Posts Tagged innovation

New Zealand’s productivity paradox: Part II Shaun Hendy Mar 18

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In this post, I will continue my discussion of Philip McCann’s paper “Economic geography, globalisation and New Zealand’s productivity paradox”, New Zealand Economic Papers, 43: 3, 279 — 314 (2009). In a previous post, I briefly introduced the idea of the New Zealand productivity paradox:

The mystery is why a country that seems close to best practice in most of the policies that are regarded as the key drivers of growth is nevertheless just an average performer.

(OECD Economic surveys: New Zealand, 2003).

In this post I’ll look at the paradox in more detail.  In what ways is New Zealand close to ‘best practice’? McCann reels off the following list:

  • World rank 1 in terms of investor protection;
  • World rank 3 in terms of strength of property rights;
  • Amongst the world’s most transparent and least corrupt business environments;
  • World rank 9 for overall institutions;
  • Relatively small public sector: Total tax revenue as a % of GDP is ranked only 15th in OECD – the second lowest for a small country;
  • Social expenditure as a % of GDP is ranked only 21st in OECD;
  • Very light levels of regulation by OECD standards;
  • Amongst the world’s lowest trade barriers;
  • World rank 1 for lowest labour firing costs;
  • World rank 7 for labour market flexibility;
  • World rank 1 in terms of the lowest number of procedures to start a business;
  • Consistently ranked as one of the world’s most liberalised economies;
  • High firm competition and turnover;
  • Ranked 2nd best country in the world for doing business;
  • One of the world’s best locations for capital investment;
  • New Zealand is the world’s most entrepreneurial society.

Yet despite these advantages, and despite enjoying favourable macroeconomic indicators such as low inflation and low unemployment over the last twenty years, New Zealand’s economic growth has lagged behind that of its OECD peers.  In 1984, New Zealand’s GDP per capita was close to those of Australia, Canada and other western European economies; from From 1985 onwards New Zealand falls behind not just Australia, but all other advanced OECD countries.  New Zealand’s GDP per capita is now 73% of Australia’s and 82% of the OECD average; it has been overtaken by Spain and Greece, is being overtaken by Slovenia, and about to be overtaken by Israel, Korea and Taiwan.

New Zealand’s poor performance is probably not news to you.  Indeed, Don Brash’s 2025 taskforce (Treasury’s austerity measures clearly extend to their website) was set the task of getting to the bottom of this poor performance.  Where McCann and Brash differ however, is that McCann argues New Zealand’s performance can be explained primarily by its economic geography, while Brash appears to believe that its insufficient to be ranked number 2 by the World Bank as the best place for doing business (Doing business 2009. Washington, DC: World Bank) in order to perform as well as the rest of the world.

This is just a restatement of this paradox.  Why does New Zealand need to be number 1 plus daylight on deregulation, low taxes, and entrepreneurship, just to keep up with the rest?  In the next post, I will start delving into the economic geography that may explain this paradox.

New Zealand’s productivity paradox: Part I Shaun Hendy Mar 18

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Philip McCann is a Professor of Economics at the University of Groningen in the Netherlands who has developed a very interesting view of New Zealand’s economic situation.  After a talk by Philip in Motu’s public policy lecture series last year (‘Economic geography, globalisation and New Zealand’s productivity paradox’), and a lively discussion over at Public Address, a number of people made the connection between some of my work on scale in R&D (in particular, the increase in patents per capita with city size as discussed here) and McCann’s analysis.  The slides from his talk are available here.

I wasn’t able to make it to his talk, but I was put in touch with Philip earlier last year after I presented some of my results at a MoRST chat shop.  We have subsequently had some interesting discussions about innovation and scale, and then last week I was able to see Philip give a talk at the Reserve Bank.

