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Get off the Grass is a surprisingly accessible, readable book given the subject matter. Shaun Hendy and the late Sir Paul Callaghan, are asking a big question: how should New Zealand position itself to achieve sustained economic growth over decades?
Their response to this question is that New Zealand needs to become a city of four million people. The book discusses why, with a great balance of anecdote, analysis and argument.
If you want a good overview of the book’s content, you should watch this recording of Sir Paul Callaghan giving a keynote at the StrategyNZ conference from March 2011.
The book navigates economic history, attempts to explain why New Zealand’s economy hasn’t skyrocketed after implementing its reforms of the 1980s, explores possible supplements to the status, why there isn’t enough R&D in a typical economy and ends up with several calls to action.
A strong thread of conversation is that countries which invest in innovation (in the right way) do very well. The book spends a lot of time persuading the reader that dramatically changing an economy’s trajectory is achieveable and worthwhile. Israel, Finland and Denmark are heralded as economies which have had similiar or worse positions to New Zealand’s current situation, that have been able to undertake radical change for the better.
What is meant by the right way to invest in innovation? Economies that have invested in building a rich diversity of high-technology industries. The authors demonstrate that high-technology industries create knowledge that flows into many other areas. The reason why they have chosen to argue for a city of four million people is that networks produce innovation at a higher rate.
There are many threads of the argument, but here it are some of the main points in a rough form:
Diversity is important
Diverse economies are resilient economies. They are able to adjust to a changing environment and are better able to create complementary products using knowledge from multiple sources.
New Zealand should invest more in science
Out recent economic past is held up as strong evidence that macro-economic stability is not sufficient for high economic growth. The authors look for something else to sit on top. They find that countries with high levels of public investment have done really well. Macro-economic stability is necessary, but insufficient.
New Zealand should support ICT and other high-tech industries
Not innovation is able to be recycled into new products and bridge into other industries. The authors have mined international patenting activity and can demonstrate that some industies support many others, while a few are isolated.
High-tech firms are able to have products that can be complements to products in many industries. Specialist tools for agricultural purposes are not able to be leveraged for many other uses.
Using this knowledge, Hendy and Callaghan argue that supporting ICT actually enables the country to support many industries.
New Zealand should facilitate the creation a broad network of innovators
Innovative products are created by young firms, often using complementary knowledge. To create that knowledge, it’s important for a society to foster weak relationships. People with weak relationships are likely to be the sources of complementary knowledge to your own. The people you spend the most time with tend to have a similiar knowledge base to you.
Incumbents do not produce products which could be detrimental to their current market position. Product development is risky and expensive.
A broad network will enable people to collaborate to solve problems. Some of those solved problems will become products. Indeed, it’s these new products that investing public funds in research is really aimed at.
Callaghan Innovation should be getting onto it
The book discusses another difference between New Zealand and other countries’ approach to innovation. New Zealand businesses are pretty bad at ‘open innovation’. This term isn’t strongly defined in the book, but means at least that an organisation collaborates with people outside of it to conduct R&D.
Structurally, the authors would like Callaghan Innovation to make researchers more discoverable to industry. In effect, Callaghan Innovation is very well positioned to join jots.
Three areas of the book that I found especially strong were its historical survey of economic thought, their treatment of Rogernomics and their ability to convey the significance of their own analysis.
Historical survey
Rather than jumping into technical analysis, the authors take the time to provide their readers with some context. It’s an interesting read and prevents the pair being labelled as incompetent on economic matters. After all, they are physicists commenting on economic development.
Treatment of Rogernomics
Most people talk about Rogernomics in an extremely polarised way, almost as if it was some form of verbal characature. It was either a necessary, yet difficult time that ended up or was a destroyer of a New Zealand way of life that failed to bring about the benefits that it promised.
Hendy and Callaghan are much different. Rather than pass judgement, they accept that the reforms took place and try to look for reasons why New Zealand’s economy hasn’t accelerated in its low inflation, low interest rate, stable state. They take a scientist’s view and seek out the evidence. Their answer is New Zealand’s low spending on R&D.
Public investment in R&D
One of the book’s strongest areas is its arguments in support of public investment into R&D. First, they spend time explaining that countries don’t invest enough in R&D and then they discuss why. As it happens, investors are not the only beneficiaries innovation, despite the fact that they bear almost all of the risk. Then they spend time discussing what to do about it.
Mature companies have subtle disincentives to stick with the status quo. Staff trained in a new area could simply leave from the original firm to create another, just as Gordon E Moore and others did to create Intel after abandoning William Shockley.
New Zealand companies are also found to be ineffective at bringing in new ideas. The book discusses how New Zealand companies practice a relatively closed form of innovation and rarely incorporate inventors from outside the company in their patent applications. This, in the authors’ view, is indicative of a country which is not working together.
These factors and others present themselves as a market failure in any given economy. In New Zealand’s case, the failure is even more accute, as its innovation investment is delivered to industries (e.g. agriculture) that have far fewer spill off benefits than others (e.g. high-tech companies).
One of the concerns I’ve had with public funding of research is the massive opportunity cost. For every large project we fund that has benefits tomorrow, we miss out helping a cancer patient today. It became clear to me as I was reading the book, that by doing the wrong thing for the economy will lead to a greater human opportunity cost for patients in the future. As our country’s economy grows stronger, its capacity to support its weakest and sickest citizens grows too.
The book’s authors use data extracted from patents for much of their analysis. Good friends of mine will be quite irritated by this. They’ll argue that patent activity is a poor proxy for innovation. That was certainly my view as I went into reading the book.
At this point, I should make some notable disclaimers. I’m a current Councillor of New Zealand’s Open Source Society Inc. and have previously worked at the New Zealand Intellectual Property Office administering New Zealand’s Patent Cooperation Treaty Receiving Office.
Through reading the text, it was clear that the authors understood the limitations of their dataset. In fairness, it’s an extremely large, clean dataset with rich metadata. Even better, the dataset is available in bulk and is in the public domain.
Given the level of aggregation that the authors used, these qualities make patent data an acceptable trade off.
For the record, I am more concerned about the messiness of PCT classification codes than the relationship between patenting and economic growth.
In my view, one of the weaker areas of the book was discussing what to do next. The policy recommendations a little weak. Boosting Callaghan Innovation and creating a register of researchers doesn’t feel that aspirational.
The ingredients for some great advice for the country are there. In particular, the pair show that creating 100 high-technology firms with $1 million in revenue per annum will build a sustainable base of tens of billions of dollars in a decade. That sounds like an achievable, measurable goal.
What does New Zealand need to do to produce those 100 companies?
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