Office of the Minister of Science and Innovation The Chair Cabinet Economic Growth and Infrastructure Committee Process for Establishing Regional Research Institutes Proposal 1 This paper seeks Cabinet approval to my proposed process for establishing new regional research institutes in New Zealand. I will report back to Cabinet in the first half of 2016 to seek approval for the release of any portion of Budget 2015 funding set aside in contingency to establish new institutes, and particularly with regard to the $5 million earmarked for release in 2016-17. Executive summary 2 New Zealand s overall research system is highly productive, performs relatively well on research quality, and has some world-leading concentrations of expertise. However, we perform poorly by international standards in translating publicly-funded research into commercial developments and business innovations which are critical for growing our economy. Variations in our regional economies impact on R&D support and activity 3 Research and development, and the commercialisation process, are central to regional economic growth, but remain low in the regions. This can impact on the capacity of the regions to exploit their economic advantages for accelerated growth and productivity gains. 4 Therefore, directing resources towards building a deeper knowledge base in the regions is important. Doing so in ways that directly stimulates leading edge, commercially focused, and industrially exploitable research can accelerate the economic competitiveness of the regions. This can further spur job growth, lead to new export opportunities and generate wider positive benefits that might not otherwise get realised. Establishing new, private regional research institutes 5 At Budget 2015, I announced the Government has set aside $25 million in contingency over three years, beginning with $5 million earmarked for 2016-17, to establish new regional research institutes in New Zealand. Establishing new research institutes in the regions will deepen their knowledge base and help to accelerate business innovation and regional economic growth. 6 I propose to establish new institutes as private or private not-for-profit entities with a strong mission of supporting industry. As a result, institutes will themselves directly contribute to Government s goal of increasing business expenditure on R&D, and will also work to directly leverage industry investments to increase R&D intensity in the regions.
7 Proposals to establish institutes are likely to emerge from various industry sectors based on the various strengths of our regional economies, and these are likely to develop from new collaborations between industry and research institutions. Criteria for establishing regional research institutes 8 I expect to establish one to three institutes over the next four to five years and will direct MBIE officials to establish regional research institutes using six core high-level criteria, in addition to gaining financial commitment from industry. These criteria include having eligible regions being those outside the main population centres of Auckland, Wellington and Christchurch, establishing new institutes as private organisations, and producing relevant research in support of industry-led efforts to increase R&D intensity. 9 Government s initial role will be to catalyse the establishment of research institutes in a way that incentivises them to become self-sustaining over time. Proposals, therefore, must make a clear business case that demonstrates ongoing financial sustainability beyond initial government support. I intend any government funding for establishing these institutes will taper off over the medium term to a level similar to that of available government support for business expenditure on R&D for example, meet 20 per cent of the R&D expenditure. Background/Context Deepening our knowledge-based capital, and widening its impact, is critical for growth 10 Research and innovation are central to achieving improved economic, environmental, social and cultural outcomes for New Zealand. Research plays a critical role in creating new opportunities and finding promising solutions to our most pressing concerns. Innovation the introduction of new or improved technologies, products and services, processes and branding lifts our productivity. Improving the productivity of New Zealand s businesses by increasing the intensity of knowledge production, and through its effective transfer to other parts of the economy, is the only path to sustainable long-term prosperity. 11 New Zealand has a persistent gap in our income level when compared with most other advanced economies, with GDP per capita being 26 per cent below the OECD average, measured between the years of 2000-10. This is partly because of a slow but steadily widening gap in labour productivity. Research undertaken by the OECD suggests that about a third of this gap could be explained by a lack of investment in knowledge-based capital (or intangible assets). Knowledge-based capital encompasses a broad range of activities, such as branding, software development, design, and scientific research and development. Investment in knowledge-based capital is growing in importance as a source of productivity and economic growth. 12 Knowledge-based capital investments should also flow across a range of economic sectors, so this Government has significantly increased its investments in industry-led research since 2010. This has included establishing Callaghan Innovation in 2013 with $566 million for business R&D grants over four years, along with $80 million additional funding over four years provided in Budget 2015. It includes increases in the Primary Growth Partnerships to $65 million per annum from 2012-13 (up from $30 million in 2009-10) to drive substantial economic growth in the primary and food sectors, through joint investment by government and industry. Changes are also being introduced to the Performance-Based Research Fund, following a review during 2012-
