David Charles. Innovation in Australia.

Jun 25, 2015

Policy Series. 

Australia is currently facing a challenging situation in which the economy needs to transform from one very largely driven by investments in the minerals and energy sector to one which has a wider spread of investment drivers. The overall economic growth rate, while still reasonably strong by OECD standards, is below the long term rate of about 3 to 3 and one half per cent per annum. 

The famous three Ps – productivity, population and participation – all need to play their part if Australia is to get back to its long term growth path. 

Arguably rather too much attention is focused on lifting productivity by the usual list of microeconomic reforms, including greater labour market flexibility. While these matters deserve a place in a comprehensive strategy, they need to be complemented by action designed to improve Australia’s innovation performance and in particular its performance in terms of technological innovation. Raising the rate of technological change is central to competitiveness and long term economic growth. 

At the outset it should be said that innovation is not just about stimulating knowledge flows. In order to create new business opportunities and lift economic performance there must be economic actors who can exploit new knowledge. The importance of individuals and the innovation system as a whole is sometimes overlooked by central agencies of government who tend to think in terms of more macroeconomic frameworks. They are also too willing on occasions to trade off good long term policy for short term budgetary savings. 

How has Australia Performed? 

The optimistic view expressed in some parts of the Australian innovation literature is that we have done remarkably well over the course of last 200 years in terms of adding value to our latent minerals and primary resources. It is not hard to identify major innovations that enabled mineral resources and primary products to be taken to world markets. 

Beyond mining and primary production, there are also some outstanding examples of innovation in the medical and telecommunications fields which have gone global. 

The pessimistic view is based on the reality that with a small, developed country most of the innovations that set the framework of our daily lives tend to come from elsewhere. Australia’s performance as an exporter of high value added products and services is modest at best. 

Of greater concern is the fact that many Australian innovators have had to move to the United States and elsewhere to tap the capital and complementary resources they need for global success. 

Moving from the anecdotal to a more evidence-based approach to measuring the effectiveness of the Australian innovation system, the Global Innovation Index finds that Australia is placed 17th but well behind the top 10 (which include countries like Singapore, Switzerland, Sweden, Denmark and the Netherlands). Australia is more a tail light rather than a leading light among the top group. We should and must do rather better if we want higher living standards in a much more challenging world for commodity prices. 

One of the data points that gives real cause for concern is the relatively low level of collaboration between researchers in Australia’s universities and publicly funded research agencies and business. Given the relatively large investment of public funds involved improving this situation offers real potential for improving the impact of our research and innovation system. 

Given the importance of small to medium sized enterprises (SMEs) in the Australian economy – it is from this group the future Hidden Champions will emerge, lifting collaboration will of necessity mean improving the connectivity between Australia’s SMEs and the research community. This is no small thing. 

Key Requirements for Innovation Success 

The literature suggests that there are four dominant requirements that must be present for sustained and widespread innovation success. 

The first requirement is the presence of a highly educated and skilled workforce. The world leading sources of innovation all have strong school and university systems. They all place a strong emphasis on so-called STEM skills (science, technology, engineering and mathematics). 

The second requirement is the capital available to support innovation. This is not just a question of the availability of financial capital but just as importantly the availability of what might be called “smart” capital, ie, entities and individuals who understand innovation and markets and the likely time horizons for success. 

The third requirement is a high degree of connectivity between university and publicly funded research entities and business. World class research by itself is no guarantee of successful innovation. The successful innovation nations have all found ways of strengthening connectivity between researchers and business. 

The fourth requirement and in some ways the most challenging is to encourage the development of supportive eco-systems generally focused on particular emerging technologies. Silicon Valley is the parade example in the IT field but there are many other examples in the US and elsewhere of clusters of excellence centred on a range of fields. 

How does Australia Rate? 

Australia does well on the first requirement. We possess a highly educated and skilled workforce. Depending upon the measure used, six to eight universities in the global top 100 speaks for itself for a nation Australia’s size. We cannot rest on what has been achieved to date. The bar is being raised all the time. 

The Chief Scientist has rightly identified STEM skills as being highly important and an area where Australia needs to do better. Fundamentally we need to at least maintain our global position and if possible improve it. 

The other positive sign is that Australia has thought leaders in at least some of the fields from which disruptive technologies with great potential impact are emerging. 

Australia’s performance in terms of the availability of capital for innovation is something of a mixed bag. The global mining companies have demonstrated over long periods that they are able to marshal the capital to support innovation in their businesses. Capital has also been forthcoming for innovations related to the provision of new internet enabled services provision businesses. Sometimes these have come from wealthy individuals with a strong understanding of the potential of these businesses or multinational companies. 

Where performance has been less impressive is for innovations outside these areas where there is a lack of “smart” investors with deep pockets. This either puts pressure on Australian innovators to go offshore or to proceed to early to an IPO to tap equity capital markets. Efforts have been made to kick start a venture capital sector in Australia but it is clear more needs to be done. AVCAL points out that Australia only invests a small amount in new businesses compared to the US and Israel. 

