NZ investment in crucial R&D worryingly low
KIRK HOPE
OPINION: What is the most important ability for business?
Some would say the ability to innovate. Huge new forces – globalisation and the digital economy – have made innovation essential for business success.
Because of these forces, purely local businesses now have competitors all over the world and all over the internet, pushing the bar for success ever higher.
As a result, many businesses can no longer compete just by producing their best quality product at their best price. These days, they have to continually monitor their competitors and continually update their product with offerings that are exciting and new.
Consumers don’t just want quality at a good price – these days they also want ‘‘new’’. This consumer desire for new products and new features is creating unprecedented responsibility and cost for businesses.
Firms these days must continually invest to innovate, or lose competitiveness.
But investment in innovation is risky – the payoff is never certain. Businesses can’t always capture all the benefits of their investment.
For these reasons, many businesses may not be spending enough on research and development (R&D).
R&D spending by businesses is lower in New Zealand than in many other countries – less than 1.3 per cent of gross domestic product, compared with an OECD average of 2.4 per cent.
This matters – not just to businesses, but to all of us. Everybody benefits when firms invest in innovation. It can mean more profits, and therefore more tax revenues.
This is a significant benefit, as company tax and GST contribute about half of the tax revenues that pay for all government services.
It’s a key reason why countries all around the world have taxpayerfunded support for R&D. And it means New Zealand must do the same, or become less competitive than the rest of the world.
The way in which New Zealand supports R&D is currently under debate. The Government is proposing changing from a grantsbased system to a system that also includes tax credits.
At present, firms are able to apply to Callaghan Innovation for cash grants for qualifying R&D expenditure.
The Government is proposing that some of those grants should be replaced by a system of tax credits.
Under this system businesses would be able to apply for a tax refund equal to 12.5 per cent of their R&D spending, with eligibility criteria.
This would be for medium-sized and larger businesses that spend more than $100,000 a year on R&D.
Smaller companies whose R&D expenditure is less than this would continue to be eligible to apply for Callaghan grants.
The benefit of introducing a tax credit system is that it could be simpler to administer – businesses would be able to apply for the tax credit as part of filing their tax online. It could result in more companies investing in R&D because of the ease of applying.
On the other hand, a tax credit system could bring the risk of businesses gaming the system – some might be tempted to reclassify other spending as innovation spending in order to fit the criteria. Resources would also need to be applied to police the system.
It would be useful to hear a wide range of opinions on this proposed tax incentive. Public submissions to the Ministry of Business, Innovation and Employment’s website are due on June 1.
Views on other R&D issues will be welcome too, including how best to provide R&D support for lossmaking companies, whether to treat software development as R&D, and whether exporters should be treated differently from other businesses.
It’s important that New Zealand companies invest strongly in innovation, and important that we get the best possible support system for them to do so.
Firms must continually innovate, or lose competitiveness. But investment in innovation is risky – the payoff is never certain.
❚ Kirk Hope is the chief executive of BusinessNZ.