Thursday, 6 September 2001 [1.15pm] Hon Pete Hodgson Speech Notes

[Address to Canterbury Manufacturers' Association conference, Christchurch]

You've asked me to talk about how government sets the policy environment for manufacturing to flourish.

That's an intelligently phrased topic and I appreciate the invitation.

It's intelligently phrased because it implicitly recognises both the responsibility and the limitations of government. We are responsible for public policy. But we cannot make manufacturing - or any other sector - flourish. Entrepreneurship and innovation are largely up to you.

I think there is a growing awareness of the need for New Zealand Inc to lift its game. It showed up strongly at the Knowledge Wave conference last month and it frequently shows up at conferences like this one.

You are right to ask what the government's contribution is. And there has been a significant shift, with the arrival of this government, in the Beehive's approach to economic development.

We believe in taking a smart, active role. We believe in sticking to our promises, so you know what to expect of us. We believe that a smart, active role means building partnerships with the private sector. It means being a facilitator, a broker, and occasionally a funder.

Economically, New Zealand is doing okay at present, while much of the developed world is in or heading towards a slump. Canterbury, in particular, is doing well.

But my central message to you today is that as a nation we need to do better, we can do better, and we will do better when we transform our economy by making more room for innovation and entrepreneurship to thrive.

Some recent economic data serves to remind us that we're in reasonable shape economically.

Unemployment is at a 13-year low and full-time employment in the June quarter was up 3.2 percent on last year.

Tourism is now measured by Statistics New Zealand as a $13.2 billion dollar industry. It makes up almost 10 percent of New Zealand's GDP and directly employs more than 94,000 people.

The trade balance is showing a stable surplus, with exports in July up 20 percent on the previous year and import growth more modest at 9.5 percent.

Seasonally adjusted building consents were up 9 percent in the June quarter. Retail sales rose 2.3 percent in the quarter and 6.9 percent in the year to June.

The current account deficit is projected to shrink to around 3.3 percent of GDP by 2005. That is still high, but it is a lot better than it has been for many years.

New Zealand is now back on a stable AA+ credit rating and consumer and business confidence are both in positive territory.

Finally amongst the good news, the government is running an operating surplus. It is projected at over one percent of GDP this financial year, rising by roughly half a percent of GDP a year for the years after that.

That's a pretty good picture at the national level. And Canterbury is contributing strongly to that, showing the signs of an export-led recovery ¡X as your own association has reported.

Increased export volumes and value, a favourable exchange rate and strong returns in the rural sector are working well for you. Business confidence here is increasing steadily.

I note that nearly two thirds of the businesses in your July survey reported an improvement in profitability over July last year. The same was true in June.

The expectations of growth shown up in the survey are also encouraging, with about half the respondents expecting to increase their investment in plant, equipment and people.

While the ICT sector internationally is suffering a major slump, Canterbury's ICT businesses seem to be weathering the storm pretty well so far.

Of course it's not all roses: it never is. Some businesses in the region are experiencing flat domestic sales and the exchange rate is, as usual a double-edged sword. Manufacturers with high import content are feeling the effect of that. And the global economic slowdown is a continuing source of uncertainty for many of you.

But on balance we have good reasons to be positive about New Zealand's economic position, positive about the Canterbury regional economy and positive about the place of manufacturing in the region.

You have a strong local business support network here, including this association, the Chamber of Commerce and the Canterbury Development Corporation.

The challenge for us all is to keep moving, to keep looking for the next improvement ¡X whether to public policy, business management, technology, human resource management, or whatever ¡X that is going to enhance New Zealand's competitiveness and productivity.

We are taking a "whole of government" approach to this challenge, looking for a coordinated response from the various departments, ministries and agencies at our disposal.

Back in April Jim Anderton convened a manufacturing sector steering group at Vogel House to talk with manufacturers about what the Government can do to make it easier for you to operate. Some of you may have been there. (Note: A number of Canterbury manufacturers were there, notably Robert Stewart of Skope.)

The decision to call this group together followed the successful work of the Wood Processing Industry Steering Group, which is developing a strategy for the wood processing industry.

The manufacturing group identified some crucial ingredients for manufacturing success that are too often causing difficulty ¡X notably skills and training, access to capital, and retaining and attracting talented people.

These issues are not specific to the manufacturing sector. They are fundamental concerns for all businesses, and there already a number of government initiatives under way to address them ¡X the Modern Apprenticeship Programme, the Venture Investment Fund and the Technology for Industry Fellowships, to mention just three.

I rather suspect the diversity of manufacturing is such that we may have to work with more specific product groups to identify more specific barriers and opportunities. I expect this will be discussed at the next manufacturing sector steering group meeting on 17 September ¡X along with an attempt to identify a vision for manufacturing, and three or four key things government and manufacturers could do quickly to make a positive difference to growth in the sector.

Taking the wider view, the Knowledge Wave conference at the beginning of last month threw up some challenging ideas about where to go next in the quest to lift New Zealand's economic performance across the board.

One of the key contributions came from the Prime Minister's Science and Innovation Advisory Council ¡X a first-rate bunch of thinkers and doers that includes two of Canterbury's finest, Vicki Buck and Sir Angus Tait.

When the PM set up the council last year she asked them to identify and address barriers to the transformation of New Zealand into a knowledge society. They have responded with two reports they presented to the Knowledge Wave conference: an Innovation Report Card, summarising the current state of play, and an Innovation Framework, which sets out seven key challenges for the future.