As pointed out in many studies on Australia’s innovation system, Australia rates poorly in terms of research collaboration involving both research entities and business. Efforts have been made to address this weakness, most notably through the long running Co-operative Research Centres program, and gains have been made in some areas but much more needs to be done. 

Apart from the notable eco-systems that exist around Australia’s leading minerals and primary production industries, it is much harder to detect the presence of effective eco-systems in other areas of potential strength to the Australian economy. A lot of effort has been directed to building the conditions for strong clusters to emerge but for the most part they have not been notably successful. 

Building eco-systems remains important to future innovation and competitiveness and has recently received serious attention from the Commonwealth Government. 

What is to be done? 

For the optimists and the commentators who believe that innovation is purely a matter for the private sector, the answer is either nothing or at most identifying and removing regulatory barriers. 

For the less ideologically driven amongst us, there are a number of things that need to be done by governments, research and education organisations and businesses if the full potential of Australia’s innovation system is to be realised. Some of these matters are now being addressed, but there are others which need to be given attention. 

The Industry Innovation and Competitiveness Agenda announced by the Commonwealth Government in October last year represents an important step forward in encouraging innovation and improving the national innovation system. The main measure is designed to establish five industry growth centres in:

Food and agribusiness;

Mining equipment, technology and services;

Oil, gas and energy resources;

Medical technologies and pharmaceuticals; and

Advanced manufacturing sectors. 

$188.5 million has been provided to fund these industry-led centres which are expected to foster better use by industry of Australia’s world class researchers so that the community sees stronger commercial returns from the $9.2 billion annual Commonwealth investment in research. 

The industry growth centres are expected to be in operation by the second half of this year. Chairs of the five industry growth centres have already been announced. These bodies have the potential to contribute to both building the relevant eco-systems and strengthening collaboration between researchers and business. 

The Industry Innovation and Competitiveness Agenda also announced measures to encourage employee share ownership and to promote STEM skills in schools.

Subsequently, it has been announced the Ministers for Industry and Education will look into ways of tweaking University block grants to strengthen university researchers incentives to connect with business. Better aligning researcher incentives with business is a key to strengthening Australia’s innovation system. 

The other important announcement of the Commonwealth Government concerns the response to the Miles Report on the future of the Co-operative Research Centres program. This important program is to be continued but with reforms to ensure it is in fact industry-led and subject to a streamlined system of administration. Clarity around the relationship between the CRCs and the industry growth centres has been achieved which should ensure they work together in a complementary manner. 

The industry Minister announced on 26 May this year funding of $74 million over 7 years for two industry-led Cooperative Research Centres, namely, the CRC for Optimising Resource Extraction and the Innovative Manufacturing CRC. Both have clear links to a number of the Industry growth centres. 

While all these measures are welcome and are pointing in the right direction, the main criticism of them is that they don’t go far enough and leave some important areas untouched. 

The explicit aspiration to obtain a better return on the $9.2 billion annual Commonwealth investment in research is certainly right but the suspicion is that the measures announced to date fall short of what is needed to achieve nationally significant impact. 

This reality becomes all to palpable when regard is had to the size of the resources countries in Asia Pacific are devoting to boosting their innovation systems and competitiveness. We need look no further than Singapore to see the efforts being made by the Island State. While every nation has their own place and structures to deal with, there do seem to be some consistent threads to the strategies adopted by the winners. We need to be prepared to learn from others where we can. The Miles Report does point to the German Fraunhofer Institutes as an example Australia could do well to learn from. Other examples in Asia Pacific readily spring to mind. 

When push turns to shove effective innovation systems turn on education/skills and finance. At this stage Australia’s efforts in relation to providing “smart” capital for start ups and businesses with the potential for global growth are not really world class. 

We need to bring to the development of innovation policy the sort of mindset that is crucial to successful innovation more generally, ie, a willingness to experiment and to shake up old ways and institutions. But at the same time a degree of certainty for planning purposes is needed with long running innovation policy measures. Bipartisanship is therefore important. 

A point that should be made is that to this stage the focus has really been on supply-side policies for innovation. The literature in Europe and the really innovative countries in Asia strongly suggests that demand-side policies also need to be considered. These are particularly relevant when it is necessary to create space in the market for new technologies which provide high external benefits and the promise of game changing reductions in costs over time. 

It is virtually impossible to think about innovation without recognizing the debt we all owe to Joseph Schumpeter. He put innovation at the centre of economic growth and recognized the crucial role played by the entrepreneur – the person that recognizes the market potential of emerging technologies. Part of the challenge to raising Australia’s innovation performance is to strengthen innovation entrepreneurship. This is a task that has more to do with our management education institutions than its does with Government policy. But as in most things, to raise Australia’s innovation performance to world leading we need a balanced portfolio of mutually reinforcing actions by governments, business and our research and education institutions. 

The pay-off from getting things right can be very large indeed. We are facing a situation characterized by the emergence of potentially disruptive technologies in fields as diverse as 3D printing, robotics, energy technologies, genomics and large scale data analysis systems. Exploiting these technologies for business and health applications offers huge possibilities for Australia. 

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.





















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