How_Does_the_National_Innovation_System_in_New_Zealand_Support_the_Growth_of_Business_and_New_Ventures

SCIGEN 201 ASSIGNMENT Michael Wade, San Ly, Edmond Teoh, Zeus Engineer New Zealand has generally had a labour and capital based strategy to stimulate economic and production growth. Its innovation system has been shaped by the country’s geographic location, its business structure and its focus on exploiting natural resources [8]. More recently though, it has moved towards a knowledge based economy [1] where the diffusion of knowledge, innovative thinking and the commercialisation of creative and marketable ideas are more important. A problem encountered in New Zealand is that there are many innovative and creative ideas which are not being utilised to start up new ventures [11]. The government introduced organisations helping entrepreneurs to establish new companies and assisting small ventures to grow and pursue research and development. These organisations are referred to as incubators. The purpose of incubators is to aid this transfer of knowledge, from those who possess experience in the field, to those attempting to make use of their creative ideas. They seek to maximise the potential of entrepreneurial actors with services and support that complement their existing talents and resources, which in turn is meant to enable them to expand their potential [2]. They are the link between a potentially marketable idea and the commercialisation of this idea. In this paper, we will discuss how incubators work, the effect they are having on the National System of Innovation in New Zealand, and the role that incubators play in supporting private firms to pursue innovation and research commercialisation. Incubators originated in Batavia, New York in 1959[7]. One of its first clients was said to be a poultry producer - hence the term ‘incubators’ [7]. They protect and facilitate business development in the earliest, most critical stages [10]. The National Business Incubator Association believes their purpose is to help the development and transfer of new technology [6]. The focus is on: linking talent, technology, capital, and know-how to leverage entrepreneurial talent; accelerating the development of new technology-based firms; and aiding the commercialization of technology [6]. The majority of incubators are connected to institutions such as universities, research institutes and governmental organizations [6]. Incubators offer many services to the budding entrepreneur, from business advice, to providing facilities at a relatively cheap rate [9]. The initiation of a contact network can be challenging and incubators offer support, helping the new venture on its way to independence [9]. They act like a development tool for young businesses [12]. Incubators are established to do much more than simply assist new businesses in the critical start-up phase. They are established to facilitate economic development in the regions or industries they serve [13]. The government encourages this to help stimulate the economy as these spin-outs provide employment, contribute to exports and contribute to the development of technology [6][16]. These spin-outs experience a simplified business environment thanks to the incubators, which reduces their concerns/anxiety when they venture out into the market [17]. Incubators have been shown to improve the long term survival rate and growth of graduate ventures [14] [15]. Incubators act as the link between start-ups and other partners that provide valuable resources and thus perform a bridging function with this network [9]. This helps to instil shared values, providing a benchmark against which the entrepreneurs can measure the challenges they face [14]. The incubator networks also reduce development costs [14] by enabling them to share resources such as equipment, facilities and knowledge. However not all spin outs from incubation are highly successful in the open market [11]. “While company tenants have the potential to be ‘high growth' companies, the majority of company exits surveyed have not recorded the expected high growth outcomes” [12]. Most are relatively new firms (less than five years old) with new products and a business profile that is still in early stages of gaining recognition in the market [11]. Incubators in New Zealand are mainly funded by New Zealand Trade and Enterprise with the rest coming from private investors [20]. But the majority of incubators have plans to become financially independent thereby reducing reliance on such funding. This benefits the innovation system by allowing the government to focus on the less successful incubators to help improve their performance [12]. Managers of the New Zealand incubators believe they are unable to be truly independent of the government because “the pursuit of financially viable incubators precludes a focus on social outcomes, such as employment generation and cultivation of an entrepreneurial climate [12].” In the process of becoming financially independent, “incubators would have to focus on particular sectors, where the risks are better understood, i.e. IT, electronics industries [12]” reducing support for the more risky sectors. Also, financial independence of incubators is non-viable in New Zealand, given a small population base and lack of well-capitalised start-up businesses [12]. Another reason for this is that if an incubator decided to charge market rates for facilities (as opposed to discounted rates), the start-ups may be challenged to generate the revenue necessary to pay for these, thus an incubator focused on being financially viable could result in tenanting established businesses, as opposed to starting up firms [12]. New Zealand is known to be one of the most entrepreneurial countries in the world [4] and has one of the most liberalised economies in the world today [3]. This and other beneficial features being noted [3], we would expect to New Zealand to have a high level of innovation. However it is ranked 27th in the world in terms of innovative performance, which is the fourth lowest ranking for any advanced economy, and is much below the OECD and EU average [5]. Experts believe that small and large firms have the highest propensity to innovate [19]. 50% of the total business research and development in New Zealand originates from firms with less than 50 employees and about 80% is accounted for by firms with less than 250 employees [5]. This is twice as high as the next highest country, Australia [5]. Compared to thresholds set out by the European Commission and the Small Business Administration (USA), the vast majority of New Zealand’s businesses “are therefore actually micro or nano firms, rather than small or medium sized firms [5].” In fact, on these definitions, very few firms in New Zealand would even be classed as medium sized firms in the USA. A few firms eventually reach a stage where they are unable to expand, simply due to the size of the New Zealand market [8]. Though incubation helps in establishing international networks, New Zealand’s geographical isolation is a disadvantage for local firms aiming to expand [8]. New Zealand’s nearest market is 2500km away in Australia and only accounts for 20 million people in total [5]. International exports require tremendous amount of effort for it to be successful and hence it is very difficult to compete in overseas markets. “Incubation programmes have been seen as a key economic transformation by New Zealand business communities [19].” This can be seen from the survival rate of firms leaving incubation compared to companies starting their own business by themselves. In 2009, 87.1% of companies leaving incubation are reported to be in operation even after 2 years graduation from incubation, showing a high survival rate compare to just 69% of companies surviving on their own [18]. In another context, it is shown that NZ incubators are having higher survival rate as compared other countries, for example Germany which only has a 61.4% survival rate of companies coming out of incubation[11]. * Of all the funding given to the R&D sector, 65% of it is provided by the government, which is approximately NZ$ 743 million in 2009/2010[1].