Research investment strategies:
Start-up and Diversified Companies (Economic Diversification Evaluation Part 2)

Infometrics, 2006.

Scope:

The aim of the evaluation was to assess:

• the key factors leading to firm start-up or diversification
• the role R&D played in this formation or diversification
• whether Foundation?-funded R&D made a critical contribution to formation or diversification
• the success factors and constraints to firm start-up or diversification.

The evaluation involved structured interviews with 43 technologically innovative New Zealand businesses that had either started operations in the last ten years or attempted to diversify their operations in this period.

Diversification was defined as companies having established, or attempted to establish, novel or modified products, processes, or services that allow them to enter business sectors in which they were not previously active and that are not existing areas of strength for New Zealand.

Summary

1. The main factor that sparked business start-ups was an idea held by the founding entrepreneur. R&D plays a minor role in encouraging business start-ups as start-ups are more likely to be driven by commercial opportunities than technical considerations.
2. Start-up firms need to combine their basic idea with manufacturing and marketing expertise to achieve a successful product.
3. Start-ups cite the skills of the business development team, market analysis and the quality of strategic decision making as critical for success. Access to finance was the factor most commonly cited as hindering business start-up. R&D was not identified as a hindering factor.
4. For established firms, R&D played a significant role in both stimulating and supporting firm-level diversification.
5. For some firms diversification is part of their ongoing business strategy with a dedicated R&D team developing a stream of potentially new products or services.
6. As with start-up businesses, innovation activity for diversifying firms was driven by commercial prospects.
7. Diversified firms cite market analysis, R&D, and strategic decision making as critical for success. Marketing, R&D, and finance were the most commonly cited hindrances to diversification.
8. Compared to general financial support (loans, grants) or management advice public funding of R&D is likely to have only a small impact on encouraging the start-up of new businesses.
9. R&D activity plays an important role in business diversification, which suggests a case for public funding of R&D for established businesses.
10. Over two thirds of companies identified as either start-up or diversified received Foundation funding for R&D, and half of these viewed Foundation funding as vital to their success.

Conclusions

There is no evidence that, for this group of companies, Foundation funding effects their spending on R&D.

The only significant difference found was in the number of researchers employed. In the companies interviewed, only Foundation-funded companies employed more than five researchers and overall Foundation-funded companies were significantly more research intensive through the employment of research staff. Whether there is a causal relationship is not able to be confirmed but it is an encouraging result with respect to building the tacit knowledge inside companies and so leveraging public-private investment as intended by the TechNZ schemes. A comprehensive statistical analysis by NZIER showed that, although the trend is there, the sample sizes are too small for the results to be robust.

R&D, funded by both the Foundation, primarily through Technology NZ programs, and the companies themselves, was found to be important to the start-up and diversified companies interviewed. However, for most companies R&D was not a single primary driver of diversification. Other factors, particularly those related to commercialisation activities and processes, tended to be more, or at least equally, important.

Although Foundation-funded R&D can be very important to firms, it is not realistic to try to isolate the influence of Foundation funding in the diversification process. Foundation funding will be, most often, one element among a number of changing and interacting factors leading to diversification.

Related work

Measurement of Spin-outs from Foundation-Funded Research (Strategic Evaluation – Economic Diversification Part 1).