Minister for economic development Pete Hodgson has laid into National over its plan to abolish research and development tax credits at the opening of a new Auckland R&D centre.
Hodgson opened the R&D centre today for network technology developer Endace, a company which, according to a statement released by the minister, is considering shifting its R&D to Sydney if National wins the election and abolishes the credits.
Hodgson told the gathering that to give away the tax credit, which amount to $1.60 a New Zealander a year, is a "dumb, dumb idea".
“If Endace leaves New Zealand, our country could be dumber,” he added in a statement released for the event.
“Our nation needs more rapidly growing spinout companies like [Endace]. If we are to lift our productivity, create jobs for skilled New Zealanders and increase our exports then we need more Endaces starting up and no Endaces clearing off to Australia."
However, Endace CEO Mike Riley told Computerworld that it is not that Endace would shift to Australia because the company's intellectual property is still in the heads of people here.
"It's crazy to even think about it," he said.
That said, the next time Endace comes to decide where to locate its next big R&D investment "that's what it comes down to".
Riley said Australia is upping its commitment to R&D, and therefore Endace will be forced to look at what is on offer.
Hodgson said companies such as Endace are the least likely to take profits out of the business, and the most likely to plough them back in. They will also grow much faster if R&D efforts are "rewarded by a reduction in taxation".
Riley said when the credit was introduced, earlier this year, he thought it was a good start and it would get better over time. However, now the company faces the prospect of it going away altogether.
"If it stayed we wouldn't even consider going elsewhere," he said.
He says he feels the move was a knee-jerk reaction to the Government opening its books to show a deteriorating economic situation.
"R&D was the low-hanging fruit," he says. The negative reaction the policy has received was probably unexpected.
“One of New Zealand’s inconvenient truths is that private sector expenditure on R&D is almost exactly one-third of the western world average," Hodgson said in the statement. "Yes, New Zealanders are an innovative lot, but our companies are painfully bad at investing in R&D and commercialising R&D successes. The lack of a tax incentive until 1 April this year is one reason why."
Hodgson said when the tax credit was introduced, officials at Inland Revenue had to work out how much tax would be foregone. Their modelling calculated that the full effect would be $332 million a year, which they calculated was enough to drive reported private sector R&D expenditure from one-third of the western world average to almost two-thirds.
“Imagine the value of that increase on the growth of smart businesses, the growth of high-skilled employment and the growth of non-commodity exports. Then imagine the value to our institutions — universities, crown research institutes — who would capture part of that increase by winning research contracts," Hodgson said.
Endace has an R&D centre in Waikato, where it employs 50.
The company recently relocated its Auckland office from Manukau to the new R&D centre in Greenlane.
Riley says he cannot see any benefit to Endace in moves to force the New Zealand Superannuation Fund to invest in local businesses.
"I cannot understand what it would mean for us. I can understand what it might mean for smaller businesses," he says.
He adds that investing in Crown Research Institutes and universities is fine (Endace's core technology was developed at Waikato university), but New Zealand also needs companies that will commercialise those developments.
He says that is the difference bwetween "research" and "development" For Endace it is a big "D" and a small "r".