• No results found

Analysis of the Institutional Setting for Biotechnology in Setting for Biotechnology in

In document the New Zealand Biotechnology Sector (Page 159-171)

Chapter 5 Analysis of the Institutional

the accumulated knowledge and the science and technology institutions which underpin innovation

iii. transfer factors

which strongly influence linkages and flows of information etc which are essential to innovation

iv. the innovation dynamo

dynamic factors shaping innovation at the level of the firm.

These four categories can be presented as a map; the innovation policy terrain (Figure 5.1) that highlights the main categories of factors affecting innovation and points to areas that need to be taken account of when formulating policies relating to innovation.

FRAMEWORK CONDITIONS The general conditions and institutions which set the range of opportunities for innovation

TRANSFER FACTORS Human, social and cultural factors influencing information transmission

to firms and learning by them

INNOVATION DYNAMO Dynamic factors shaping innovation

in firms

SCIENCE AND ENGINEERING BASE Science and technology institutions underpinning the

innovation dynamo

Note: Adapted by the author based on OECD(1997b)

Previous chapters have described and analysed different parts of the innovation policy terrain. Framework conditions for innovation and the science and engineering base were introduced in chapter 1, while chapters 4 and 6 present detailed analysis of the innovation dynamo (factors shaping innovation in firms) and transfer factors. This chapter brings these different strands together, and

Figure 5.1 The Innovation Policy Terrain

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

presents some additional information on framework conditions in order to assess the effect of institutional factors on innovation in New Zealand’s biotech sector.

The Oslo manual framework follows the Systems of Innovation (SI) approach (Freeman, 1987; Lundvall, 1992b; Nelson, 1993b). Central to this concept is the idea that the overall innovation performance of an economy depends not so much on how specific organisations perform but on how well they interact with each other. Systems of innovation have been analysed at several levels ranging from sectoral and enterprise specific innovation systems, to local, national, regional and global systems of innovation.

Bartholomew (1997) was perhaps the first author to refer to a national system of biotechnology innovation which she defined as “the specific institutional arrangements within a country which affect the generation of scientific knowledge relevant to biotechnology, and the diffusion of that knowledge throughout industry”.

Country specific factors in the development of the biotechnology industry have been extensively investigated often within an SI framework e.g. in Canada, Japan and Germany (Arundel & Rose, 1999; Fransman & Tanaka, 1995; Momma &

Sharp, 1999). Less work has been published on smaller or less developed economies with the exception of Fontes and Novais (1998) on Portugal, Rickne (2002) on Sweden and various authors (Janszen & Deganaars, 1998; van Geenhuizen, 1999) on the Netherlands.

This chapter makes use of interviews conducted in 2000 as part of a scoping study into the New Zealand biotech sector. The scoping study aimed to achieve an improved understanding of the New Zealand biotechnology sector with a particular focus on issues affecting innovation. Data collected in the study are reported directly in this chapter2, and were also used to facilitate design of the larger scale questionnaire survey conducted in 2002 (see chapter 6 and appendix 3). Senior members of ten leading firms and other organisations were

2 and in other publications e.g. Marsh (2000; 2001a; 2003)

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

interviewed using a semi-structured method that included a core list of standard questions and also addressed other issues of interest as they arose. All interviews were taped and fully transcribed. Quotations in this chapter refer to these transcripts and are referenced as interviews A-H in order to preserve the anonymity of the interviewees.


New Zealand’s Innovation System for Biotechnology

New Zealand’s innovation system for biotechnology is dominated by Crown Research Institutes and universities which rely on the government for the majority of their funding. Research and teaching in biotechnology is carried out in seven of New Zealand’s eight universities. Biotechnology research is also carried out at eight of the country’s nine Crown Research Institutes. Indeed this spread of activity has been argued to be a serious waste of resources by some who believe that it would be more efficient to concentrate biotech research into a smaller number of sites3.

Data from interviews with biotech industry representatives carried out as part of this study provide little evidence for the existence of a well functioning innovation system for biotechnology. Private firms did not place high importance on strong linkages with CRIs and universities. Universities and CRIs do not generally have particularly strong linkages; indeed the relationship is often more one of competition for scarce research funding. Nor is their much movement of staff between CRIs, universities and the private sector. Turnover at the CRI HortResearch was reported to be 3-5% per annum “there were limited cross-CRI transfers and just a few people moving on to universities or polytechnics” (Clark et al., 1999, p. 6).

3 Such views led the government to provide special funding of $10-$13 million per year for

‘Centres of Research Excellence’. The first seven centres were selected in 2002. Four work mainly within the field of biotechnology, a fifth (the New Zealand Institute of Mathematics and its Applications) has applications for biotech e.g. bio-engineering and bio-informatics (Royal Society of New Zealand, 2002) and http://www.rsnz.org/funding/core/.