It was an excellent talk (even Alan Bollard seemed to enjoy it), and it helped me get to the bottom of some of the things that Philip has been writing about:

This paper examines New Zealand’s poor productivity performance from the reform period onwards, from the perspective of economic geography.  Rather than employing institutional or free-market versus interventionist arguments to explain New Zealand’s low productivity, as is usually the case, the argument developed here is that the debate should be considered from a very different viewpoint.  If we adopt an economic geography perspective, there is nothing really paradoxical about New Zealand’s productivity performance.  As such, New Zealand’s productivity performance is rather more of a conundrum, a riddle, with a fairly straightforward solution.

McCann, P., “Economic geography, globalisation and New Zealand’s productivity paradox”, New Zealand Economic Papers, 43: 3, 279 — 314 (2009).

So over a series of posts I would like to discuss some of Philip McCann’s ideas.  Do they offer an explanation for some of the data I have, and what insights do they offer for innovation in New Zealand?

But first, what is New Zealand’s productivity paradox?  The OECD put it this way:

The mystery is why a country that seems close to best practice in most of the policies that are regarded as the key drivers of growth is nevertheless just an average performer.

(OECD Economic surveys: New Zealand, 2003).

In other words, New Zealand’s recent productivity performance has been poor, and no one quite knows why.

The domestic discussion about productivity often focuses on the gap between NZ and Australia.  However, what I’ve found in my work on patents is that at the city scale, our cities perform no worse than Australian cities of the same size.  Indeed, Philip McCann argues that the productivity gap between New Zealand and Australia has the same underlying cause as the gap in patents:  Sydney and Melbourne.  Why are big cities crucial for both innovation and productivity?

Angels with fat tails Shaun Hendy Mar 01

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A couple of years ago, I had a chance conversation after a Dragons’ Den exercise organised by Industrial Research Ltd.  (I didn’t go so well in the Dragons’ Den – I won’t go in to the gory details, but suffice to say that someone later said that they could tell I was a university lecturer!)  Afterward, a Dragon talked me through his day job as an Angel Investor.

His first point:  when evaluating an investment, he wanted to know the maximum pay-off, rather than the most likely pay-off.  He already knew that the most likely outcome of any of his individual investments would be failure – sure things are backed by banks, not Angels.

His second point:  he expected to pull the plug on nine out of every ten investments within two years.  He then relied on the sale of the tenth to repay his fund with net profit.

On the face of it, this may not surprise you.  An Angel’s business is that of making risky investments, and a pay-off from one in ten is much better odds than playing Lotto.

But one in ten is an interesting number.  If the value of each investment was distributed on a bell curve, it seems unlikely that the Angel would make a profit by winding up nine and keeping one.  Instead, it appears that the Angel relies on the Pareto principle – that is, almost all of the pay-off from his portfolio will be generated by just one of the investments in it.

In other words, the distribution of pay-offs has what is sometimes called a ‘fat tail’.  A bell curve (more technically, a normal or Gaussian distribution) does not have a fat tail:  the likelihood of large pay-offs falls off exponentially.  For distributions with fat tails, pay-offs are not necessarily clustered around the mean, and the likelihood of large pay-offs drops off more slowly.

As I’ve come to learn, fat tails often crop up in economics, but my conversation with the Angel was the first time I had come across a fat tail outside of physics.  If you’re a regular reader of this blog, you will have seen a fat tail or two when when we looked at the distribution of patents among applicants.

Does this tell us anything about innovation?  Angels invest in ideas, which are then tested in the marketplace.  Some of these ideas fail or have little impact, but the way that Angels invest does suggest that there is a fat tail of ideas that succeed spectacularly.

This may be something that is characteristic of innovation.  Thomas Kuhn, author of The Structure of Scientific Revolutions, argued that science did not progress by incremental accumulation of knowledge, rather it developed via occasional revolutions called paradigm shifts.  Kuhn called the humdrum stuff that most of us scientists do in between paradigm shifts ‘normal science’.

It is quite tempting to draw the analogy between Kuhn’s scientific revolutions and the Angel’s one in ten investment that pays out.  What if the impact of scientists’ work and ideas was distributed according to a Pareto principle?  In this picture, Kuhn’s paradigm shifts would be those bits of science that live way out in the tail.  However, the analogy is not complete; a scientific Pareto principle would require that the impact of science is distributed across a continuum, rather than in a dichotomy, where some ideas shift paradigms, while others have no outcome.

