New Zealand prides itself on being competitive in the sporting arena and it’s fair to say Kiwis punch above their weight in many sporting codes – and lead the world in a few.
But there’s one race where we are well back in the field and slipping further and further from the pacesetters, despite what we think are our best efforts – the innovation race.
New Zealand has a proud record in this area; a history of developing devices on farms and in engineering workshops with good old number-eight wire and determination.
However, the world is full of creative, intelligent and connected people solving problems – all without a strand of number-eight wire in sight. We must stop patting ourselves on the back for our dogged self-determination and get smarter about how we launch ourselves onto the international stage.
The lifeblood of innovation is research and development and the global stats don’t lie. The Government and Callaghan Innovation recently lauded Kiwi businesses that R&D expenditure was up 29% - but that’s a misleading stat. It’s heading in the right direction but is off a very low base.
A scan of the comparative spend of countries on R&D as a percentage of GDP shows we spend an average of 1.3% of revenue on R&D. Australia and China spend over 2%, the US over 2.5%, Denmark, Finland and Sweden 3%, Japan 3.5%, Israel over 4% and Korea 4.2%. The OECD average is 2.4%. We’re well out of medal contention.
Thankfully, some NZ companies put their money where their mouths are: Tait Communications spends 15% of revenue on R&D; Fisher and Paykel Healthcare spends 10%. But as a rule, our innovating companies aren’t investing enough in R&D, and even when they do they don’t take any steps to stop their competitors from benefiting from their progress.
Businesses are very good at valuing their tangible assets – equipment, land, buildings, stock and so on. But they aren’t so sharp in protecting or leveraging the value of their intangible ones – the brands, inventions, and know-how. In terms of pure business value, 87% of the value of Standard & Poors 500 companies in 2015 was in their intangibles, up from 17% in 1975.
But how can you justify spending on R&D if the results can then be copied by your competitor because you have not controlled the IP? If you are not seeking IP protection, then you are simply funding your competitors’ R&D. Hoping to be the first to market, and then running as fast as possible to keep ahead of the pack, is a naïve approach that can rarely be successful except for the largest or luckiest companies.
Common reasons for not filing patent applications are that they cost too much and are too hard to enforce. That’s a bit like building a house (R&D expenditure) and then not installing a front door (patent costs) because doors cost too much and a savvy burglar will always find a way in anyway. It’s a false economy - spending all that money on R&D and then not having any control of it is like opening your house up to anybody to use anytime and hoping you can find a place to lie down at the end of the day.
Most businesses don’t intentionally infringe patents but they do set out to copy ideas that have not been protected. Having a patent portfolio is a significant deterrent.
A patent portfolio also enables you to expand into markets that you were not looking to export products into. It can be easier to export the technology itself through licensing, rather than export the products that embody that technology.
The problem with not controlling your IP is not only are your best ideas being copied, but your competitors are also filing their own patents and restricting your freedom to operate (FTO).
Companies can invest heavily to establish a “path to market” overseas, but there’s a risk that money will be wasted without knowing the IP landscape there. They may be firmly told to stop – that they’re infringing on the rights of an existing IP-holder.
The leading patent-filing companies are found in the high-tech sector, with IBM heading the list at a rate of about 8000 per year. Trailing IBM are Samsung, Qualcomm, Toshiba, Sony, GE, Apple, Fujitsu, Microsoft, Toyota, Google, Panasonic, LG Electronics, Seiko Epson, Ford, Huawei and Hyundai. High-tech companies all the way – and not a piece of number-eight wire in sight.
China is on an astonishing charge in the innovation race. The concept of China as a place that only manufactures others’ products and inventions is a thing of the past. Its Government has poured funds into the R&D sector to expunge that image, and commentators expect Chinese patent numbers to soon pass those of the US and Europe.
Here’s an interesting stat – with a bit of a warning for NZ companies: over 80% of patent filings in NZ are by overseas companies, and the number is increasing. Shoring up their intellectual property in our market. Smart. On the other hand, patent applications filed by Kiwi inventors are falling at an alarming rate. Between 2012 and 2016 patent applications filed in New Zealand by Kiwis fell by 43%. This is a great shame. The patent system is perfect for New Zealand innovators; it allows us to overcome the tyranny of distance and export technology rather than the products that embody that technology.
New Zealand innovators need to resist patting themselves on the back for turning a great idea into a product. A healthy level of R&D spend is just the start; you also need to shore up your IP – here, and where you want to market abroad.
You also need to make sure the path to market - how you get your product to the consumer - is clear; and central to that is your legal freedom to operate. Professional advice and support has a cost, but the risks involve much greater sums of money and the returns from ensuring a clear run to the finishing line are undeniable.
In short, to be competitive in the future you need to invest in innovation through R&D expenditure, own and control the products of that expenditure through robust IP protection, and conduct due diligence on the IP landscape in your intended markets.