So how are we doing?

The SIAC Innovation Report Card noted that we have very good participation rates in early childhood and tertiary education, but a wide range between high and low achievers.

Adult prose literacy is high, but the levels of document and quantitative literacy are lower. The analytical and critical thinking skills of primary age students are less advanced than their ability to observe and retain facts.

We have relatively good government R&D investment, but private sector investment is a third of that in Australia. We also have a low rate of commercialising innovation, suggesting a need to improve the relationship between our research institutions and businesses.

We have a good banking and financial infrastructure and a relatively new but fast-growing venture capital sector.

We are big spenders, as a nation, on information and communication technology compared to other developed nations.

We enjoy and celebrate success, particularly in sport ¡X but perhaps not quite enough in commerce and enterprise.

The summary: lots of potential, but we can do better.

So how do we make the necessary improvement?

The advisory council identified seven key challenges in its innovation framework:

- To reward the “can-do’ attitude, risk taking and success;

- To educate for a knowledge economy;

- To become a magnet nation for talent;

- To generate wealth from ideas and knowledge;

- To excel globally, putting aside parochial and sectoral concerns to compete internationally;

- To network, collaborate and cluster; and

- To take an investment-driven approach to government.

For each of those challenges the council has identified some key goals and bold moves we could take towards achieving them. Some of those moves are for the private sector, some for the public sector and many would require a partnership between the two.

Some of the moves are already being made.

The government is setting out to lead change from the top, for example. We are making a concerted effort to communicate the importance of innovation and economic transformation to all New Zealanders.

We are working to clear more space for small businesses to grow, with initiatives like the tax simplification and compliance cost reduction programmes.

In education we are piloting four new information and communications technology programmes at secondary level. We're working towards the creation of centres of excellence in our universities.

We are setting out to make better use of the diaspora of New Zealanders abroad, with a "brain gain" project called World Class New Zealanders that is building an international network of talented kiwis.

We are taking an investment approach to public science spending, and funding more basic and strategic research with high value-added applications. And we have significantly improved the tax treatment of private sector R&D, as well as providing grants to support it.

There are other initiatives in the innovation framework on which we are already moving, but that is not the main point. I am not trying to claim that the Government is already doing everything that should be done.

The main point of a document like the innovation framework is that it emphasises there is still much we can do to take charge of our economic and social development.

I was involved in the organisation of the Knowledge Wave and I am involved in the follow-up, because the government and other organisers are determined to build on the momentum for change that the conference created.

You may have picked up the news that a Knowledge Wave Trust has been formed to carry on the work. It will be monitoring progress on the recommendations from the conference, producing new studies and commentaries and providing research, and promoting public awareness of the issues. It will also identify and initiate a series of projects, by the Trust or by business and community organisation partners, focussed on key economic, education, social and environmental areas.

The Knowledge Wave discussions produced recommendations in the areas of people and capability, innovation and creativity, entrepreneurship, sustainable economic strategies, and social cohesion and the knowledge divide.

There was a strong emphasis on the importance of science, and as the science minister I want to talk a little about that.

This Government recognises the need to invest in research, science and technology. But we also realise that research in itself is not enough to foster a knowledge economy. We know that New Zealand science is good. But we know also that its commercialisation is poor.

To succeed we need to create an overall environment where innovation can thrive. We have the brains, talent, the education and research organisations in New Zealand, but we haven’t been as successful as we need to be in private sector involvement and commercialisation of our good ideas.

I have mentioned our efforts to encourage growth in private sector R&D, which is low by international standards, with supporting grants and improved tax treatment. It is vital that we increase the level of commitment to science in the business sector and increase the level of R&D management expertise.

Increased funding for Technology New Zealand and the establishment of the business incubator support programme are part of that picture. So is the New Zealand Venture Investment Fund, which I mentioned earlier.

We will be co-investing the $100 million in this fund with private sector partners in seed-stage and start-up New Zealand businesses. They will be businesses based on technology or high value-added goods and services. I expect many of them will be businesses that share your association's aim of "making things better".

The aim of the fund is to accelerate the development of the venture capital market in New Zealand. Note that word accelerate, because acceleration is the key idea.

Venture capital has been growing rapidly in New Zealand in the last couple of years or so. At the Knowledge Wave conference Scott Perkins of Deutsche Bank estimated the size of the current venture capital pool at $794 million. But there is general agreement that it's still shallow at the seed and start-up end of the spectrum.

Development of the human resource is ultimately more important than the money. New Zealand needs more people with the expert knowledge to manage the venture capital funding that is essential for turning bright ideas into new businesses.

I believe New Zealand has a good base from which to pursue innovation success. New Zealanders are bursting with bright ideas and with great business potential. We possess natural advantages and a can-do attitude that older economies find hard to harness.

The first change we have to make is to get serious about innovation and succeeding as knowledge-based society. Then we need to take some bold steps. As a government I believe we are providing the right environment to do that. I think the Venture investment Fund is one of those bold steps. I think the realignment of our tertiary education system will come to be seen as another.

Maybe some of you have some original, bold steps of your own in mind ¡X for your industry or for government. I'd like to hear them.

Ten bucks for the first one that doesn't involve cutting taxes.

Ends

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