Growing business innovation
Introduction
Innovation is the development or introduction of any new or significantly improved products, processes or methods. This includes products, processes and methods that a business was the first to develop and those that have been adopted from others. Innovation is essential for keeping pace with global technology, progress and productivity.
Innovation is critical for developing New Zealand industries and improving the productivity of our economy. Its benefits – including new businesses, industries and highly skilled jobs – spill over into society.
Rates of innovation in New Zealand businesses are low compared to the rest of the world. This has been attributed to a small proportion of businesses being in R&D-intensive industries, the cost of innovation, a small domestic market and little competition. There are also the challenges of our geographic isolation, a lack of connectivity across research and industry networks, and a lack of research capability to address business technology needs.
The Research and Development Tax Incentive has been available to eligible businesses since the 2019/20 tax year. It is expected to increase R&D activity in businesses, as well as R&D uptake across different industries. COVID-19 is expected to affect business R&D expenditure in the current year. The temporary R&D Loan Scheme was introduced to support affected businesses to continue their investment in R&D.
This chapter explores innovation trends, including industry type and size, as well as capital investment into early-stage businesses.
Ngā miramira wāhangaChapter highlights
The proportion of businesses that innovate in New Zealand is low compared with other small advanced economies, and is declining. However, business expenditure on innovation is increasing.
Compared to other types of innovation, New Zealand businesses spend most on product development, with a focus on introducing new goods and services to the market.
R&D expenditure has increased in most industry groups since 2012. There has been significant growth in R&D expenditure in the computer services industry, which increased 4.2-fold between 2012 and 2020. The highest R&D expenditure by industry group in 2020 was computer services ($924 million) and manufacturing ($825 million).
Larger businesses (with 500+ employees) account for most of New Zealand’s total business expenditure on R&D and undertake the most product innovation.
Investment in start-ups in New Zealand has been generally increasing over time, driven almost entirely by the software and services sector, which saw a 6.6-fold increase in investment between 2010 and 2020.
3.1 — Ngā ia auahatanga
Trends in innovation
Proportion of businesses that innovate compared with other small advanced economies and Australia
Innovative activity in New Zealand is lower than in other small advanced economies and Australia.
The proportion of businesses that innovate decreased from 53 to 46 per cent between 2013 and 2019. This trend was observed in most small advanced economies and in Australia.
Expenditure on innovation by type of innovation
Product innovation includes introducing new goods and services. Businesses that self-identify as carrying out product innovation are presented in figure 20. Expenditure on innovation increased by 56 per cent across all businesses that carry out product innovation between 2009 and 2019. The increased expenditure was primarily in R&D, which increased 2.9-fold during this decade.
Expenditure on design increased by 40 per cent, and expenditure on marketing and market research decreased by 48 per cent between 2009 and 2019.
The proportion of businesses undertaking innovation declined (figure 19) but the total expenditure on innovation has increased.
Innovation that is new to New Zealand or new to the world
Innovation that is new to the world can give businesses an advantage over their competitors. Innovation that is new to New Zealand (adopting overseas innovations here) helps our businesses stay competitive internationally. While both types of innovation are important for productivity, distance from international markets may make it more challenging for local businesses to adopt international innovations.
Businesses carry out product innovation that is new to New Zealand at twice the rate of innovation than innovation that is new to the world. Larger businesses carry out more product innovation with new-to-New Zealand products. There is no clear difference in product innovation by business size for new-to-the-world innovation.
3.2 — Ngā ia kei te R&W pakihi
Business R&D trends
R&D expenditure by industry
R&D expenditure has increased in most industry groups since 2012, notably 4.2-fold in the computer services industry and 2.0-fold in the wholesale trade industry. Primary industry expenditure decreased by 19 per cent during this period.
In 2012, the largest expenditure on R&D was made by the manufacturing industry (45% of total business expenditure) and the computer services industry (19% of total business expenditure). These industries were also the largest contributors in 2020 at 30 and 34 per cent respectively. There have also been substantial increases in R&D expenditure by other service industries.
Average R&D expenditure by number of employees
In 2020, businesses with 500 or more employees accounted for 73 per cent of New Zealand's total business expenditure on R&D.
Since 2010, the largest percentage growth in R&D expenditure has been by businesses with 1000+ employees and by businesses with 250–499 employees.
Concentration of R&D in top spending companies
New Zealand’s expenditure on R&D is more concentrated than most other OECD countries (within the top 100 ranking businesses, see OECD microBeRD project).
The concentration of R&D expenditure measures the proportion of total R&D expenditure by the top 5, 10, 25 and 100 spending companies. This metric has implications for the allocation and potential targeting of public support for business R&D.
The proportion of total innovative activity has become more concentrated in the top 5, 10 and 25 R&D performing businesses since 2010. In 2020, 62 per cent of R&D expenditure was made by the top 100 businesses and 40 per cent was made by the top 25 businesses.
The R&D Tax Incentive was designed to support a wider range of businesses to carry out R&D. It has been available to eligible businesses from the 2019/20 tax year.
R&D Tax Incentive
The incentive offers most New Zealand-based businesses a 15 per cent tax credit on money spent on R&D in New Zealand. Businesses that spend between $50,000 and $120 million a year on R&D may be eligible to make a claim. Other conditions may qualify those with a smaller spend.
Strong international evidence shows that tax incentives are the most effective way to lift R&D investment by businesses. This approach supports R&D throughout the economy without favouring particular industries or sectors.
The R&D Tax Incentive was introduced on 1 April 2019. Future RSI reports will provide information on its uptake.
3.3 — Te whakapiki i te maha me te rahi o ngā pakihi hou
Increasing the number and scale of start-ups
Venture and early stage investment
Private investment can help companies grow by providing expert advice and support in addition to funding. Capital investment can be sourced from angel investors, venture capital and crowd-funding. Venture capital funds are the main source of private investments. Venture and early stage investment has generally increased over time in New Zealand, with large individual deals resulting in significant variations from year to year.
Start-up investment by sector
Investment in start-ups in New Zealand has been generally increasing over time, driven almost entirely by the software and services sector that had a 6.6-fold increase in investment between 2010 and 2020. Start-ups in other sectors continued to attract venture capital but did not have the same growth in investment.
Venture capital investment compared with other small advanced economies
Venture capital investments in New Zealand increased by $14.47 million between 2010 and 2020. Despite these increases, this type of investment is low in dollar terms compared with other small advanced economies.
Venture capital investment is likely to provide funding later than angel investors. The government-owned Elevate Venture Investment Fund has $300 million to co-invest with the private sector into new venture capital funds.
Data science driven evolution of aquaculture for building the blue economy
The data science for aquaculture programme will contribute to a blue economy in New Zealand and a transition to a zero-carbon society. It aims to develop innovative data science techniques to enable the aquaculture industry to produce high quality, low carbon protein efficiently and at scale.
New Zealand oversees the world’s 5th largest ocean estate. Also, the fishing industry is 50 per cent Māori-owned, with significant Māori ownership in aquaculture. Māori are, however, under-represented in data science courses at university. Bringing together marine scientists and specialists in machine learning, modelling and data visualisation will develop new science to support decision-making. This will equip farm managers to respond to climate challenges, manage disease, improve production yields and farm sustainably at scale.
COVID-19 Innovation Acceleration Fund
This fund was open from April to June 2020 for research-based innovations to support New Zealand’s COVID-19 response. It provided rapid, short-term support to develop and deploy new products, processes or services. These ranged from mass-production of diagnostics, ventilators and masks to marine tracking, modelling and pandemic preparedness. Fifty-six initiatives were supported by $32.5 million in funding.
