New Zealand’s voyage of economic self-discovery

By Shaun Hendy 22/07/2011

ResearchBlogging.orgHow do we generate improved economic growth for New Zealand?  Sir Paul Callaghan argues that we must shift from low productivity industries, like wine and tourism, to new high productivity industries, such as advanced manufacturing.  If we were to do this, we would no doubt lift our economic performance.  So why don’t we just get on with it?  What’s holding us back?

It’s the economy, stupid

There is no lack of opinion on the matter:  check out the comments that follow this NZ Herald editorial.  Much of the debate relates to the size and role of government.  Twenty years ago, a group of economists might have held a similar discussion.  The Washington Consensus (now defunct) more or less held that

’Once a developing country government establishes the rules to a fair game and ensures their enforcement, it would be well advised to stand back and enjoy the self-generating growth’

J. Talbott and R. W. Roll, Why Many Developing Countries Just Aren’t. (The Anderson School at UCLA, Finance Working Paper No. 19-01. 2001).

In other words, once New Zealand’s economy was liberalised in the 1980s, the economic theory of the day said that we should have ‘just gotten on with it’.  Instead, this happened.

New Zealand’s liberalised economy is not alone in its failure to perform as advertised.   Latin America signed up wholesale to the Washington Consensus in the 1990s, with disappointing results.  In contrast, the Asian tigers (South Korea, Taiwan and Singapore) didn’t follow the script:  their governments were active in encouraging industry and R&D in advanced sectors, and their economies have flourished.

In fact, over the last decade, economists have spent a lot of time thinking about why some governments have been more effective in growing their national economies than others.  Do governments have a role to play beyond simply ensuring macroeconomic stability and building strong institutions?

Economic complexity

As I discussed in a recent post, economies are complex things.  A recent collaboration between economists and physicists at Harvard has attempted to illustrate this by mapping the relationships between products that countries export [1].  These maps of ‘product space’ provide a way of representing the complexity of a country’s economy.  A more complex economy will tend to contain firms that are more specialised, and according to Adam Smith, a more specialised firm is a more productive firm.  Indeed, the Harvard analysis shows that countries with more complex economies are richer.

In addition, the Harvard team found that countries face barriers when exploring the manufacture of new products.   Some parts of product space are more densely populated with opportunities than others.  Countries that export existing products in these regions find it easier to develop comparative advantage in the manufacture of new products.

Countries that occupy sparsely populated regions, on the other hand, find it difficult to develop new areas of comparative advantage.  It appears to be difficult to jump to new regions in product space.

Countries like Taiwan and Singapore, where governments have not been afraid to intervene, have made the transition from sparse to rich regions of product space, enabling them to grow rapidly in the last few decades.  Governments don’t always get it right:  Taiwan’s push into the aerospace industry has not been as successful as its move into electronics.  However, it seems that governments do have an important role to play in moving economies into new regions of product space.

The trouble with markets

What might be behind some of the barriers to moving to new areas of product space in a free market?

A few posts ago, when I made a case for R&D tax credits, I looked at an externality that reduces innovation.   In a competitive marketplace, a firm will not put as much effort into innovation as is optimal for society as a whole, because its innovations can spill over to other firms, preventing the innovator from capturing the full benefit.

This spillover of knowledge is an example of a positive externality:  society shares some of the reward from private R&D without contributing to its costs.   Because of this, many countries, including New Zealand, subsidise R&D to encourage innovation in the private sector, via tax credits or otherwise.

A second type of externality is relevant to this discussion [2].   This arises at the point where an entrepreneur or firm starts producing a new product.  When a firm does this, it is experimenting.   If the new product is not a success, the firm will withdraw it from the market, or maybe even go bankrupt.

On the other hand, if the product sells profitably, the innovative firm may do quite well for a while, but eventually other firms or entrepreneurs will notice and play copy-cat.  The first mover bears all the risk of launching the new product, but does not necessarily reap the all the benefits.  Hence it is possible that firms may not be as entrepreneurial as would be socially optimal.

If these externalities are in play, then a laissez-faire approach to economic development might not be sufficient to diversify an economy.

