Why New Zealand needs Auckland

Auckland, like many of the world’s big cities, is often pilloried in the provinces. But, while you might not live there, you’d be worse off without it, writes Professor Shaun Hendy. And if New Zealand is to prosper in the knowledge economy, we need to quit the parochialism.

“Auckland is a drain on the New Zealand economy”, said the lanky farmer at the back of the auditorium. I had just relocated to Auckland, only to find myself back in Wellington talking about innovation to the 2014 Red Meat Sector conference.

While I had anticipated a degree of skepticism from my audience – I was a physicist talking to a group of farmers, after all – I did not expect to get called out on the fact I was now an Aucklander. As it happens, I couldn’t disagree more with his parochialism. In fact, I believe that getting over this regional mind-set is the key to building a more innovative economy.

It is true that Tāmaki Makaurau doesn’t produce much milk – the basis of our largest export industry – nor a lot of red meat, but Auckland is where we add the most value to our exports. It is where our most productive businesses are located. Auckland is also where we create value. Its citizens file more patents on a per capita basis than any other region in New Zealand. Auckland is, in sum, our most productive and most innovative city.

This may surprise many New Zealanders. Every day our media subject us to a litany of the city’s woes: congested roads, housing shortages and an underperforming rugby team. But Auckland fits an international pattern: the bigger the city, economists have found, the more innovative and productive it tends to be. A 2008 study by Motu and Te Pūnaha Matatini economist Dave Maré found that industries based in Auckland enjoy a productivity premium of between 23-33 percent over their counterparts in the rest of the country.

Some of this advantage follows from economies of scale. Companies in bigger cities can share infrastructure and have access to deeper labour markets. Importantly, companies in bigger cities have more opportunities to benefit from the knowledge and expertise in other companies, something that economists call ‘spillovers’. When a company generates new ideas, its neighbours also benefit from these ideas.

But bigger cities don’t just offer firms scale, they also provide a more diverse business environment. And Auckland fits this pattern – it's home to the most diverse range of industries of all New Zealand regions.

This is thought to be important for innovation because many new technologies come about by combining older technologies. The security systems sold by Waikato company Gallagher originated from a combination of technology from Gallagher’s electric fencing business and the Cardex swipe-card technology, developed by Manawatu company PEC Systems. In a city with a diverse range of industries, innovation by recombination becomes all that much easier.

Auckland also has range of specialisations in manufacturing and services that are present in other regions in New Zealand. This gives access to unique sources of technology and know-how, making Auckland businesses more likely to hit upon ideas that are novel.

But if the prospects look good for Auckland, New Zealand as a whole still underperforms on measures of productivity and innovation compared to other advanced economies. Two years ago, the OECD described this as New Zealand’s productivity paradox: “New Zealand’s broad policy settings should generate GDP per capita 20 percent above the OECD average, but it is actually over 20 percent below average. Closing this gap would dramatically lift incomes and wellbeing for New Zealanders.”

The OECD attributed this gap to New Zealand’s lack of international connections and an underinvestment in knowledge-based capital. There is no doubt that our distance from our major export markets and other significant global cities is a disadvantage. While we can’t move ourselves any closer physically, we can close the distance socially. We now have the Kea network that connects us to the New Zealand diaspora and initiatives like the Kiwi Landing Pad in San Francisco that provide a base for startups chasing US venture capitalists. Auckland is undoubtedly our international gateway. Its international airport is our primary point of access to the rest of the world. Auckland also has a secret weapon: it is one of the most ethnically diverse cities in the world.

In fact, more than 40 percent of Aucklanders were born overseas. Work by Isabelle Sin, another economist at Motu and Te Pūnaha Matatini, shows companies that employ highly skilled staff born in foreign countries enjoy significant advantages in exporting to those countries. And firms that export to more markets are also more likely to innovate.

The rest of the country needs to make more of this. If we could weave connections between Auckland and the rest of the country that were strong enough, New Zealand would be able to innovate more like a city of four million people than an archipelago of small provincial towns.

Sir Paul Callaghan and I wrote about this in Get Off the Grass in 2013, and while we have taken a few steps in this direction since, we still seem to have a long way to go.

We are still notoriously averse to sharing our ideas. When Kiwi-born serial entrepreneur and robotics innovator Catherine Mohr visits us from the US, she is always astounded at how closely we guard our ideas. Our reluctance to share means it takes us longer to find out when our ideas are bad and miss crucial opportunities to combine our ideas with others.

This attitude isn’t just confined to our laboratories. Our businesses lack the will and sometimes the skill to build partnerships that allow the beneficial exchange of intellectual property.

This type of sharing happens more naturally in cities as ideas are swapped through informal social networks. But when four million people are spread over the Land of the Long White Cloud, we need to be much more deliberate in our approach to sharing.

Cities innovate on a diet of diverse ideas, but stagnate when the menu becomes monotonous. Despite the success of our highly innovative ICT and manufacturing sectors and a stack of government strategy documents that acknowledge the urgent need to diversify our research base, only one of the ten national science challenges support ICT and manufacturing, while four target the primary sector.

Our science system is still geared towards supporting our traditional industries rather than looking for new opportunities in knowledge-based industries. According to the OECD, this underinvestment in knowledge accounts for at least half of our productivity gap. This is something that we can no longer ignore. Research and development in ICT and computer services has grown rapidly in the last few years, despite a lack of government support. In fact, less than one percent of the $200 million that MBIE invested in science this year went to projects that will benefit the ICT sector.

Our tendency to dismiss our largest urban centre and our reluctance to embrace the knowledge-based economy are no doubt grounded in our past. Yet New Zealand’s future will be very different.

I remain optimistic. Auckland is embracing its role as a knowledge-intensive global city. A unitary plan that adopts smart urbanism and a recent willingness to innovate with cycle ways and public transport to ease congestion are signs of a city that is growing in confidence. Far from being a drain, Auckland is paving the way for a new economy.

Professor Shaun Hendy is director of Te Pūnaha Matatini, a New Zealand Centre of Research Excellence focused on the study of complex systems and networks at the University of Auckland, an award-winning author and researcher, and a proud Aucklander.