Digital Economy & Innovation

Overview

1. Problems/opportunities identified
2. Relevant information/data
3. Examples of global leadership
4. Policy proposals

1. Problems/opportunities identified

1.1. A prosperous country in the Digital Age

New Zealand can once again be a prosperous country by becoming a global leader in the Digital Age. We lack the vision, leadership and determination to do so. New Zealand needs to make a conscious choice and set a path towards this goal urgently as it requires energy and change to every aspect of our social, political and economic lives- from education and infrastructure to expectations and culture.

The Internet is profoundly transforming every aspect of our society, allowing interconnectivity between individuals, the rapid spread of information, and access to global markets previously thought beyond the reach of local companies. It is leading to a change in the global economy at an unprecedented rate – a change that will continue as innovation responds to increased demand for new services and products. The digital economy is synonymous with innovation.

This presents a ‘once in a hundred years’ opportunity for every nation that chooses to be at the forefront of the digital revolution but requires leadership, strategic planning, and prioritisation of resources at a country level. The Internet presents the means for a geographically isolated country like New Zealand to overcome the tyranny of distance and forge greater interconnectedness with the global economy.

Digital technologies, including the Internet, are an opportunity to overcome persistent problems that New Zealand has faced over decades, such as low productivity, a low wage economy, and a lack of sufficient high quality jobs. New Zealanders work harder and earn less than most other people in the developed world. We are “Working hard but not smart”.

We now have many opportunities to attract investment by becoming a leader in the global digital economy, for example, by progressing policies that greatly enhance technological innovation and the incubation of ideas, by attracting large Internet companies to be based here, and by offering digital training to companies and individuals who see the potential of the digital revolution.

Ranked at the lower end of top 20 countries in global innovation indexes, New Zealand already has the beginnings of a burgeoning high-tech industry sector, whose success could be greatly expanded with the right government support and strategies for private and public sector research and development, the growth of innovation eco-systems, and the encouragement of university-generated start-up companies. The current second wave of start-ups in New Zealand shows potential to become the world’s incubator of ideas, innovation and design.

The digital economy, and New Zealand’s digital future, is not about high-tech firms and technology infrastructure alone. Every part of the economy has an increasingly digital aspect, making the whole economy a digital one. Firms that use Internet services more extensively are four years ahead of the average in their industry in terms of business competitiveness. If firms currently making low use of Internet services became more like high-using firms, it could be worth an additional $34 billion in productivity impacts.

New Zealand may seem handicapped by its geographic isolation and small domestic market, but in fact has a solid manufacturing base on which to grow science and innovation, which are considered the keys to lifting productivity and prosperity. Additionally, New Zealand is in the perfect position to attract talent and business by virtue of our beautiful scenery and laid back lifestyle. We can aspire to be the place where the best global talent wants to live. This is the fuel for the digital economy.

The digital economy does not automatically translate into benefits for all. Rapid advances in technology are creating unprecedented benefits and efficiencies, but there is no economic law that says everyone, or even a majority of people, will share in these gains. That is the challenge for Government.

1.2. New Zealand’s economy

Economies like ours based mainly on producing commodities (the top export commodities – dairy, meat, and wood – accounted for 47%of total exports) have poor long-term prospects in the modern knowledge-based developed world.

While the primary sector makes use of New Zealand’s vast natural resources, it does not employ a large number of Kiwis and is not likely to contribute to the development of knowledge in other industries. It has narrowed the focus of education, innovation, and research and development. All of this makes New Zealand a low complexity economy, vulnerable to global commodity trends beyond our control.

1.3. Lack of innovation

New Zealand’s level of innovation is lower than most other countries in the OECD. Research shows that the missing ingredient in New Zealand’s economy is support for innovation in sectors other than primary production. We do not yet have the kind of technological “innovation ecosystems” that have boosted the economies of similar-sized countries like Finland, Denmark and Israel.

1.4. Inadequate investment in research and development

New Zealand does not spend enough on research and development, and its opaque and competitive public research institutions do not foster the kind of innovation, knowledge and skills essential for smaller countries to lift economic performance. Public spending is focused narrowly on the primary sector, which means opportunities are being missed to develop and diversify other sectors of the economy. There is insufficient incentive for the private sector to invest in the kind of research and development that leads to technological innovation and market success.

1.5. Widening gap in knowledge and skills

New Zealand faces chronic shortages of skilled ICT staff. There are issues both with growing appropriate and sufficient skills in New Zealand as well as making it easy to attract the best talent in the world. Some firms have had to move development overseas to cope.

Most kids are leaving school ill-equipped for the Digital Age. Reviewing the positioning and content of Digital Technologies within the New Zealand Curriculum is long overdue. Non-university qualifications also need to be reviewed, both as career paths as well as their current lack of adequacy for immigration eligibility.

Some of the world’s prime examples of innovative success - such as South Korea, Israel and Singapore - are associated with a close relationship between education, talent, social cohesion, and the building of collaborative communities of scientists and technologists who are encouraged to interact, work in teams, and move around within employment circles, ensuring knowledge is portable, shared and available to stimulate enterprise within companies and research organisations.

Closing the knowledge and skills gap will be essential if New Zealand is to prosper in the Digital Age. There needs to be a new direction in education, both in schools and tertiary level, and better strategies to create innovation eco-systems and transform educational research outcomes into high-tech start-up companies.

1.6. Start-ups

There has been a noticeable pick-up in start-ups in New Zealand in recent times. Financial support for start-ups and rapidly growing companies can be difficult from a relatively narrow pool of venture capital and angel funding. The recent surge in IPOs (Initial Public Offerings) and emerging alternative sources such as crowdfunding equity are unlikely to provide a complete solution.

When a New Zealand start-up is sold to overseas buyers, there is often criticism about potential loss of jobs, government grants, control, future growth, and R&D work. Social enterprises and the potential for a distinctively different start-up ecosystem based on the Māori economy lie untapped and largely unrecognised.

1.7. The Digital Economy transformation framework

To assess the challenges and components of transforming New Zealand into a global leader in the Digital Age, the Internet Party has developed the following framework:

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Framework for the Digital Economy

The Digital Economy Framework helps to illustrate two critical points in the transformation challenge that New Zealand needs to take up. First, work needs to be done on all three tiers. There is little point in, for example, investing in infrastructure for the Digital Age without supporting institutions or taking a NZ Inc approach.

Second, the tiers are hierarchal. Leadership needs to drive Enablers that drives the Core. For example, laws and regulations need to be driven by Vision & Strategy, not the other way around.

The opportunity and need for Vision & Strategy has already been discussed. Also mentioned is the need for prioritisation, which is the use of scarce resources to make a ‘whole of New Zealand’ change ranging from education to infrastructure. NZ Inc refers to the need for greater partnership of government, business and individuals working towards the common vision over a decade long transformation.

Many aspects of the Enablers and Core are covered in separate Internet Party policy documents. This document focuses on Entrepreneurs, Supporting institutions, Pubic investment, skills and training, and some aspects of laws and regulations that are not otherwise covered elsewhere.

2. Relevant information/data

2.1. The Digital Economy

The “ digital economy” was defined in 2007 as representing “the pervasive use of IT (hardware, software, applications and telecommunications) in all aspects of the economy, including internal operations of organizations (business, government and non-profit); transactions between organizations; and transactions between individuals, acting both as consumers and citizens, and organizations… The reality is that while the benefits of new technologies are often exaggerated at first, they often turn out to exceed initial expectations in the moderate-to-long term.”

Another take on the digital economy is an innovation economy. What Definitions are hard to find, but most academics agree on one thing - innovation of the kind that drives economic progress is not linear and inevitable. Kline and Rosenberg began their overview of innovation with the comment that innovation is “complex, uncertain, somewhat disorderly and the subject of changes of many sorts”.

Robles said innovation economics is an economic doctrine “that reformulates the traditional model of economic growth so that knowledge, technology, entrepreneurship, and innovation are positioned at the centre of the model rather than seen as independent forces that are largely unaffected by policy.”

“Innovation economics is based on two fundamental tenets. One is that the central goal of economic policy should be to spur higher productivity and greater innovation. Second, markets relying on price signals alone will not always be as effective as smart public-private partnerships in spurring higher productivity and greater innovation. This is in contrast to the two other conventional economic doctrines, neoclassical economics and Keynesian economics.”

According to The Work Foundation, “ knowledge economy” refers to a transformed economy where investment in “knowledge-based” assets such as research and development, design, software, and human and organisational capital has become the dominant form of investment compared with investment in physical assets – machines, equipment, buildings and vehicles. The term appears to have derived from “knowledge worker”, coined by US management expert Peter Drucker.

