David Charles. Innovation, Disruption, Growth and Jobs of the Future

What a difference a day makes to so many things including innovation. Immediately prior to the replacement of Tony Abbott by Malcolm Turnbull the Commonwealth Government barely had innovation, to say nothing of digital disruption and start ups, on its radar. Its major achievements in the area of funding for innovation were mostly notable for cutting and rebranding existing programs.

To be sure they had responded to worthy ideas from the Business Council of Australia to identify and support five industry growth centres but the level of support – $188.5 million over 4 years – is modest and expectations about their impact, outside government, is limited.

The Labor Party had gradually been building up a series of initiatives aimed at strengthening Australia’s innovation capacity but these were gaining very limited traction in the broader economic debate.

In one giant bound the new Prime Minister has put innovation, start ups and the great opportunities for both growth and jobs offered by technology disruption and the digital revolution in particular centre stage.

He has matched his rhetoric by placing Christopher Pyne in the Ministry of Industry, Innovation and Science and making Wyatt Roy, who was not even born when the internet was let loose, Associate Minister for Innovation.

The amazing thing about the change in the priority of innovation is not that it has happened at all but that it has happened so relatively late compared to other developed and emerging economies. We had better hope that there are advantages in being a fast-ish follower.

There is rather a lot to digest in the brave new world that has been opened up. My purpose is to attempt to throw some light on the now fashionable term of disruption, whether digital, technological or innovative and the most important disruptive technologies. To briefly review what earlier adopters, including China, have been doing and to point to areas where Australia might focus in a bipartisan way.

Disruptive Technology/Innovation

The literature on innovation tends to identify three different kinds of innovation, all of which have somewhat different implications for competition, creative destruction and supporting policy instruments.

The first two kinds which have until relatively recent times dominated discussion of innovation tend to be those which do not radically alter existing markets and value networks. The simplest kind might be considered to be evolutionary/continuous innovation which improves existing products and markets in broadly expected ways. They add value to customers and companies but don’t alter the nature of things.

The next step up the innovation food chain is radical/discontinuous innovation which tends to come in unexpected ways and have a large impact on the value proposition for customers and companies. The introduction of the first automobiles can be seen as an example of such innovation, but initially the impact of the new technology was not large and far reaching.

The third step in innovation is disruptive innovation, popularized by the management writer Clayton M Christensen, which creates a new market and value networks by replacing an existing market and value networks. The mass production system associated with Henry Ford is a powerful example. While new technology was involved in mass production as opposed to craft production, the radical change was the new business model introduced by Ford and the thoroughgoing change it made to transportation.

An example of disruptive innovation which is in the news at the moment is that associated with the name of Uber. If the Uber model is allowed by regulators to proceed, it will radically alter the on demand transport market and force wide ranging and painful change in the traditional taxi business.

Disruptive innovation will change both markets and value networks. For a country which is only a marginal player in some important manufacturing and services markets, it offers the opportunity to carve out serious positions in newly emerging value networks and create the jobs of the future. Perhaps it is this characteristic which has captured the imagination of policy makers.

Where is technology disruption taking place?

Three directors of the McKinsey Global Institute have recently published an important book on this subject with the title “No Ordinary Disruption: The Four Global Forces Breaking All The Trends “ by Richard Dobbs, James Manyika and Jonathon Woetzel. The four disruptive forces are:

The age of urbanization.

Accelerating technological change.

Responding to the challenges of an ageing world.

Greater global connections.

The 12 disruptive technologies they identify which will drive acceleration technological change are:

Changing the building blocks of everything (Next generation genomics and Advanced materials;

Rethinking of energy comes of age (Energy storage, Advanced oil and gas exploration and recovery and Renewable energy);

Machines working for us (Advanced robotics, Autonomous and near-autonomous vehicles and 3-D printing); and

IT and how we use it (Mobile internet, Internet of things, Cloud technology and Automation of knowledge work).

All these areas are likely to be important and offer opportunities for agile and capable Australian companies. At various times these technology disrupters have all received some attention in the media.

But the reality is that in the field of start-ups a lot of the attention has been given to IT and how we use it. Seek is an often quoted example of Australian success and Uber is pointed to as a harbinger of the sharing economy. There is no doubt that IT in its various forms is important but it is not the only game in town and in developing policy responses to build Australia’s innovation system it is important a broad view is taken rather than putting all our eggs in one basket.

Britain in its 8 great technologies program announced a couple of years ago has committed 600 million pounds to big data, space, robotics and autonomous systems, synthetic biology, regenerative medicine, agri-science , advanced materials and energy.

The China Challenge

China has already been a major source of disruption in global markets with its command of manufacturing production in a range of industries. Optimists in the west see the Chinese challenge stopping at the stage of labour intensive products and me-too products. However, the emergence of companies such as Haier in white goods, Geely Motors in automotive, Huawei in telecommunications and Hengan International in consumer products strongly suggest a different and more challenging reality. These companies are disrupting global markets and building new value networks.

The Chinese government realizes that the future for China lies in innovation and in 2006 launched a 15 year plan to raise the share of R&D in GDP to 2.5 per cent.

