The futile call for an effective Govt innovation policy

Dr Bryce Wilkinson
NZ Herald
27 April, 2021

Too many New Zealanders demand and expect too much from Government. One result is a never-ending cycle of disappointment and fruitless exhortation.

That is my reaction to reading the New Zealand Productivity Commission’s latest report New Zealand’s Firms: Reaching for the Frontier.  It was published last week.

The report’s focus is on what government might do maximise the contribution of New Zealand’s frontier firms to the economy. Frontier firms are those that are the most productive in their industry. They tend to employ more capital per worker and be larger than their local competitors. They tend to be better plugged into overseas markets, capital and know-how.

The report finds that between 2003 and 2016, the growth in output per hour worked amongst New Zealand’s frontier firms broadly kept pace with counterpart firms in other small, advanced economies. The report’s “Gee Whizz” statistic is that the productivity level of the New Zealand frontier firms was only 45% of that in the best frontier firms in small, advanced economies.

Is 45% too high or too low? Superficially, it is too low. If output per person could be more than doubled in these firms, wages could be commensurately higher relative to the firm’s output prices with increased competitiveness. The key word in that sentence was “if”.

On the other hand, the people running these frontier firms are at the top of their industry. Few if any will be over-looking attainable ways of raising productivity. To do so would harm their customers, owners and staff, effectively subsidising their competitors. They will be cognisant of innovation and productivity levels in comparable companies overseas, particularly in Australia.

Perhaps government policies are holding them back? The Commission’s report diligently explores this question. Government is indeed omnipresent economically speaking, and not just for frontier firms.

Government dominates in health, education, vocational training, immigration, workforce regulation and thereby the supply of skilled and unskilled labour. It dominates research through the Crown Research Institutes, tertiary institutions and government research grants. It controls access to foreign direct investment through the Overseas Investment Act. It has a myriad of programmes for favouring some businesses or activities at the expense of others, all worthy in their ostensible intent.

The report also documents the discouraging list of chest-thumping government initiatives since 1999 to raise overall economic performance. All have been to no avail if lifting trend national productivity growth were the objective.

Initiatives from 1999-2008 included the creation of a Minister for Economic Development in 1999 with a supporting ministry and, soon thereafter the New Zealand Trade and Enterprise, a government agency. In 2001, the new thing was the Knowledge Wave Conference followed by the “Growth and Innovation Framework”. That framework was replaced by the “Economic Transformation Agenda” in 2006. Auckland was to be built into “an internationally competitive city”. Pity about Auckland house prices.

In 2012 a “Business Growth Agenda” was the new way forward. A Crown-Maori Economic Development Strategy was announced in 2013.

At ACT’s initiative, the 1999 National-led government set up a taskforce to advise on how to close the income gap with Australia. It brought down two reports, with many recommendations, large and small. They fell on infertile ground.

In 2019 the Labour-led government issued an Economic Plan and we had a self-proclaimed Wellbeing Budget. The 2020 Budget foreshadowed a ‘reset’ modelled on the economic strategy of the 1935 Labour government. (That strategy precipitated a serious foreign exchange crisis in 1938.)

The Productivity Commission’s report has 11 chapters, 71 findings and 30 recommendations. One finding is that New Zealand firms seeking government assistance for innovation and exporting face “a bewildering choice of programmes and points of contact”. The same could be said of course for our social welfare system, and much else. To have a government programme for every community itch is proof that government ‘cares’.

One particularly pertinent recommendation questions the value of the restrictions on foreign domestic investment. One reason why labour productivity, and thereby wages, are relatively low in New Zealand is that capital per worker is relatively low in New Zealand. Another recommends reassessing the case for banning innovative genetic engineering research.

Many of the findings lament inadequate accountability and performance measures for existing policies. Its associated recommendations politely ask the government to remedy these deficiencies.

To make such recommendations is to beg the question of why they are needed. If rigorous evaluation were politically useful, the government, any government, would have already asked for it in preparing its annual budgets. The sticking point is that to ask for one is to risk getting a politically embarrassing answer.

Despite its own evidence that successive governments are not deeply interested in the results of their innovation policies, in general or of specific programmes, the report grandly urges the government to “focus on areas of the economy with rich potential for innovation and to implement a “focused innovation policy”. On past form, its guesses are likely to be wrong and its implementation at best patchy. Political time horizons are short; good intentions trump results.

The report repeatedly tells the government what it must do. It asserts that a lift in the innovation and productivity of frontier firms is critical to “delivering sustainable and inclusive prosperity in the long-term”. That is not a recognisable finding from the economic literature on the sources of national prosperity.

The report particularly encourages the government to embrace Maori firms with additional support and assistance. It asserts without demonstrable evidence that they offer valuable lessons for other New Zealand firms; by implication lessons that their managers are too thick to appreciate. Yet, elsewhere the report cites a research finding that Maori firms’ operations align “very closely” with those in “the western world”.

This is not to knock Maori firms; it is to warn against patronising them, particularly state patronage. The problem with specific government industry support is the recipients of its largesse become vulnerable to changes in political whims. Government support weakens competitive commercial tests. Witness the withdrawal of import licensing patronage and farm subsidies a few decades ago.

There is surely no need to exhort Maori firms to be careful; the best are admirably commercially and politically savvy. But the immediate dollar temptations from government may be irresistible to some of their “stakeholders”. That is the danger with smothering government support.

The fact is that there are limits to what governments can achieve, regardless of whom is in power. We need governments to excel where they are most needed. They are least needed in the commercial sphere.


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