The US Information Technology and Innovation Foundation says technological innovation, particularly in information technology, is at the heart of America’s growing economic prosperity.

“Crafting effective policies that boost innovation and encourage the widespread ‘digitization’ of the economy is critical to ensuring robust economic growth and a higher standard of living. However, as in any new and changing situation, policymakers have varied awareness of what is needed and what will work. In some cases legislators have responded to new and complex technology policy issues with solutions more suited for the old economy. And as the innovation economy has become increasingly important, opposition to it from special interests has grown.”

2.2. New Zealand’s economic context

“New Zealanders work harder and earn less than most other people in the developed world,” reads the first sentence in Get Off The Grass, a seminal treatise by leading Kiwi science researcher Professor Shaun Hendy and the late Sir Paul Callaghan on the need for New Zealand to grow an innovative economy and so find greater prosperity.

Measured by GDP ( Gross Domestic Product), our growth rate - while favourable at the moment - has historically lagged behind many Organisation for Economic and Co-operative Development (OECD) countries. We are “working hard but not smart”.

In their 2012 co-authored book Get Off The Grass, Hendy and Callaghan said the gap between ourselves and other OECD nations opened during the latter half of the 20th century [until 1984] when we delayed making essential structural changes to our economy. The lag in making changes [from 1985] left us trailing behind in absolute terms, “albeit with a gap that is no longer expanding”.

There was a sudden upturn in 1993 and from then on it has been close to those of Australia, Denmark and the OECD average. But to match Australia, New Zealand must increase its long-run productivity growth seven-fold.

The co-authors referred to the so-called “ New Zealand paradox”, which holds that we have one of the most liberal free market systems in the world, but it has not been matched by growth in productivity. It is something that puzzles many overseas commentators, who are questioning a global bank economist’s recent claim that we have a “rock star” economy.

In 2012, the World Bank declared New Zealand the easiest country in the world in which to start a new business, and the third easiest place to do business, while other global organisations rank us highly for the protection of legal rights, lack of barriers to free trade, and low tax burden on corporate dividends and personal incomes.

In 2011, in rankings showing how much revenue the government consumes, New Zealand - at 30%- ranked well below the OECD average of 35%, and a long way below countries we are urged to emulate, like Finland (54%) and Denmark (55%).

The OECD estimates that New Zealand should have GDP per capita 20% above the OECD average, but its weak productivity performance means it is 20% below. “In the long run, productivity is probably the single most important factor in determining a country’s wealth and wellbeing.”

Hendy and Callaghan have deduced that having one of the most laissez-faire markets in the world is not on its own enough to ensure prosperity.

The pain of fundamental change inflicted by the “ Rogernomics” reforms of the 80s Labour government has not resulted in a promised trickle down of prosperity. We have one of the developed world’s biggest gaps between rich and poor, and many New Zealanders believe it is getting worse.

According to Hendy and Callaghan, insufficient resources mean our health system is unable to provide treatments that are free in countries like Australia and Canada, our infrastructure is decrepit, our roads poor, our passenger train systems are an embarrassment, and many houses are inadequate or, even when new, badly built.

“Our native forests are in decline because we cannot afford to address pest control in a comprehensive manner. Our universities have been slipping in international rankings, solely because lack of investment has made it harder to retain and attract the best staff. Our young people see their futures abroad; we export 24% of our university graduates.”

They explored the reasons why there is in fact no mysterious paradox about New Zealand’s poor economic performance. They concluded the reasons were clearly linked to our over-reliance on primary production by the agricultural industries and, to some extent, hydrocarbons and mineral extraction.

While our agriculture is among the best performing in the world, these are not sectors that engender innovation of the kind needed to diversify the economy. They have generated an approach to research and development, and education, that neglects the path along which smaller countries are likely to find market success - the innovation, knowledge and digital, economies.

New Zealand remains largely dependent on traditional industries, such as primary products and tourism, which are not producing the jobs or high wages that can lead to a prosperous future.

2.3. New Zealand’s current economic trajectory

In the year ending December 2013, the total value of New Zealand’s goods and services exports was $64 billion. The largest increase in goods exports came from milk powder exports, up $1.8 billion to a record high of $8.7 billion.

China moved up the ranks to become our top destination for goods exports, of which just under half was dairy exports. The majority of export commodities were down, with much of the increase in exports coming from dairy destined for China. The top export commodities – dairy, meat, and wood – accounted for 47% of total exports.

Services exports fell 0.5% to $16 billion. The majority of services exports were down compared with the previous year, mainly due to falls in merchanting and film production services. Travel and transportation services, valued at $11.6 billion for the year ended December 2013, accounted for 72% of total service exports.

Some academics use the term “ economic geography” to describe why particular economic activities succeed in some places but not others.

According to Hendy and Callaghan, New Zealand’s economy is unusual for a developed nation - we have low population density (and a lack of big cities, where innovation can thrive), the most extreme geographical isolation, and the lowest export diversity of any advanced economy.

New Zealand’s high dependency on exporting commodities gives us what is known as a “ low complexity” economy, which means we tend to export products that many other countries can, and do, export. This is consistent with our lack of ability to take ideas to scale.

Having an economy dominated by the export of dairy, beef products, and logs has crucial impacts on innovation and knowledge. Hendy and Callaghan said the overall result was our “innovation eco-system” was “under-nourished” and “yet to reach its full potential”.

In comparison with Switzerland - which has 10 times the number of patents per person than New Zealand - our commodity-based economy lent itself less to patenting. “Productivity in the dairy sector, for example, relies heavily on animal and pasture varieties that are not typically protected by patents. Farm practices that boost productivity will also generally not be patentable.”

Economic development was path-dependent, they said. “Countries develop comparative advantage in new industries by assembling previously acquired knowledge and skills in new ways. Countries with comparative advantages mainly in commodities (like New Zealand) utilise highly specialised knowledge that does not readily lead to new industries.”

However, despite the bleak picture often drawn from our commodity-dependent economy, Hendy and Callaghan’s research highlighted a few striking instances of technological innovation leading to successful niche marketing, high income, and valuable shared knowledge. In one example, Gallagher, the company began as a manufacturer of electric fences for farms but now also makes security systems and electronic scales. A more recent example is the rise of Xero as a global scale online accounting and business services platform.

2.4. Changing course to a digital future

While a fundamental change of direction is needed, New Zealand does not actually have to begin from scratch to lift its economic performance. Total revenue from our top 100 technology companies (hi-tech manufacturing, biotech and ICT) exceeded $8 billion in 2012, with more than $5 billion coming from exports. Over the same period, there was about $11 billion in dairy exports.

More broadly, the technology industry is New Zealand’s fastest growing sector. Exports have doubled over the past six years and it’s the country’s third largest export earner behind dairy and tourism. On the domestic front, the technology sector accounts for 73,000 jobs and contributes 5% of GDP.

According to the ICT Sector Report 2013, the sector has strong employment growth, with wages and salaries twice the New Zealand average. Further, four times as many firms in this sector invest in research and development than the average for all sectors.

Export earnings by the high-tech companies have grown at 5% a year since 2006 (11% a year over the past two decades – 14% if inflation is accounted for). According to Hendy and Callaghan, if that growth rate is maintained, New Zealand’s high-tech exports will exceed dairy exports by around 2027 and dominate all exports by about 2040.

The vast majority of New Zealand high-tech companies are in software and ICT, electronics, digital media, consumer and industrial appliances and machinery, and specialised instrumentation. Only 5% of revenues came from the sort of companies linked with primary industry, biotechnology firms, “despite the high profile of this sector.”

Outlining a scenario for growth to take New Zealand up to the OECD average over the next 30 years, the authors calculated we would need 75 new $1 million, start-up, high-tech firms generating an extra $5 billion a year. To do it in 20 years, some 300 such start-ups would be needed.

“This may seem rather daunting, especially given the risks involved in starting such companies, but the pay-offs can be huge. The average worker in a [top 100 tech company] generates annual revenues of more than $250,000, compared to less than $120,000 for an average employee in the tourism sector.”

“New Zealand will need to take more risks if we are to close the gap in GDP with other advanced economies.” The authors believed the country was better placed to achieve that than most people understood.

A recent example is Rocket Lab, a New Zealand start-up that has developed a rocket system to carry small satellites into orbit, cutting the average cost of a launch by traditional means from $155 million to $6 million. Since its foundation in 2007 by New Zealander Peter Beck, Rocket Lab has received $25 million in government support and has partnered with Silicon Valley giant Khosla Ventures.

2.5. The whole economy is increasing digital

As Now Every Company Is A Software Company says, “Regardless of industry your company is now a software company, and pretending that it’s not spells serious peril. With hardware and software growing more capable at exponential rates, data of all sorts are increasingly getting into the hands of ordinary people—competitors, employees and, especially, customers… This transition to a new world of responsiveness and agility will be painful and require a new mind-set.”