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

Some private firms placed little emphasis on linkages in development of biotechnology innovation; others found few organisations worth linking with (perhaps because the use of modern biotechnology in New Zealand is so limited) and so concentrated on developing strategic alliances and joint ventures with overseas partners. Others felt that CRIs and universities have little to offer them:

“they operate on a completely different time horizon … the difference between commercial reality and university and government research is so wide that most people cannot understand that what they are doing never actually achieves a desired outcome” (interview C).

This view is supported by another biotech CEO quoted in Mazoyer (1999): “NZ does not have a broad range of public research agencies that are well inter-linked.

There may not be much cross-over into industry – in fact the public research system seems to operate in a sector of its own”. Opinion is divided as to whether it is the public research agencies which don’t meet the needs of the private sector or the private sector which has a limited ability to apply the results of publicly funded R&D or to evaluate opportunities (Winsley, Couchman, & Gilbertson, 1998, p. 61). It is not surprising then, that Mazoyer goes on to conclude that

“commercialisation is sometimes hindered by a lack of interaction between the science sector and manufacturers … [and that] more effective learning interactions and networking between scientists, public and private investors and users needs to be encouraged” (1999, pp. 6-7).

Modern biotechnology activity in New Zealand may perhaps be better described through the idea of ‘islands of excellence’. Leading edge work is carried out in a number of areas; but these islands of excellence tend to collaborate strongly with a small number of other organisations rather than being strongly connected to any wider innovation system. A good example is provided by the forestry industry where a small number of leading companies collaborated with the Forest Research Institute to promote research into forest biotechnology. A New Zealand company was able to develop the ability to genetically transform pine trees using a company scientist, a recent graduate with an MSc in biotechnology and email contact with a colleague in Canada (interview D). This is now an area where New Zealand based firms and scientists are at the forefront of technology. Arborgen,

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

one of the world’s leading forestry biotechnology companies is a joint venture between two huge US companies (International Paper and Westvaco Corporation) and three New Zealand companies (Fletcher Challenge Forests, Genesis and Carter Holt Harvey).

While New Zealand’s position in forestry genetics owes much to ‘industry pull’

the drivers of innovation in other areas are quite different. Scientists at AgResearch and the University of Otago perform world leading research in the field of sheep genetics where they are reported to have acquired “a very good base for driving forward in biotechnology [that was] … totally driven by scientists … irrespective of what the industry thought they needed” (interview F). A different model again is provided by Genesis, where research excellence at the University of Auckland Medical School seems to have played a key role. Jim Watson was head of the Department of Molecular Medicine before he used his understanding of signalling molecules to found Genesis Research and Development (interview B). Genesis has strong partnerships with three CRIs, Fonterra and six overseas companies4, however during its start-up phase, it could best be characterised as being part of the international innovation system for biotechnology rather than having particularly strong links with many New Zealand based institutions.


Framework Conditions for Innovation

Many of those interviewed for this study had serious concerns about New Zealand’s framework conditions for innovation. They focussed particularly on the lack of a pro-business environment, national attitudes to entrepreneurs and risk takers and the regulatory framework which has made New Zealand an expensive country in which to do business. One interviewee cited the increase in the top rate of income tax as an example of negative attitudes to business that has harmed their ability to recruit scientists internationally. He also expressed the opinion that

“we don’t like people being enterprising, we don’t admire people being rich [and]… if we don’t have an admiration for people taking risks and being successful then we won’t have innovation in biotechnology”.

4 See http://www.genesis.co.nz/partnerships.asp

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

Increasing levels of popular concern over the safety of some modern biotechnologies culminated in the setting up of the Royal Commission on Genetic Modification to inquire “into and report on the strategic options available to enable New Zealand to address genetic information now and in the future” (Royal Society of New Zealand, 2000). The Commission spent over NZ$6 million and 14 months listening to all sides of the debate before concluding “that New Zealand should keep its options open. It would be unwise to turn our back on the potential advantages on offer, but we should proceed carefully, minimising and managing risks” (Royal Commission on Genetic Modification, 2001, p. 2). In October 2001 the government announced its response to the Royal Commission report, including permission for field trials to restart and a two-year ban on commercial release of genetically modified products. In October 2003 the ban was lifted amidst much vocal public opposition from ‘GE Free’ lobby groups5.

Work on genetically modified and new organisms in New Zealand is controlled by the Hazardous Substances and New Organisms (HSNO) Act 1996 which aims to “protect the environment, and the health and safety of people and communities, by preventing or managing the adverse effects of hazardous substances and new organisms” (Environmental Risk Management Authority, 1999). Serious concerns have been expressed both about the degree of control and the associated delays:

“it can take 18 months to get approval from ERMA to do a piece of research … by the time you get approval to do it, it is a whole new world, literally”(interview A).

