Is New Zealand’s Research and Development really that low?

The August MBIE Building Innovation report is out – it’s worth a read, and I do like the progress report at the end. It is, of course, flawed, but it’s good to see it.

The report uses a chart showing how low New Zealand’s research and development spend is as a share of the economy.

 

The issues that underly this chart are under-reporting, tax incentives and hidden R&D spend.

The Australian level of expenditure is higher than New Zealand partially because they have an R&D Tax Credit system that is “The Best in the World“. This encourages business to actually report their R&D spend, as well as to invest a bit more in R&D. It is difficult to tell how much is due to each reason.

It’s compounded by effect of the incentive for New Zealand companies to under-report R&D spending by showing it as an expense (tax deducted immediately) rather than capital investment (tax deducted over time). The actual reporting I believe is through Statistics NZ, but I suspect companies would align their reporting with numbers submitted to the IRD.

I’m not arguing for a tax credit – I prefer a simple tax system with almost no loopholes. But let’s not beat ourselves up too much.

The overall thrust of the report is focussed on developing technology, patents and so on as methods to deliver market returns. The smarter companies are better at really understanding customer needs first, and perhaps not embarking on longer term risky technology projects, but focussing on delivering less purely innovative but far more defensible and profitable products and services.

It seems also to completely miss the software industry, which is where I see much of the innovation happening. It’s a lot harder to fund something with such intangible products, but it’s an area that easy to grow rapidly.

Rather interestingly (and somewhat sadly) apparently:

One-half of all business R&D around the world occurs in three industries: motor vehicles, electrical equipment and pharmaceuticals. New Zealand has a relatively low share of these R&D- intensive industries.

I say sadly as investment in automobiles and pharmaceuticals is often in the direction of tail fins and hair loss. I’m glad that there is no advocacy for a return to Muldoon style attempts to create our own sub-critical mas auto manufacturing industry. We do though have an awakening aviation industry, with plenty of innovation coming from Altitude Interiors [Flash warning], Pacific Aerospace and more recently Composite Helicopters.

I found the following somewhat surprising:

Kiwi businesses tend to over rely on bank debt and internal sources of capital which can restrict funding for R&D.

In my experience New Zealand businesses really struggle to attract bank debt for anything but purchase of capital equipment, or when backed by director guarantees and their own homes. Regardless, the point is made that there is a huge gap in the market for a fund that can provide capital (debt or equity) to growing companies by looking at their valuation rather than their balance sheet and directors’ balance sheets.

Plenty more in the report – do read it. I would love to see these reports printed and placed in Koru lounges.

Note:

Define Instruments, where I am a director and shareholder, spends 10-20% of revenue on R&D – currently 13%. We have accepted government co-funding in the past, which was extremely valuable for the company.

 

About Lance Wiggs

@lancewiggs
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4 Responses to Is New Zealand’s Research and Development really that low?

  1. @CJ_NZ says:

    The NZ tax system can actively discourage R&D or at least it being reported.

    If R&D creates IP, that must be capitalized (asset) but can’t always be depreciated. eg. Spend $1m developing a widget.

    However, if they expense it and hid it from IRD (normally as wage and salary costs) the company can claim an upfront deduction.

  2. There is no bank debt for small businesses directly. It’s all mortgages so secured on the residential dwelling of the business owner.

    Lack of software was a pretty big omission.

    Our issue is cultural. Until business owners aspire to grow significant businesses we won’t.

    My 2 cents.

    Rod

  3. Paul Dippie says:

    Just back from Oz, where our company posted a pretty good annual result (ASX RCR) certainly assisted by the R&D tax credit scheme. However, this will be the last year, the rules (very helpful (read generous)) have been changed. We will no longer be allowed to count as R&D a commercial prototype.
    So expect to see the official OZ R&D spend fall away.

    Paul

  4. K1W1 says:

    Having been involved with the R&D tax credit system both in NZ and Aus(currently), all I can say is that the Aussies have now implemented rules which are very similar to what we had in NZ. We had a well designed scheme to start with and we could have improved considerably, provided it was not canned by National.
    You will be amazed as to how beneficial many industries in NZ felt having the system in place. Has it killed/reduced R&D spend of SME’s – yes and has it reduced the R&D spend of large organisations – NO.
    I sincerely hope Mr key re-introduces it and finally, I wouldnt put too much notice on the graphs above for spend by Aus companies. The true numbers/percentages will only reflect from now-on.

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