Marc Andreessen in Why Software Is Eating The World says, “More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense… Software is also eating much of the value chain of industries that are widely viewed as primarily existing in the physical world.” Within a New Zealand context, physical businesses as diverse as Air New Zealand and Fonterra, with their reliance on the digital aspects of their operations, are good examples of the whole economy becoming a digital economy.

This raises new challenges for all businesses, whether they realise it or not. For example, perhaps the most valuable asset a company has today is its data and information. This is increasingly harder to protect.

The shift to a digital economy also provides new opportunities for all businesses, whether they realise it or not.

According to a recent pwc report, creative industries in New Zealand, including music, book publishing, and film and television have a direct impact of $1.6 billion with a total impact on GDP of $3.6 billion. NZ-made video games are booming, with industry earnings at $36 million dollars in 2012. The majority of that income came from exports of smartphone and online games – greater than film, music or TV royalty exports.

A 2012 report from MYOB found New Zealand businesses have been relatively slow to take advantage of the opportunities presented by the Internet. Just 35% of businesses in New Zealand have their own website, and only 14% of businesses are making use of cloud solutions or applications.

A closed group of organisations, businesses and sector leaders have formed The Innovation Partnership facilitated by Google to “drive greater innovation through the internet.”

According to a report they commissioned, The value of internet services to New Zealand businesses, which specifically looks at the economic impacts of the Internet for businesses outside the ICT sector, “Across the economy, firms that make more extensive use of Internet services are 6% more productive than average firms in their industry… So one way of expressing it is to say that firms that use Internet services more extensively are four years ahead of the average in their industry in terms of business competitiveness.”

The report goes on to say, “We estimate that if firms currently making low use of Internet services became more like high-using firms, it could be worth an additional $34 billion in productivity impacts, initially for those firms and through them for the nation’s economy as a whole.”

“New Zealand businesses are already highly connected. Ninety-six percent of businesses in our sample say they have access to the Internet… How much positive difference the Internet makes to economic performance depends on how well businesses make use of it, especially how much they use it to productively reorganise the way that they do things… Regardless of their sector, all our interviewees told us that Internet services brought a range of benefits including direct cost savings from technology-enabled processes, more efficient uses of resources, access to new business opportunities, time savings, and access to international markets.”

“…the real issue for productivity is how to get business using what they already have more effectively. This is the substance of the next Internet policy challenge.”

As MIT notes, the digital economy does not automatically translate into benefits for all. “While digital technologies are rapidly transforming both business practices and societies and are integral to the innovation-driven economies of the future, they are also the core driver of the great economic paradox of our time. On one hand, productivity, wealth, and profits are each at record highs; on the other hand, the median worker in America is poorer than in 1997, and fewer people have jobs. Rapid advances in technology are creating unprecedented benefits and efficiencies, but there is no economic law that says everyone, or even a majority of people, will share in these gains.”

An additional challenge in the digital economy is the tax challenges (the so-called BEPS or Base Erosion and Profit Shifting problem). Another is GST and requiring non-residents to charge and collect GST has been identified by the OECD as the most viable option to protect GST collections. Implementing this recommendation requires coordinated global action and a high degree of care to not throttle the Internet and the digital economy.

2.6. Need for more innovation

New Zealand is not the land of innovators that our number 8 wire mythology suggests. In fact, the average OECD country produces four times as many patents as New Zealand, wrote Hendy and Callaghan.

Countries like New Zealand that have neglected their innovation sectors have fared less well than those like Finland, which produces 10 times as many patents per person according to the latest OECD statistics.

The free market has on its own not supported enough innovation, for various complex reasons involving competition, lack of transparency and collaboration, risk, and a tendency to shift the onus to public funding.

The Government’s Building Innovation report says, “Successful innovation improves competitiveness, increases our output, drives productivity growth, and creates successful exports by introducing new or improved products, processes, or methods into the economy. Innovation is also essential to improving environmental, social and health outcomes.”

According to Mary Quin, head of Callaghan Innovation, “the big opportunity for Kiwi innovation is to increasingly join the dots between what different organisations are doing and to share expertise. Our deep capability [is] in five key areas: electro mechanical systems; software; agritech; food technology; and biotech. These are areas where New Zealand really has become world recognised as a great place to launch and grow these kind of companies because of the depth of scientific knowledge and innovation.”

One of the 20th century’s most influential economists, Harvard professor Joseph Schumpeter envisaged the kind of technological change needed in New Zealand as involving three steps - invention, innovation and diffusion. The first invents something, the second converts it into a marketable product or process, and the third spreads it into potential markets.

Hendy and Callaghan said inventions needed knowledge and experience (generated by investment in research and development), and then entrepreneurs to manufacture the result. “The amount of knowledge and capital available to entrepreneurs in an economy depends on conditions in the economy itself. Likewise, the state of the economy will depend on the ability of firms and entrepreneurs to innovate.”

“Crucially, each innovation adds to the stock of knowledge that can be built on by the next inventor and the next entrepreneur.”

They referred to a trend showing that the number of patents produced per person was related to city size, with Auckland ranking alongside similar-sized Australian cities. One of the problems for New Zealand, then, was a scarcity of large cities, whose relevance lay in the fostering of face-to-face collaboration between people at universities, research centres and private sector companies.

The co-authors identify some small clusters that already foster technological innovation in New Zealand (like the Waikato Innovation Park), and explore the possibilities of creating much larger innovation eco-systems that involve private sector company agglomeration, economies of scale, specialisation, inter-company collaboration, knowledge “spill-over” as a result of people more frequently changing employment (and not being shackled by restraint-of-trade rules), dissemination of new ideas, greater investment in more diverse research and development, targeted education, educationalists and students working in academic teams, and more accessible publicly funded knowledge.

For that to happen, there must be support from the right political and government strategies, such as subsidies for the co-location of innovating firms around universities and public research centres. They referred frequently to Finland, Denmark and Israel as examples of how different government and private sector approaches produced similarly buoyant levels of innovation and growth (see Global Leadership).

The lack of diversity in our economy and innovation system might also reduce the opportunities for inter-industry knowledge spill-overs.

Strong networks are key to creating spill-over effects to the wider community. By enhancing openness and community engagement in the entrepreneurial process, New Zealand can facilitate connection and collaboration within innovation circles.

In his book Where Good Ideas Come From: The Natural History of Innovation author Steven Johnson argues that throughout history great ideas have been developed and spread through networks. Chaotic environments and spaces in which different people from different background came together and shared their ideas have been the centrepieces of inventions, highlighting the importance of innovation ecosystems.

2.7. Inadequate investment in research and development

According to modern theories of economic growth, long-term growth rates are ultimately determined by research and development decisions made by firms and governments. Yet, New Zealand currently spends 1.3% of GDP on research and development. The OECD average is 2.4%.

Countries that are good at taking ideas “to scale” also tend to spend more on research and development, both in the public and private sectors, Hendy and Callaghan found. For example, Finland and Israel spend around 4% of GDP on research. The figure below shows that New Zealand lags behind in investment in R&D compared to countries with more advanced digital economies.

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Source: OECD Main Science and Technology Indicators.

New Zealand economist David Skilling observed that eight of the top 10 countries ranked on the contribution manufacturing and industry make to GDP are small countries, and that high-tech exports account for 6.2% of total exports in small countries as opposed to just 3% in larger advanced economies. Small countries invested more in research and development and generally performed better on measures of science and technology.

Hendy and Callaghan said our strength in certain technologies was a result of an increasing emphasis on research and development by the private sector, in particular export focussed high-tech companies. Industry-financed research and development had grown 4% a year over the last three decades, although it still amounted to only about half a percent of GDP, which is about a third of that in other OECD countries.

New Zealand’s Innovation Index was up 3% over that period thanks to an increase in R&D spending of 7.6% p.a. despite the Global Financial Crisis and subsequent recession according to an IBM study for the years 2007 to 2011.

Despite such pockets of success, the authors identified a number of issues with New Zealand’s approach to research and development.

One was simply not spending enough. While a company like Tait Electronics would devote about 15% of its revenues to research and development, New Zealand businesses overall spend about 0.5% of the country’s GDP. As the Building Innovation report notes, “New Zealand faces some significant challenges in raising BERD [Business Expenditure on R&D] as we have a relatively low share of R&D intensive industries (e.g. pharmaceuticals), we are a long way from markets, which increases risks for innovators, and we have few of the very large firms that dominate R&D around the world.”

