The recent slump in dairy prices once again reminds us how vulnerable the New Zealand economy is to price fluctuations for commodity products. Of course animal protein is particularly susceptible because it is a renewable commodity that any farmer anywhere in the world can produce.

When prices fall, the profitability vanishes and the dairy industry contracts worldwide. The lack of supply this creates drives up prices, leading to an increase in herd sizes and dairy farm numbers, which again leads to an oversupply, and the inevitable prices drop. Clearly it’s not a happy business model.

We pride ourselves on our ability to produce cheap dairy products, and a lot of research money goes into finding ways to reduce the cost of production so that we can be more price competitive than producers in other countries. However, this encourages competition from producers overseas to also reduce their costs for dairy production – whether that be through subsidies or setting up low cost efficient 50,000 to 100,000 cow dairy farms in South America or Asia. This in turn will drive prices down. And the problem is exacerbated by the fact that foreign competition is buying in Kiwi IP to improve their competitiveness against New Zealand dairy producers.

Kiwis just don’t seem to be able to graduate from striving to sell a commodity for less and less. This is not a recipe for increasing the wealth of New Zealand workers.

Our belief in the benefits of a farm-based economy assume that with its growing population, the world will always be hungry for our food. However, we know that many countries are investing large amounts of money in research and development around food production. Think about how easily land could be used in South America, China, Africa and Eastern Europe to produce dairy products cheaply and in volumes that would seriously challenge the viability of the New Zealand dairy industry.

It’s alarming that our most valuable exports are commodity items – dairy, meat, logs and oil – and the message needs to get through that New Zealand Inc must diversify and start seriously encouraging innovation.

The total value of goods exported from New Zealand topped NZ$50 billion dollars for the first time in March 2014. Given New Zealand’s current estimated population of 4.56 million people, that translates to around $10,900 for every person in the country. Compare this performance with Singapore: with a population of 5.6 million people, and total exports in 2014 of US$410 billion, that’s $113,016 (NZ) for every person in Singapore.

One of the big differences between the two economies is that of the top 10 Singaporean exports, only one is a commodity item (oil). The other exports, in order, are electronic equipment, machinery, organic chemicals, plastics, medical and technical equipment, gems and precious metals, pharmaceuticals, aircraft and printed publications.

What this highlights is that New Zealand needs to press the reset button and focus on manufacturing and marketing more sophisticated finished products, and IP-rich products, which face limited competition and whose value won’t fluctuate with supply issues outside our control. Hopefully with the fall in dairy prices, the New Zealand Government will seriously turn its attention to developing a knowledge economy. We certainly need that if we’re to foot it with the likes of Singapore.

With any luck the first thing the Government will address with this new focus is the lack of research and development in New Zealand.

Current NZ R&D expenditure totals 1.26% as a proportion of GDP, compared with an OECD average of around twice that. That ranks us about 31st in business expenditure on research and development in the OECD. The Ministry of Business Innovation and Employment and Callaghan Innovation aim to encourage an increase in business research and development expenditure by 1% by 2018, which sounds very encouraging. The 2015 budget was promoted as a response to critics of the Government’s research and development policy, with its $80 million boost to Callaghan Innovation. This increase raises to $160 million a year Callaghan Innovation’s total funds for dispersing as research and development growth grants.

It’s a start, but such approaches show the Government’s unhealthy predilection for taking money from New Zealand tax payers, filtering it through administrators, and then handing what’s left out to those businesses who can be bothered filling in the forms and jumping through the hoops necessary to receive funding to compensate for a minor percentage of their research and development costs.

Larger, established companies in New Zealand have time to commit to obtaining funding and it appears that it is these companies which take the lion’s share of research and development funding. However, the New Zealand economy is driven by small businesses. Many of those SMEs that are trying to develop innovative products, complain that it is hard enough doing research and development while trying to run a business without having to find the time to complete the extensive paper work that has to be submitted to obtain and maintain funding.

These kinds of incentives are not going to create a sea change in the country’s currently reticent attitude to spending on innovation. We need innovation heroes and we need every business thinking about innovation and R & D. Encouraging New Zealand’s SMEs to commit to research and development requires a far simpler approach.

Let them spend what they can afford on research and development, and then do what the Australian and other governments have done – stimulate research and development among SMEs by providing relatively simple tax deductibility for research and development expenditure. Otherwise, take a leaf out of the UK’s book and offer reduced taxation on revenue generated from products which are the subject of a patent. This is certainly one way of encouraging research and development, as well as motivating business to own the IP derived from it.

Offering tax deductibility for R & D will excite interest in innovation among SMEs and encourage the shift in focus the New Zealand economy needs.

There’s no question that research and development is always a gamble, but if SME’s are willing to take the risk of investing money in innovation – some of which can be claimed back – then the public purse through its tax revenues should provide encouragement by sharing that risk. Whatever the answer, we need to be doing something to generate the change of attitude towards investing in innovation that is required if we are to free ourselves from the volatility of commodity pricing.

This article first appeared on Idealog online and was written by Ceri Wells, partner, James & Wells. He has been involved in patent drafting, litigation, trade mark ownership, unfair competition and copyright matters for 30 years. He’s passionate about making sure business get the best possible bang for their innovative buck.