How do we improve New Zealand’s rate of economic growth? The late Sir Paul Callaghan argued that we need to shift from low productivity industries, like wine and tourism, to new high productivity industries, such as high tech manufacturing. If we could do this, the numbers tell us that we would lift our economic performance. So why don’t we just get on with it? What’s holding our economy back?
A recent study by economists and physicists at Harvard University has shed light on this by determining the relationships between the types of products that countries export. By looking for products that tend to be exported together, the Harvard group has mapped the interdependence of industries by their tendency to coexist in the same countries. Their map shows that clusters of industries exist in sectors like electronics, chemicals and medical products, and industrial machinery. However, there is little industry clustering around primary sector products like coal, minerals or meat. The lack of clustering around these commodity industries shows why it has been difficult for New Zealand to diversify from its primary sector base.
One of the difficulties comes from the lack of incentives for entrepreneurs to try the truly novel. When an entrepreneur or firm starts producing new product, it is form of experiment. If the new product is not success, the firm will withdraw it from the market, or maybe even go bankrupt. If the product sells profitably, however, the innovative firm may do quite well for while, but eventually other firms or entrepreneurs will notice and play copy-cat. The first mover bears all the risk of launching the new product, but does not necessarily reap all the benefits. This reduces the incentives for firms to experiment.
The transistor was invented at Bell Labs in 1947, but it was not commercialised until one of its inventors, William Shockley, left to found Shockley Semiconductor Laboratory in the San Francisco Bay area. In the end, Shockley’s lab floundered as his employees left to found their own firms and it is these later entrants that dominate the market today. While Shockley and his investors bore much of the risk for establishing the semiconductor industry in California, it was later arrivals like Fairchild and Intel that reaped much of the benefit.
While patents reduce some of the risks associated with being first mover, Shockley’s discovery that the San Francisco Bay area was great place to found the semiconductor industry is not something that is subject to intellectual property law. In the end, even Silicon Valley needed the support of the US government to become success. The appetite of the Apollo space programme and the US military for transistors drove down the cost of production until they were cheap enough to be incorporated into consumer products for the general public.
Despite these difficulties, the successes of companies like Fisher & Paykel Healthcare show that we can learn new tricks when we put our minds to it. Forty years ago, an Auckland doctor identified need for humidified air for his intensive care patients, and took his problem to an engineer at the Department of Scientific and Industrial Research. The engineer put together humidifier from an Agee jar and sent it over to Fisher & Paykel, which went on to discover that Auckland was great place to build respiratory humidifiers.
As Sir Paul used to say, we will be good at what we are good at. And at the moment, we need to discover whole lot more of what we are good at. The data shows that this is unlikely to happen if we focus on our traditional strengths in farming and tourism. Instead, New Zealand needs to experiment more, by trying new things. What are we waiting for?
Professor Shaun Hendy, Victoria University of Wellington, was chosen by Sir Paul Callaghan to continue his writing on innovation, and has been honoured for his work and commentary on the links between science, technology and economic prosperity. He will be speaking at MindStorm on 18 April on the links between science, technology and economic prosperity. Visit mindstorm.co.nz for more information.