Shockley Semiconductor

The story of the transistor illustrates some of these points.   The transistor was invented at Bell Labs in 1947, but it was not commercialised until one of its inventors, William Shockley, left to found Shockley Semiconductor Laboratory in Mountain View, California (near where his mother lived).  In the end, Shockley Semiconductor floundered as Shockley’s employees left to found their own firms and it is these later entrants that dominate the market today.

Why should we care whether or not Shockley Semiconductors turned a buck?  Today, we all own billions of transistors — this hardly seems to be an example of market failure.  But look at it from Shockley’s point of view.  He and his investors bore much of the risk for establishing the semiconductor industry in California, but later arrivals like Fairchild and Intel went on to reap much of the benefit.

If first movers are not adequately compensated for the risks they take, then there will be less entrepreneurship than is optimal.  While patents reduce some of the risks associated with being a first mover, Shockley’s discovery that the San Francisco Bay area was a great place to found a semiconductor industry is not something that is subject to intellectual property law.

In the end, even the success of Silicon Valley was contingent on the support of the US government, which bought almost every integrated circuit built during the first decade after they were invented.   The large volumes required by the Apollo space programme and the US military drove down the cost of production until the circuits were cheap enough to be incorporated into consumer products for the general public.

Economic self-discovery

The key to improved economic growth for New Zealand lies in the discovery of new areas of comparative advantage and the diversification of our economy.  Unfortunately, by retaining the focus of its innovation system on areas of historic comparative advantage, I would argue that New Zealand has largely failed in this task.   Indeed, the Harvard team found that New Zealand’s productivity is quite consistent with the existing complexity of its economy.

So can New Zealand escape its productivity trap?  Laissez-faire does not seem to provide a way out, and the data suggest that a focus on historic comparative advantage will also lead to a productivity dead end.  We have little choice but to explore fresh economic territory.

The success of companies like Fisher & Paykel Healthcare and Rakon show us that we can learn new tricks.  Forty years ago, an Auckland doctor identified an unmet need for respiratory humidification in his intensive care patients, and took his problem to the DSIR.  A DSIR engineer put together a prototype and took it to Fisher & Paykel.  Fisher & Paykel tried it out and discovered that Auckland was a great place to build respiratory humidifiers.

Could this light handed, serendipitous approach to picking winners be what is needed today?   As Sir Paul Callaghan says, we will be good at what we are good at.  It’s just that at the present moment in our economic development, we need to discover a lot more of what we are a good at.

[1] Hidalgo, C. A. & Hausmann, R. (2009). The Building Blocks of Economic Complexity Proc. Natl. Acad. Sci. 106(26):10570-10575 arXiv: 0909.3890v1

[2] Hausmann, R. (2003). Economic development as self-discovery Journal of Development Economics, 72 (2), 603-633 DOI: 10.1016/S0304-3878(03)00124-X

0 Responses to “New Zealand’s voyage of economic self-discovery”

  • Shaun

    Some quick comments.

    The key question is how should the Government intervene to beat the market? Spill overs do mean medium to long-term investment in R&D will be lower than optimum, but it isn’t trivial deciding what the Government should invest in to compensate (although it is always easy to do this in hindsight as the Shockley Semiconductor example illustrates).

    We can see this today in NZ where in the main the investment process used by FRST over its lifetime did not lead to capability being built in areas apposite to economic growth. Investments were small, spread over a number of projects, in cheaper science and not relevant to much of NZ industry.

    The current fashion for responding to this by increasing the public resources going into close-to-market product and process development misses the point that in those areas the spill overs are much lower and so the rationale and returns from public intervention will be similarly much lower. We risk throwing the baby out with the bathwater.

    [As an aside I should add that increasing the research intensity of industry is probably welfare enhancing for NZ, but this is a matter for systemic intervention and is linked to a general issue related to under-investment in intangible assets rather than being R&D specific.]

    The other fashionable cry is for better commercialisation, more start-ups etc. Ten years ago this was an area that required attention, but I suspect now our policy settings are OK and we are into diminishing returns. The very notion of commercialisation carries with it the notion that an idea has been developed independent of commercial partners, and we are now looking around for someone to take it of our hands. In NZ the universities need this kind of capability because so often the IP is a by-product of their core role, and they naturally wish to realise value out of this. But this isn’t the main game for economic development based on applied R&D.