13, to stimulate improved knowledge transfer between tertiary education organisations and industry. 13 Additional efforts to improve our knowledge-based capital in New Zealand have included developing new ICT graduate schools in our main population centres; launching technology-focused incubators to transfer deep science into new complex technologies and new firms; growing the number of Centres of Research Excellence from six to ten, and delivering more innovative and strategically focused research for New Zealand. Directing knowledge-based capital into the regions can improve their competitiveness 14 A majority of Government support for business R&D and for public research activity flows to our main population centres due to their strong absorptive capacity for commanding and utilising resources. There is an imperative for government to consider ways to enable wider and shared benefit from R&D investments and business innovation activities. 15 Directing government R&D support into regions where there are unique comparative economic advantages emerging, but where local innovation systems are less developed, can help to grow the local economy. Doing so in ways that support a wide range of innovative activities by firms, including the tacit knowledge exchange between researchers and firms, is a critical outcome of this proposed initiative. Industry-led institutes can meet unique needs and lift business innovation in regions 16 This Government is committed to growing overall business expenditure on R&D to 1.0 per cent of GDP by 2018. This is because R&D activity conducted within the firm has a strongly positive impact on business innovation and firm-level productivity. Government provides support for business R&D because firms will tend to invest less than is socially or economically optimal because they are unable to capture the full benefit of their investment. 17 A $25 million initiative to establish new privately-led regional research institutes in New Zealand was announced by this Government as part of Budget 2015. Funding has been set aside in contingency, with $5 million earmarked to be available beginning in 2016-17, followed by $10 million in 2017-18 and $10 million in 2018-19. This funding should be released only upon receipt of clear business cases from the regions that demonstrate merit and propose ongoing financial sustainability beyond initial government support. 18 There is a strong complementarity between internal and external business R&D activity. Evidence shows that when firms engage in both internal and external R&D, they often introduce more innovative products and services than firms engaged in either external or internal R&D alone. Many of this Government s initiatives, therefore, support firms to conduct more of their own R&D activities, and to complement these efforts with growing and relevant contributions from our other science investments. 19 There are many examples internationally where governments are introducing similar initiatives, which include supporting industry-led private research centres and networks to induce more research orientated towards commercialisation. In these examples, industry takes the lead on governance arrangements of the private centres and largely determines what complementary external science expertise will be conducted by centre(s) for transfer into technology and commercial developments. 20 Government has worked closely with industry in each of these cases to establish the centres. This ensures that they have industry-related science and technology oriented
missions, that they drive sector and regional economic growth, and that they fill gaps in their science and innovation systems. 21 Establishing regional research institutes in New Zealand, will be driven largely by two complementary drivers: a) gaining the commitment of business-industry in the regions to support the establishment of private institutes and to drive their research missions, and b) determining the market response, from the research community, to meeting business-industry demand. Process for Investigating the Establishment of Institutes 22 I propose that MBIE officials use the following process to elicit interest and commitments from industry and researchers to establish new regional research institutes: a) Introductory workshops: Beginning in August 2015, MBIE will conduct introductory workshops in the regions to provide interested investors and potential participants with a clear picture of the concept and high-level criteria for establishing a regional research institute. MBIE is working with key regional actors such as economic development agencies, the regional business partner network, chambers of commerce, and industry associations to schedule and convene workshops. The workshops will be open to any interested stakeholders. b) Registration of Interest (ROI): In October-November 2015, MBIE will conduct a ROI process that elicits early-stage commitments and proposals from the regions, to be reviewed by a selection panel, and to progress some into a full business case development stage. c) Business case development and recommendations: From November 2015 to March 2016, MBIE will use the better business case development process to work more directly and in-depth with a few selected proposals that merit full business case development and for promotion to a final expert selection panel. 23 While I propose to use this competitive process, I also wish to conduct the investigation in such a way that the regions themselves (businesses, scientists and others) generate new thinking and actions around effective R&D collaboration for driving industry growth. This may lead to collaborations that stimulate other new opportunities and innovations within the regions. It will also set the stage for additional business case development from the regions that could draw down from the higher level of contingency funds set aside in years two and three for this initiative this is $10 million set aside for 2017-18 and another $10 million set aside for 2018-19. 