I will explore this idea further in another post.

Key speech highlights high-tech manufacturing Shaun Hendy Feb 12

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In his speech to Parliament earlier this week, John Key signalled that supporting high-tech manufacturing would be a priority for his Government.  As my colleague Richard Blaikie, Director of the MacDiarmid Institute, pointed out in his newsletter last week to MacDiarmid Institute researchers, New Zealand is becoming increasingly reliant on high-tech industry for our export receipts:

New Zealand’s high-tech industries are now our third-biggest exporter earners, outpacing wine and meat exports and sitting relatively close behind the dairy and tourism sectors.  This is according to the Technology Investment Network’s 2009 TIN100 Report, sponsored by NZTE and Ernst & Young, which says that technology exports rose 4 per cent last year to NZ$5.1b, compared to the dairy sector’s NZ$8.8b.

The Report, now in its fifth year, makes excellent reading if you are interested in the growth of New Zealand’s high-tech industries, and sits very well alongside the messages and stories that Paul Callaghan makes so eloquently in Wool to Weta.

You can get an executive summary of the 2009 TIN100 report here.  The full report is well worth reading if you can spare the $200, or you have a chance to look at it in a library.  Paul Callaghan’s arguments are also worth reading:  take a look at his Herald article here or buy the book.  As Paul points out, to catch Australia in per-capita prosperity, we would need to lift our GDP by US$30 billion a year.  We could increase the number of dairy farms five-fold, or we could quadruple the number of tourists … well, you can see why Alan Bollard might be a pessimist.  But back to Richard Blaikie:

The scope for future growth is enormous, and the TIN100 people have pulled out “Ten Companies to Watch” that grew combined revenues by a massive 34% in 2009 to a total of NZ$1.8b.  The high-tech growth potential is not resource limited as for our other important big sectors, and with the price-to-weight ratios of many products measured in dollars per gram (rather than dollars per tonne for commodities) the tyranny of distance to market is not a show-stopper either.

Can we turn NZ$5b in exports into NZ$50b?  It’s a tough ask, one which I doubt we’ll achieve by tinkering with the tax system, but it’s worth remembering that this is essentially what Finland did with Nokia in the mid 1990s.  As I have discussed in previous posts, the Finns took Nokia from a Fisher & Paykel-sized electrical appliance company to a globally dominant mobile phone company.

Now I don’t know what’s sufficient to turn an F&P into a Nokia, but it is clear from our patent studies that the Finns built Nokia on the intellectual grunt of a large cohort of engineers.  And I don’t know about you, but turning out 300 PhD engineers a year in New Zealand sounds a lot easier to me than quadrupling our tourist numbers (any room on your couch?) or quintupling the dairy herd (space for a cow or two on your lawn?).

Kiwi superconductivity industry overcomes resistance Shaun Hendy Feb 08

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This week, New Zealand hosts the 18th International Superconductivity Industry Summit, where multi-national heavy-weights like Siemans AG will rub shoulders with New Zealand-based companies such as General Cable NZ Ltd and HTS-110.  As the superconductivity industry matures over the next decade, these New Zealand companies have an excellent chance of becoming significant export earners.  How did New Zealand come to have a superconductivity industry in the first place, and why are multi-national companies descending on Te Papa later this week to hear what we have to say?

Superconductivity was discovered almost 100 years ago, when it was found that many metals completely lose electrical resistance once they are cooled to a few degrees above absolute zero (-273 degrees C).  When metals become this cold, rather than jostling and shoving their way through an electrical wire, electrons can pair up and ‘waltz’ quantum mechanically along the wire without resistance.  Today, to produce the intense magnetic fields needed by MRI machines, expensive liquid helium is used to cool metal electromagnets to temperatures at which they will superconduct.