The University of Otago recently fell foul of ERMA regulations on “a very low risk project that in any other country would not require the approval of a regulatory authority” (Cassie, 2000). There are concerns that implementation of recommendations from the Royal Commission will make New Zealand’s regulatory regime even tighter.

On the positive side, research costs are estimated to be 40% below international levels (New Zealand Trade Development Board, 2000, p. 4). This and New Zealand’s rigorous border controls and relatively disease free status have been

5 This refers to groups who believe that New Zealand should be kept ‘free’ of all genetically modified organisms.

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

pushed heavily by BIOTENZ and the New Zealand Trade Development Board in an attempt to increase overseas funding of biotechnology activities in New Zealand.

Unfortunately these low research costs are a double-edged sword when it comes to attracting overseas talent and retaining top New Zealand scientists as illustrated by the following quote from a CRI manager: “We were recruiting a plant breeder.

We had a very good candidate from the US who we brought out here. We paid for him to come out. We said we don’t want you to come just for an interview, come for a week. You need to find out about us and we need to find out about you. He was our preferred candidate. We offered him between $5,000 - $10,000 more per annum starting salary. So we really wanted this person. But he converted his dollars back and said ‘No’” (Clark et al., 1999, p. 5).


Government Policy

Over the six years from 1984 to 1991 New Zealand engaged in “one of the most radical market liberalisation programmes initiated anywhere in the world”

(Massey, 1995, p. xii), “transforming New Zealand from the most to the least regulated economy in the OECD” (Hazeldine, 1998, p. 1). These non-interventionist, free market policies continued to dominate the New Zealand political scene until the election of a new Labour government in 1999. There have been neither large-scale policy interventions designed to increase R&D spending nor major funding initiatives to promote biotechnology6. Indeed government and industry only seem to have started taking a close interest in biotechnology in the last four to five years (interview F). However, the present government is taking a more interventionist approach to science policy through the Growth and Innovation Framework (GIF) and the creation of task forces and sectoral strategies (see section 4.1).

6 The current Labour Government has increased R&D spending in some areas and is promoting biotech through the New Zealand Biotechnology Strategy (Ministry of Research Science and Technology, 2003a), however neither of these initiatives are ‘large-policy interventions’

comparable to developments in many of New Zealand’s competitors.

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

New Zealand’s approach has until recently, contrasted strongly with some of its regional trading partners. In Australia, the federal government established two new agencies “to ensure Australia realises the potential gains being offered by biotechnology” (Biotechnology Australia, 2000). The Singapore Government has a strategy ‘to position Singapore as the strategic hub for the pharmaceutical, biotechnology and health care industry in Asia’ while Taiwan aims to develop into ‘an Asia-Pacific R&D Center’ and ‘an Asia-Pacific Manufacturing Center for high-tech products’. Taiwan currently spends NZ$200 million per year on biotech and is increasing its technology budget by 10-15% per year (Rolleston, 1999, p.


There is a significant level of dissatisfaction with government policy towards research, science and technology in New Zealand. Indeed Sommer (2001, p. 7) found that the 1996 and 2000 surveys of New Zealand scientists and technologists

“indicate a stunning level of dissonance over New Zealand science and technology policy reforms”. The statement “The management systems now in place are appropriate for the effective advancement of research,” evoked 69.8%

disagreement in 1996 and 70.9% in 2000. Similarly, the statement “The changes in the organization of New Zealand science over the past four years have enhanced my situation/conditions for performing innovative research,” was disagreed with by 70% of panellists in 2000.

More specific criticisms are that “the science reforms produced an over-emphasis on incremental innovation or technology and undermined the science base, leaving less time for research from which big new ideas could emerge” (quoted in Mazoyer, 1999, p. 9); and a “focus on small projects focussed on individuals has taken away the ability of CRIs to build future science capabilities”(interview A).

This is supported by Petersen (1998, p. 10) who suggests “there must be some mechanism that allows scientist to be kept on the payroll while alternative funding routes are worked out”. There is a serious brain drain of students completing PhD’s “because they are not prepared to spend the rest of their lives living from hand to mouth on short-term contracts”.

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

On a more positive note some interviewees found that government programmes to encourage technology transfer were useful. They attributed low uptake of these programmes to company culture and short termism. Others said accountability requirements were excessive (Mazoyer, 1999, p. 10).


R&D Funding

It has been known for some years that New Zealand’s expenditure on R&D is low relative to other OECD members. In 1996 New Zealand’s gross expenditure on R&D (GERD) was 0.98% compared to 2% or over for G7 and a group of small OECD countries (Engelbrecht & Darroch, 1999). Spending by New Zealand industry, as a % of GDP was 0.26% in 1995, far below the OECD average of 1.46% (OECD, 1999, p. 131).