    What we need is for subsectors of industry to engage in a strategic discussion with applied research providers about where their markets are going and the technologies they are likely to need in the medium term, and for these partnerships to co-invest in getting there (markets, products, technologies). The CRI task force got it right by suggesting this is more likely to happen if the CRIs managed this than having it all run from the centre – although this has somewhat been honoured in the breach.

    Note that this involves investing where we already have commercial capability (although it doesn’t mean that new areas shouldn’t be included within a portfolio if we have international competitive advantage in the R&D). This is unashamedly an argument for leveraging off our larger firms and historic comparative advantage – because the latter does include highly transformed products as well as primary products.
    The types of investments we should favour are those that are platform in nature i.e. we should be investing in capability that touches a number of companies (not just for risk management reasons or to build scale, but also because we are farming spill-overs). We also should be thinking more about investing up and down the value chain, rather than horizontally (which is a mind-set that comes from our commodity industries). In addition to the obvious economic sense this helps make economic activity stickier in NZ.

    So that’s the challenge IMHO.

  • I’m not certain that your history of semiconductors does justice to various people/companies, including Arnold Beckman, Texas Instruments and Sherman Fairchild. From memory, Shockley appeared to observers as a miserable, paranoid despot, and the skilled workers were treated so badly they left to create new companies with mentors like Fairchild. The story is more about a despot ( in one memorable example, all staff were compelled to take a lie detector test ), rather than first inventor failure.

    With regard to NZ’s economic development, since WWII, we’ve tried several strategies, eg
    – Provide incentives for individual producers to co-operate, and develop their technologies and markets. Not effective.
    – Once the defined industry body existed, industry alliances were formed with with government research to add more theoretical expertise ( DSIR, latterly CRIs ), with industry paying 50% and government 50%. These industry associations were good at promulgating new techniques and problem solving, but limited in their strategic role. Most died as industry bodies fell out of favour with their individual producers, or large producers dominated and appropriated the IP. These entities covered most technology in NZ, eg RITS = dry cleaning, PACRA = ceramics, MIRNZ = meat, etc. etc.
    – Reshaping DSIR to match new industries, eg spinning out Industrial Processing from DSIR Chemistry division, and offering virtually free access to scientists. Available to all who asked, and several innovative industries started, but most didn’t develop into large businesses, partly because information usually was published in scientific literature – altruistic, but naive.
    – Forming CRIs with clear financial goals as well as improving links to NZ industries, and keeping IP confidential as a marketable commodity. Most have struggled, and still rely on government funds.
    – government funding was changed to disinterested competitive bidding, with no long term strategic missions, so bidders offered only achievable targets that scored highly. Bids were often limited by the industry partner’s immediate issues.

    In all of the above, the spirit ( government ) was willing, but the flesh ( industry ) was weak. My cynical view is that the last 20 years have made the task of taking strategic research to innovative commercial more difficult, because expectations have accelerated – boards want to see financial returns on investment ( even research! ) appearing with a few years, and preferably in the same year. Nobody wants to accept the risk of providing the persistent and protracted investments required. Industrys have limited long term strategies, with 5 year plans usually addressing current issues.

    The software industry may be able to provide returns in a few years, but most industries using natural resource feedstocks take decades. Rakon started in 1967 and appeared despite government actions ( opposed the import of crystal-producing equipment ). It’s even harder now to start globally-competitive innovative industries, with the huge incentives available from other countries.

    Perhaps NZ should look to addressing some of our own needs, and wait to see if the solutions are globally viable. Obvious areas include efficient transport, friendly fuels and energy forms, minimising pollution, producing valuable commodities, etc. etc.

