In the private sector, you might say to the business unit leader, quietly, and not-quite casually, “Are you quite sure you want to measure your performance by something over which you have no direct control?” In the public sector, you just step back and say, “Wow.”
Callaghan Innovation released its inaugural business case last week. Browsing through it, I was struck by two things. First, only two of its six key performance outcomes has a number attached to it. Secondly, those numbers are stupendous: Callaghan aims to double the revenue of New Zealand’s TIN100 firms, and, quite as ambitiously, it wants to boost New Zealand’s total business expenditure on research and development (BERD) from $1.2 bn (in 2012, when it was 0.58% of GDP) to the equivalent of $2.1 bn (or 1% of GDP) by 2016. That's an additional $864 million in private-sector spending on R&D, or three quarters more than New Zealand’s businesses currently spend. Looked at a different way, it’s equivalent to doubling the research budget of our four largest-researching industries (manufacturing, ICT, primary, construction and transport sectors). And it wants to achieve both targets in three years, by the end of 2016.
I want to focus on Callaghan’s goal of increasing private-sector R&D spending by 75%. It plans to do this partly by offering consulting, or ‘Accelerator’, services through a cadre of client solutions managers, or CSMs, 30 of whom Callaghan plans to have in place by 2016. These people will help companies work out what’s restricting their growth and identify the R&D grants they might be eligible for. Callaghan plans to offer not just platforms for universities and the private sector to collaborate, but also contract research and an innovation precinct on IRL’s old Gracefield site.
But how far will this actually go towards adding $864 m to New Zealand's business expenditure on R&D? Callaghan’s business case says that it will target small and medium enterprises (SMEs) in the high-value manufacturing sector. Okay. In 2010, there were 470,000 SMEs in NZ, about 6% of which, or 28,200, had high sales growth view. About 11% of those were engaged in manufacturing, meaning that the high-growth manufacturing sweet spot Callaghan targets is home to about 3,100 companies.
Yet can we really expect those companies to add the missing $864 m to BERD in order to make Callaghan’s 2016 target? To make it work, Callaghan’s thirty client solutions managers would each need to convince a hundred of these small businesses to add about $279,000 to their existing R&D budget, and even winding that figure back to account for increased R&D expenditure by others in the ecosystem leaves a number too large to be plausible.
By measuring itself on a three-quarters boost in NZ’s private R&D spending by 2016s, Callaghan has adopted a measure it doesn’t control directly. Of course, it can – and plans to – foster and encourage research through the networks and facilitation it will provide. New Zealand certainly needs that. But I’m left with the uneasy feeling that the organisation has appointed itself cheerleader-in-chief without being given everything it needs for the job.
If the Government really wanted to turbocharge the private R&D spending, the most powerful lever available would be restoration of the R&D tax credit, which would bring New Zealand back in line with practice in most of the OECD. Ironically, the abolition of the tax credit year seems to have hit the smaller firms whom Callaghan targets especially hard: R&D by firms with fewer than 50 staff declined by 37% from 2008 (when SMEs invested half of NZ's total BERD) to 2012.
(Some change may be in sight, though it’s not yet here: as PWC reports, the 2013 Budget proposed allowing businesses with an R&D spend equal to at least a fifth of what they pay in wages and salaries to cash up their R&D spend in some circumstances. It’s not a full restoration of the tax credit, but it does bode well for growth.)
Is Callaghan’s only quantitative KPI achievable? Are NZ’s businesses likely to boost their R&D spending by three quarters over the next three years? I hope so, of course, and I think Callaghan is right to emphasise its role as facilitator, networker, and a growth consultant - roles central to the dense weave that needs to underpin the fabric of our startup sector. But adding $864 m to BERD? I don’t see where the money will come from, or why. Just encouraging is not enough: we need to bring back the R&D tax credit, and then watch Callaghan’s targets respond to incentives.