The Productivity Commission has begun a year-long investigation of tertiary education, saying tertiary institutions are risk averse.
An issues paper published today said there was considerable inertia and an unwillingness to try new things in the system of polytechnics, universities and private institutions.
It raises contentious issues such as universities which teach but do not conduct research, the difficulty of setting up new tertiary institutions and the lack of specialisation by different institutions.
Productivity Commission chairman Murray Sherwin said increases in tertiary education had not translated into increased economic productivity, and the sector needed to be ready to make the most of new technologies.
Mr Sherwin said the investigation would look particularly closely at some of the challenges facing tertiary institutions.
"There are fewer students coming into the system than used to be just the way the demographic bubbles work, a lot of competition from international universities beginning to spring up, and we've got a whole lot of technology coming at us, whether we like it or not, and that makes a difference and are our universities and other institutions coping with that and ready for that?"
Mr Sherwin said increases in tertiary education spending and enrolment had not been matched by increased economic productivity.
Tertiary Education Union secretary Sharn Riggs said it was worried the investigation had not spelled out what productivity and innovation meant in tertiary education.
"We're concerned that in the absence of the paper really defining things like what innovation means, what productivity means, that this becomes another way of maybe crunching some numbers to tighten up the sector from a funding perspective rather than from a productivity perspective."
Ms Riggs said New Zealand's public tertiary institutions had been early adopters of new technology but there was a danger it would be seen only as a way of saving money by using fewer lecturers to teach more students.
She said the contribution of tertiary education to the economy was important, but so too were its social and cultural contributions.
The issues paper considered aspects of the system, including funding, quality assurance, and the way government agencies oversaw institutions.
It asked for submissions on the idea of universities that provide teaching, but not research, and on the difficulty of setting up new tertiary institutions.
Submissions are due by 4 May, and the commission's final report to the government is due on 28 February 2017.