  • Let me throw a few curve balls here…
    1. The NZ economy may be performing as well as could reasonably be expected, given our size, geography, culture, business skills, and so on. Maybe our angst is misplaced.
    2. The icons keep getting broken. Ireland? Nokia? What next?
    3. A plausible scenario (which is newish) is that we are entering a long period of high prices for the things which our primary sector is good at producing. This is a gamechanger. It means that we will have an exchange rate which will weed out and destroy those industries which are not really world-competitive, even if they look exciting on the surface.
    4. It also bears on our research agenda. It means we should invest in extracting more value from our commodities and keeping this value in NZ. And in making our primary industries more sustainable; which involves a variety of hard and soft sciences.
    5. This is not to say that we shouldn’t prize and support new high-tech businesses. They have huge cultural value and will stem the flow of or brightest and best to offshore locations.
    6. But when we study F&P, Tait, Rakon et al, the firms which are rather anomalous in a NZ context, ie they don’t derive any advantage by being here, and ask “what can we do to create more of them?” the answer is hard to find. Some had their origins in import licensing, which we certainly won’t repeat, and the others began in rather capricious circumstances.
    7. It has always seemed to me that asking the taxpayer to back a few promising scientists or entrepreneurs in the hopes of creating large high tech firms or industries is akin to asking them to buy Lotto tickets.
    8. In that sense you fall back on the Washington Concensus and perhaps go back to my point 1.

  • Kemo sabe: Your point 6. It is precisely the likes of Tait that NZ desperately needs. Sir Angus set up the company and he was determined to ensure the company remains in New Zealand. His setting it up as a trust seems to have assured that. Rather than sell out years before and run with the cash, he also saw that NZ needed to have businesses that employed NZers, training them and extending them. The likes of Sir Angus are everywhere in Germany. Businesses owned and managed by “the family”, and naff as it sounds, providing regular, quality employment for their fellow citizens.

    Find us some more and we won’t be milking cows and shitting our rivers for much longer.

  • In the tech sector, I believe that that most companies failed to connect with academic R&Ds or even know that they really need R&Ds.

    Prof. John Hosking at Auckland University Computer Science make a comment on the NZ Herald a few years ago on that point about the software industry.

    Hosking said…
    John Hosking, professor of applied computer science at the university and a driving forces behind Extenda, says one problem is that senior technology staff in New Zealand businesses tend not to have post-graduate or often even degree qualifications. As a result, the companies they work for, while often successful at selling a single idea, can struggle when it comes to continuing to grow through innovation.

    “Although they [the technology managers] are bright and innovative, they haven’t been exposed to research methods as you would through doing a masters or PhD,” he says.

    “We’d like to open their eyes to what research can do to make companies grow quicker. Obviously we’d be interested in helping them do that research – we’re quite open about that – but the name of the game is to raise a research culture within their companies, and allow them to grow quicker, be more innovative and avoid this one-product wonder trap that
    they get into.”

    Original Article From the Herald : Lifting image of low-wage log-on slogging

  • Ross
    The example of Tait Electronics demonstrates my point.
    Angus got his business going at a time when there was strict import licensing in NZ, which meant that he had no foreign competition for his products. He was able to get up to critical mass on the domestic market and then start exporting. We can count this as a success story. But we have now signed up to Free Trade Agreements which means these circumstances will never recur.
    Moreover, as you say, Angus put the company into a Trust so it couldn’t be sold overseas. (This was partly because his children didn’t follow him into the business.)
    Both of these factors make the Tait example capricious. As I said before, it’s hard to see what the government or anyone else could do to encourage this sort of thing to happen again.

    Falafulu Fisi
    I agree. Statistics show that R&D staff in NZ businesses tend, in general, to be under-qualified, and it is getting worse. This may make a lot of our industrial R&D rather superficial and a poor basis for fast growth. Do you have any suggestions for fixing this problem?

  • Interesting comments from everyone.

    Bruce: Yes, the Shockley story is more complicated than I wanted to get into in my post, but I think the point still stands. First movers (lets call them entrepreneurs rather than inventors, who have the ability to patent) may not be sufficiently rewarded for experimenting, and if they aren’t, then society suffers because there won’t be enough of them. Who knows, in Shockley’s case it may have even been because he was rather unhinged that he decided to try such an unlikely spot to found the semiconductor industry.

