Innovation will be tough without Marsden funding

The National Party is prioritising economic growth through innovation. This makes it surprising that their recent changes to research funding will create a formidable barrier to innovation in this country.

What is the connection between research and innovation? Innovations are novel ideas implemented to meet practical needs. A supply of new ideas is therefore obviously central to innovation, and research is a critical source of new ideas. The role of research in creating these new ideas can be thought of in two steps.

First, there is basic (or ‘blue-skies’ as the Government refers to it) research. This doesn’t focus on anticipated societal use – it simply seeks to find truly novel things. In this way it makes previously unimaginable advances, which drive the truly novel innovations.

Applied research then picks up the threads of these blue-skies research ideas and helps translate them into actual innovations. In reality, blue-skies and applied research form a highly interdependent network rather than a pathway, and both are needed to create innovations and improve productivity, as is well-known both here and internationally.

Government investment in blue-skies research is needed to drive innovation because of its critical role in kick-starting the novel ideas that lead to innovations. China, for example, has deliberately engaged in a policy of supporting blue-skies research to help build an innovation economy.

However, the Government has changed the focus of the only blue-skies research fund in this country, the Marsden Fund, so that it now only funds applied research (with humanities and social sciences research funding removed completely).

It is perplexing that the Government would remove a key driver for innovations, as noted by former Productivity Commission Chair Ganesh Nana, particularly because blue-skies research is already underfunded. Possibly it doesn’t understand the role of blue-skies research in innovations – instead it thinks only applied research is necessary and blue-skies research is frivolous. This is suggested by the language announcing the changes, e.g., that research must focus on ‘science with a purpose‘.

A more charitable explanation is the Government recognises the value of blue-skies research, but thinks that, rather than investing ourselves, we can just pinch advances made in other countries. However, it’s difficult to imagine many countries making blue-skies breakthroughs and then ignoring their innovation potential, and more fundamentally ignoring the interdependent nature of blue-skies and applied research.

Whatever the reason, this change flies in the face of what is known and what other countries are doing; the Government is taking a massive gamble by hoping everyone is wrong that domestic blue-skies research is necessary for an innovation-based economy (a risk alluded to in New Zealand’s recent Science System Advisory Group Report and specifically pointed out by Ganesh Nana).

The changes are also perplexing because they contradict the Government’s ideology. Could you imagine the Government directing, say, Fonterra to sell some things and not others, and to focus on selling existing products rather than developing really novel ones? And could you imagine Act rushing to praise such a move? Yet, in the research space this is exactly what has happened – the funding changes create a kind of ‘tariff’ that distorts what research can be done, thus limiting the innovations that can be generated.

We need the Government to fund blue-skies research, as Richard Nelson outlined in his classic 1959 paper, because the private sector cannot capture the value produced by blue-skies research. What benefits blue-skies research provides, and over what timescales those benefits accrue, vary wildly and unpredictably. Instead of cutting blue-skies research, the Government should, when funding it, employ two measures that will help stimulate innovations and drive New Zealand’s economy.

The first is to give researchers the freedom to operate without distortionary constraints, like being obliged to focus on particular areas or styles of research, so the best ideas come through. And, the best way to do this is to double down on the original Marsden concept (originally created by National in 1994) by taking a venture capital mindset.

In his book, The Power Law, financial historian Sebastian Mallaby captures the way venture capitalism has repeatedly shown that when uncertainty is high but successes are richly rewarded, a high risk-high reward strategy gives the best returns.

These are precisely the conditions of basic research – most basic research won’t lead to innovations, but the rare successes, which cannot be predicted, have enormous impacts that make investment worthwhile. Having a venture capital mindset will enable us to overcome our pathological aversion to risk by accepting the ‘failures’ (which aren’t really failures as they grow research expertise and ideas that fuel future innovations).

The second is the Government should implement a relentless policy of talent attraction. Talented researchers have the drive and ability to make major advances – in blue-skies research, in applied research, and in entrepreneurship.

As Vannevar Bush said in his famous 1945 report on science to the US government, “Basic scientific research is scientific capital”. We need changes that will increase scientific capital so we can drive real innovations.