Data from the R&D surveys conducted in 2000 and 2002 (Ministry of Research Science and Technology, 2002, 2003b) show some significant increases, leading some to hope that a long awaited shift in attitudes towards R&D is finally taking place7. Figures released by Statistics New Zealand indicate a 30% increase in private sector spending on R&D8, while GERD increased by 20% to 1.06% of GDP. However business expenditure on R&D (BERD) has been increasing in most OECD countries so a sustained period of above average growth in BERD will be required for New Zealand spending to reach the OECD average. While no comprehensive data are available on R&D expenditure on biotechnology9, it may be logical to assume that “if New Zealand is bad at doing R&D generally it would [expect to be] a whole lot worse in the biotech area” (interview B).

One factor that would be expected to affect the level of R&D expenditure by industry is the tax and incentive regime. In a recent review of the evidence on the effects of fiscal incentives for R&D, Hall and Van Reenen (2000, p. 449)

7 See ‘2002 R&D Stats Commentary’ at http://www.morst.govt.nz

8 Business expenditure on R&D (BERD) was 0.31%, 0.34% and 0.42% of GDP in 1998, 2000 and 2002.

9 See chapter 4 for a discussion of available data on biotech expenditure in New Zealand.

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

concluded that “in the current (imperfect) state of knowledge … a dollar in tax credit for R&D stimulates a dollar of additional R&D”.

All OECD countries except New Zealand have special tax schemes for R&D expenditures such as immediate write-off and various types of tax credit; indeed New Zealand came bottom of an OECD league table of the amount of tax subsidy for R&D (OECD, 1999, p. 135). In New Zealand, private sector expenditure of one dollar cost companies $1.13 after tax and compliance were included. This compared to 89 cents in Australia, 83 cents in Canada and 69 cents in Spain.

It has also been suggested that differences in national tax regimes may significantly bias reported levels of R&D expenditure. The negative treatment of such expenditures in New Zealand encourages under-reporting while the favourable treatment in other countries encourages widespread over-reporting.

Industry views appear to be somewhat polarised on whether the tax treatment of R&D spending has had a major effect on the level of expenditure in the private sector. Some large players saw this as a key influence: “the 150% tax rebate meant that you could do research for free in Australia and make money out of it

… it was a pretty favourable regime – nothing like that here” (interview B).

Others were more sceptical: “I have not seen results that suggest support of R&D delivers real commercial benefits” (interview C).

Difficulties in obtaining venture capital may also constrain start-up or expanding biotech firms in New Zealand, although some suggest “the lack of entrepreneurs who can build companies, rather than a shortage of money, is curtailing the development of new companies” (Springall, 2000). Until recently no venture capital appeared to be available for biotechnology and companies relied on traditional methods of funding. However there has recently been a marked increase in private sector funding. At a 1999 venture capital conference in Auckland one speaker concluded “New Zealand does not yet have a venture capital market. But we do have up to NZ$800 million in venture capital available for high-tech firms and another NZ$900 million already committed by 30 venture capital companies (Caragata, 2000)”. Overall venture capital investment in

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

Australia and New Zealand combined has increased sharply over the last three years with the health/bioscience category showing a huge increase from A$7.9 million in 1998 to A$81 million in 1999 (Australian Venture Capital Journal, 2000).

5.6 Conclusions

New Zealand has some ‘islands of excellence’ where world-leading biotechnology R&D is carried out. While most biotech activities build on existing strengths in primary industry (e.g. forestry, deer and sheep) there are also examples of innovative research in health and the creation of intellectual property. The factors that seem to have encouraged the emergence of world-leading research are diverse, ranging from strong basic science in medical research, and science push in sheep genomics, to industry pull in the case of forest biotechnology. Growth in these and other biotech-based sectors may be constrained by the poor performance of New Zealand’s National System of Innovation. The system is dominated by Crown Research Institutes and universities which rely on government for the majority of their funding. Leading edge work is carried out in certain areas, but this tends to involve links with a small number of organisations rather than strong connections to any wider system of innovation. There have been major changes to research, science and technology policy since the late 1980s, but it remains to be seen whether these will result in improved performance.

The New Zealand Government has only recently taken leadership in fostering innovation in modern biotechnology. Indeed government and industry only seem to have taken a close interest in biotechnology in the last four to five years. New Zealand has not made the kinds of large investment seen in Australia and some of its regional trading partners. Instead it has concentrated on science sector reforms and a free market oriented approach. New Zealand has the potential to demonstrate a new model for the development of a biotech industry based on comparative advantage in primary industry and some other niche areas. The jury is still out on whether New Zealand’s innovation environment will allow that potential to be achieved.

PhD Draft 2004 Rev3 Aug 27 Final.doc 30-Aug-04 1:04 PM

Chapter 6 Analysis of Factors Affecting

In document the New Zealand Biotechnology Sector (Page 159-171)