Since the original discovery, many scientists have have tried and failed to find a material that would superconduct at room temperature:  such a material could allow us to dramatically shrink any device that needs powerful electromagnets, including electric motors.  I was lucky enough recently to see a talk by Jeff Tallon, one of New Zealand’s leading physicists, on the prospects for room temperature superconductivity.  Unfortunately, recent work by Jeff and James Storey (a kiwi physicist at Cambridge) suggests that room temperature superconductivity is unlikely to be possible, and even if it does exist, would not be practical enough for real applications.

However, thanks to Jeff and many other scientists at Gracefield in the Hutt Valley, we have the next best thing.  In the 1980s, Jeff and his colleagues at the DSIR (now Industrial Research Ltd) discovered a material that would superconduct at temperatures where nitrogen is a liquid (-196 degrees C).  Liquid nitrogen is a much cheaper coolant than liquid helium, so Jeff’s material makes it feasible to exploit superconductivity in many technologies beyond MRI machines.

So why can’t you catch a 300kph superconducting maglev train to visit Jeff in Lower Hutt two decades on?  Inconveniently, these ‘high temperature’ superconductors have proved to be very brittle, and it has taken more than 20 years to figure out how to turn them into wires that are ductile enough for real world applications.  Even then, these superconducting wires are difficult to work with, and require lots of know how to turn them into working electromagnets.  It is in these technologies that New Zealand has developed an edge. 

What is particularly interesting to me is the role that intellectual property has played in the development of this sector in New Zealand.  Jeff and his team only won the patents for their superconductor (BSCCO) after a long battle, but the paper value of these patents will quite possibly be dwarfed by the value of the industry that has been established around them.  Yet it was these patents that attracted the patient investment by government and others, which has been necessary for developing New Zealand’s capabilities in high temperature superconductivity.  These capabilities are now embodied in the skills and know how of a large team of scientists and engineers. 

In turn, this IP was generated by basic research undertaken at the DSIR.  The research was not carefully vetted by a purchasing agency prior to proceeding, nor was it undertaken after a careful assessment of New Zealand’s competitive advantage.  Rather, it was an inspired piece of ‘bottom-up’ science, by a team of talented New Zealanders, responding rapidly to international discoveries reported in the latest scientific journals. 

New Zealand has got this far with superconductivity because it backed a team of scientists conducting fundamental research in a highly competitive field, and because it then showed the patience to invest in developing the resulting technology for two decades.  Overseas investment has been crucial, and so the HTS wire itself is now made in the US by American Superconductor.  While the success of New Zealand’s superconductivity industry is not yet a sure thing, and further investment will be needed for it to grow, it is now earning export revenue with high-tech products that no other country can match.

Top patenting organisations in New Zealand: some stats Shaun Hendy Jan 22

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In a post a few weeks ago, there was a discussion on the value of patents. Sciblogs reader Bruce Hamilton pointed out that the value of an abandoned patent could simply be as an output for a funding agency. Could it be then the requirements of funding agencies for outputs is driving patenting activities? Bruce has put together a selection of statistics from IPONZ looking at patenting activity in some of New Zealand’s research organisations, both public and private. Bruce did not intend the list below to be exhaustive, but he has covered a selection of Universities, CRIs, large private companies and smaller start-ups. It’s very interesting to see who some of our top patenting organisations are, and how many of them have patents in progress.

Number Aborted (%) In Progress (%) Completed (%)
Fisher & Paykel 424 60 2 38
Uniservices 388 66 14 21
Industrial Research Limited 374 66 5 29
Agresearch 210 55 12 33
Fletcher 201 41 9 50
Carter Holt Harvey 186 56 9 35
Fonterra 143 43 17 39
Otago University 100 77 4 19
Gallagher Group 83 43 12 48
Massey University 76 55 8 37
Genesis R&D Corp 45 36 11 56
IGNS 37 58 6 36
Otago Innovation 18 50 17 33
Syft Technologies 15 57 0 43
Blis Technologies 13 64 0 36

Aborted = Abandoned + Voided Pre-acceptance
In Progress = Filed, Examination, Accepted
Completed = Granted, Expired or Not Renewed.