As noted by Hendy and Callaghan, “In 2009, the New Zealand government spent a similarly miserly 0.58 percent, considerably less than other small advanced economies like Finland (0.95 percent), Denmark (0.85) or Singapore (0.86). Unless the New Zealand government can increase it’s spending on science and technology to 0.8 percent of GDP [which is the OECD average], it is likely that our innovation eco-system will struggle.”

The private sector tends to undertake too narrow a portfolio of research and development, which underlines why governments must maintain a diverse research portfolio in their public research institutions and universities. The government must fund untargeted academic research in universities and state research laboratories to maintain diversity.

The authors said various governments had been aware of the under-investment problem for almost 30 years. Many reports had all drawn the same conclusion, yet while several New Zealand governments had stated their intentions to increase investment in science and innovation to 0.8%, none had ever followed through.

Their book also detailed problems in the way public research organisations had been restructured to make them leaner and more profitable, but at the cost of deterring collaboration and enveloping research outcomes in commercial secrecy.

The private sector often did not help matters. For instance, most New Zealand companies followed a business model that favoured “closed innovation”, the exclusive development and control of key core technologies, which discouraged the sharing of intellectual property needed to grow innovation eco-systems like the one Finland developed around Nokia.

“In the long run, forgoing the opportunity to develop complementary knowledge may prove detrimental to a firm’s ability to react to disruptive technological change.”

There were things that New Zealanders and their government could do collectively to encourage more research and development. “Some of these things will require government intervention and spending, but others simply require new ways of thinking.”

According to the OECD, in addition to providing grants, contracts and loans, many governments contribute to business R&D through tax incentives. “In 2013, 27 OECD countries gave preferential tax treatment to business R&D expenditures. In 2011, the Russian Federation, Korea, France and Slovenia provided the most combined support for business R&D as a percentage of GDP. R&D tax credits were worth USD 8.3 billion in the United States, followed by France and China.”

The OECD says that over 2006-11, the importance of tax incentives vis-à-vis direct support increased in 11 out of 23 countries for which complete data is available. Their share of support fell in many countries owing to the crisis-driven decline in business R&D. Mexico and New Zealand abolished their tax incentives, but Finland introduced them in 2013. Falling profits at the outset of the economic crisis also reduced firms’ ability to claim incentives.

While the current Government scrapped Labour’s R&D tax credit scheme after winning the 2008 election, Budget 2014 introduced a small relief for R&D spend by start-ups. It allows start-ups to “cash out” some of their tax losses (an upfront payment rather than the losses being applied to future income) up to $140,000 in the first year, rising to an eventual maximum of $560,000 per year.

A second Budget 2014 adjustment was to allow all businesses tax deductibility for R&D “black-hole” expenditure (which is currently neither deductible nor able to be depreciated).

2.8. Widening gap in knowledge and skills

“In order to grow, technology start-ups and established research-intensive firms also require a supply of skilled people,” said Hendy and Callaghan. “Firms will invest in research only if there is a sufficiently skilled workforce available to perform the research…Thus, it is very important for universities to provide a skilled workforce - the so-called human capital of an economy - that matches the future needs of the economy.”

For example, the availability of skilled engineers was essential to the growth of Finnish phone company Nokia and Finland’s economic transformation: “A workforce with the right skills will be equally important for New Zealand if we are to close the knowledge gap.”

New Zealand faces chronic shortages of skilled ICT staff. NZ Immigration markets IT jobs as “Enjoy a unique lifestyle and make a global impact”. Some firms have reportedly turned to offshore development to cope with a persistent shortage of skills within New Zealand. Others are hiring talent from overseas and bringing them to New Zealand or working with remote development centres.

A pwc Survey showed that “80% of New Zealand CEOs say the availability of key skills is the biggest business threat to their organisation’s growth, compared to 63% globally, with technology and engineering firms struggling the most with the shortage of skilled employees. Despite rising business confidence equating to more jobs, organisations are struggling to find the right people to fill these positions… An overwhelming majority of New Zealand’s business leaders (90%) say they need to change their strategy for attracting and retaining talent, although three in five haven’t taken any steps to do this yet.”

According to the Ministry of Business, Innovation and Employment’s Occupation Outlook 2014 report, within the wider science, technology, engineering and mathematics (STEM) sector, ICT is one of the hottest career paths around. It predicts the employment in this sector to grow annually by 3% from 2016 to 2021, edging out other sectors in the report.

Research shows that an excellent developer is 10 times more productive than a mediocre one. This drives smart employers to seek out the best in the market, worsening the overall skills shortage.

Given the government’s relative size in the ICT market, its practices and projects can have a significant impact on the market as a whole. For example, with a persistent push over the last few years to reduce headcounts, full time employment has decreased while contracting has proportionately increased. This has impacts of skills availability, pricing, and ongoing skills development.

Skills shortages have been heightened in recent times by the success of some local start-ups like Trade Me, Orion Health, Xero and Vend.

One positive impact of improving local conditions relative to overseas is that the off-shore flow of IT talent has reversed and Kiwi professionals are coming home from Australia, the US and the UK. A report from recruiter Candle notes that, “the flexibility of New Zealand’s labour market, where the share of workers on individual contracts is higher than in Australia, is an advantage. This flexibility incentivises employers to take on new workers, and allows them to quickly adjust their labour arrangements. Australian businesses lack this flexibility.”

Engineers and IT skills are named in the current Immigration NZ skills shortage lists, but they are not given particular weight in immigration points above those sought for primary, health and creative arts sectors. Minimum educational requirements are set at a Bachelor’s Degree, which is out of step with the reality of the ICT industry. A high profile example of a person with no degree education who made his way to the top of the US intelligence system in the ICT field through sheer talent and hard work is Edward Snowden. Other famous examples include Bill Gates and Steve Jobs.

Despite skills shortages, some immigrants attracted by the potential leave the country unhappy or without finding a job. Others take up jobs outside the ICT industry in frustration. One report found that “NZ employers appear fearful of hiring expats and don’t recognise the skills and global connectivity opportunities which they can bring.”

A lack of recognition of overseas qualifications also plays a role. According to one article, “it is on Auckland’s taxi ranks where the horrible waste of talent is brought into sharp focus. Checking at Auckland’s airport, seven drivers - all Indians - were a radiographer, two engineers, an electrical engineer, an accountant, a teacher and a blood analyst chemist. None can get work in their chosen fields for a variety of reasons, but mostly because their qualifications from Indian institutions are not recognised.”

One government strategy that demonstrates how educational directions can be changed was a 2006 reduction in fees for international students enrolling here in PhDs to that for domestic students. It led to a doubling in the number of PhD students graduating from New Zealand universities.

Data on undergraduate degree completions in 2009 showed that New Zealand universities produced many more graduates in the so-called “life” sciences than the OECD average, and fewer graduates in engineering. We were slightly ahead on maths and physical sciences, but trailed a country like Finland, whose engineering graduations also towered above those for the OECD average and New Zealand. Ironically, while many of our biological-science graduates have to seek employment opportunities overseas, our technology firms also have to look offshore to recruit physical science and engineering graduates.”

As Hendy and Callaghan put it, “The challenge for New Zealand will be to maintain sufficient diversity and flexibility in our education sector so that when firms with high growth potential emerge, firms like Xero and Lanzatech, we can respond as rapidly as Finland did when Nokia seized its opportunity.”

Budget 2014 saw the proposed introduction of ICT Graduate Schools in Auckland, Wellington and Christchurch. This was welcomed by some, such as Grow Wellington.

Meanwhile, the Labour Party’s policy is directed towards creating 1200 new digital apprenticeships rather than the graduate level. Universities are not the only education arena that can contribute to a change of skills culture. As advocated by the Labour Party, a system of digital apprenticeships could also be set up to train those with technological talents who are not disposed towards university study but who could contribute greatly to innovation and development.

Since 2011 the high school curriculum has been expanded so that schools have the option of teaching digital technology as an achievement standard under NCEA, covering topics such as the basics of information management. Previously, the only choice was to take computing as a unit standard course covering low-level skills which made it unattractive to better students. While the NCEA changes were positive and long overdue, it turned out to be a big change for schools to adopt and with bottleneck in the supply of skilled teachers and almost no government support such as training.

Non-university qualifications are currently being reviewed. Importantly, a new science and technology plan has been released which includes reviewing the positioning and content of Digital Technologies within the New Zealand Curriculum. This has been welcomed by the professional body IITP which wants “Digital Sciences” to become a Learning Area in its own right.

Industry-led efforts to attract more students into ICT include ICT-Connect as well as the work being done by EPIC Innovation and IT HOTHOUSE.

