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Focus innovation funding to build world class firms

Unlocking the door to the global productivity frontier
4 December 2020

The New Zealand Productivity Commission today released its draft report on frontier firms. The performance of our firms shapes the nation’s productivity. Our most productive or “frontier firms” set the bar for all firms. They are also a key pathway by which innovation in the form of new technologies and work practices make their way to firms behind the leading edge.

New analysis undertaken by the Productivity Commission indicates that the productivity of New Zealand’s frontier firms is only about half that found in their counterparts in other small advanced economies.

“Innovation is the key to New Zealand’s economic future,” says Commission Chair Murray Sherwin. “Successful small advanced economies have large companies that export specialised, distinctive products at scale. By comparison, most of New Zealand’s larger companies are strongly oriented towards sales in the domestic market. A mere 30 companies account for over half of our exports, and those exports tend to be less specialised, less distinctive than we see in other advanced economies.

“A key difference is that successful small advanced economies focus their investments on creating world class innovation ecosystems around their leading firms.”

“Yet small countries can’t be world class in everything. We have to focus and specialise, much like we do in sport.”

Innovation ecosystems describe the capabilities and networks of relationships between firms, researchers, workers, educators, investors, government and consumers, that drive innovation. Building a world class innovation ecosystem requires coordinating investments in infrastructure, regulation, skills, research and business support.

“The Commission recommends overhauling the innovation system, including focusing significant investment in target areas. This isn’t about picking winners - these areas should be based on areas of existing or emerging economic strength and competitive advantage,” notes Murray Sherwin.

“This will not be easy to do. New Zealand has struggled to effectively implement these sorts of ideas in the past. To make this work will require high-level political leadership, durability across the electoral cycle, as well as careful evaluation and adaptive management. This isn’t something Government can do alone – it needs to work in partnership with industry and researchers.”

The Commission’s findings draw on the lessons from high-performing small advanced economies such as Sweden, Denmark, Ireland, the Netherlands, Israel and Singapore. Small advanced economies are different. To be world class, firms require scale. Scale allows firms to invest in the up-front costs required to innovate and then export, which in turn allows them to fully exploit the benefits of their innovation. Firms in small countries face a Catch 22; due to their small domestic markets, they need to export before they can get scale. This means they face the hurdles of high costs and risks of exporting at a much earlier stage in their lifecycle than firms in large economies, who can expand within their domestic market.

“New Zealand has a few world-leading firms, but they are thinner on the ground than in other small advanced economies. It is time to act and learn from those countries,” Sherwin said.

Today’s report makes 22 recommendations to overhaul New Zealand’s innovation system and make investments in infrastructure, regulation, skills, research and business support. The Commission is inviting public review and feedback on the report via submissions. A final report will be presented to the Government in March 2021.

About the frontier firms inquiry.