At least in this data set, it does look like public organisations abort more of their patents than their private counterparts. However, public research organisations are charged with disseminating their research findings through journal articles or presentations at scientific conferences. Once a piece of research has entered the public domain, it can no longer be patented, so public research organisations may chose to protect their IP by filing a provisional patent prior to publishing or presenting their work. This gives them the option of proceeding with a full patent within the next year should they choose to do so, while allowing them to publish their work. Private research organisations, under less pressure to publish, can simply choose to not release their findings while they decide whether a piece of work is worth the expense of filling a full patent.

Thanks to Bruce for taking the time to extract this interesting data.

How the US lost its lead in science and technology Shaun Hendy Jan 15

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Having bailed out Wall Street last year, the US is now looking for new industries to kick start its economy. However, many observers feel that the US may have squandered its technological lead over the rest of the world:  the US trade balance in high technology products has fallen steadily into the red over the last decade, from US$5.3bn in surplus in 2001 to to more than US$50bn in deficit by 2007.  What went wrong?

Many commentators point to the outsourcing of high-tech production as the root cause of the US decline. It has been argued that innovation in many industries is most effectively transmitted by face-to-face contact. This favours clustering, where, as Michael Porter has observed, companies in similar industries find it advantageous to be geographic co-located, to allow information flow between organisations.

In the Harvard Business Review, Gary Pisano and Willy Shih generalise this concept. They see the collective R&D, engineering, and manufacturing capabilities of a nation as an industrial commons. Each firm benefits from the existence of the commons, and each contributes to the commons through its know-how in R&D and production. In fact, they argue that flow of information between the shop floor and the lab is vital to the commons. As Gregory Tassey from NIST puts it:

“… co-location of R&D and manufacturing is especially important because it means the value added from both R&D and manufacturing will accrue to the innovating economy, at least when the technology is in its formative stages. This phenomenon occurs because much of the knowledge produced in the early phases of a technology’s life cycle is tacit in nature and such knowledge transfers most efficiently through personal contact.”

J. Technol. Transfer (2008) 33:560–578

Despite this, it may make sense at the individual firm level to split R&D and production by outsourcing. Firms that choose to outsource may improve their profitability in the short term, but at the same time this capability is lost to the commons. Pisano and Shih argue that the US industrial commons has been eroded to the point where US firms have lost their competitive advantage in innovation.

The weakening of the US industrial commons has been blamed on the rise of a managerial class in corporate America, who, in search of short term financial efficiencies, have outsourced production on a massive scale and dismantled their large industrial labs. For example, the Kindle cannot actually be manufactured in the US, even if Amazon wanted to do so – the technological capacity now exists only overseas. Bell Labs, the organisation that gave the world the transistor and the photovoltaic cell, began the decade with more than 30,000 staff; today, under the ownership of Alcatel-Lucent, it has less than 1,000.

Even the US government has retreated from its support of research and development as shown below:US R&D spend

Pisano and Shih make two suggestions as to how the US can turn things around:

•    The government must alter the way it supports both basic and applied scientific research to promote the kind of broad collaboration of business, academia, and government needed to tackle society’s big problems.

•    Corporate management must overhaul its practices and governance structures so they no longer exaggerate the payoffs and discount the dangers of outsourcing production and cutting investments in R&D.

The question remains:  does the US have the energy, ingenuity and cold hard cash to rebuild its industrial commons?

World Economic Forum: New Zealand is failing to innovate Shaun Hendy Jan 11

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In its 2009 report on global competitiveness, the World Economic Forum identified lack of innovation as one of the key weaknesses in the New Zealand economy. Drilling down into their report, they rate New Zealand’s strengths in innovation as

  • the quality of our research institutions,
  • our collaboration between universities and industries,

and its weaknesses as

  • lack of business spending on R&D,
  • low availability of scientists and engineers,
  • lack of government procurement of high-tech products and services,
  • lack of patenting.

