The NZ Institute says we (NZ) are hopeless at converting science into business. Referring to “innovation factors” in the World Economic Forum’s Global Competitiveness Report, Director Rick Boven says
New Zealand performs poorly relative to advanced economies on several of these innovation measures. Our relative performance indicates that we do not yet have the conditions in place to compete successfully.
I’m sure there is scope for improvement, but here are a few reasons to be a bit more cheerful…
First, to the extent that the WEF report makes sense, we’ve done OK, moving from up 4 places to 20th in the world over the last year. Second, all the WEF rankings are heavily influenced by surveys of selected business people, so they’re susceptible to a fair bit of sampling error if not actual bias. Also, for some reason NZ was under-sampled (47 instead of the average of 97 per country). Third, some might quibble with the answers those 47 gave, which among other things result in NZ being ranked in 1st place for
corporate ethics, the strength of auditing standards, and protection of shareholders
I find this a bit hard to square with finance company meltdowns, the Securities Commission’s weakness and investor protection issues more generally.
Turning to the inferences NZ Institute draws for policy, the list starts out well with this idea
Focus on the requirements for innovative economies where we can make an improvement
But then it rapidly descends into a possibly worthy but very question-begging list that includes:
- Increase the availability of scientists and engineers
- Develop business clusters
- Penetrate more layers of the value chain
- Increase FDI and technology transfer
- Address the brain drain
- Improve hiring and firing practices
After that, I needed something uplifting. So naturally I thought of two NZ entrepreneurs who are doing exactly what we’re supposed to be hopeless at: turning science into business.
First up is Peter Beck from Rocket Lab in Parnell, who (among many other things) is preparing NZ’s first space rocket launch scheduled for November. It is expected to get 100km high.
Second is Glenn Martin from the Martin Aircraft Company in ChCh, which has built and is now selling a functional JetPack.
NZ generates the vast majority of its science inside public institutions, it is publicly funded and CRI’s retain the property rights for the R&D. They are then measured on their commercial performance, and are thus encouraged to commercialise the R&D that they do. Crucially, they are not encouraged to transfer this R&D to the private sector except by selling it at value (as opposed to cost).
However, the underlying public policy problem is that the PRIVATE sector will underprovide R&D as it is unable to capture the full benefit from it. The NZ approach doesn’t address this problem as the private sector is still underproviding R&D.
This matters as it is difficult to transfer knowledge (it takes three years to get a degree for example) to the private sector for them to commercialise even if the incentives ran in that direction. Which they do not because of the profit incentive that the CRIs have and their retention of the property rights.
And I question whether any organisation can manage commercialisation across the breadth of markets that a large CRI has to manage. Private sector companies that are reseach based such as Monsanto or aerospace companies tend to be very narrowly focused.
My view is that there must be a transition to purchasing R&D from the private sector. The funding into CRIs is a massive scientist magnet. The more capability that they build up, the less likely it is that private providers can compete. So over time there needs to be a transfer of capability to, and purchase from, the private sector if we are to become a more technologically based economy.
For R&D, I’d like to know if a way to transition more activity into commercialisation is to run competitions (e.g. Admirality chronometer competition and recent space flight competition). Whilst there is some difficulty in transferring technology (three year degree) in general knowledge transfer happens very rapidly in society. So to some extent the problem is not just capture by CRI’s of knowledge but it is that the cost of producing a new piece of knowledge is very high (fixed cost) but once produced it is easily replicable or acquirable at a very low marginal cost – look at generic drugs. This is not an argument for patent rights per se.
What needs to be considered is what is the best mix of incentives/funding to generate new knowledge (old knowledge and current CRI model is sunk costs so we can ignore it). Competition based science funding may provide a mechanism to generate private sector R&D (winner gets $xM ) and is normally directed to a commercial activity, spin-offs are generated by the number of teams entering examining multiple paths, each which may have there own spin-offs.
May need to consider whether the winner gets commercialisation rights as well, or just gets the prize money and first mover advantage in subsequent commercialisation.
Thanks Doug and WH. Your thoughtful and constructive responses put my slightly flippant original post to shame.
A quick cast around revealed that there was recently something of a nexus between them in the form of a kind of “ideas competition” run by IRL and won by Resene Paints. Basically IRL put up $1m of research time as the prize in a competition for the best idea that would use that resource (perhaps using a kind of Dragons’ Den selection).
The IRL concept looks good, but it is less radical than either of your ideas. You have inspired me to persist with this subject!
Stick with it – if we can learn anything from the last 200 years (and Adam Smith) it is the story of technology and the market place which has transformed our lives and world enabling so many to have a living standard today that would make histories Kings and Queens look like paupers.
I’m interested in the IRL and resene paint story – it quietly passed me by. I’ll have a look into it, thanks for pointing this out.
Another example of a successful prize-based approach to R & D is the recent Netflix Prize. The winning team was awarded US$1m for improving DVD recommendations to subscribers by over 10%.
Paying $1m for three years work by a team of seven experts is an excellent return on investment. Another benefit is that Netflix were able to attract participants with full time positions at other firms (AT&T and Yahoo for example), who wouldn’t have been able to leave their firms to work at Netflix in a full time role.
You can read more about it at http://www.slate.com/id/2229225/
I read a proposal that is similar to the prize idea and addresses the issue that while successful R&D can be disseminated relatively costlessly, this is costly to the developing firm as it loses the profits that accrue to the exclusive property right, and thus the incentive to do the R&D in he first place.
The idea is the the government purchases the rights to sucessful R&D from the developing firm at value and then makes the R&D available (presumably domestically) at no cost. This way the firm is rewarded for their efforts, and the country can take advantage of the public good-ish nature of the information.
Applied to publicly produced R&D here in NZ, this would mean that successful R&D would be available to firms at no cost as the government has already paid for it to be produced.
If purchase was transitioned to firms from CRIs over time, then there could be some prize (the purchase price) that would require some judgement about the firm’s contribution, or as WH suggests some first mover advantage afforded by it being most familiar with the technology. Might be a moral hazard problem though.
I think that the prize idea in isolation duplicates existing profit incentives unless there is an element of making the information / IP publicly available.