2.9. Start-ups

As a list and map of start-ups in New Zealand shows, this is an increasingly thriving sector of the economy across the country. One commentator listed the following eight things about the New Zealand start-up community that could “surprise” people:

“The World Bank listed New Zealand as the #1 place in the world to start a new business.
Auckland’s small size is both a hindrance as well as a help for startups.
Getting equity in the company is just not part of the Kiwi startup culture.
It’s really, really hard to get VC funding in New Zealand.
Most New Zealand startups do all their PR in-house.
The tech startup scene in New Zealand is highly dependent on the future of reliable internet in the country.
Startups in New Zealand are thinking smaller, not bigger.
The New Zealand startup community lacks leadership.”

The Boulder thesis, developed by leading venture capitalist Brad Feld, outlines four key components of a vibrant start-up ecosystem. Firstly, the ecosystem must be led by the entrepreneurs – the “leaders”- which Feld distinguishes from the government, universities, and others in support roles – the “feeders”. Secondly, entrepreneurs must maintain a long-term view and commitment to building the innovation ecosystem. Thirdly, Feld argues that inclusiveness is essential so that all are welcome, not just entrepreneurs. Finally, activities and events that engage entrepreneurs will help maintain and make use of innovation networks.

Venture capital and private equity have had a chequered history in New Zealand. It took four years of lobbying for Government to legislate allowing limited partnerships, the standard vehicle for investment globally.

The latest New Zealand Private Equity and Venture Capital Monitor is for 2013 and notes, “The Private equity (PE) and venture capital (VC) market showed a significant increase in activity in 2013 after a relatively quiet 2012… In 2013, total activity of NZ$1.1b compared with NZ$188m in 2012. This reflected growth across all segments… Venture and early stage funds surged to NZ$54.8m investment [across 66 deals], from a quiet year in 2012.”

The report further notes, “IT and software, and health/biosciences continue to be a key sector for early stage fund activity. Historical trends have highlighted a funding gap for early stage growth companies seeking funds beyond the level of seed and start-up funding available from domestic VC and early stage funds.”

Already it is clear that 2014 will be a different year with a big jump in IPOs (Initial Public Offerings) and the launch of crowdfunded equity. Further, the Financial Markets Conduct Act 2013, with the initial changes coming into force from 1 April 2014, contains the most substantive securities law reforms New Zealand has seen for many years. This law has removed some of the barriers in developing employee share schemes too.

The Government set up NZVIF (New Zealand Venture Investment Fund Limited) in 2002 as a private equity ‘fund of funds’ investor that manages fund of funds investments as well as direct co-investments. It currently has $200 million of funds under management invested through two vehicles- the $160 million Venture Capital Fund (of Funds) and the $40 million Seed Co-Investment Fund.

The Seed Co-Investment Fund “is close to running out of money and is asking for a government top-up until it becomes self-sustaining.” It has invested in 116 companies and spent a total of $29.93 million of the Government’s $40 million establishment capital. “Although the fund is allowed to recycle those returns into new investments, it’s not likely to generate enough in the next two years to keep going without a further capital injection or a government underwrite.” This has drawn both support as well as criticism.

The Government has recently announced $250,000 (excluding GST) per year for two years of 1:2 co-funding for three Lightning Lab start-up accelerators. This is in the form of a repayable grant, applied as a 3% royalty on the firm’s gross revenues.

Separately, inspired by the Israeli model (see Global Leadership), a hybrid model of founder-focused and technology-focused incubators was announced with the latter getting $450,000 repayable grants per start-up over two years on a 3:1 co-funding basis. In addition, there is a $35,000 pre-incubation grant. The chosen technology-focused incubators are PowerHouse, Astrolab, and WNT Ventures.

One commentator believes there are funding gaps in New Zealand across all sectors- angel, venture capital and private equity. Others note that the biggest gap is not in start-ups and angel investing but in follow-up funding in private, medium sized businesses.

When a New Zealand start-up is sold to overseas buyers, there is often criticism about potential loss of jobs, government grants, control, future growth, and R&D work. This is rebutted by some such as Peter Maire, Navman founder who said, “So is selling companies offshore such a bad thing? The answer is NO. The more we start and the more we sell the more we build up experience on how the whole game works. We will also end up with more crazy people like me who put the money back on the table again. If we do this enough we will attract offshore VCs to NZ to partner with local operators. The VC market here today is pretty well non-existent so we need to attract more funds here who have good paths to market.”

Commentators, including the OECD, have also highlighted the importance of culture in influencing entrepreneurship – entrepreneurs are more incentivised in countries where people are not held back from taking risks by fear of failure.

According to one expert, “Kiwi companies tend to get things done and are more agile then their global competitors. The downside is products/services are often taken to market before they’re ready and without the necessary research done on existing and potential competitors and market demand… Another trait is our independent mindset which means many Kiwis are entrepreneurial. Where that becomes a weakness is when that independence gets in the way of collaboration or the company founders accepting they need outside help and capital to take the company global.”

“We still have a cultural hang up over business success and tend to ‘not be hungry enough’ when it comes to closing a sales deal… it’s not enough to attack new markets overseas part-time from New Zealand.”

In June 2010 Bill Payne, one of the United States’ foremost angel investors, concluded a five month stay in New Zealand and prepared a report providing reflections based on his observations of New Zealand entrepreneurs and angel groups during his visit. He noted, “After one-on-one sessions with 75 Kiwi entrepreneurs, I am not able to differentiate between Kiwi and American entrepreneurs or their ventures. Similar to their American counterparts, Kiwi entrepreneurs are passionate about their products and technology. Likewise, they have little or no understanding of marketing, sales channels, capital sources, governance or competitive analysis.”

Universities have played a key role in the growth of high-tech innovation clusters in places like Silicon Valley in the US and Cambridge in England. Hendy and Callaghan said there were many examples around the world where clusters of technology firms developed around universities, Stanford Research Park in California being an outstanding example (see Global Leadership).

This has not tended to happen in New Zealand, unless there is a connection with primary industry. “New Zealand’s strong emphasis on primary-sector research that targets on-farm productivity has probably not been producing the type of knowledge that naturally leads to new companies.”

They said while New Zealand universities were becoming better at commercialising their research, they were not so effective at creating spin-off companies. They created 29 new companies in the four years from 2003 to 2006 - compared with 30 produced by Cambridge University in half that time.

There are some useful examples in New Zealand of what can be achieved with university-fostered business innovation. Hendy and Callaghan cited PowerbyProxi, a University of Auckland spin-off company founded in 2007 on the concept of delivering power wirelessly. It developed a double-A battery that can be charged up without being plugged into a recharger.

Since March 2014, the Long Term Business Visa has been replaced by an Entrepreneur Work Visa. This requires a minimum investment of $100,000 but can be waived in exceptional cases, for applicants proposing to establish a science or ICT-based business where it displays a high level of innovation or has credible short-term high growth prospects.

As noted in a Fulbright report, there is currently no Government social enterprise policy or funding stream. This type of start-up applies commercial strategies to maximise improvements in human and environmental well-being, rather than maximising profits for shareholders. The potential for a distinctively different start-up ecosystem based on the Māori economy lies untapped and largely unrecognised.

The NZVCA Regulatory and Tax Recommendations of October 2013 lists a number of areas where changes are required to make New Zealand a better place to do business and lighten the regulatory load. This includes, “Specifically exempt gains made by private equity and venture capital funds from the sale of shares in New Zealand resident companies from tax” on the grounds that it is “Consistent with approach to similar investments, encourages investment.”

2.10. Global ranking and comparisons

The Global Innovation Index 2014, in its 7th edition this year, is co-published by Cornell University, INSEAD, and the World Intellectual Property Organization. The core of the Report consists of a ranking of world economies’ innovation capabilities and results. The theme of the 2014 Report, the ‘Human Factor in Innovation’, explores the role of the individuals and teams behind the innovation process.

Switzerland, the United Kingdom and Sweden topped this year’s Global Innovation Index (GII). New Zealand ranked 18th, between Australia (17th) and Iceland (19th). On the seven components, New Zealand’s ranking was:

Institutions: 2nd
Human capital & research: 16th
Infrastructure: 24th
Market sophistication: 8th
Business sophistication: 33rd
Knowledge & technology outputs: 17th
Creative outputs: 17th

Compared to the overall ranking, the component New Zealand was weakest in was Business sophistication. Looking at this component in detail, New Zealand scored poorly in Innovation linkages, ranked 60th.

