Search the site by keyword

Follow-on review - Frontier Firms

The Productivity Commission Te Kōmihana Whai Hua o Aotearoa completed its follow-on review of its New Zealand Firms: Reaching for the frontier (Frontier Firms) inquiry report.

In April 2022, the Ministers of Finance and Economic Development requested the Commission to undertake a follow-on review of the Government’s policy settings to determine whether the productivity dial is shifting, and if New Zealand is “progressing towards a more sustainable and inclusive economy, or whether more radical change is needed” 

The Commission assessed the Government’s policies and programmes relating to the New Zealand Firms: Reaching for the frontier inquiry, and to lifting New Zealand’s productivity against the recommendations made in the final report of the inquiry. We undertook a ‘helicopter-level assessment’ of whether the Government’s reform agenda is having the intended effects. We reviewed initiatives undertaken, how far these have progressed, and the general direction of travel to assess what progress has been made and look at the development and implementation of policy to lift New Zealand’s productivity performance. 

FF Follow on Image Moving forward


  • Commence review
    September 2022
  • Final report
    April 2023
  • Government response
    September 2023

What did the follow-on review find?

Focused innovation policy is key to lifting productivity

Frontier firms are the most productive firms in an economy and are vital to lifting national productivity and wellbeing. To best enable these firms to emerge and flourish, the Government should focus on building strong innovation ecosystems in a small number of high-potential areas.

A critical crossroads for innovation policy

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

While some progress has been made, existing arrangements, including those for developing industry policy and the research, science and innovation strategy (Te Ara Paerangi: Future Pathways) fall short - Industry Transformation Plans lack resources, co-investment by business, connections with researchers, and enough focus and ambition to spark transformational change. In addition, material decision making for Industry Transformation Plans, National Research Priorities, and other processes remain largely centralised and top-down, rather than being collaborative and devolved. Our 20 full findings are provided below.

What does the Commission recommend?

Frontier firms are vital to lifting national productivity and wellbeing. To help lift the wellbeing of all New Zealanders, frontier firms in New Zealand need to raise their performance closer to the global frontier, they need to grow larger, and diffuse innovation through the rest of the economy. 

Focused innovation policy will create the conditions for frontier firms to achieve these things. The development of innovation ecosystems that enable firms to innovate and export at scale requires government investment in focused innovation policy in areas of existing or emerging economic strength and competitive advantage. The Government needs to work with industry, knowledge institutions, and other stakeholders to realise the potential for productivity growth and export success in these chosen areas of the economy. This was a key recommendation in the New Zealand Firms: Reaching for the frontier inquiry.

A package of actions to improve the chances of success



The Commission recommends six key areas for action. These recommendations are a package - interlocking and interdependent, all of which must be in place for success.

Use the process for selecting National Research Priorities to give effect to the Commission’s recommendation to choose a small number of areas for focused innovation. This should not be a top-down exercise led by government, but a collaboration with industry, researchers, iwi/Māori and educators.

Establish a high-level national council to provide strategic leadership and broad coordination, along with a devolved governance body for each focus area. The national council would provide overall governance of the strategy, including choice of the focus areas and overseeing implementation. Each focus area should be governed by an independent body with devolved funding and decision rights.

To make progress, material levels of investment are required. Finite government resources need to be deliberately focused on a small number of high-potential areas. International experience indicates this should be in the order of $30 to $50 million a year for each focus area, matched by industry contributions. Decisions on how to allocate this funding should be devolved to the governance bodies for each focus area, rather than being tied to specific government portfolios.

Clearly identifying a small number of specific focus areas would help government agencies improve policy alignment and reduce fragmentation. These focus areas need not be based on standard industry classifications, and one or two could be mission-based. Policy settings across areas such as exporting, innovation, infrastructure, education and training, immigration, and regulation may all need to be improved, to support world-class innovation ecosystems in the focus areas.

Flourishing innovation ecosystems for Māori requires iwi and Māori voices in decision making, and Māori leadership of efforts to improve support for Māori business. Māori leadership is required both within and outside government. This calls for ongoing efforts to build capacity and capability and to adequately resource Māori contribution and leadership.

Arrangements for monitoring and independent evaluation need to be built in from the outset, with dedicated funding. Results measurement should focus on outcomes. Evaluation should be transparent and visible, with evaluation findings published as a matter of good practice.

Our 20 detailed findings

Below are the full details of the 20 key findings of our follow-on review. These findings informed our recommendations on how we think Government should proceed, given New Zealand’s current situation, to improve the chances of establishing high-performing innovation ecosystems.

Our detailed observations report provides further information to support these findings from the main report.


Effective focused innovation policy comprises a near-complete package of complementary measures consisting of:

  • collaborative governance and implementation;
  • substantial government and non-government co-funding;
  • a relentless focus on new initiatives;
  • transparent monitoring and evaluation; and
  • a consistent but adaptive approach to strategic direction.

The Government has yet to establish a complete package of governance, funding, and evaluation arrangements for focused innovation policy, as the Commission recommended in its Frontier Firms report. Even so, the Government is implementing a range of initiatives which could provide elements of an effective strategy for focused innovation policy.

