Stitch Innovation Series #1

   

2007. Gauldie, R. W. Gauldie, R. W. and W. L. Giesbers. Up the Creek and Looking for a Paddle, Or, if we do not get New Zealand's commercial innovation under-way soon, we will all be up to our ears in it. STITCH Innovation Series#1. The Gail Press, Wellington ISBN 978-0-9597776-2-8. Hard copy and digital copy are deposited with the National Library of New Zealand. Download PDF (7.7MB)

 
   

Abstract

Up the Creek and Looking for a Paddle, Or, if we do not get New Zealand's commercial innovation under-way soon, we will all be up to our ears in it.

Bob Gauldie and William Giesbers

 

New Zealanders are once again deeply in debt, making less money by working inefficiently, and saving nothing; this is what is popularly known as being up the proverbial creek without a paddle.

Our article is about trying to find a paddle.

Trading out of debt is our only realistic way of rebuilding our national wealth. If we try to do this by devaluing the dollar, a domestic debt crisis will be created simply because we have borrowed so much in foreign currency denominated loans. To some extent devaluing the dollar may be unavoidable, but our primary target must be to increase the profit margin on the goods we sell, regardless of type. But there are two government-imposed constraints that hold us back:

  1. A misunderstanding of how commercial enterprises find the innovative ideas that go into profitable products. This misunderstanding wastes taxpayers' money and inhibits, rather than encourages, commercial innovation.
  2. A misunderstanding of the full extent of the amounts and kinds of the resources that managers need to develop and market profitable innovative products from New Zealand. We are too often turning up at the commercial Twickenham with our bag of marbles, and our box of tiddlywinks, instead of a front row of exporters who can put the fear of God into our competitors.

The effect of these two constraints is to leave us paddle-less and drifting in a noisesome commercial backwater. How can we turn these two constraints into advantages that will enable us to get ourselves out of this mess on the strength of our own efforts?

The present New Zealand government behaves in its funding and taxation practice as if it actually believes that the Universities, CRIs and SOEs can lead commercial innovation in New Zealand.   New Zealand companies source the bulk of their innovative ideas in-house, or from other companies, suppliers and trade contacts; innovations are " Never " to " Occasionally " sourced from New Zealand Universities, CRIs, SOEs or government departments. Government-funded research does not appear to have a lot of impact on commercial, profit-making research either in New Zealand, or anywhere else in the world where it has been assessed.

It is important to recognise the pressures that make in-house research obligatory for most commercial companies. Individual companies react to the big picture research in their sector in the context of their own production facilities. This is the classical business product cycle of how commercial business expenditure of R&D (BERD) operates: a series of short-term improvements in the area of adoption-adaption-innovation .

We need to spend $3 billion in BERD each year just to match our target nation, Finland's current spending, not even to catch up! New Zealand's BERD figures from the OECD are less than $300 million a year.

Spending $3 billion in BERD every year means not only a ten times increase in BERD spending, but also a ten times increase in skilled manpower and   managers skilled in implementing commercial innovation. These numbers are additive for at least the 3-5 year product cycle of adoption-adaption-innovation . In addition, the money spent on creating the innovation itself requires anything up to ten times as much again to move into factory production and penetrate overseas markets with the actual profit-making goods. Now we are talking about a $3 billion BERD investment, followed by a $30 billion market penetration investment.

The $3 billion BERD investment barrier, and the $30 billion market penetration barrier, dominate any attempt by New Zealand to generate commercial go-forwards. If we can get past these two barriers, we can reasonably expect a self-funding, self-managing and self-developing New Zealand economy.

On the problem of importing capital, suppose that all NZ companies were allowed at their IPO, or first takeover, to walk away with all the profits tax-free.   This kind of policy would have two desirable effects.

  1. Encourage investment of overseas money and skilled manpower into New Zealand by boosting the leverage of investment on profit and decreasing the time of return on investment.
  2. Decrease the market capitalisation cost because more cash can be taken out of a company IPO at a lower sales price. This would also allow the limited cash resources of the NZ market place to retain significant value in successful companies to prevent the bulk of on-going earnings from being repatriated offshore.

The manpwer we need has to be skilled right through the system. An increase in management skills across the $3 billion and $30 billion barriers is not something that government can directly achieve by education.

All over the world we can see countries that have used their own efforts to raise the capital input to push their economies and their standard of living ahead of us, or rapidly closing behind us. Singapore and Malaysia, remember when we were helping them? Finland has raced away from us and Chile has rapidly come up on our shoulder. Without massive investment in BERD in New Zealand we will continue to drift in our little eco-friendly backwater without a paddle and without a clue as to what to do next.