Subsidies whether you like it or not

Last updated 05:00 18/11/2014
Shaun Hendy is a professor of physics at Auckland University

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Trade Me founder Sam Morgan recently questioned the value of Callaghan Innovation's latest tranche of R&D growth grants, which awarded a total of $32 million to 22 hi-tech businesses. 

OPINION: In a series of tweets Morgan pointed out that these were a "subsidy for private investors" and that taxpayers were "giving free money to publicly listed tech companies to benefit wealthy tech investors".

Morgan is right. Callaghan's R&D growth grants are a subsidy for tech investors.  

Steven Joyce, never averse to taking on New Zealand's tech heroes on Twitter, replied that Callaghan's grants are designed "to increase NZ's low levels of biz R&D; in this case by lowering the cost".

Joyce is on solid ground. The economic case for these subsidies is strong, with many studies showing that the R&D carried out by one firm generates knowledge that significantly benefits the rest of the economy. 

And this means that the benefits of R&D to the wider economy are not reflected in the market value of that R&D. 

If Joyce can increase the level of R&D in New Zealand by subsidising it, our economy ought to grow faster.

But Morgan has other objections. He worries that Joyce's subsidies might be paying for R&D that would have been done anyway by private investors. Economists call this 'crowding out'. When economists have tried to measure this, they have found that subsidies do actually increase the net amount of R&D. Public subsidies complement private investment rather than displace it.

Morgan also dislikes the fact that Joyce's growth grants are handed out by bureaucrats, who have little incentive, and perhaps lack the skills, to make the right choices.

Business commentator Brian Gaynor agrees. He thinks Callaghan needs to do a better job of measuring the success of its grants. 

An alternative would be to subsidise R&D across the board by using a tax credit that applied to all firms. This was the approach that Joyce's government scrapped when it came to power in 2008.           

Adam Jaffe, a Wellington-based economist, who is a world-renowned expert on innovation policy, says that while tax incentives do increase R&D, they are a relatively expensive way of doing it. 

Jaffe also advises that R&D grants should subsidise the types of R&D that generate the largest benefits to the wider economy. 

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These are likely to be projects that have the best chance of generating commercial returns, because these will create innovations that are more likely to make it to market.

There are also good reasons why New Zealand should be looking to diversify its economy. By subsidising exporting technology firms, we can alleviate our dependence on commodity products. 

So when Morgan complains that "the policy is simply a subsidy for private investors like me", he is right on the money. 

It may not seem fair, but the evidence does suggest that it is good for the economy to subsidise the R&D that Sam Morgan's tech companies do. 

Sorry Sam - the cheque is in the mail.

- Unlimited

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