Universities are key to addressing New Zealand’s productivity gap

The context for addressing New Zealand’s long-standing productivity challenge is more complex than ever. Climate change, social inequalities, digital disruptions: the issues are indeed many and huge. Then along comes Covid-19, forcing an abrupt and uncomfortable disruption to our lives but also offering a tremendous opportunity to rethink why we do things the way we do.

It is against this backdrop that the government-convened Productivity Commission is undertaking its current inquiry into the economic contribution of so-called “frontier firms”, defined as being the most productive companies in their particular industry globally and generally also more profitable and innovative. The draft commission paper, published in December, concludes that more frontier firms are key to lifting New Zealand’s productivity, and that a better functioning innovation ecosystem is, in turn, key to growing more successful frontier firms.

It is no earth-shattering finding that New Zealand’s innovation ecosystem is relatively weak and that this partly explains the scarcity and limited scale of our frontier firms – as well as our low and declining ranking in global innovation indices and measures of productivity. We know what constitutes a well-functioning innovation ecosystem, and we also know that New Zealand lags because we have been less willing that other small advanced economies to invest big and long-term; our R&D spending sits at 1.4 per cent of GDP, compared with about 3 per cent in countries such as Sweden, Denmark, Finland and Switzerland. Moreover, New Zealand has failed to diversify its economy and grow the high-value industries needed to underpin a transition to a truly knowledge-based economy.

Rising to today’s challenges and building a low-emission, sustainable, innovation-based economy for the 21^st century relies on the efforts of many. As a university, we are acutely aware of our share of the responsibility, alongside policymakers, business leaders and the wider community. We supply two of the key ingredients for productive and competitive economies. We generate knowledge and ideas that underpin ground-breaking innovations. And we educate highly skilled people.

This educative role deserves a lot more attention in discussions about New Zealand’s productivity gap and its relative lack of frontier firms. Ample international research evidence attests that research-based education is linked to growth and productivity through innovation at both the firm and macro level. University-trained employees enhance the ability of firms to absorb new technologies and create innovations. Not to mention, of course, entrepreneurial graduates who start their own knowledge-rich and innovation-based businesses.

It is our experience that almost all of our successful start-up companies and licenses owe their birth and continued success to PhD students. And yet while participation in tertiary education is high in New Zealand, our graduates have lower degree levels, on average, than those of other small advanced countries. The comparative statistics on postgraduate study are revealing; only 5 per cent of New Zealand adults have a master’s degree, compared with the OECD average of 13 per cent. Thus, although the Productivity Commission’s draft report suggests New Zealanders are well educated, this is certainly not the case at the crucial top end of the educational pyramid.

New Zealand has attempted to fill the skills gap by attracting highly skilled migrants and entrepreneurs from overseas. However, as a recent report by the New Zealand Institute of Economic Research to the Productivity Commission found, our productivity is still low despite high migration – perhaps because, as the report concludes, “relatively few top-tier skilled migrants and entrepreneurs with global ambitions are looking to move to a small country a long way from the centres of the international economy”.

Perhaps that may change in the wake of Covid-19, given New Zealand’s success in containing the virus. But rival countries may double down on their own efforts to attract talent as part of their economic recovery plans. This suggests that we must, first and foremost, invest in our own talent in New Zealand. And that means a much larger investment in and role for advanced level tertiary education.

Nurturing talent is a well-established pathway to building a prosperous society. And such a society, in turn, will be better able to offer such great career and life opportunities that more of our most talented kiwis will decide to pursue their productive careers here rather than overseas.

Dawn Freshwater is vice-chancellor of the University of Auckland.