A strong recovery depends on investing in talent

The context for addressing New Zealand’s long-standing productivity challenge is more complex than ever. Climate change, social inequalities, digital disruptions; the challenges are indeed many and huge. Along comes Covid-19 forcing an abrupt and uncomfortable disruption to our lives, but also offering a tremendous opportunity to rethink how and why we do things the way we do.

It is against this backdrop that the Productivity Commission is undertaking its most recent inquiry into frontier firms and their role in overcoming New Zealand’s persistent productivity challenge. 'Frontier firms' are defined as being the most productive firms in their particular industry, and generally also more profitable and innovative.

The draft Productivity Commission paper concludes that more frontier firms are key to lifting our productivity, and that a better functioning innovation ecosystem is, in turn, key to growing more successful frontier firms. It is no earth-shattering finding that New Zealand’s innovation ecosystem is relatively weak and that this partly explains the lack of and limited scale of our successful frontier firms. We know what constitutes a well-functioning innovation ecosystem, and we also know that New Zealand lags other small advanced economies because we have been less willing to invest big and long-term in improving the fundamentals of a robust innovation ecosystem.

New Zealand’s investment in skills and innovation lags considerably behind that of other small advanced economies, such as Sweden, Denmark, Finland and Switzerland. Take for example, R&D spending, which sits at 1.4 percent of GDP compared to around 3 percent in higher performing small advanced economies. As a result, New Zealand’s ranking in global innovation indices and measures of productivity are low and have been sliding. Moreover, New Zealand has failed to diversify its economy and grow the high-value industries needed to underpin a transition to a truly knowledge-based economy.

Rising to today’s challenges and building a low-emissions, sustainable, innovation-based economy for the 21st century rely on the efforts of many: policy makers, researchers/academia, business leaders and the wider community. As a university, we are acutely aware of our responsibility to contribute to the transformation required in New Zealand. Our role is unique in that we supply two of the key ingredients for productive and competitive economies. We generate new knowledge and ideas that underpin ground-breaking innovations and educate highly skilled people who go on to become more innovative employees and business founders. That is, universities have a particularly important role to play in stimulating the creation of knowledge-rich and innovation-based firms; those more likely to be at the frontier.

Well-educated, but not at the top end

The education of the highly skilled deserves a lot more attention in the context of New Zealand’s lacking productivity, and indeed the relative absence of frontier firms. Although participation in tertiary education is high in New Zealand, our graduates have lower degree levels, on average, than graduates in other small advanced countries. The comparative statistics on postgraduate study are revealing; only 5 percent of New Zealand adults have a Masters degree compared to the OECD average of 13 percent. Thus, although the Productivity Commission’s draft report suggests we are well-educated, this is certainly not the case at the top end of the educational pyramid. This matters because the primary, though often overlooked mechanism for knowledge technology transfer from universities to industry and other organisations, is through our highly skilled graduates, especially those who have undertaken research at the postgraduate level.

There is ample international research evidence showing research-based education is linked to growth and productivity through innovation at both the firm and macro level. University-trained employees enhance the ability of firms to absorb new technologies and create new innovations. Not to mention, of course, entrepreneurial university graduates who start their own firms. It is indeed our experience that almost all our successful start-up companies and licenses owe their birth and continued success to PhD students.

New Zealand has attempted to fill the skills gap by attracting highly skilled migrants and entrepreneurs from overseas, but as a recent report by the New Zealand Institute of Economic Research for the Productivity Commission finds, we have not been very successful in doing so. Our productivity is still low, despite high migration, and as the report concludes “relatively few top-tier skilled migrants and entrepreneurs with global ambitions are looking to move to a small country a long way from the centres of the international economy”.

Is it possible that this may change in the wake of Covid-19 with New Zealand a particularly attractive place to be right now? There is certainly an enduring competition for global talent and the pandemic is unlikely to change that. In fact, countries may double down on their efforts to attract talent as part of their economic recovery following Covid-19. This suggests we must, first and foremost, invest in our own talent in New Zealand. This means a much larger investment in and role for advanced level tertiary education. This is a well-established pathway to nurture the talent needed to build the prosperous society that we all desire, and which offers career and life opportunities so great that more of our most talented Kiwis will be reluctant to leave.