS • Evolve towards at-scale research institutes • Aggregate commercialisation units so all are at-scale • Ensure effective links between research units and commercialisation units • Ensure performance incentives for commercialisation units and institutes provide sufficient incentive for go-global business formation • Ensure sufficient supply of talented people • Bring stronger voice-of-market to research and to business and offer development • Increase the availability of capital for expansion • Develop cultural attributes that will better support innovation ecosystem success 22
  • 23. EVOLVE TOWARDS AT-SCALE RESEARCH INSTITUTES Why? How? Larger organisations can better Focus where New Zealand can have economic afford and retain world-class strength leadership Base where New Zealand already has strength Stronger internal and external Connect smaller, related units to access scale networks Target >200 people at maturity More sustainable based on Build around or attract world-class leadership resources to address succession Assess performance via international peer issues and establish positive internal review teams cultures Fund for long term: 5 – 6 years Can attract and afford more Adjust funding based on peer review and specialist support potential Expect institutes to develop revenue streams 23
  • 24. AGGREGATE COMMERCIALISATION UNITS SO ALL ARE AT-SCALE Why? How? Diverse range of skills required for Aggregate units to ensure all are at scale success • Science At-scale means at least 8 – 10 people • Commercialisation • Market understanding Larger units may be better but keep several New Zealand units Critical mass needed for succession without loss of key skills and relationships Where possible, combine units in related fields to gain benefits from networking and specialisation 24
  • 25. ENSURE EFFECTIVE LINKS BETWEEN RESEARCH UNITS AND COMMERCIALISATION UNITS Why? How? Scientists are not often interested in Ensure local presence of commercialisation, nor do they have the commercialisation units at research units required skills Use a hub-and-spoke structure when Further development is usually required research units served are not co-located before research results can be considered for commercialisation Ensure sufficient resources to develop Relationships between researchers, commercialisation opportunities with commercialisation unit staff and potential potential commercial clients are important for success Describe research results in a standard way and make results available more Strong relationships provide the widely foundation for effective networks 25
  • 26. ENSURE PERFORMANCE INCENTIVES PROVIDE SUFFICIENT INCENTIVE FOR GO-GLOBAL BUSINESS FORMATION Why? How? Formal performance measures for Ensure commercialisation units are commercialisation units emphasise short resourced sufficiently term revenue and profitability but not long term value creation People and funding to identify and develop research results so they are ready for Therefore commercialisation units lack commercialisation incentives to form businesses that would provide returns Capital for business formation Despite this, commercialisation units do Ensure commercialisation units have long form businesses, but they should have term value-growth metrics that encourage explicit incentives to encourage them to the go-global option when it has develop equity participation opportunities worthwhile potential 26
  • 27. ENSURE SUFFICIENT SUPPLY OF TALENTED PEOPLE – GENERAL SKILLS Why? How? Monitor key skills demand and supply via linkages with go-global leaders and The market does not supply sufficient agencies and continue to add supply until skilled talent for go-global business gap is closed because the innovation ecosystem is growing Review immigration strategy and policy to encourage world-class scientists, Entrepreneurship/leadership, international entrepreneurs and marketers to move to market entry and go-global governance New Zealand skills are in short supply Systematically connect successful New Efforts have been made to increase the Zealand based and returning supply but these have not yet been entrepreneurs with networks that can sufficient to overcome the shortage leverage their skills Expand internship opportunities for science and business students to work in go-global companies 27
  • 28. ENSURE SUFFICIENT SUPPLY OF TALENTED PEOPLE – SPECIFIC SKILLS Skill area How Scientist skills Accelerate the inclusion of business studies opportunities in science courses; subjects and joint degrees Provide structured opportunities for scientists to learn business formation, offer development and market entry Director skills Establish formal learning opportunities for go-global directors Establish a broking activity to connect aspiring go-global directors with companies that need them Entrepreneur and Increase training opportunities for current and aspiring entrepreneurs go-global leader and go-global business leaders skills Ensure focus on practical aspects Marketing and Develop and disseminate understanding of go-global go-to-market market entry skills strategy Establish specialised opportunities for business leaders and marketing and sales professionals to learn about launching new products into new markets 28
  • 29. BRING STRONGER VOICE-OF-MARKET TO RESEARCH AND TO BUSINESS AND OFFER DEVELOPMENT Why? How? Understanding market needs Ensure participants in the innovation ecosystem in is critical for success of go- New Zealand understand the importance of voice-of- global ventures market early in research and development Newly formed ventures Require governance sign-off that a market opportunity usually have limited cash, has been identified before committing funds production-oriented staff, and Research projects with a commercial purpose want to get to market quickly Ensure governance of public funding includes input Many develop their offers from practitioners bringing the market perspective without sufficient voice-of- Refocus NZTE efforts so international connections market are made earlier to guide offer development and channel identification The result is the offer does not fit with market needs and Build networks with overseas New Zealanders, the business needs to including via KEA, to allow commercialisation units to complete another round of extend their voice-of-market reach development Develop for market input and as source of international directors 29
  • 30. INCREASE THE AVAILABILITY OF CAPITAL FOR EXPANSION Why? How? New Zealanders have relatively low Ensure macroeconomic settings encourage wealth overall and it is concentrated in investment in productive assets housing investments Consider further encouraging investment in go- global opportunities There is limited supply of expansion Focus on reducing the losses from failure; the capital for go-global ventures upside is already there • Equity investors usually limited Facilitate expansion of equity investment funds to a few million dollars maximum that allow individual investors to invest in the • Debt funding is hard to source go-global sector given high risk of the sector and Create opportunities for unskilled passive security available investors to co-invest with skilled investors who have skin in the game The result is that the investment Encourage financial institutions to offer working opportunity is not retained in New capital funding products for expanding Zealand businesses Consider sharing risk if the line-of-business is not viable on a standalone basis 30
  • 31. DEVELOP CULTURAL ATTRIBUTES THAT WILL BETTER SUPPORT INNOVATION ECOSYSTEM SUCCESS Why? How? Culture has a powerful effect on Create excitement around go-global economic development companies and motivate talented people to join the sector Some New Zealand cultural Ensure participants in the innovation characteristics impede the success of ecosystem understand the importance of early our go-global companies voice of market and of marketing, and are • Lack of aspiration and sizzle around encouraged to improve our performance entrepreneurship Renew effort and increase investment in • Production mindset prevents us from building networks being customer oriented Emphasise focused commercial introductions, • Poor preparation and presentation of not meet and greet our proposals • Independent style preference that Expand opportunities for go-global leaders to inhibits working together and learn how to develop and present commercial networking proposals Test of sufficiency based on skill levels of leaders making their first international foray 31
  • 32. REQUIREMENTS FOR INNOVATION ECOSYSTEM STRATEGY SUCCESS • Ensure the institutional structure provides for a single agency responsible for managing the innovation ecosystem as a whole • Improve performance and grow the innovation ecosystem • Pay as much attention to ensuring sufficient resources for commercialisation as to increasing the availability and flow of science that can be commercialised • Measure and manage the quantity and quality of supply of key inputs, especially skills and capital • Review innovation ecosystem measurement more generally and ensure appropriate measures are defined, collected and monitored • Close gaps between desired and actual performance; avoid a „tick-the-boxes‟ approach • Deploy a long term strategy, recognise that success will take time and be patient • Invest sufficiently to move New Zealand, over time, from disadvantaged to at lease world class 32