Innovation: Is this NZ businesses 100% Pure moment?
Speak to anyone outside these shores about things they associate with New Zealand and rugby is going to be mentioned more often than not. Even though the number one global ranking position is currently held by South Africa since the index’s inception in 2003 the All Blacks held the premier position for over a decade and longer than all the other teams combined; the number one ranking has become synonymous with New Zealand. Imagine therefore a scenario where the All Blacks slipped from the upper echelons of Rugby World Rankings to somewhere between Germany and Belgium…could you imagine the uproar in the media and the demand to do something about it…and quickly.
However, if I was to tell you this scenario has happened to NZ in the Innovation stakes would it come as a surprise? Well it did to me.
Slippery Slope
Why? As guilty as the next person I fall easily into the mantra that “NZ may be a small economy but it punches above its weight in innovation” and we easily trip out a list of companies with globally significant inventions and innovations. It's become a narrative that no one dares doubt it for fear to be castigated from the collective or a truism that no one even bothers to look up and confirm.
So when the Bloomberg’s annual country innovation summary landed in my inbox the other day (via the much recommended Visual Capitalist daily email) I was expecting to see NZ up there in the mid-teens where it was and I still thought it was. Unfortunately, the reality is we currently come in at #29, sandwiched between Hungary and Greece.
Whilst not wanting to denigrate these nations innovative successes it’s probably not where you’d expect NZ to be either. For the last four or five years, depending on which index you refer to, NZ has dropped from ranking in the mid-teens to barely hanging on to the twenties.
To add insult to injury in the Bloomberg table NZ garners a special editorial highlight “New Zealand slid by 10 places to the 29th spot, falling for the third consecutive year.” also noting that NZ’s fall is due to “a slide in value-added manufacturing performance”.
The most concerning thing is the rapid drop; we were in the Top 20 in 2015 (18th) of the Bloomberg Index and also in the top 20 of the Global Innovation Index (link), the two major indices that measure this economic marker. This is a similar story across the others (link) for instance www.theglobaleconomy (Cornell and INSEAD) 2012 NZ was 13th falling out of the top 20 in 2017 (21st) and now is 25th on this Index.
You may recall the mid-2018 moment NZ’s “100% Pure” tourism messaging was called out by highly respected internationally media (and the Guardian) as total B.S and was quietly dropped. Irrespective the good people at Tourism NZ came up with a new one and we carried on; NZ still being a great place for a holiday, just less pure!!
In my opinion, this Innovation “scare” is New Zealand Businesses “100% Pure” moment.
Some Detail
In looking deeper at this I want to make one thing very clear from the start. Those that have the pleasure `(I think that’s the word) of working with me know I detest pretty much all targets; they are frequently folly and too often incorrectly and misguidedly relied upon and so to castigate a country for dropping in what effectively can be viewed as a “target” rather than league table would be churlish.
However, to take a contrarian view on my own standards league tables are subtly different as they can be simply taken as a compilation of measurements in an attempt to be comparative without installing a target culture. Importantly in isolation, if the constituent parts comprising our the rankings and scores are assembled through transparent reporting enables change. Contrary to my opinion of targets I think there is great merit in measuring as many things as possible provided they are relevant and useful.
In essence, it’s not that we should be high on the index for the sake of being high on the index but that we need to look at the constituent elements of where we have fallen over the years and what can be done to address them for the sake of long term improvement, economic gain and the benefits of having surplus capital derived from this improvement to spend on social, environmental and other wider initiatives.
I don't intend to lay out all the criteria here and for those that are interested, I would recommend looking at the very comprehensive reports that accompany each of the indices each year. On digging further into why NZ has performed badly I have looked at the detail and I'd invite you to look at the methodology behind the Bloomberg and GII indexes as they use quite wide and diverse criteria.
The GII methodology is regarded as the premier index and goes into many areas and also helpfully quantifies the Input and Output of efforts, it also breaks down the Input and Output components which have not changed since 2015 to allow us to build a picture over time.
What’s important in all the league tables are that the metrics measure performance over periods up to three years, they measure on a Purchasing Power Parity, GDP or per capita basis and are weighted. As such we can’t make the “punching above our weight” counterargument as Ireland, Luxembourg, Estonia and Iceland rank higher.
Furthermore, the underlying elements that lead to the scores and the rankings are not quick to affect or particularly easy to game as they involve significant investment at both government and business level as such change has to be over a sustained period of time; there’s no quick fix.
Review them using the rankings (figures in brackets in GII table) rather than the actual numbers, whilst the latter gives a relative performance from year to year the ranking shows how NZ competes with other countries, is comparative, takes into effect that some of the categories have changed slightly and also allows comparison fairly as there is a weighting system that alters the significance of the actual figure; for instance, there is greater weighting to Productivity scores than there is to the “number of Wikipedia edits”.
The following summarises the results of the Bloomberg and the GII surveys over the last few years.
I/O
The key observations of the GII table are the difference between the Input functions and the Output. NZ does not lack good networks, infrastructure, regulation and legislation to create good output.
As such this tells us our favourite target to bash as businesses; politics and government, are sadly not at fault here (well for most of the blame anyway). The NZ Government machine couldn't do much more to support “input” efforts scoring very highly in the GII scores.
In fact to view this innovation ranking as a machine is quite a useful analogy. The quality of our input is very good the processing bit – business – is not producing a good product.
As such businesses need to undertake some serious introspection and action; the slide in NZs ranking is down to what happens inside the machine. In school report parlance "NZ business is given lots of opportunities to show its potential and needs to try harder” or to keep our initial sporting metaphor going “we are not converting possession to points…”
What’s wrong with the machine?
So where has the decline been and what can we do?
The key areas from the Bloomberg and GII tables associated with the decline are:
- Manufacturing Value Add/ Productivity,
- Tertiary Education output,
- Business Sophistication and
- Knowledge and tech output.
The specific elements in the GII report where we compare badly against other countries and especially against other high-income countries are
- Declines in Patent application and revenue
- New Business Density (easy to open a business just no one is doing it….)
- Growth rate of GDP per person engaged (in numeric terms it's -0.6)
- and High tech exports
In the Bloomberg index “Manufacturing Value Add” has never been a strong performance as can be seen in the above table and the overall score was kept high through a high historic Productivity score but sadly this has dropped significantly in the last few years and could have been due to the GDP from new builds associated with Christchurch. This drop in productivity is confirmed by the GII table in the “Knowledge Impact” score.
To correct this we quite simply need to produce more, improve GDP per worker. As GDP is a broad measure of undertaking, being the summation of private consumption + government spending + investment + net exports it gives ample scope and opportunity for growth.
NZ certainly does not lack the wherewithal to undertake growth in productivity in a meaningful and sustainable way however as seen from the Input/Output the emphasis needs to be with Business, not Government.
Assistive Growth Funding
To accompany an effort by Business there needs to be willing (read as risk aware), actively deployed and engaged capital investment focused primarily to fund growth, support R&D, new products and market expansion. The immediate consequence of this is to help ensure NZ businesses remain in NZ for as long as practicable to create stronger foundations for further growth and to create breadth, depth and diversity of ideas across all sectors in New Zealand.
For instance, one area of leakage is “IP receipts” a sub-category in “Knowledge diffusion” in the GII defined as
Receipts between residents and non-residents for the use of proprietary rights (such as patents, trademarks, copyrights, industrial processes, and designs including trade secrets, franchises), and for licenses to reproduce or distribute (or both) intellectual property embodied in produced originals or prototypes (such as copyrights on books and manuscripts, computer software, cinematographic works, and sound recordings) and related rights (such as for live performances and television, cable, or satellite broadcast).
By way of example, Iceland (Global rank 20 in 2019 and 5 above NZ) ranks 10th globally versus NZ’s 23rd for IP receipts and without further analysis could be down to the number of exits NZ companies are subject to over Icelandic ones causing leakage of long term IP.
There’s nothing wrong with a successful exit of course but when it is done due to lack of capital in NZ any joy over short term gain is lost when taking into consideration the longer-term benefits of retaining knowledge, IP and some cash flow in-country. I am not espousing protectionist action here just common sense, pragmatic balance.
Thankfully one mechanism to address this issue is being addressed. Until recently the idea of growth capital in NZ was very much overlooked but with the introduction of the Elevate NZ Venture Fund via NZ Growth Capital Partners (the agency formerly known as NZVIF) this situation will certainly improve.
Of course investment capital is merely an extrinsic factor and only one of the components of success. We have to solve real-world problems in a way that is valuable to the customer and in this regard NZ companies should not be shy in actively seeking strategic assistive input into helping scale operations; growth is a lot harder than start-up but the rewards can be significant.
With an ever-increasing pool of public and private capital seeking a home to generate yield against a backdrop of volatile stock markets (you may have caught this on the news this week) and bank interest and bond markets barely returning invested capital an allocation of capital into growth should be viewed both seriously and quickly.
There is an input problem
Okay, it's not all down to business, to say there are no input problems is strictly not true. The government and legislature scores very highly in many areas and both sides of the political spectrum should be applauded for their efforts in all but one area and that is education.
Government funding into education does not stack up at all well alongside other nations and whilst enrolment in tertiary education is strong (probably down to recent political initiatives) STEM subjects are very underrepresented at Tertiary level and markedly below our High-income peers as are classroom sizes in secondary schools. This is highlighted as a major issue in both GII and Bloomberg indices.
These are systemic long term issues that need resolving quickly. Without strong input into a system where innovation and productivity are driven largely by a strong Science, Tech and Maths base it does not bode well for the future and the knock-on effects from this drop could take generations to resolve.
In this regard, the recent suggestion by Ministry of Education to “dumb down” and remove specialisation of sciences at NZEA level 1 is a genuine area of concern and deserves the outcry that has come from STEM teachers and whilst the move is not final and out for consultation it should be a major concern and I would urge readers of this to make sure your voice is heard.
So an Easy Fix?
Nope, not at all but gains don't come easily. Business needs to take the lead and whilst the “to do” list never shrinks this should be pretty high up it.
The NZ Ascent fund is a great start and there needs to be much greater capital and support to companies who have successfully exited the initial stages coupled with quality advice and support services, this whole eco-system needs to be bigger.
There needs to be greater scale and productivity, R&D and sustainable high-value export growth. NZ companies need to be able to source investment from within NZ to counter the massive pool of international capital all too ready to capture bargain prices on our shores and foster them long term for another country's benefit. In turn, these businesses need to grow, undertake R&D, encourage learning, IP monetisation that helps create a long term capital flow back to New Zealand creating productivity growth.
The current volatility is a great time to support long term domestic growth and an excellent opportunity for companies to pause and look at how they can improve growth and productivity to compete on the world stage. There’s no reason this league table slide cannot be stopped and reversed it doesn’t have to be a 100% pure moment but it does require some positive steps to ensure we grow.