Across all indicators, New Zealand was relatively weak in the following areas, with a ranking of 70th or worse:

FDI net outflows, % GDP (116th)
Gross capital formation, % GDP (87th)
ICT exports, % (85th)
State of cluster development (70th)

New Zealand is ranked 20th in the latest Bloomberg’s Global Innovation Index. Ranking on the determining factors (with weighting) were:

R&D intensity (20%): 29th
Productivity (20%): 26th
High-tech density (20%): 37th
Researcher concentration (20%): 11th
Manufacturing capability (10%): 45th
Tertiary efficiency (5%): 16th
Patent activity (5%): 7th

The Global Information Technology Report 2014 from the World Economic Forum and INSEAD, “provides a comprehensive assessment of networked readiness, or how prepared an economy is to apply the benefits of information and communications technologies (ICTs) to promote economic growth and well-being.”

Finland, Singapore, and Sweden are the top three countries. New Zealand is ranked 20th, unchanged from 2013.

The Report evaluates New Zealand’s performance as, “shows a stable performance in the rankings with a slight advancement in score. The country’s regulatory and business environment remains its strongest competitive advantage (2nd overall in the environment subindex, just behind Singapore). New Zealand ranks 1st for the independence of its judicial system and 1st in both the number of days and the number of procedures to start a business. The excellent skill base of its population (6th) also contributes to the country’s ability to properly use and leverage a fairly good ICT infrastructure, although it remains rather pricy (127th), constituting New Zealand’s main weakness.”

In fact, New Zealand rates very poorly on the affordability indicator, ranked 138th for prepaid mobile tariffs; 113th for fixed broadband tariffs; and 97th for Internet & telephony completion. Further, the country is ranked 88th for mobile network coverage (as a percentage of the population).

3. Examples of global leadership

3.1. Finland - from trees to Nokia

While Finland, a similar-sized country to New Zealand, faces new challenges following the eclipse of its biggest industry, mobile phone company Nokia, it is still held up as a prime example of how a nation can transform its economy from primary production to one of the leading digital economies in the world.

Today, Finland is ranked by the World Economic Forum as the third most competitive nation in the world. It produces 10 times as many patents per person as New Zealand. It has broken its dependence on the primary sector and grown its economy over the past 20 years while maintaining low levels of income disparity. It invested heavily in research and development, finding new areas of comparative advantage that drove it back into the top half of the OECD.

Just a few decades ago, Finland was in a very different economic situation. Much of Finland’s economic development in the latter half of the 20th century was driven by development in raw material industries, using Finland’s vast forest resources. However, in 1990 Finland was hit by a devastating financial crisis which saw its GDP drop by 10% in three years and unemployment rise to nearly 20%. Reasons for the economic downturn included a decline in forest-related industries that were vital to the economy, the collapse of Finland’s trade partner, the Soviet Union, as well as its lack of export diversity.

Foresight and necessity led to a diversification of exports. While a great chunk of public expenditure was cut as a result of the recession, public investment in R&D rose in order to transition to an innovation-based economy. The government implemented national innovation strategies, which connected the public and private sector through economic policy programmes that were attended by all Finnish MPs. The World Bank has noted the success was facilitated “by the government’s strong vision of the potential of the sector and by the flexibility of the economy in responding to the opportunity”.

Education has also played a key role in Finland’s socioeconomic transformation. Finland continues to provide free and high-quality public education, ensuring that Finns are among the most educated in the world. Following the economic crisis, the government focused on retraining people as a way of overcoming unemployment and integrating into the restructuring economy, reasoning that “education is the key to both the supply of and demand for innovation”.

While public policies in the 1990’s are important in explaining Finland’s development, several commentators have noted the importance of the policy groundwork that was laid in the 1970’s and 1980’s to Finland’s economic transformation. In 1982 Finland established the National Technology Agency to coordinate public R&D and technology programs, with a focus on commercialising research results. Later in the 1980’s the Science and Technology Policy Council, chaired by the Prime Minister, was established to advise the Government on science and technology matters. In light of the recession in the 1990’s, the council implemented the national innovation system to have a nationwide systemic approach to innovation. Deregulation of telecommunications in Europe, global developments in the ICT sector, as well as a domestic environment of high social cohesion and political stability are further factors that helped propel Finland as a global leader in the ICT industry.

However, much of the credit can be attributed to the growth of Nokia, a large Finnish conglomerate which at the end of the 1980’s made a strategic decision to move into mobile phone manufacturing. A robust network of inventors, innovators, scientists, and engineers grew around Nokia, leading to the development of a substantial ICT sector, or “cluster” in Finland, which in 2006 was comprised of 6,000 firms, 300 of which were subcontractors to Nokia.

Commentators claim that the impact of Finland’s ICT cluster is vast – in the 1990’s its share of the GDP rose from 4% to 10%. The high-technology sector’s share of total exports grew from 5% in the 1980’s to 20 percent in 2004, leading to a significant trade surplus.

Furthermore, the cluster around Nokia led to a significant increase in privately funded R&D, which in 2012 comprised 2.24% of GDP. Nokia had substantial government support for its expansion plan, a factor that was important to its success. In the end, while Nokia was the giant at the centre of the incubator, the spinoffs of knowledge, skills and start-up companies that grew over time enabled Finland to become a diverse and highly productive digital economy with many more enterprises than just the phone company.

The focus on innovation requires Finland’s government to be forward thinking. The Finnish Parliament currently has a cross-party Committee for the Future, which is tasked with assessing and conducting dialogues on future problems facing the country. Innovation policy needs to have long term strategic perspective.

3.2. South Korea Global ICT leader

South Korea is a country that has also undergone a dramatic transformation in the past decades from being one of the world’s poorest countries in the 1960’s to its current status as one of the world’s largest digital economies. Korea is now one of the leading IT nations in the world– marked by its ascent to the top of the United Nations ICT Development Index.

Underlying South Korea’s phenomenal development has been a strong focus on science and technology. In the beginning of the 1960’s, while South Korea was still under military rule, the government established a Ministry dedicated to the field, as well as an R&D institute dedicated to technological development. Over several decades the government expanded their role, established several similar institutions, and facilitated their interactions with the private sector. Such polices laid the groundwork for the Daedeok Innopolis, a science and innovation hub which now hosts 242 research organisations with 24,000 employees.

The Korean State has played a very active role in facilitating technological development and enhancing the IT sector. One of the key success factors has been the role played by the government in fostering close ties between private and public actors through its R&D and policy organisations. One sign is the 4.5% of GDP that public and private sectors currently devoted to R&D, including 1% funded by the government. (New Zealand total investment is 1.3% of GDP).

Furthermore, the State has focused on rolling out Internet infrastructure, leading to Koreans being the most connected people in the world. In 2012, nearly all households in South Korea had a high speed Internet connection, with some of the fastest broadband speeds in the world.

The government has introduced several key e-Government development plans which have effectively digitised most government operations, ensured rollout of essential infrastructure, and helped stimulate demand for ICT products and services. South Korea has been number one on e-Government global rankings since the year 2010.

Additionally, the government is tackling any shortage of skills and/or knowledge with a special visa system for foreign IT workers which offers extended visa periods and special terms and conditions. Named the Gold Card System, this programme was launched in 2000 to support the recruitment of foreign hi-tech professionals in to attract both talent and diversity to South Korea’s IT industry.

Such policies have led to a booming ICT sector, with computer, electronic, and optical industries currently claiming 5.5% of the exports.

One of the major success stories of South Korea’s digital economy has been the development of Samsung, a diversified electronics company that commands 30% of the global smartphone market. While vertical integration has fallen out of favour around the world, Samsung is the opposite. Its sales are equal to about one-quarter of South Korea’s economic output. Samsung Electronics, the flagship, posted $190 billion in 2013 sales — about the same sales as Microsoft, Google, Amazon and Facebook combined. Samsung is a world leader in innovation and technological development.

Thanks also to a quality education system South Korea is a nation of educated and tech savvy people, who are willing to spend money on technology products and, in the process, lead technological development.

3.3. Israel the “Start-up nation”

Israel has attracted global recognition as a ‘ Start-up Nation’ due to its high concentration of start-ups – second in the world only to Silicon Valley. Start-ups in Israel attract more venture capital per person than any other country, despite being located in a small country with a population of 7 million and with no natural resources.

As a global leader in innovation, high-tech products and services in Israel account for one third of GDP, and almost half of the country’s exports. Many of the world’s most successful IT companies have at least one branch in Israel due to its high concentration of start-ups and skilled workforce, contributing to jobs and tax income.

Furthermore, the government is dedicated to increasing R&D - in 2012, Israel devoted 3.9% of its GDP to R&D, demonstrating its commitment to innovation and technological development. Israel’s digital economy is underpinned by extensive Internet infrastructure - 99% of Israeli homes are within reach of a broadband connection, with some of the lowest prices in the world, allowing almost all Israelis to benefit from global connectivity.