The Government has successfully replaced Growth Grants for business R&D with the R&D Tax Incentive (RDTI). The RDTI should stimulate further growth in business expenditure on R&D (BERD), from a low base. BERD as a percentage of GDP in New Zealand remains well below that in most comparator and small advanced economies.

The Government has not yet made clear strategic choices around where the balance of its support for research, science, and innovation (RSI) should lie. Choices include what proportions of support should be for:

  • mission-led research;
  • implementing technologies that are new to New Zealand vs supporting innovation in existing technologies;
  • non R&D business innovation; and
  • initiatives that facilitate “business pull” in shaping public research effort.

The Te Ara Paerangi process, combined with expert high-level governance arrangements for the choice of national research priorities, provides the Government with an opportunity to make clear and considered strategic choices around the balance of its support for RSI.

The Government has refreshed and refocused its efforts to protect mātauranga Māori and intellectual property. The Commission believes that the direction set out in the work programme, Te Tumu mō te Pae Tawhiti, looks promising.

Te Ara Paerangi sets out proposed changes to the research, science and innovation (RSI) system to better enable and protect mātauranga Māori. These changes must be Māori led, and they will rely heavily on the capacity and capability of Māori in the RSI system to engage. They are unlikely to succeed unless Māori are adequately resourced for their engagement and contributions.

A single national Hui Taumata has not yet been planned. Te Puni Kōkiri has held some regional business hui, and various government agencies are progressing work to improve government supports for Māori businesses.

Initiatives to grow public purchasing from Māori businesses have included support to grow the capability of Māori businesses to participate in public procurement processes. The initial 5% target for the number of public service contracts awarded to Māori businesses has already been exceeded and was recently increased to 8%.

Major reforms to Te Ture Whenua Act 1993 have not been progressed. However, Te Puni Kōkiri has expanded its Whenua Māori Service. The Government has also started working with the National Iwi Chairs Forum to address issues raised through the Reserve Bank’s work on Māori access to capital.

Te Puni Kōkiri (TPK) has progressed a programme of research into Māori business. In July 2022, it released its second Te Matapaeroa report. Alongside Te Matapaeroa, TPK released a new data visualisation tool that allows users to explore data on Māori businesses. Other research projects are underway or planned.

The Internationalisation Support Review is not yet complete, but indications are that the Government and officials are using it as an important opportunity to:

  • examine the mix of services to evaluate those that are most effective in helping innovative firms overcome the fixed costs of starting to export or expanding to new products and/or markets; and

tailor NZTE services and funding to some extent to the needs of firms within industry transformation plans, as potential areas of focused innovation.

Callaghan Innovation has responded to the Frontier Firms report by building the concepts of frontier firms and focused innovation ecosystems into its new strategy. Yet, until the Government is clear on focus areas, agencies like Callaghan Innovation must choose these themselves, and this risks fragmentation of efforts across government.

While Callaghan Innovation and New Zealand Trade and Enterprise are collaborating better to serve common business customers, scope exists to improve alignment across them to support innovation ecosystems in areas of focus.

The supply of enough workers with specialised skills and knowledge in focused innovation areas is critical to the success of these areas. This task falls primarily to the domestic education and training system and secondarily to immigration policy. The domestic education and training system is not yet geared up to play this role effectively.

Work on developing an investment attraction strategy is an opportunity to set policy to attract foreign direct investment (FDI) that is innovative, oriented to exporting, likely to stay long term and a source of spillover benefits. Policy design can also make provision to align FDI attraction to areas for focused innovation once these areas are chosen.

The current review of the Recognised Seasonal Employer (RSE) scheme provides an opportunity to incentivise growers to innovate and shift away from a reliance on seasonal migrant labour, and to address human rights concerns. However, the way the review is being undertaken suggests it will do little to encourage innovation, or to address the needs and concerns of Pacific Island countries and their RSE workers.

Policy development and implementation in activities such as innovation, exporting, investment attraction, education and skills, procurement and immigration should be excellent in the areas agreed for focused innovation, and should be aligned with the needs of those areas. However, this is not happening much. Where it is happening, the efforts are hampered by lack of clarity about the areas for focused innovation.

Progress against the recommendations in the Frontier Firms report case studies on specific regulatory regimes has been mixed. It is important that regulatory regimes are designed, resourced, and maintained in a way that enables and does not stifle innovation.

The Internationalisation Support Review is an opportunity to progress the Commission’s recommendation to improve the evaluation of New Zealand Trade and Enterprise (NZTE) services, by tagging which firms receive which services in the Longitudinal Business Database and making this a condition for firms to receive NZTE services.

The Commission did not find evidence of a systematic approach to taking stock and evaluating existing supports for leadership capabilities. A new pilot programme for building dynamic capabilities, run by Callaghan Innovation, shows promise. However, in the absence of systematic monitoring and evaluation, and rationalisation of supports, even if this programme proves to be successful, its visibility and effectiveness could be lost in the existing clutter of programmes.