Reflecting the importance of STEM skills Edward Tse in his recent book China’s Disruptors makes the point that of 200,000 doctorates awarded around the world in science and engineering in 2010 China was second in the world with 31,000 compared to 33,000 in the USA.

In IT and e-commerce a number of Chinese companies have already come on to the global radar and have the potential to rival the big name US companies. Companies like Baidu, Alibaba, Tencent and Xiaomi are ultra entrepreneurial, large and growing quickly. They all have global aspirations and in time will look like and act like US and European multinationals with their own global value networks. Some of these companies are already significant investors in start-ups offshore in places like Israel and have R&D centres offshore.

The next Chinese challenge is well and truly on the radar of governments and industry in the US, Asia and Europe. Innovation policies are being developed partly with an eye to the challenge.

What are other countries doing to support innovation?

Most developed countries have innovation policies of one kind or another but two small countries which have received a good deal of attention are Israel and Singapore.

Israel which spends 4.5 per cent of its GDP on R&D has through its Office of the Chief Scientist pursued a range of policies aimed at boosting innovation. Special emphasis has been placed on creating a very positive environment for start ups. Notable in this regard is the Israeli Incubator Program which supports 20 incubators throughout Israel. Special early stage funding has been provided to support the development and growth of start ups. This can involve the provision of $7 for every $1 invested by private sector entities.

In 2014 start up exists are estimated to have been valued at $15 billion. While a lot of venture capital has come from US sources, in recent years Chinese investors have become important.

Singapore through its National Framework for Research, Innovation and Enterprise has learnt from the Israeli approach and amongst other things has put in place a Technology Incubation Scheme. Under this scheme the government co-invests up to 85 per cent of the costs of a start up.

Special attention is being given to the digital economy. The Infocomm Development Authority which has a mission to support the development of the IT and telecommunications sector provides Sing$ 200 million to support start ups. They plan to support 500 start ups over the next five years.

Apart from funding start ups, both Israel and Singapore are also focusing on building up their talent pools to support the digital economy.

The Conservative Government in the UK and its immediate coalition predecessor have placed a high priority on policies to support innovation. A key agency is the Technology Strategy Board, now renamed Innovate UK, which has a portfolio of programs including Smart Grants, Catapult Centres and the Small Business Research Institute. The Catapult Centres launched in 2013 are designed to convert good ideas into commercial results. So far 9 have been established.

The UK Treasurer in his 2015 Budget Speech argued that one of the aims of the British Government was to improve economic growth by making Britain:

“The best place in the world to start, invest in and grow a business, including through a package of measures t help unlock the potential of the sharing economy.”

As noted earlier, the UK government has identified 8 great technologies. These go well beyond the digital economy.

Some pointers for Australia

We now have a great opportunity to develop an effective and hopefully bipartisan innovation policy worthy of the name in comparison to what other developed countries are doing and Australia’s special needs and potential.

We are not starting from ground zero. Some of the key elements of such a policy are in place:

The importance of STEM skills has been recognized notably by the Chief Scientist and action aimed at building the talent pool has started. The Opposition has promised a series of STEM initiatives.

Five industry innovation growth centres are being established and some funding has been provided albeit modest in comparison with the UK Catapult program which seems to have been the model for the centres.

The CRC Program following the Miles Review is being continued.

But a strong case can be made that given the challenge and the size of the opportunities available that a much more strategic and rather better funded set of integrated instruments are urgently needed.

As we have seen, Israel, Singapore and the UK innovation policies are seen as playing a very significant role in future growth, business development and jobs. These policies all place a heavy emphasis on building the STEM talent pool. As well, they devote very substantial resources to the incubation of start ups and the financing of early stage businesses. Australia by comparison has hardly begun to move the needle. The Opposition’s promised $500 million Smart Investment Fund to co-invest in early stage companies is one way forward.

Innovation and the incentives to create and build businesses ought to be essential elements of tax reform. Perhaps using the UK aim of being the best place in the world to start, invest in and grow a business as a starting point for Australia.

In terms of scope, while the opportunities associated with digital disruption are no doubt large and perceived to be so in other jurisdictions putting great weight on innovation, innovation policy should not ignore the also large opportunities that will come from the technological disruptions identified by the McKinsey study noted earlier.

A global perspective is needed to fit Australian companies into emerging global value networks. Given our location in Asia Pacific the opportunities offered by building connections to the leading Chinese IT and manufacturing companies are likely to be considerable. The Australia China Free Trade Agreement ought to be part of creating the right environment for these connections to be built.

Finally, a community effort is required involving not just the Commonwealth and State Governments but also business, universities and the research entities such as the CSIRO and the medical research institutes. The conversation about innovation has just received a major injection of energy, the will is now needed to take advantage of this in a comprehensive, bipartisan and durable way.

David Charles was the Chair of the Advanced Manufacturing CRC and will be a Director of the recently-announced Innovative Manufacturing CRC. He is a Director of Insight Economics Pty Ltd. From 1985-1990 he was Secretary of the Department of Industry, Technology and Commerce. He was a Founding Director of the Allen Consulting Group.

See link below to an article by David Charles in the Policy Series which was published on 25 June 2015.

http://johnmenadue.com/blog/?p=4143

 

 

 

 

 

 

 

 

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