2014 R&D Survey Results Out: who cares?

Disclosure Statement: George likes the R&D Survey because there is always one number in there you can use to prove your point. Were you aware that the Beverage and Tobacco Manufacturing sector was New Zealand’s most ambitious with 45% undertaking research to become a dominant player in the market? George also consults on R&D for a number of organisations in the Business, Government and Higher Education sectors.

The results of Statistics New Zealand’s biannual survey of R&D expenditure have been out for a couple of weeks. They were  greeted by a disappointingly small number of commentators saying, ‘aren’t they great (vote for me)’, ‘aren’t they terrible (vote for me this time, not him)’, and, ‘Yes, we did read the Statistics New Zealand press release’.  Disappointing because these are important numbers for New Zealand and the future of its economy.

The biggest number is Gross Expenditure on R&D, the total the country spends on R&D, which was basically flat at $2.62b in 2012 and 2014. I guess, ‘Oh, well, things could be worse’ doesn’t make for a good headline so everyone turned to the next biggest number, Business Expenditure on R&D to make the news. This was up 4% (Yay!) from 2012 at $1.25b but not as a percentage of GDP (Boo! but of course Yay! that GDP rose).

The reason people look at the percentage of GDP is because it allows comparisons with other countries.  The Organisation for Economic Cooperation and Development (OECD) is a group of 30 or so of the world’s more developed economies (including us) who all share a lot of dataso we mostly look at them. In OECD terms we don’t come out so well on R&D. New Zealand’s Gross Expenditure on R&D is a bit less than half the OECD average and well down on our current favourite comparator economies, Israel, Finland and Denmark. Our Business Expenditure on R&D, currently 0.54% GDP, is even lower at less than a third of the OECD average. For which you can make excuses but it’s still pretty dismal even though the dollar amount is heading in the right direction.

This matters because it is R&D carried out by business that really boosts economic growth. The current Government has very laudably set a target of getting Business Expenditure on R&D up to 1% of GDP. I was a little taken aback when I heard that announced. Although going from 0.54% to 1.0% doesn’t look very dramatic it means New Zealand business will have to spend about another $1b per annum on R&D (assuming this Government manages to keep GDP flat) and, basically, pigs will fly. In the government time frame anyway, even if we get there eventually. So it looks like a hiding to nothing for the agency, Callaghan Innovation, tasked with making it happen.

This talk of Business Expenditure on R&D is slightly confusing because that is what gets spent by business but it doesn’t tell you where the money is coming from. In fact the amount that business spends of its own money on its own research had been rising quite nicely, up over $120m from 2010 to 2012 but it levelled off with only a $12m increase from 2012 to 2014. That equates to a more or less steady 75ish percent of business funding its own research. This is overall a good thing (although you do have to wonder what happened in 2012).

The money government has been giving to business for R&D (grants, corporate welfare, call it what you will) almost doubled from 2010 to 2012, up from $82m to $146m, but fell a little, back to $139m in 2014. I don’t think this is so good. It obviously came as a surprise and a disappointment to the Government, especially with all the rhetoric around Callaghan Innovation accelerating business, because least week, as part of their pre-budget announcement a further $20m a year was given to Callaghan to fund business R&D. Or 0.0% of GDP – oops, sorry, lets up the number of decimals on my calculator – 0.01% GDP. I guess in the week following the Statistics New Zealand announcement they hunted behind the sofa cushions and that was all they came up with. Mr Key also made the point of saying that the new funding would be allocated on an ‘objective and independent’ basis. Um. Ok… So it hasn’t been up to now? Was he saying the Government has run out of friends to give …no, of course, well… almost certainly not.[1]

But, jokes aside, government funding of business R&D in New Zealand is important. We don’t have the big research intensive industries such as aerospace, pharmaceuticals or even automotive so spending on R&D is unfamiliar to us. Our businesses are typically small and lack the capacity and even the appetite for risk to get involved in R&D but clearly businesses that do spend on R&D, like Fisher Paykel Healthcare, the Livestock Improvement Corporation, Zespri, and even Fonterra, are successful. So if the government can help things along by reducing the risk with funding and providing people and support to improve capability that will get things going and the economy will benefit. I think that the increase in business funding its own R&D following the government’s increases is a sign that this is happening. So, the $80m announced last week is a good sign, even if the claim it is to get closer to the OECD average is a bit overblown. Other numbers indicate progress. My favourite statistic from the 2014 Survey, that salaries for R&D staff in business rose from $70,000 per annum in 2012 to $75,000 in 2014, shows that business is valuing its R&D staff more. Outside of business R&D salaries were pretty flat.

Another interesting statistic is that the biggest increase in Business R&D came in computer services, up $90m. While the residual chemist in me is tempted to say ‘that isn’t real research!’ the bureaucrat says ‘look at the numbers.’ Xero, Orion Health, Datacom and Weta are getting to be our biggest, fastest growing companies and can only benefit from building up their R&D capacity.

The increase in overseas funding for business R&D in New Zealand also caught my eye.  In 2008 this accounted for 8% of R&D funding for New Zealand business at $54m. In 2014 it is $144 (more than New Zealand government investment in business R&D) or 12% of the total. That has to be significant but I have no real idea what it means. I hope it shows that New Zealand business R&D looks competitive on the world stage.

In the meantime, government investment in its own research institutions and higher education fell. This doesn’t bode well for the future so let’s hope they take the opportunity to turn it around in the next budget. And, with any luck, by more than 0.0% GDP.

[1] Mr Key, with military matters surely on his mind, could have taken Lance-Corporal Jones’ public relations advice – Don’t panic, don’t panic.

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