    What I was trying to get at is that it is often hard to pick winners, or where winners are likely to arise. Economies find new winners through entrepreneurial experiments, yet this experimentation is likely too rare to be socially optimal.

    Kemo sabe: Yes, I think you can make the argument that we have done about as well as you might expect (see my posts on Phil McCann’s paper from last year – the more we look at with our patent data, the more we look like a state of Australia!).

    However, the flip side is that some countries seem to do better than might be expected through well targeted government intervention. The work by Hidalgo et al provides some empirical and theoretical evidence for why that might be the case.

    Falafulu Fisi: I am sure this extends into NZ senior management as well. When you look at the board and senior management of Nokia (despite Nokia’s current issues, I am pretty sure that New Zealand would be more than happy to take it off the Finn’s hands if it is troubling them!), it is remarkable how many of them have engineering or technical degrees.

    Ross & Kemo Sabe: Silicon Valley needed a decade of government procurement to stand on its own two feet, but we probably don’t have the scale in our domestic market for that.

    I understand that South Korea used low interest government loans to help grow its industrial conglomerates – interestingly only a handful of the original post WWII conglomerates survive (Samsung, LG) so it was evidently able to let these fail.

  • Kemo sabe: The other companies mentioned. F&P certainly were protected by import restrictions. But interestingly wiki provides insight into the Rakon history where if it wasn’t for the import protection given to the Post Office, Rakon would probably not have existed. It was because of this protection that Rakon were forced to produce their first crystals.

    So I have a suspicion the idea that businesses like this could not grow may be misplaced.

    There is no doubt in this day and age that governments are spending heaps to support R&D. We have have finally figured out that we are the odd ball country in this global game. And we are now well behind the eight ball.

  • My point was that mentors ( Arnold Beckman for Shockley, Sherman Fairchild for the ” Traitorous Eight ” – as Shockley called the scientists that joined Fairchild) were responsible for encouraging the formation of new companies. Texas Instruments were already making silicon transistors, and probably could be called the relevant first mover.

    Dysfunctional organisations can spawn fertile businesses, even in NZ ( and technical mentors can greatly assist the new business ). One successful company ( now purchased by an Australian conglomerate ) was formed because some DSIR staff decided they would no longer tolerable the verbal abuse and
    histrionics of their immediate manager.

    I totally disagree about NZ industry researchers being underskilled, having spent half my working life in private industry and half in DSIR/IRL, there’s no difference.

    The need is for industry management to stop treating research as a distress purchase, and start bhaing with a more longer term strategy than their next annual report/assessment.

  • F&P weren’t completely protected by import restrictions, as there were several competing appliance manufacturing firms in NZ, including the large Frigidaire ( a subsidiary of General Motors ) factory at Petone,

    F&P introduced lower cost appliances by replacing expensive components ( eg porcelain enamelled steel fridge interiors with formed plastic ), and designing for shorter product life cycles, traditionally 20 – 25 years, down to 12 – 15 years.

    There were different tariffs based on local content, and whilst fully-assembled appliances were heavily penalised, most NZ appliances used some imported components, eg Freon refrigerants and fridge compressors from Danfoss or similar.

  • Ross
    “There is no doubt in this day and age that governments are spending heaps to support R&D. We have have finally figured out that we are the odd ball country in this global game. And we are now well behind the eight ball.”
    I don’t follow this. The big difference between NZ and other OECD countries is not in what the government does, but in what the business sector does. Elsewhere, business spends heavily on R&D from its own resources, and does most of the R&D in-house.

    “I totally disagree about NZ industry researchers being underskilled, having spent half my working life in private industry and half in DSIR/IRL, there’s no difference.”
    The statistics collected from thousands of firms tell a different story.

    Of the firms mentioned so far, Tait is the only one not to have started moving its manufacturing offshore.
    What does this tell us?

  • Kemo sabe,

    You’ll have no problem then pointing to the actual data that demonstrates the lack of skill in industry. I hope you’re not using academic qualifications as the metric.

    There’s a large number of multinational pharmaceutical companies who have invested billions in acquiring and supporting elite graduates into R&D, so would appear to have some of the most-highly highly-skilled R&D divisions in world.

    They still have empty product pipelines, and are closing down the facilities, or moving to the next big markets.

  • Bruce: In fairness to Kemo Sabe, he did originally say “under-qualified”. I took a look at some very patchy OECD stats on qualifications of business sector R&D personnel and the proportion with a University degree in a) New Zealand is 71%, b) Finland 78%, c) Sweden 84%. So not disastrous, but room for improvement perhaps.

    Now it is difficult to assess the skill levels of those with qualifications than those without, but if you go by income then the stats show it pays to be better qualified.

    And doesn’t the drying up of drug pipelines say more about the diminishing returns available in that sector?

  • Kemo Sabe responded to my comment about skills, so I’m still very interested in seeing his data from “thousands of firms”. Simple request, so should be no problem to deliver,

    Underqualified compared to what?. The example of Sir Angus Tait is that he left school with no formal qualifications but with a huge interest in electronics. He built a business, then rebuilt it again after receivership.

    Enthusiasm, persistence, and technical skill, combined with an understanding what the market will accept are prerequisites for innovation success, along with mentors and savvy financial backers.

    Given the recent NZ rich list, I’m not sure that, on an individual basis, it pays to be better qualified :-). I still hear scientists complaining about their salaries, and bemoaning the higher wages of other professionals – such as lawyers.

    From the chemistry blog comments, there’s also quite a lot of bitter, redundant, Ph.D. pharmaceutical chemists in the US who have discovered the meaning of over-qualified.

    Commentators on pharmaceutical sites I visit ( eg Derek Lowe’s In The Pipeline ) agree there remain huge opportunities for successful pharmaceutical R&D ( in small molecule, peptides, and polymer areas ). The problem was that much of the multi-billion dollar investments in high-quality R&D produced “methyl, ethyl, butyl, futile ” research because those projects produced achievable outputs. Sound familiar?.

    The American model of researchers joining smaller startup companies with lower wages and the promise of lucrative share options seems to have produced more pipeline products, yet many of those people were from “second tier” institutions or employed with lower final qualifications.

    Hence the on-going buy-up of such companies by cash-rich large pharma management/shareholders disenchanted with the returns from their in-house R&D output. The generous incentives for multi-national pharma to off-shore their R&D into India and China are well-known, and also another source of US researcher disgruntlement.

  • Bruce
    Look at the Stats NZ biannual R&D surveys, on line. They survey all firms who report R&D expenditure and the response rate is very high- certainly several thousand.
    Between 2002 and 2010, the NZ business sector increased its R&D expenditure from ~$400M pa to ~$600M pa (constant 1998 dollars).
    It has increased its employment of R&D personnel from ~4000 FTE to ~8000 FTE.
    That sounds terrific, but we also find that the number of PhD qualified researchers has hardly moved, at about 800. I find that quite worrying, not withstanding your remarks about academic qualifications being a poor guide to researcher quality.
    The Canadians did some work on this in the 1990s when they were studying the effect of their R&D tax break. They thought the number of PhDs being employed was a significant indicator of R&D quality and commitment, and firms’ ability to connect with research in the universities.
    . I concede straight away that in some industries having a PhD may be less important, but we are talking about the whole economy here.
    I am at a loss to draw any conclusions from your other remarks.

  • Kemo Sabe.

    Thanks for the pointer, however I can’t see anywhere that is reinforces your comment that Industry researchers are underqualified. All it measures is the resources, not the output per resource.

    If anything the data, along with the decade-in-review MORST study of NZ R&D from 1994 to 2004, reinforces that NZ industry has been increasing investment in R&D, suggesting management recognised value from their investment, possibly because it was for distress purchases that yielded immediate returns.

    Both reports show that much of the growth in industry R&D is in information technology/software, unfortunately included in Services, whereas it’s innovative and globally-competitive.

    Consider 2010 and (2002) R&D FTEs by industry type.
    Primary – Research 130 (139), Technical 70 (96).
    Manufacturing – Research 2500 (1432), Technical 890 (695).
    Services – Research 2300 (919), Technical 1200 (331)

    The MORST report also shows that researcher numbers in industry ( mainly manufacturing ) doubled. R&D ROI may be best measured by the growth of a business, but many other factors can overwhelm any effect, eg Fonterra’s growth by acquistions. I couldn’t find any evidence that industry researchers are underqualified, and the growth of the NZ software industry also suggests otherwise.