I have previously discussed the relationship between our lack of spending on R&D and our patenting: our patent data shows that these are strongly correlated. There is much more to be said about this – as the New Zealand Institute’s Rick Bowen points on in the Herald, just blindly increasing our R&D spending will not necessarily lead to improved outcomes.

Yet the power law that describes the tail of New Zealand’s patent distribution among applicants is the same as that of Australia, Finland and the United States. This suggests to me that commercialisation of science is hard where ever you are, not just in New Zealand. Perhaps it looks harder here – as a small country we have fewer successes to celebrate (although see Paul Callaghan’s book Wool to Weta).

I have also discussed the lack of scientists and engineers (despite their significant earning premiums once out of university), and this will no doubt come up again. In particular, there is a mismatch between the biotech focus of our sci-tech graduates and make up of our top 100 technology companies.

One thing I haven’t discussed yet in this blog is the role of government procurement in innovation. This has been on my mind since I read Making Silicon Valley by Christophe Lacuyer last year. I was aware of the role that Stanford University and the first modern venture capitalists played in the development of Silicon Valley, but I had not understood how important US military procurement was in nurturing it through its first 40 years. In his book, Lacuyer convincingly makes the case that Silicon Valley would not exist today without many years of patronage by the US military. Could the New Zealand government do more through procurement to build up high-tech manufacturing?

The productivity of inventors in cities Shaun Hendy Dec 16

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In previous posts I have looked at data that showed that bigger cities produce more patents per capita. For instance, over the 30-years that the OECD database covers, Auckland has produced one PCT patent for every 750 people, whereas Sydney has produced one for every 550 people. Why is this?

We have seen that inventors that participate in large collaborative networks tend to be more productive. It could be that the opportunities to collaborate, which will presumably be greater in a larger city, increase the productivity of inventors in bigger cities. For instance, if you are putting together a research team that needs specialist skills, it is more likely that you’ll find people with the right skill set in a larger city.

Inventor productivity We can test this by looking at the dependence of inventor productivity on city size. On the left I have plotted the inventor productivity (that is, the number of patents per inventor) versus city size for cities in Australia. This can be less than 1 as typically there is more than one inventor per patent application. As you can see, inventor productivity does not have a dependence on city size in this data. We have found similar results in all the countries we have looked at, including New Zealand.

The corollary is that the number of inventors per capita increases with city size in a similar way to the number of patents. Bigger cities have more patents and more inventors per capita. This seems to rule out collaborative network effects as the cause of the higher number of patents per capita in bigger cities.

What else could be going on? Economists talk about knowledge spillovers where innovations that take place in one business, spur innovation in neighbouring businesses. In this scenario, we would expect to see inventors clustered together, while not necessarily being more productive. This idea is at least consistent with the data above. We’ll explore this in later posts.

2009 RS&T Scorecard released Shaun Hendy Dec 09

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The 2009 RS&T scorecard is now available here. Unfortunately I wasn’t able to obtain a pre-release copy from MoRST so I have not had time to fully digest it.

However, I will draw your attention to the interesting plot on page 4 which charts the number of patents per billion dollars GDP (2009 PPP). This measure presumably says something about the R&D intensity of economies. I find it extremely interesting that the scaled data for New Zealand and Australia are so similar.

Readers will recall that in a previous post I observed how the patent gap between New Zealand and Australia seems to be related to the differences sizes of our cities. Does this then mean that the GDP gap between the two countries is also related to the differences in city size? I suspect so, and sure enough there do seem to be some economists (such as Phil McCann now at the University of Groningen) who have similar suspicions.

As a country we have little control over many of the circumstances that dictate our economic geography.  So is it actually possible for us to close this GDP gap with Australia? Lowering tax rates doesn’t seem to me to be the answer – what do we do when Australia lowers their rates? Instead, along with many others, I think we need to move from a commodity-driven to an innovation-led economy, something that may in fact be more easily accomplished in a smaller country, and something that the Scandinavian countries have managed. Can we follow suit?

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