R & D won't set NZ free

28 May 2014

Associate Professor Suvi Nenonen and Professor Kaj Storbacka.

By Associate Professor Suvi Nenonen and Professor Kaj Storbacka (Graduate School of Management)

Research and development funding is not the economic elixir it used to be and New Zealand needs urgently to move beyond that thinking.

This country is struggling to turn filed patents into commercial successes but throwing more R&D money into the problem - or pigheadedly trying to commercialise products that lack a supporting ecosystem - will get us nowhere fast.

We've lived in this amazing country for three years, and it hasn't taken us long to learn that alternative 'national anthem': 'Our GDP is lagging behind the OECD average and so is our R&D expenditure'; 'We are too reliant on the primary sector'; 'Get off the grass...spend more on R&D and the GDP growth will follow'!

It's a powerful rallying cry, but it may just lead New Zealand into throwing good money after bad. We aren't questioning the accuracy of the national statistics but we argue that the story is more complex than we are taught to believe.

Let's look at the facts. We are among the top countries in the world when it comes to filing patents: third or fourth, depending on whether you compare the number of patents to the country's GDP or population size. So even with moderate R&D expenditure, New Zealand is punching above its weight in inventing things.

We also know that the path from R&D expenditure to GDP growth is not a straight one, and there are many crucially important intermediating factors that are conveniently left out of the public debate.

But it's clear that what happens after we 'invent' something - turning those inventions into international commercial success stories - is the problem. And how would increasing R&D expenditure fix this? Do we really want to file more patents that are just gathering dust?

The idea that investing in R&D and product innovation generates value existed in a time very different to today - when there was a shortage of everything and the business networks were relatively simple. There was demand for almost any product that you could push through the factory doors, and new businesses found their places in the world with relative ease.

Now, fast-forwarding some 200-300 years to the current day, and you see a very different reality. Sure, there still are unmet customer needs, but the complexity of business networks has increased exponentially. And herein lies the problem.

Customers buy those products that create value to them, and generally this value creation is completely dependent on the market ecosystem in which these products are being used. Let's for instance consider cars as an example: how much value would a car create to its owner if there were no tyres, petrol stations, service shops, roads, insurances or even traffic laws? Would you like to start the world's first car dealership if these other elements of the car ecosystem were not in place?

This is the dire reality that faces many inventors, and at least partially explains why we are struggling to turn filed patents into commercial successes. And this is not true only for us - it is a fact that all companies have to face, be it that they invent software, electric cars or new engines for ships. Merely inventing a great new software product is not enough - you have to convince influential market researchers such as Forrester and Gartner to start making market research about the new software category. Electric cars worldwide are struggling despite strong incentives as the charging infrastructure is underdeveloped - largely due to the lack of common standards. Building the best liquefied natural gas (LNG) engine for ships is more or less worthless unless someone starts operating LNG terminals and feeder ships.

As the examples illustrate: Markets are not a synonym for demand that either is there or isn't. They are ecosystems for value creation but sometimes need a little help to develop in the right direction.'

That might sound academic or complicated, but it actually opens doors to abundant opportunities for businesses and policy-makers alike. If you have a great invention without the supporting ecosystem, convince others to start building it. If someone else has made a fantastic innovation before you, don't walk away in anger. Find a way to be part of that emerging ecosystem and if your current market is dwindling, find a way to change it so that it creates more value to customers and you enjoy the profits that follow.

If we as a country are serious about bridging the GDP gap, we have to stop thinking like Adam Smith and start actively innovating market ecosystems. Some innovative New Zealand companies like Air New Zealand and Xero are already acting like this, which begs the question: when will the policies, and the business education, follow?