Is R & D spend a useful measure of innovation?

Posted on 10 July 2011 by JasonK

In 2011 we are all born global and to do well in the competition for capital and other resources we need to develop better measurement frameworks for promoting New Zealand as a centre for innovation to the rest of the world.

Its election year in New Zealand and one old chestnut that gets wheeled out is the idea that

NZ has some of the lowest R&D spend in the OECD” 

on twitter by @paulbrislen *

Igor Portugal posted a response on his blog Liberty by IP   – “One solution: How to increase New Zealand’s R&D spending and stop educated people from leaving the country”

Igor says

“My response to Paul is that I don’t believe that the statistics are accurate. New Zealand companies don’t have an incentive to account for R&D. In fact there is a big disincentive to account for it. If you hired someone or purchased something and your intention is R&D, that means that it is a capital expense.”

In NZ the back yard shed is the real innovation centreWe have seen the ebb and flow of some of these tax policies before.

Changing taxation policies might make more R & D spend visible but in my view it is not really something that will stop educated people leaving the country – or help improve NZ’s visibility on the innovation stage.

I’d agree with Igor in that I think much of NZ’s true R & D is not measured very well at all. And kudos for him in making these 2 suggestions:

“Step 1. Make all R&D related expenses 100% tax deductible, same as operating expenses.

This step will remove the accounting disincentive. However, in itself it is not enough.

Step 2. Reduce the income tax burden for all employees that are engaged in Research & Development activities. Make it so the higher the qualification, the lower the tax burden.”

Both of these ideas are worth debating especially in an election year.

There are some related topic questions here as well. The one I’m most interested in is how to sell NZ as an innovation centre on the world stage and while R & D investment would help with that – I do think there are other measurements that might be useful.

1. Number of Patents Issued

Back in the about 1993 I recall Simon Upton (he was Minister of Research, Science and Technology) using number of patents as a global indicator. As I remember it NZ ranked very highly after Switzerland at the time as a place with a proportionately high number of patents.

At the time I debated this idea with friends and colleagues and we agreed that patents; while useful didn’t always lead to useful outputs in the commercial sense.

Furthermore in a world of open source and pretty much instant global idea traffic I know a fair number of projects that just can’t be bothered with the patent process and many NZ businesses who wish that they hadn’t done. Defending IP is an expensive business.

If you measured how much legal budget was spent on defending IP around the world the U.S would win but again as an indicator that wouldn’t tell us very much.

However if you don’t defend your IP any innovation capital that you have can be seriously devalued by competitors and other commercial concerns.

Have a look over at Innovation in NZ stats each month which lists the number of designs, patents and trademarks registered.

2. Measuring Inputs generally

Even if we can really measure inputs like R & D spend and Patents etc. – once again these don’t always lead on to commercial success so that won’t work either.  A highly visible input would be population and given that 20% of the NZ population lives in Australia and else where in the world as part of the brain drain or whatever you want to call that.

Inputs are important but what really matters are the actual business outputs. Managers compete for resources globally now and while that does lead to some odd results like having 1m Nzers’ out of NZ they are not completely lost to NZ as a resource. Even though on the face of it NZ should have a local populations of 5m+.

Ironically Simon Upton has been one of NZ’s more interesting exports and has been offshore since 2001 and currently works for the OECD in Paris -  environment division of the OECD. Someone please get Simon back here a vist please.

I’ve had the personal pleasure to meet up and work with NZ’ers around the world and just because they are out of the country doesn’t mean that we are forgotten. I would guess having an NZ perspective at the OECD from someone like Simon would be invaluable.

3. International Start-up Competitions

I was at a Start-up competition in SF last year where I saw a top 10 of ideas that were presented.  In NZ terms some of them didn’t rate very well at all but a key competitive factor I liked was that all of them could scale to a billion plus.

In NZ we don’t think about global scale enough and if we did – we could enter some of those competitions and clean up. Demo is one event that I know a number of NZ and Australian companies have benefited from.

