Dialogue: Government on wrong track in bid for a knowledge economy

Government efforts to overcome our poor high-tech performance must be redirected to focus on connecting with global markets, writes IAN MCCRAE.

New Zealand is performing badly in the high-tech sectors and there is little indication of improvement. We are exporting our people and ideas instead of products.

While the Government appears committed to expanding our knowledge economy, it does not seem to know how to achieve this. It is barraged by consultants, venture capitalists, universities, crown research institutes, overseas conglomerates and experts with proposals that generally promote three solutions: more research (for example, through tax breaks, incubators, further grants or additional investment in crown research institutes); more venture capital funding; and set-up subsidies for overseas conglomerates.

All three propositions are fundamentally flawed and will never deliver a thriving high-tech sector. To understand why, we must acknowledge the difficulties of taking our high-tech products to the world.

Commentators fail to grasp the compounding effects of our tiny local market, our isolation from the markets of the United States and Europe, and the special problems associated with selling high-tech products.

These problems are highlighted in Geoffrey Moore's book, Crossing the Chasm. Moore describes how "high-tech products initially sell well, mainly to a technically literate customer base, but then hit a lull as marketing professionals try to cross the chasm to mainstream buyers."

A direct consequence of our small local market is that New Zealand firms are bad at marketing. We don't need to market here because our salespeople often know all the potential New Zealand customers.

But a San Francisco-based high-tech firm wanting to sell US-wide will know the only way is by marketing and more marketing. Thus any American high-tech firm will typically have a highly paid vice-president of marketing in charge of a substantial marketing team.

In comparison, our high-tech firms rarely have marketing staff. They tend to gain some initial local success, possibly a few early adopter sales overseas, and are then hit by the triple whammy of non-existent marketing, isolation from overseas markets and high-tech marketing difficulties.

Moore describes American high-tech firms crossing a chasm from early adopter sales to reach the mainstream buyers. Our high-tech firms have an ocean to cross, figuratively and literally, to reach those same customers.

When our firms reach this point, they frequently become stalled. The going gets tough, resources are stretched and generally the easiest option is to sell out.

Essentially our high-tech firms have great ideas and products but few clues as to how to cross the "ocean" to global success. Investing in more research is, therefore, a waste of money. We don't know how to sell our products, many of which are equal to or better than those of overseas competitors.

It could be argued that the barriers to global success can be overcome by having adequate resources and that venture capitalists should be an ideal source of such funding. But few venture capitalists want to embark on a drawn-out campaign in major global markets. By necessity, they have a strategy of getting in cheaply, ramping up the price, then selling out as quickly as possible.

For venture capitalists, one of the best times to exit a New Zealand high-tech firm is when it is starting to get noticed by global competitors but before huge international marketing costs are incurred. This makes the more venture capital funding option a strategy to export our successful high-tech firms rather than their products.

The third suggested solution is providing subsidies for overseas conglomerates to set up here. This again is an export strategy whereby we export our profits, best people and ideas to the conglomerate's head office.

Having significant high-tech development occurring in time zones that are five to 12 hours different makes communication difficult. It is unrealistic to think that such firms would not entice the best people and products from a remote New Zealand office to the US, for example, where they can be more effectively managed.

Clearly, the commonly suggested solutions aren't working. We need a plan aimed at creating a number of New Zealand-domiciled high-tech organisations with one to 5000 employees and products that enjoy global success.

We don't have a problem with technology or innovation. We love technology, as is illustrated by our adoption of the internet. But we do have a problem connecting with global markets. We consistently fail to connect our best high-tech products with the big markets of North America and Europe.

We must focus our resources on overcoming this failing. The Government needs input from the firms positioned to deliver serious high-tech sector growth. These are high-tech firms on the brink of exporting, having started to export, or that are well-established in some overseas markets.

Historically, input into Government strategy has been too heavily weighted towards organisations such as tertiary institutes, consultancies, crown research institutes, venture capitalists and others that have little understanding of the unique problems facing our high-tech exporters.

The organisations that really understand the issues are the exporters themselves. They are aware of the barriers to entering global markets and can readily identify development programmes that will work. The possibilities include:

TradeNZ and other branches of Government have offices in most major capitals. Exporters entering a new market find setting up an office costly and risky. The Government could make office space available at subsidised rates for, say, a six-month establishment period.

Attending international trade shows is also very costly and the schemes offered by the Government are unworkable. Help in this area would be useful, through funding to partly cover costs and by waiving repayment if a company generates new exports.

Most firms lack adequate marketing and public relations capabilities in foreign markets. The Government could recommend such organisations in each country, strongly recommend high-tech firms to use their services and, similarly, subsidise fees to trade shows.

The Government needs to simplify the complicated and confusing range of incentive schemes. These schemes must be brought under the control of one Government department, with an account manager appointed to manage the interest of each company. These managers should be motivated by bonuses to increase exports, staff numbers and the success of companies under their wing.

High-tech clusters should be encouraged and opportunities for creating technology parks explored.

Once New Zealand has formed a plan, we must focus our limited resources upon its implementation. We cannot afford poorly targeted research funding and economic development schemes.

With vision and planning, we can achieve an Ireland-like turnaround, allowing our talented population to produce many high-tech blockbuster global successes.

* Ian McCrae is the chief executive of Auckland-based high-tech exporter Orion Systems.

Features:

* The jobs challenge

* Common core values

* href="http://www.nzherald.co.nz/storydisplay.cfm?reportID=57032">The knowledge society

Official website:

Catching the Knowledge Wave