Ten year target to boost research & development – Expert reaction

The Labour-New Zealand First coalition will undertake to increase spending on research & development to 2% of GDP over ten years, according to the agreement released yesterday.

New Zealand’s level of gross spending on R&D is currently 1.3%, according to the OECD (Organisation for Economic Co-operation and Development), lagging the OECD average of 2.4%.

Labour’s own R&D policy involves introducing a 12.5% tax credit on companies’ spending on research and development.

Is the target realistic and will it make a difference to innovation in New Zealand?

The SMC asked innovation experts to comment on the R&D target outlined in the Labour-New Zealand First coalition agreement. Feel free to use these comments in your reporting. 

Professor Rod McNaughton, Deputy Dean, University of Auckland Business School, comments:

“The objective of increasing NZ’s R&D spending to 2% of GDP over ten years shines a welcome spotlight on a fundamental weakness in the NZ economy. But, the devil is in the details of how this might be achieved.

“The target is for total R&D, while innovation and economic growth is strongly linked to business enterprise expenditure on research and development (BERD). NZ’s record of BERD is dismal compared to many OECD countries, with low overall spend, and a high proportion of that expenditure occurring in small firms.

“How the government goes about increasing R&D is vital. During the election Labour mooted a 12.5% R&D tax credit. The experience of countries such as Canada whose innovation policies rely heavily on R&D tax credits, suggests this may be an ineffective approach. NZ has too few firms with large research budgets, and rebating a small proportion of an already small expenditure will do little to achieve the large scale focused investment required to make a difference.

“R&D tax breaks might be popular, but it is unlikely that many breakthrough innovations will be achieved because of them.”

Professor Shaun Hendy, Director, Te Pūnaha Matatini, University of Auckland, comments:

“It is pleasing to see wide-spread political support now for lifting our R&D investment, and it would not have surprised me to see this in a National-NZ First agreement had the chips fallen the other way. Other countries have managed to grow their R&D spend at the rate envisioned by Labour-NZ First so it should be achievable if the new government can get its policy mix right.

“National did manage to nudge up R&D spending, but lacked a coherent strategy for doing so (Exhibit A: Callaghan Innovation). Indeed, the incoming government will have to quickly sort out Callaghan, particularly if Callaghan’s grants are to be replaced by the R&D tax credit.”

Dr Adam Jaffe, Director, Motu Economic and Public Policy Research, comments:

“2% of GDP on R&D is a good aspirational goal, but it will be difficult to achieve, and possibly in conflict with other Labour policies. In particular, since R&D is mostly about people, we need to recognize that achieving this goal would require an increase in the number of active researchers of something like 50%. This would almost certainly require a large influx of foreign scientists and engineers.

“The international evidence is that R&D tax credits are modestly effective at increasing business R&D. This could be part of a portfolio of policies to increase R&D, but the most important factor in firms’ R&D decisions is the perceived opportunity, not tax credits.”