24 I propose that MBIE use the following criteria to determine which proposals will be successful, in addition to financial commitment from industry. These six criteria are: 24.1 eligible regions for hosting an institute are only those outside the main population centres of Auckland, Wellington and Christchurch 24.2 new institutes must be established and maintained as private or private not-forprofit organisations with their own independent governance arrangements 24.3 new institutes must perform relevant research in support of industry-led efforts to increase their R&D intensity 24.4 new institutes should congregate and develop their own in-house expertise, but are also expected to facilitate and integrate researchers from other NZ institutions, or from overseas, into their mix of activity
24.5 new institutes are expected to bring new research activity into the regions whilst meeting industry demand in their host region and possibly across several regions due to the nature of their industry engagement 24.6 proposals for establishing (a) new institute(s) must make a clear business case that demonstrates ongoing financial sustainability beyond initial government support 25 Budget drawdowns from the funds set aside in contingency will be recommended to Cabinet only if and where business case developments from applicants are feasible and merit Government support. I will ask that MBIE officials report back to me regularly through their investigation, and I will report back to Cabinet in the first half of 2016 on the results of MBIE s findings and to seek approval for funding of recommended proposals, should any emerge. Risks 26 There are many policy interventions that seek to improve the impact of science investments and simultaneously enable growing rates of business R&D and innovation. I believe this approach to investigating the establishment of regional research institutes is complementary to these other interventions. If it were to eventuate that no specific industry drivers exist to establish the institutes in New Zealand over the near term, then the proposed levels of funding can either be stopped or reallocated to other initiatives that seek similar outcomes. 27 There has been some concern expressed through the consultation on the draft National Statement of Science Investment that our science system is overly complex. While introducing institutes into the system might seem to add to this level of complexity, I advise that if they were to be established, their proposed mission would be consistent with strong signals given in the National Statement of Science Investment which focus on greater connectivity, relevance and impact of science to key end-users and particularly to industry where commercial outcomes and economic growth can be accelerated. Consultation 28 The following departments and agencies were consulted on this paper: The Treasury, Ministry of Education, Ministry of Primary Industries, Ministry for the Environment, Department of Conservation, Ministry of Health, Ministry of Social Development, Ministry of Foreign Affairs and Trade, Te Puni Kokiri, Ministry of Pacific Island Affairs, Callaghan Innovation, New Zealand Trade and Enterprise, and Department of the Prime Minister and Cabinet. Financial Implications 29 This paper has no financial implications. Budget drawdowns from the funds set aside in contingency will be recommended to Cabinet only if and where business case developments from applicants are feasible and merit Government support. Other implications 30 This paper has no human rights, legislative, regulatory impact, business compliance cost, gender, or disability implications. Recommendations 32 The Minister of Science and Innovation recommends that the Committee:
32.1 Approve the proposed approach for investigating and determining the feasibility of establishing regional research institutes in New Zealand, which is: 32.1.1 Introductory workshops from August 2015 32.1.2 Registration of Interest in October-November 2015 to identify early-stage proposals from the regions 32.1.3 Business case development and recommendations from November 2015 to March 2016 for proposals that merit full development. 32.2 Approve my proposed high-level criteria for establishing regional research institutes in New Zealand, which are: 32.2.1 eligible regions for hosting an institute are only those outside the main population centres of Auckland, Wellington and Christchurch 32.2.2 new institutes must be established and maintained as private or private not-for-profit organisations with their own independent governance arrangements 32.2.3 new institutes must perform relevant research in support of industry-led efforts to increase their R&D intensity 32.2.4 new institutes should congregate and develop their own in-house expertise, but are also expected to facilitate and integrate researchers from other NZ institutions, or from overseas, into their mix of activity 32.2.5 new institutes are expected to bring new research activity into the regions whilst meeting industry demand in their host region and possibly across several regions due to the nature of their industry engagement 32.2.6 proposals for establishing (a) new institute(s) must make a clear business case that demonstrates ongoing financial sustainability beyond initial government support. 32.3 Agree to retain the tagged contingency for Regional Research Institutes established in Budget 2015 until September 2016 to enable detailed business case development prior to decision making on the results of investigations into potential regional research institutes. 33 I will report back to Cabinet in the first half of 2016 to seek approval for release of contingency funding to support any recommended proposals. Hon Steven Joyce Minister of Science and Innovation / /