"National’s plans to cancel the tax incentives for Research and Development, appear to undermine Dr Hutchinson’s enthusiasm, and many business lobbyists and economists have joined in to declare it was a giant leap backward from the knowledge economy.

I have spent many years of my life promoting innovation based on both government and private initiatives. I soon learned the conventional wisdom behind these incentives was wrong."

Chris Laidlaw’s Sunday programme recently hosted a fascinating discussion on the proposed Square Kilometre Array project, a multi-billion dollar programme to build a giant set of radio telescopes across the Australian continent with a total “dish” area of 1 km². If New Zealand joins in (at a price of $7 million for four telescopes) the telescope ‘baseline’ is extended from 3,500 km to 5,000 km and performance is increased by 60% – which hugely improves the Australian bid. We benefit from hooking into both the super-computing network processing all the collected data in real time, and the consequent super-broadband links between Australia and New Zealand.

This project would be the Southern Hemisphere’s equivalent of the super-collider and is exciting stuff. But Minister of Science Pete Hodgson was lukewarm to say the least, scoring the “direct science benefit” as “low”, the “good world citizen” element “well”, and the indirect benefits as “don’t yet know”.

Dr Hutchison, National Party spokesman for Science and Technology, was much more enthusiastic about this “terrific opportunity”, but clearly has his work cut out.

After all, at the same time, lobbyists, councils and government agencies were promoting a cycle lane across the Auckland Harbour Bridge, because, they proclaim, a fifty million dollar spend-up on bikes symbolises the future direction of “sustainable” transport in New Greenland.

This “sustainable vision” is truly scary because it reflects the “rear-mirror vision” of so many politicians and agencies further down the food chain.

National’s plans to cancel the tax incentives for Research and Development, appeared to undermine Dr Hutchinson’s enthusiasm, and many business lobbyists and economists joined in to declare it was a giant leap backward from the knowledge economy.

I spent many years of my life promoting innovation based on both government and private initiatives. I soon learned the conventional wisdom behind these incentives was wrong.

First, the key to economic growth is broad-spectrum innovation – rather than scientific R & D. In the late seventies, the late Dr Lee Kum Tatt, founding Chair of the Singapore Institute of Standards and Industrial Research, explained to me “Innovation is any new idea that makes money.” Hence, under-armed bowling was an invention, but one-day cricket was an innovation. Neither depended on R. & D. Innovation spans many fields – crafts, movies, musicals, fashion-houses, and all manner of trivial pursuits.

Second, NZ is not the R & D laggard we are led to believe. An unusually large percentage of our GDP is generated behind the farm gate where farming families find it difficult to carry out formal R & D, even though their daily operations are based on substantial technical knowledge and expertise.

Third, we are a nation of small businesses. Overseas companies like Roche or Microsoft have large R & D departments conveniently concentrated within single buildings, easily identified as eligible for any available subsidies. Tax incentives increase the R & D handouts but may not increase actual R & D. Most of the innovation is found in the accounts departments. Also many handouts subsidise major weapons research – hardly a major sector in NZ.

Fourth, most R & D in New Zealand is carried out by the owner working at home after dinner. Such informal R & D simply isn’t subsidised, so isn’t counted.

I sat on the board of an Australian company and soon learned how much time could be taken making sure decisions and spending would attract the “incentives” rather than generate income and profit.

Government programmes and tax incentives focus on Scientific R & D and exclude many areas of innovation, if only to ring-fence the spending. When I first administered the DFC’s Applied Technology Programme, computer software was ineligible. Then it was allowed if it was a new product rather than proprietary. But what if the software was to enhance production of an in-house product? We spent much time on such debate.

The rules also excluded industrial design because “design” wasn’t science. When I complained about the poor “packaging” of a new piece of computer hardware many IT engineers thought I was criticising the carton.

Market research was a definite no-no.

Quality Control was also ineligible – so accountants soon became expert at disguising quality control systems as new products or processes. But surely R & D which enables earlier detection of, say, melamine in milk, is worthwhile?

These rules meant that tax incentives went to science-based research rather than to innovation, and reinforced our local weaknesses rather than turn them into strengths.

Many of these rules reflect the British notion that scientists are gentlemen who belong to the Royal Society, whereas innovative entrepreneurs indulge in common “trade”.

Tragically, we have also developed a body of Environmental Case Law that rejects objections from price competitors but accepts objections that claim the applicant’s “waves of creative destruction” might make the community’s existing investment “unsustainable.”

So what government policies can promote the full spectrum of innovation and hence stimulate economic growth and development?

First, keep inflation down. Once inflation hits 10% or more hardly any development programme can generate the required internal rates of return because future income is so heavily discounted.

Second, keep all business taxes low so that companies have some funds to invest in new development after they have paid their workers, suppliers, bankers, and shareholders, and of course, the IRD.

Third, allow rapid depreciation of most assets. Many new products make existing production equipment and machinery obsolete. High depreciation rates reduce the pain.

Fourth, treat scientists, engineers, artists, songwriters, filmmakers, software writers, industrial designers the same. Science is already heavily subsidised through funding programmes. Don’t distort downstream investment choices by tax incentives or other subsidies.

Then allow the private sector to fund development by having in place the four ingredients that enable venture capital markets to develop. These are:

<!--[if !supportLists]-->1. <!--[endif]-->A zero or light capital gains tax. (Tick)

<!--[if !supportLists]-->2. <!--[endif]-->A low cost board on the Stock Exchange. (Tick – our main board is a low-cost board.)

<!--[if !supportLists]-->3. <!--[endif]-->Allow pension funds etc to operate under the Prudent Manager Rule. (Tick.)

<!--[if !supportLists]-->4. <!--[endif]-->Allow special partnerships that limit liability but allow investors to write off losses against income. (Tick.)

We have ticked the magic four. So why is our venture capital sector struggling?

For many years we did not have the prudent manager rule (which allows fund managers to invest a prudent percentage of their portfolio in high risk ventures.) We introduced it just as the ‘87 crash turned prudent managers into terrified managers.

We also had special partnerships but because of some rorts in the subsidised film industry they were canned – even though for a few golden years Auckland’s Strada Holdings was the worlds largest and most successful investor in Broadway and West End Musicals. (New Zealanders are still collecting royalties from their mid-eighties investments in Les Miserables and Phantom of the Opera.) Special Partnerships are now back – but we seem to have forgotten what to do with them.

Dumping tax incentives for private sector R & D was good for innovation. When I see who supports tax incentives for R & D I am reminded that one should never ask a barber if you need a haircut.

We should just let a thousand flowers bloom.