Another factor that has contributed to Israel’s success in fostering innovation has been the government’s efforts in establishing economic infrastructure that has connected inventors and entrepreneurs throughout the country. In the 1990s, the government created local incubators to integrate newcomers to the country with local talent – there are now more than 24 of these located throughout Israel. The Israeli government invested around USD 600 million into the incubators and the start-ups involved had in turn secured USD 3.6 billion in foreign investment. The programme currently produces 100 new start-ups each year that are added to Israel’s innovation ecosystem.

Commentators have praised their chutzpah (sort of a supercharged version of ‘giving it a go’), their own version of a number 8 wire approach, military experience, and Israel’s ability to welcome immigrants as a great resource in their economies as one of the key drivers of its success.

Israel took on a very different approach to Finland, which focused its R&D on telecommunications with the growth of Nokia – instead Israel has generously invested into R&D in a range of sectors of the economy. The government established a programme to attract venture capital funds, domestic and foreign, to the country’s entrepreneurs – which was reportedly able to wind down after five years due to its success. ** **

3.4. Garage innovation: QB3 Garage@Berkeley

In 2000, the University of California created QB3 and three other California Institutes for Science and Innovation to drive the state’s economy by looking to research, innovators and entrepreneurs.

QB3’s domain is the “quantitative biosciences” and the QB3 Garage@Berkeley in Stanley Hall has about 75 square metres wet laboratory space, set up with eight stations for incubator use. Each station offers bench and desk space, and network connections. Tenants also share use of a prep bench with standard lab facilities, along with space for floor-standing equipment such as a refrigerator, freezer, and centrifuge.

Garage tenants can make arrangements to use QB3 core facilities such as a bio-molecular nanotechnology centre, a spectrometer, a genomics laboratory, the College of Chemistry Mass Spectrometry Facility, the QB3 MacroLab, a genomics sequencing laboratory, and a proteomics/mass spectrometry laboratory.

“Our faculty members - professors at UC Berkeley, UC Santa Cruz, and UCSF, among them one Nobel laureate and 42 members of the National Academies - publish regularly in top academic journals. They also patent their discoveries and launch spinoff companies.”

“Graduate students and postdoctoral fellows, with their youth and energy, are a resource for innovation and job creation. QB3 has built a matrix of support for entrepreneurs that include a renowned incubator network and a venture capital fund. The 105 companies in our incubators have created hundreds of jobs and attracted more than half a billion dollars in investment.”

They also connect UC scientists to global industry through a number of innovative partnerships such as a $US3.5 million-a-year alliance with Pfizer.

3.5. Cambridge Science Park, UK

The science park - established by Trinity College, Cambridge, in 1970 - has 150,000 square metres of buildings and is home to more than 100 companies, from small start-ups and spin-outs to subsidiaries of multinational corporations.

The science park idea was born during the 1950s in the US where the first was established by Stanford University. The Cambridge project grew from an initiative by the 1964 Labour government, which urged UK universities to expand their contact with industry to increase technology transfer and get better payback from investment in basic research and an expansion in higher education.

Setting up science-based industry close to Cambridge takes advantage of the university’s concentration of scientific expertise, equipment and libraries, and increased feedback from industry into the Cambridge scientific community.

The science park concept was an unfamiliar one and growth was slow in the first five years. The first company, Laser-Scan, moved to the site in 1973 and by the end of the 70s some 25 companies had set up there.

“During the 80s, several venture capital companies opened offices on the park, including the regional office of 3i, the UK’s leading venture capital company. In the second half of the decade, University academics began to bring companies to the park, encouraged by its success and also because of the breaking in the mid-80s of BTG’s monopoly of intellectual property originating in UK universities.

“The Cambridge Science Park also began to accommodate spin-outs from existing tenant companies such as Cambridge Consultants, and saw the first collaborative venture formed by park companies – Qudos, which was founded by the University’s Microelectronics Laboratory (which was then located at the park), Prelude Technology Investments and Cambridge Consultants.”

In the 1990s, incubators for start-ups were established elsewhere in Cambridge and the supply of venture capital in the UK and from locally established venture funds had increased dramatically. The Cambridge cluster grew to some 1200 high-tech companies employing around 35,000 people, with 64 companies at the park employing about 4000.

In 2000, a joint venture between Trinity College and another Cambridge College – Trinity Hall (which owned adjacent land) completed the remaining 22.5 acres of brown field development land adjacent to the park. Five bespoke buildings of up to 3300 square metres were designed, built and pre-let. The Trinity Centre conference facility opened in 2000, followed by the Cambridge Science Park Innovation Centre in 2005.

“The Centre is typical of the flexible and practical approach to letting arrangements that has allowed early-stage companies to grow and flourish according to their particular circumstances.” Developments included One Zero One, a £17 million new-build office and R&D building, which opened in 2008 and attracted Dutch electronics giant Philips and software solutions company Citrix.

4. Policy proposals

4.1. Leadership and Vision

The Internet Party will provide vision, leadership, and determination to make New Zealand a prosperous country again by becoming a global leader in the Digital Age. This will involve a ‘whole of New Zealand’ transformation, making resource allocation decisions accordingly, and strategic alignment of all our policies. Success will be measured by being in the top five of global innovation and digital economy indexes. Tangible progress will be visible quickly but successful transformation will require a decade long effort.

A critical aspect of our efforts will be to build a NZ Inc approach, working with businesses, non-government organisations, and people as partners. The Internet Party will also strive to build cross-party consensus so as to steadily keep on the transformation path for a decade and get buy-in for the tough trade-offs that will inevitably be required.

4.2. New Zealand as the world’s start-up incubator

The Internet Party will not only actively promote New Zealand start-ups but will set a more ambitious goal of becoming one of the world’s leading incubators of innovation and new ideas.

Ideas grants: To encourage potential entrepreneurs develop their ideas, build a prototype, and get ready to seek seed funding, ‘ideas grants’ of $10,000 will be introduced. This is intended to supplement bootstrapping or replace what people typically raise from family and friends. Ideas Grants will be awarded through a professional group of angel investors, independent of government, via competitive bidding rounds to a cap of 500 grants ($5 million) a year.

Refresh NZVIF (New Zealand Venture Investment Fund Limited): A review of NZVIF will be completed to refresh its position based on the results so far and a bigger role in the future. It is expected that funding for the Seed Co-Investment Fund will be extended but the emphasis will be on building new partnerships and better ways of working in line with a NZ Inc approach and stimulating the growth of venture capital availability (particularly in the $1-10 million category) and early stage funding in New Zealand.

NZVIF will be given an establishment capital of $25 million for a new Social Enterprises Fund where success metrics will be social rather than financial outcomes. NZVIF will also be tasked to find ways to best work with the Māori economy and other pools of domestic capital currently untapped, such as the ACC and NZ Super Funds.

Attracting overseas VCs: Proactively reaching out and attracting overseas venture capital funds to set up in New Zealand will diversify and deepen the pool of venture capital available in New Zealand. It is also an essential requirement to meet our goal of becoming the world’s incubator of innovation and ideas.

Professional support services: Aimed at start-ups and SMEs outside of incubators and accelerators, we will deliver funding and support for mentors and professional services for marketing, sales channels, capital sources, governance and competitive analysis. This will be delivered in partnership, taking the form of co-funding and coordinating private services as well as promoting greater networking within the innovation ecosystem.

Greater funding and support will also be provided to supporting institutions and organisations to scale up and widen their operations. This includes Better by Design, Return on Science, and Kiwi Landing Pad.

Tax laws: A review that identifies and removes issues with tax laws aimed at promoting the growth of angel funding, venture capital, and private equity in New Zealand. The review will look at equity and options taxation, both at issue and exit, as well as exemption from any capital gains tax in recognition of the nature of such funding.

Review Entrepreneur Work Visa: This will ensure that the visa is working as intended, processes work well for applicants, and is fit for our goal of becoming the world’s incubator of innovation and ideas.

Promote funds recycling: When founders and early stage investors exit, including by selling to overseas buyers, the Internet Party believes this creates an opportunity for the funds, experience and networks to be recycled into new start-ups. We also believe that non-repayable government grants to private companies generates sufficient direct and indirect benefits to the economy so that neither claw back provisions on overseas sales of companies nor government taking equity are required. Given the lack of hard data, the Internet Party will commission research to confirm these policy positions.

4.3. OECD average Research & Development investment

Target: The OECD average is 2.4% of GDP whereas New Zealand currently spends 1.3% ($2.6 billion) on R&D. The Internet Party will lift New Zealand’s R&D expenditure to the OECD average over 7 years.

Increased Government R&D expenditure: Over the next 3 years, to take a big step towards the 7 year target, the Internet Party will support the Green Party’s proposal to increase government expenditure on R&D by $1 billion, taking total R&D expenditure to between 1.65% and 2% depending on the amount invested by businesses. There is an opportunity to go even further, raising the first year expenditure from $100 million to $300 million, taking the 3 year total to $1.2 billion.

Increased spending on R&D by the government will be largely directed towards the digital economy and green technologies. Government’s R&D expenditure creates positive externalities and signals prioritisation. The proportion of total government R&D spending will therefore, over time, shift to emphasise diversification away from primary industries.

Increased private sector R&D expenditure: R&D tax incentives, including tax credits and accelerated depreciation, are widely used by OECD countries and need to be re-introduced in New Zealand with sufficient safeguards to ensure the expenditure is genuinely going into R&D. However, tax credits will be insufficient for non-government R&D expenditure to allow New Zealand to reach the OECD average. For that, other elements of this policy- including the NZ Inc approach, boosting the digital economy (ICT firms invest four times the average for all sectors), and innovation hubs- are essential.

4.4. Innovation hubs

While there are start-up communities thriving all across New Zealand, university-centred innovation hubs attached to every major New Zealand university will give a big boost to innovation. Modelled on the Stanford Research Park in California and the Cambridge Science Park in UK, it takes the next step forward from existing centres such as the Waikato Innovation Park.

These innovation hubs will encourage close relationships between academia, talent, and collaborative communities of scientists and technologists who are encouraged to interact, and work in teams. Hubs facilitate moving around within academia and employment circles, ensuring knowledge is portable, shared and available to stimulate enterprise within companies and research organisations.

The hubs will initially focus on the areas that Callaghan Innovation has determined are areas of deep expertise for New Zealand- electro mechanical systems, software, agritech, food technology, and biotech. These are areas where New Zealand’s capability has become world recognised and can immediately boost innovation.

Innovation hubs, as part of the wider innovation ecosystem, will be directed to maximise strong networks that are key to creating spill-over effects to the wider community. The innovation hubs and networks will expand to include successful New Zealand companies and sectors to create virtual clusters. As an example, there is an opportunity for virtual clusters to bring together New Zealand’s film and design capabilities with game development, 3D research, and fast networking technologies.

4.5. Plugging the skills gap

The Internet Party will double the number of tech workers in the digital economy by a combination of short and long term measures:

Review the immigration points system to ensure there is a greater weight given to skills needed for innovation, research, development and associated activities in the high-tech sector. In addition, allow greater recognition of non-University qualifications when combined with relevant work experience. The review will also look at recognition of international qualifications to see if they are sufficiently accepted in New Zealand. All of this places New Zealand in a position to actively market itself to the best global talent.
Support the Labour Party’s proposal to establish a clearer pathway for non-university careers in the IT field by funding 1200 ICT apprenticeships.
Encourage school children to gain greater exposure to careers in the digital economy and learning how to code. Actively encourage greater industry-schools engagement to interest school children in the diverse opportunities and high quality jobs that will continue to be available in the future.
Support the call from Institute of IT Professionals (IITP) for the New Zealand Curriculum to include “Digital Sciences” as a Learning Area in its own right.
Free tertiary education and universal student allowance proposed by the Internet Party (see other policies below) will lift the number of graduates and post-graduates working in the digital economy. Besides STEM (science, technology, engineering and mathematics) graduates, the digital economy needs skills across all disciplines.
Advocate for sector organisations to take the lead in driving increased on-the-job training, ongoing skills development, and skills retention by their member organisations. The Internet Party will seek their advice on how employers can take on more expats and immigrants who are otherwise qualified and experienced.

4.6. A ‘whole of economy’ transformation

The Internet Party will promote and champion an understanding that increasingly the economy is the digital economy. Most firms are using or should be using digital technologies, including the Internet, to manage and expand their business. This is true even for organisations that are not in the tech sector and operate in physical products and services, including New Zealand’s top two sectors- primary producers and tourism.

The environment they operate in isn’t static, with whole industries being disrupted and re-shaped by digital technologies. The opportunities are global but so are tomorrow’s competitors. Persistent challenges faced by New Zealand organisations, such as low productivity, can be addressed using digital technologies.

To assist with organisations making their own transition and dealing with new challenges such as cybersecurity needs assistance, especially for SMEs and NGOs (non-government organisations), the Internet Party will catalyse, support and co-fund private and non-government organisations that make it easy for SMEs and NGOs to best use digital technologies in their individual circumstances such as Digital Journey. Leadership and collective action from sectors, at both an individual firm and sector organisation level, will be encouraged while the government’s own technology-led transformation will play an enabler role.

4.7. Attracting global businesses to set up in New Zealand

The policies outlined here as well as the other policies below will together place New Zealand in a position of being able to attract leading global online services companies to open an office here. Instead of a sales office or being serviced out of Australia, the Internet Party will proactively market New Zealand and convert interest into actual new development centres here.

New Zealand can be an ideal location for knowledge workers, the place where talent wants to live. The country already has a good business environment. To really make New Zealand an outstanding development location will require us to go further and be a truly ‘green’ nation, fix infrastructure issues, and protect Internet freedoms.

As outlined in our Environment policy, green data centres, within the right policy settings, can also be the nucleus for new Internet business ecosystems in New Zealand.

The Internet allows New Zealand to turn its geographical isolation into a potential advantage, like Iceland. Already technical advances have started overcoming the ‘tyranny of latency’ which means our distance from major markets will no longer require only back-offices to be located in New Zealand. Global online services companies will provide the missing factor- scale.

4.8. Fibre technologies and products test-bed

With the Internet Party’s plans to provide fibre-based Internet access to 97.8% of New Zealanders (see other policies below), this places us in the exclusive category of a handful of countries with ubiquitous ultra fast broadband. This provides an opportunity to develop and deploy new online products and services across consumer, business and government markets. It also allows New Zealand’s role as a test-bed for new technologies to be advanced and get good concepts, such as telecommuting and remote working hubs, finally working in practice.

One of the innovation hubs planned will be dedicated to fibre technologies and products to turn this opportunity into innovation and a big step forward in our goal of becoming a global leader in the Digital Age.

4.9. Other policies

Successfully achieving the Internet Party’s vision of becoming a global leader in the Digital Age also requires a number of other policies that have been detailed in separate policy documents, including:

Infrastructure

A second submarine cable connecting New Zealand to USA and Australia.
Halving Internet access costs.
Community-led initiatives to deliver fibre (ultra fast broadband) to the remaining 22.8% in the RBI coverage area so that 97.8% of New Zealanders in total have access to world-leading fibre Internet access infrastructure.
Overcoming the digital divide by providing Internet access to all New Zealanders unable to afford it or lacking the necessary confidence, knowledge or skills.
Boosting green technologies and green data centres as well as real-time analytics, big data for innovative solutions, and smart cities and homes.

Skills and training

Free tertiary education that will help close the skills gap as well as allow entrepreneurs to take on the risks associated with start-ups.
Modern schools that equip all kids with the skills needed for the Digital Age.

Laws and regulations

Maintaining global trust in New Zealand’s digital products and services, including by repealing last year’s changes to the spy agency GCSB’s law, exiting the Five Eyes intelligence sharing arrangement, and repealing TICSA.
Better protection of privacy, strengthening the Bill of Rights, and making it fit for a digital age.
Strengthening Internet freedoms by legislating due process before websites are taken down, strengthening the position of Internet intermediaries, regulating Internet filtering by the government, and mandatory transparency reporting.
Stepping up participation and leadership in global Internet governance bodies and initiatives.
Updating copyright law for the Digital Age and boost availability of legal online content. Take a global leadership position by conducting a first principles review of copyright.
Mandating that all taxpayer-funded research be open access with the public able to freely access and reuse it.
Demonstrating the potential of the Internet in engaging people online via a Democracy Portal that will also facilitate online voting and referenda.
Protecting of New Zealand’s environment with an emphasis on renewable energy.

NZ Inc

Setting up a new Ministry as the central pillar for a NZ Inc approach that brings together inward facing government technology efforts with technology-led New Zealand economic development.
Leading technology-enabled government transformation, taking government into the Digital Age to be more responsive and deliver government services when and how people and businesses want them.
Reforming government’s ICT procurement into a partnership model driving innovation and support for local companies.
Ensuring government’s services are accessible to all as well as available on mobile devices.
Continuing to support the government open data initiatives with a particular emphasis on agencies meeting the open data principles. Re-use of the data in useful services as well as obtaining actionable insights will be actively promoted.
Using a part of the revenue from the proposed Emissions Levy to fund innovative environmental initiatives.
Ensuring that any Trans-Pacific Partnership deal provides net benefits to New Zealand and does not impose unacceptable costs for the digital economy.