Dialogue: More research money will bring back our best brains

ALASDAIR THOMPSON* says that support for research and development is the key to attracting highly skilled New Zealanders back from Australia.


Finance Minister Michael Cullen pointed out last week that Australia was benefiting greatly from the numbers of New Zealanders employed there.

The profile of the about 500,000 New Zealanders now living in Australia closely resembled a well-educated population with highly paid skills, he said.

Indeed, Australia's Bureau of Statistics has identified New Zealanders as the wealthiest ethnic group in Australia.

They are younger on average, earn a third more pay and pay a third more tax than dinkum Australians - and more than migrant groups from Britain, Germany or elsewhere.

We are seeing too many of our best and brightest migrate across the Tasman and elsewhere.

Along with skills, they take with them our aspirations for higher standards of living.

In New Zealand we are falling off the pace needed to keep abreast of changes in technology.

We are not investing enough in commercially oriented research, and the taxpayer-funding of our research institutes is not delivering a sufficiently high return on investment.

The impact of the knowledge-economy race is showing up in our trade statistics.

The growth of exports with high levels of know-how and skills embedded in them (elaborately transformed manufactured goods) has been rapid - up 20 per cent to reach $7.5 billion for the year to June.

Imports of exactly the same category of goods have been growing at about the same speed, except they now account for $23 billion.

In dollar terms we are outspending our earnings from sales of knowledge-rich products.

This "elaborately transformed manufactures" category includes our processed food exports but not dairy, meat, fish or wool exports.

Combined, these four earned $9.8 billion for the year to June.

They are growing strongly now, too, but the good news for our transition from commodity-dependence to higher value-added output is that over the past decade our elaborately transformed manufacture exports expanded four times faster than returns from primary commodities.

Nevertheless, we have a lot of ground to make up to attract the return of skilled expatriates.

We need to make New Zealand a more attractive and innovative place to live and work, with financial rewards and intellectual challenges to match our superb lifestyle. How?

Our standards of living are tied inextricably to our exports. The more value we embed in our goods and services, the higher the return for each unit earned.

The same doesn't apply to the people we export because they don't send their income home, not even to pay for their previous skills and training.

Building an economy where higher levels of technology and higher skills are in demand is plainly a large part of the answer. A higher level of research-directed activity is required.

At present New Zealand invests less than a third of the average of OECD countries on research and development.

Yet a Ministry of Science Research and Technology survey recently found that, for tax purposes, business declares about a quarter of what is actually spent on research and development.

The reason is that Inland Revenue Department guidelines on how research and development should be treated are extremely unclear and inconsistent.

Firms call their research-and-development expenditure something else, to avoid drawing attention to themselves. The last thing they want is an Inland Revenue audit.

So our research-and-development investment goes under-reported. And this sends out the wrong message - especially to potential investors.

The Budget this year substantially boosted grants for research to address the shortfall, but handouts simply will not cut it. They are less than desirable because the application costs for them are high and firms do not believe the bureaucracy understands the opportunities.

Far better would be a broad package equally accessible to all firms wanting to undertake research and development.

For these reasons business responded positively to the Government's election pledge to treat research-and-development expenses like other business costs.

The election promise was not as attractive as Australia's 125 per cent tax deduction, or the innovation and research incentives offered by most other countries, but strongly supportive of research and development nonetheless.

The Speech from the Throne reiterated the promise. Then the Government reneged. It put an extra $43 million into research grants instead, more than half of it for the Crown's own research institutes.

Alongside this disappointing commitment, little attempt has been made to ensure it will be allocated to those areas where the highest financial returns are likely.

For instance, we still allocate the overwhelming majority of our taxpayer-funded resources to produce more behind the farm gate.

All the evidence says the highest returns are from intensively researched, and skilfully branded and marketed, differentiated products for well-off consumers.

The growth of research and development skills cannot be put on the shelf for another 18 months or so while tax is reviewed.

It is important that we work to maintain our place in the technology race while we gird our collective loins for another charge at the frontrunners. Meanwhile, our businesses need other measures to tackle competitors fairly, such as a corporate tax rate below 30c in the dollar, to beat that of Australia.

A further possibility is to transfer another $100 million from Vote: Science to the private sector, with the proviso that the funds were invested directly with a Crown research institute and leave out the middleman.

The Government will get our skilled young people back only by combining the private sector's dynamism with the scientific know-how of our publicly funded research institutes.

* Alasdair Thompson is chief executive of the Employers and Manufacturers Association ( Northern).