By and large, industries in New Zealand have stopped lobbying for taxpayer subsidies and expect to survive by competing in the marketplace.

One form of subsidy-seeking that has a habit of coming back is for more government spending on research and development (R & D). A recent example was a report Making R & D a National Priority by McKinsey & Company for the Knowledge Wave Trust.

Often the case for more spending is based on nothing more sophisticated than the observation that New Zealand 's reported R & D spending is low by OECD standards, and that R & D is important for economic growth.

As it happens, the latest OECD figures indicate gross expenditure on R & D in New Zealand is 1.11% of GDP, not far short of the figure of 1.21% for the well-performing Irish economy.

Moreover, government spending on R & D in New Zealand is higher as a proportion of GDP than in Ireland . So too is higher education expenditure on R & D and the number of researchers per 1000 employees.

Lobbyists for R & D subsidies seldom acknowledge the following points:

•   R & D statistics are notoriously unreliable. If firms had financial incentives to classify spending as R & D, the statistics could change dramatically.

•   The linear idea that R & D drives innovation which in turns drives growth is discredited. Among other things, applied technology often precedes any deep understanding of the underlying theory.

•   More spending on R & D is not obviously better; as with any investment there may be diminishing returns.

•   New Zealand will have comparative advantages in some R & D activities but not in most. New Zealand firms benefit from domestic and overseas R & D. Local investment in R & D will always be miniscule on a global scale.

•   Government R & D spending and subsidies may displace private sector spending.

•   Business R & D has increased with the moves away from a protected economy and has been growing strongly: the latest figures indicate a compound annual growth rate of 6.2% from 1990 to 1997.

Governments typically fund basic or public good research. This is because the benefits of new knowledge cannot be fully captured by individual firms, hence they will not make the necessary investments.

Even the case for public good science is not straightforward, however. It has been challenged, both theoretically and in practice, with research such as Celera Genomics' human genome project. Moreover, the deadweight costs of taxation raised to fund government R & D spending and 'government failure' associated with political distribution of research funding need to be taken into account.

There is no doubt that science and technology are crucial for economic growth, and innovation even more so. Spurred by competition, firms will have incentives to invest in appropriate R & D. Depreciation and other tax rules for such investment should be efficient but where firms can capture the benefits of R & D, there is no good case for public subsidies.

Government policy can best assist R & D and innovation through low taxes, avoiding anti-technology regulation, focusing on appropriate public goods including basic research, and protecting intellectual property rights.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz