Motu News Update October 2016

Oct 5, 2016

Director’s Letter

Adam Jaffe portraitIn September I attended the Organization for Economic Cooperation and Development (“OECD”) ‘Blue Skies’ Forum on Science and Innovation Indicators in Belgium. This is a conference held every ten years to discuss what kinds of data and metrics should be developed looking forward to help governments, firms and NGOs understand and manage the research and innovation systems. There was much discussion of big data, web scraping and social media.

Issues discussed at the meeting included:

  • The creation and use of more and more microdatasets on researchers, firms and other organizations; the possibility of increased international comparability of such datasets.
  • The spread of persistent unique identifiers for people and organizations in microdatsets, to allow merging of data from distinct sources.
  • Increased recognition that metrics and indicators are not just for benchmarking, but should be meaningful inputs into policy decisions and mechanism design.
  • The pressure from decisionmakers for return-on-investment type metrics, and a countervailing concern that single metrics are dangerous.
  • Recognition that mis-use of metrics can generate undesired responses from the system (gaming or pursuit of the wrong objectives).

It is interesting that New Zealand and Motu are already at the forefront of several of these issues, particularly around microdata and the use of metrics for policy-making. Statistics New Zealand’s Integrated Data Infrastructure contains data on firms and individuals and is an excellent resource for Motu’s and others’ work on productivity and employment issues. The Ministry for Business, Innovation and Employment (MBIE) has just launched its Research, Science and Innovation Domain Plan which will create a comprehensive micro-data infrastructure for tracking research, its outputs and its social and economic benefits (impacts).

As I commented in our last Newsletter, it is easy these days to get discouraged about the difficulty of bringing systematic research and analysis to bear on the public policy choices we face. But a once-every-ten-years conference creates an opportunity for a longer-run perspective. There was much discussion of difficulties with securing adequate funding and policy-maker attention for evidence-generating research. It was also noticeable, however, that the language of evidence-based policy underpinned all of the discussions. There was even a politician who talked about the need for an appropriate control group in order to determine the effectiveness of an innovation support policy. I am pretty sure that was not the case at the last conference, 10 years ago. So it is certainly true, as Keynes remarked, that in the long run we are all dead, but maybe we can live long enough to see significant benefits from policy research.

Adam B. Jaffe


Intangible Investment and Firm Performance

Policymakers and researchers frequently discuss the ‘puzzle’ of New Zealand’s poor productivity performance. Popular explanations include low research and development (R&D) and small local markets that insulate firms from competitive pressure. Others believe poor management practices play an important role. In practice, these phenomena are difficult to separate, as competition, management and R&D investment are aspects outside of the overall economic system.

In the recent Motu Working Paper Intangible Investment and Firm Performance, funded by the Productivity Hub, we explore whether low intangible investment can explain New Zealand’s productivity performance, by looking at how intangible investment relates to performance at the firm level. We do this using data on firms’ intangible investment linked to administrative and tax records of firm performance and characteristics.

The figure below shows the basic patterns of intangible investment for each industry, by presenting the proportion of firm-years engaging in each intangible activity. Employee training and computer-ware are the most common, with around 70 - 80 percent of firm-years reporting such investments. At the low end, most industries have fewer than 10 percent of firm-years engaging in R&D. Manufacturing is the exception, with a proportion of nearly 30 percent. The differences between industries are generally expected, and support the reliability of the self-reported measures we use.

intang activities 1 2

In exploring which firms tend to invest, when comparing firms within narrowly defined industries, we find intangible investment is increasing with firm size and decreasing with firm age. Both too little and too much competition are negatively associated with intangible investment, relative to the baseline of a moderate amount of competition. And importantly, investment appears unrelated to a firm’s past growth relative to the industry average, meaning investing firms are neither struggling nor flourishing.

After they report intangible investment, firms appear to increase spending on both capital and labour inputs, and see an increase in revenue. However, the rates of increase of inputs and revenue are such that measured productivity and profitability do not increase in most specifications. We do find a small, but statistically significant, impact of recent intangible investment on the probability of enjoying a large productivity increase.

When looking for the difference that intangible investment has on productivity, we find a generally negative relationship across different quantiles of productivity, and it is most negative for the highest quantiles. Consistent with this “growth without profit” picture, we find some evidence that intangible investment is associated with subsequent improvement in ‘soft’ aspects of firm performance such as firm-reported customer and employee satisfaction.

Our results suggest that low intangible investment is unlikely to explain much of New Zealand’s apparent low productivity. Rather, such investment appears to be associated with firm growth, and improvements in firm performance along dimensions not captured by productivity statistics.

There are several possibilities listed in the paper that may allow us to reconcile the negative relationship between intangible investment and firm performance, but none of these fully explain the data. We can and should continue to try to understand better what is going on, but we should have no illusions that with enough data and the right econometrics we can produce “The Answer”. Because of this uncertainty, the policy implications of these findings seem limited. They do suggest that if productivity improvement is the goal, encouraging intangible investment is unlikely to be a powerful tool. But at the same time, they suggest that perhaps productivity is not the right goal.


An Integrated Framework for Stakeholder Processes on Climate Change Mitigation

During public consultation on the government’s 2030 emission reduction target, many stakeholders issued a strong call for greater public input into government decision making and greater collaboration across sectors. After reading Gary Taylor's useful opinion piece for Pure Advantage: Fresh focus needed on climate change governance it seemed helpful to reiterate the key messages from these stakeholder processes.

1. New Zealand has challenging emission reduction targets for 2030 and 2050, and will face increasing international pressure to decarbonise its domestic economy during the second half of the century. Achieving these outcomes will require a shift from incremental to transformational change across all sectors with collaboration across government, business, researchers and civil society.

2. We cannot know today what an optimal transition pathway will look like for New Zealand. New Zealand’s approach should be adaptive, responding to changes in technology, economic development opportunities, social norms and domestic and international circumstances.

3. Although many processes are currently underway in New Zealand to address different aspects of mitigation, they lack a coordinating framework, broadly shared goals, accessible information on the costs and benefits from accelerating mitigation across sectors, and policy certainty on future emission pricing and sectoral mitigation measures.

4. An integrated framework for stakeholder processes should address three distinct functions: technical advice, agreement on goals and strategies, and collaborative action. It should leverage existing processes and expertise, enable diverse participation, improve information sharing, encourage experimentation, stimulate creative problem solving, and underpin the national mandate for ambitious mitigation action. This framework should be agile and enduring.

5. Alongside other processes for technical advice and collaborative action, a central cross-sector leaders group could help to build relationships among decision makers; develop shared understanding of mitigation opportunities, risks and constraints across sectors; and achieve broad consensus among sector leaders on core goals and high-level strategies and pathway choices for decarbonising New Zealand’s economy. To be effective, this kind of approach requires a clear mandate with the opportunity to influence decision making, a solid information base, adequate motivation and resources for stakeholders to participate, and strong leadership.

Process elements

These messages are expanded upon in our briefing paper, which presents ideas on climate change stakeholder processes which emerged during Motu’s Low-Emission Future Dialogue (May 2014 through February 2016). They have largely been extracted from the report entitled New Zealand’s Low-Emission Future: Transformational Pathways.


Energy Transition and the Exit of Coal: Auckland Public Policy Seminar

Monday 10 October, 12.30-2pm, Robb Lecture Theatre, University of Auckland (Grafton Campus), 85 Park Rd.
Frank Jotzo (Australian National University) and Andy Philpott (University of Auckland’s Electric Power Optimization Centre) will discuss how the transition away from coal in Australia’s electricity system could be managed and the challenges of getting to a 100% renewable electricity market. More...

The Policy Challenges of Rescue, Interception, and Long-Term Response to Maritime Migration: Wellington Public Policy Seminar

Tuesday 8 November, 12.30-2pm, Lecture Theatre 1, Old Government Buildings, 55 Lambton Quay
Kathleen Newland is co-founder and a Senior Fellow at the Migration Policy Institute in the USA. She will review the policy responses to irregular maritime arrivals at regional, national, and international levels. Policy discussions today are more likely to be framed in terms of interception designed to address concerns of border protection, national security, and organized crime. The current, central dilemma is how to reconcile these concerns with international legal obligations and regional or global burden-sharing. More...


Motu News

Drivers of urban change: Wellington Region - Arthur Grimes video

Deep South Challenge Welcomes Suzi Kerr as New Science Lead

Motu researchers on the average man, the economics of the Olympics, real estate music videos, the productivity puzzle, World Bank poacher turned gamekeeper & more

New Zealand carbon trade "sorry tale" of pollution fraud

Consumption rather than income is a more accurate predictor of how satisfied people are

Apartments slowly entering first-home buyer psyche

New Motu Publications

Intangible investment and firm performance - Working Paper 16-14
We combine survey and administrative data for about 13,000 firms from 2005 to 2013 to study the inter-relationships among firm characteristics, intangible investment and firm performance. We find that firm size is associated with higher intangible investment, while firm age, very low competition (‘captive market’) and very high competition (‘many competitors, none dominant’) are associated with lower intangible investment. Relating intangible investment to subsequent firm performance, we find that higher investment is associated with higher labour and capital input and higher revenue, relative to what would otherwise have been predicted. We also find that higher investment is associated with higher firm-reported employee and customer satisfaction, but is not associated with higher productivity or profitability. While we cannot estimate a causal model, the evidence suggests that intangible investment is associated with firm strategies related to growth and possibly to ‘soft’ performance objectives, but not to productivity or profitability.

The New Zealand Emissions Trading Scheme de-link from Kyoto: impacts on banking and prices - Working Paper 16-13
The New Zealand Emissions Trading Scheme (NZ ETS) presents an opportunity to compare the theory of linked emissions trading with practice. We find that prices within the NZ ETS behaved as theory would predict. In a climate of certain linking, from 2011 when New Zealand began buying overseas units to surrender, New Zealand Unit (NZU) prices were roughly equal to Kyoto prices. Once the possibility of a future de-link emerged, NZU and Kyoto prices decoupled. NZU prices traded at a price reflecting their anticipated future scarcity – for New Zealand as a buyer of units this implies that NZUs traded at a higher price. In anticipation of the coming de-link NZ ETS participants banked (almost) all of their NZUs for future use and used cheap Kyoto units to meet (almost) all of their current obligations. The long delay between the announcement and implementation of de-linking led to a large bank of NZUs.

Income or consumption: which better predicts subjective wellbeing? - Working Paper 16-12
The positive relationship between income and subjective wellbeing has been well documented. However, work assessing the relationship of alternative material wellbeing metrics to subjective wellbeing is limited. Consistent with the permanent income hypothesis, we find that a consumption measure out-performs income in predicting subjective wellbeing. When objective measures of consumption are combined with self-assessments of a household’s standard of living, income becomes insignificant altogether. We obtain our result utilising household-level data from Statistics New Zealand’s ‘New Zealand General Social Survey’ which contains a measure of material wellbeing called the ‘Economic Living Standard Index’ that combines measures of consumption flows and self-assessments of material wellbeing.