Perhaps we need to leverage one of the Demo Global events and make that type of competition much more visible down under…

4. Global Innovation Index and GEM

Each year there are various ranking tables touted as the definitive standard on such measurements.I’m pleased to see that the Global Innovation Index uses both inputs and outputs to get to a ranking.

New Zealand rated 15th on the Global Innovation Index 2011. We are down from #9 in 2010 and well up from 27th postion in 2009.

“The Global Innovation Index is computed as an average of the scores across inputs pillars (describing the enabling environment for innovation) and output pillars (measuring actual achievements in innovation).

Five pillars constitute the Innovation Input Sub-Index: ‘Institutions,’ ‘Human capital and research,’ ‘Infrastructure’, ‘Market sophistication’ and ‘Business sophistication’. The Innovation Output Sub-Index is composed of two pillars: ‘Scientific outputs’ and ‘Creative outputs’. The Innovation Efficiency Index, calculated as the ratio of the two Sub-Indices, examines how economies leverage their enabling environments to stimulate innovation results.”

Given that the study is sponsored in part by INSEAD my recommendation is that NZ policy makers and voters get a copy of the Global Innovation Index .

“It cannot be claimed, however, that the GII model captures all dimensions of innovation across continents. Analytical chapters included in this year’s Report illustrate the richness of innovation, which is difficult to define, much less to encapsulate in a particular metric.”

I had a look at the country index for NZ which you can download as a pdf. We actually rank at # 2 in the world for Institutions – which includes assessments of our Political environment, Regulatory environment and Business environment. Get a copy of the Global Innovation Index Exec Summary here.

On some of the other indicators like Business sophistication we don’t rank so highly.

GEM is a regular entrepreneur research study which has  three main objectives:

  • To measure differences in the level of early stage entrepreneurial activity between countries
  • To uncover factors determining the levels of entrepreneurial activity
  • To identify policies that may enhance the level of entrepreneurial activity

5. A Contrary View

New Zealand is a backwater with stupid hayseed tech workers who don’t know what they are worth and should be exploited by Silicon Valley and others. OK – I’m paraphrasing a bit here but what to make of this bizarre post from the SAI last Thursday. In my view – exactly how not to promote NZ.

How To Pay Your People Half As Much And Give Them No Equity  – Nicholas Carlson

In the guise of boosting NZ as a place to innovate here Carlson quotes Paul Cameron.

“He mentioned his family and a general allegiance to his native land, but his business reasons were:

  • Tech labor is cheap here. Cameron says he can pay a good Kiwi iOS developer half as much as he would have to pay someone in California or New York. What’s more: Cameron says Kiwi start-up employees don’t demand – or even really know to expect equity. That means if/when Cameron’s company reaches a liquidity event, all the money will come back to him and his investors. Cha-ching!
  • The government is giving away money to startups. Eager to jump-start a tech industry, the New Zealand government, funded by huge tax receipts from a huge, but commoditized agriculture industry, is pouring money into startups in the form of non-equity grants and limited partner investments in VCs firms.  You don’t have to be Kiwi to get this money, by the way. You just have to incorporate here, keep your profits here, and own your patents and intellectual property here.”

I can only think that he seriously misheard the conversation or that Paul Cameron has a very low opinion of his staff and that can’t be good for anyone. If he contacts you looking for staff it will certainly make for an interesting conversation starter…

The comments about equity are very cynical if they are true. I can think of a number of high profile NZ tech companies where staff have equity but because of the actual shareholding structure are unlikley to ever be able to cash out.  A liquidity event if it ever happens is more likely if the company has a global profile and can cash out via a trade sale in a much larger market.

I’d say it’s actually the opposite. NZ staff expect to be paid better now because the actual likelihood of a liquidity event being useful to them is just much more remote. That means you can’t trade off pay in the short term in lieu of equity. The cost of living is cheaper here.

And the idea that the gov is giving away $ to start-ups. Good luck with that one. I can only conclude that Nick is doing some link baiting here. Your views please.

* Paul updated to say He’d like to see more R&D in NZ

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