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Risk versus Reward – the business case for investing in R&D

By Vic Crone, CEO Callaghan Innovation
There’s a strong case to be made for New Zealand businesses to boost their investment in research and development (R&D).

The upside of undertaking R&D can include creating new or improved products and services, valuable IP, opportunities for collaboration and knowledge transfer, increased productivity, commercial spinoffs, competitive advantage…the list of ’pros’ is extensive.

In fact, a 2017 review of economic studies around the world found the long-term payback on R&D is in the order of 20 percent a year. Data collated from UNESCO, World Bank and OECD also shows a strong positive correlation between national spending on R&D, patent applications and economic growth.
Vic Crone

Risk versus Reward – the business case for investing in R&D

If R&D is a good bet for business, then why does New Zealand have one of the lowest rates of total R&D spend in the OECD, driven by one of the lowest shares of private business contributions to R&D?

We are still falling well short of our Government’s target for R&D spend to reach 2 percent of GDP by 2027 (it’s currently at 1.37 percent of GDP). New Zealand currently lags well behind many other countries in this regard – including Israel (4.25), Korea (4.23), Sweden (3.25), Switzerland (3.37), Japan (3.14), Austria (3.09), and the United States (2.74).

It’s not all doom and gloom. As a nation we have made some progress in recent years. Total spending on R&D for all sectors – including business, government and higher education expenditure – was $3.9 billion in 2018. An increase of $757 million in two years. There’s evidence these are real increases that are not just driven by rising R&D costs: New Zealand now has 23,000 FTE R&D workers, up 17% from 2016.

The issue is that our businesses are just not investing as much time and resource in R&D as other countries. Why? The reason seems to be that many Kiwi companies fear the risk of undertaking R&D.

Overcoming a fear of risk

By definition, R&D is uncertain. It aims to discover something new or solve unanswered questions. R&D also costs money – another ’con’. Risk exists because there is no guaranteed return on investment (ROI) for a business that spends money on R&D.

All of which explains why the Government has introduced the R&D Tax Incentive (RDTI), providing businesses with a 15% tax credit on all eligible R&D spending between $50,000 and $120 million. For businesses that qualify, it reduces some of the risk of R&D by offsetting some of the R&D costs it incurs.

The Government has committed to invest $1 billion into the RDTI over the next four years. The RDTI joins a package of Government R&D funding supports that are already in place.

These include the Getting Started, Project and Student Grants that our Callaghan Innovation sector teams deliver to help growing companies on their R&D journey. Our grants can be claimed alongside the RDTI, just not for the same R&D expenditure; enabling businesses to undertake more R&D.

Re-evaluate your commitment to R&D

R&D offers a long list of compelling benefits that can help your business innovate and grow. Strong evidence points to a high payback on your R&D investment in the long term. With the RDTI heralding greater access to Government R&D funding support for a wider range of New Zealand businesses, it seems there is no better time to overcome the fear of conducting R&D.

Businesses are encouraged to re-evaluate how much of their annual budget they commit to R&D in the coming year. Now, more than ever before, the rewards can well outweigh the risk.
Vic Crone is CallaghanInnovation’s CEO
Email:
vic.crone@callaghaninnovation.govt.nz