    The rest of my comment was in response to Shaun’s suggestion about diminishing returns in pharmaceutical R&D. Very lucrative potential returns still exist in most major fields, but big Pharma has consistently heavily invested in R&D often choosing fast-return, low-risk, strategies ( eg analogue drugs, patent-life extensions such as chiral components of racemic drugs, etc.), and even missing many of those objectives.

    Smaller US pharmaceutical companies have been more focussed, innovative, diligent, and successful – with relatively lower R&D investment, hence the buy-outs.

  • Very lucrative potential returns still exist in most major fields, but big Pharma has consistently heavily invested in R&D often choosing fast-return, low-risk, strategies ( eg analogue drugs, patent-life extensions such as chiral components of racemic drugs, etc.), and even missing many of those objectives.

    Smaller US pharmaceutical companies have been more focussed, innovative, diligent, and successful – with relatively lower R&D investment, hence the buy-outs.

    Just a very quick passing comment / loose thought. Perhaps the bigger picture is that pharmaceutical companies can afford to let smaller Co.s pioneer, with the risks involved, and buy those they think promising. Unlike, say, the software industry, these smaller players might have a harder time of the delivery stage, whereas it’s no big deal for even a tiny software player to deliver as the distribution infrastructure is already there (the internet) and available to all. (I write ‘perhaps’ as I don’t have a good understanding of the drug sales (etc.) market.)

  • Grant,

    That’s one part of the new strategy ( along with off-shoring R&D to China/India, and partnering Universities ) that large pharma is embarking on. They hired the very best graduates/researchers, built superb research centres, but got few viable drug candidates. So now they are closing those facilities and moving to Plan B, as shareholders demand returns and new pipeline products to hold share price.

    Two decades of high investment into in-house R&D has produced near-empty pipelines, and their most lucrative patents ( each with annual returns of several billion US$ ) expire over the next few years – the so-called “patent cliff”. It’s the patent protection that big pharma wants, once drugs are generic returns decrease greatly. It’s not my field, but I don’t think software has that short exclusivity window of about 10 -15 years from going commercial.

    Outsourcing R&D to the cheapest tender in the US can be just as risky as moving R&D to China/India/?, as evidenced by the current Cetero Research faked data scandal.

  • Shaun
    This blog has really got legs- well done!

    I fear we may be at cross-purposes.
    I was pointing out that while business R&D expenditure has risen quite strongly, and the number of R&D staff has doubled, the number of PhDs has been constant. Thus there has been a serious dilution of the ‘qualification’ of the R&D workforce.
    You may want to argue that this doesn’t matter. Intuitively, I feel there is something going on which is very likely undesirable.
    You may have a better proxy for measuring the ‘quality’ of R&D staff in NZ, in which case please share it.
    What Prof Hosking said, as reported above by Falafula Fisi, makes sense to me.
    I speak as one who managed a large R&D department in the private sector.

  • Kemo Sabe,

    We’ve both probably got much better things to do with our time. I’ll just reiterate a couple of points from above. Much of the “research ” growth was in Information technology/software, an environment in which a Ph.D may not be a good measure of the most desirable skill a NZ business wants.

    Using the data you pointed to, the % of university graduates ( Batchelor’s degree to Ph.D ) has gone from 61.7% ( 2002 ) to 71.8% (2010) of people involved in Business R&D. Sure, the Ph.D numbers have dropped from 11.9% to 8.4%, but that still represents a 40% increase in numbers of individuals with Ph.D.

    Businesses which have clear need for Ph.D skills probably recruit them, but other businesses in the growth sectors may have found the particular skills of a Ph.D are not necessary. Maybe businesses with large numbers of R&D Ph.Ds have gone down the gurgler faster 🙂 .

    R&D resources have increased in many areas, but using Ph.D ratio as the metric of “underqualified” when discussing R&D skills appears unjustified for NZ business without relevant data.