Nicholas Reece. Falling behind in the innovation stakes

Malcolm Turnbull has promised a new innovation policy for Australia by Christmas. Bill Shorten has pledged to be a “jobs prime minister for the new economy”. For the first time in a long while, the political rhetoric matches a genuinely huge national policy challenge.

In the past 15 years, there have been more than 60 reports on Australia’s national innovation system. They all broadly reach the same finding: Australia suffers from a failure to turn public research into commercial outcomes, to generate higher levels of business research and development, to adapt new technologies and skills, and to participate effectively in global value chains.

Despite all the reports, there has been precious little action and an embarrassing lack of coherence in Australia’s policy settings. As a result, Australia finds itself languishing near the bottom of the Organisation for Economic Co-operation and Development when it comes to the commercialisation of research and in the middle of the pack when it comes to investment in higher education, research and innovation. This is a very dangerous portent for future prosperity.

If there is a silver lining in Australia being so far behind world leaders in innovation – such as the Nordic states, Israel, Singapore, Britain, South Korea and United States – it is the existence of strong evidence about what works. Now we just need our leaders to make the bold policy interventions that will drive Australia’s economic transformation.

These advanced economies all approach innovation systematically, with agile development agencies that foster collaboration and plug gaps in the innovation ecosystem.

According to chief scientist Ian Chubb​, Australia is the only country in the OECD without a national research and innovation plan. China has the explicit goal of being the greatest investor in research and development in the world within a decade. Japan wants to be the No. 1 global innovator by 2018. Australia?

We need a clear plan with an inspirational vision and goals – all backed up by our political leaders as proselytisers-in-chief.

One useful intervention would be to set up a national innovation body like NESTA in Britain, to provide strategic leadership of the nation’s innovation and research effort, and stimulate debate and entrepreneurial activity. If the Productivity Commission is like Australia’s personal trainer, keeping the economy lean and fit, then an Australian NESTA could be the coach, driving the relentless pursuit of innovation and building entrepreneurial skills and culture.

Instead, we have a Canberra-based bureaucracy that thinks its only purpose is to find and destroy “rent seeking”, like a heat-seeking missile. The result is that high-potential industries do not get the support they need, and globalisation has left us with a national economy that resembles a twisted reflection in a circus hall of mirrors: a gutted manufacturing sector; a dominant mining industry with its cycle of boom and bust; and domestically focused oligopolies of banks, insurers and retailers.

Australia needs to make a game-changing investment in wealth-generating research, innovation and commercialisation.

The Australian government allocates about 2.4 per cent of gross domestic product to research and innovation – about the same as it did in 1984. By comparison, South Korea has a target of 5 per cent.

But the problem is much deeper than just the quantum. The priorities and incentives embodied in the allocation of funds are also problematic. More than half is allocated to public research agencies, medical research institutes and universities. A further 30 per cent goes to business through R and D tax measures. Comparatively little funding is available to support research engagement between business, universities and research organisations.

For example, the Co-operative Research Centres program, which builds links between researchers and business, makes up just 1.5 per cent of total support for science, research and innovation, and the recently revamped Entrepreneurs’ Program accounts for 0.4 per cent.

Britain has allocated $3 billion over five years to its Catapult Centres, promoting industry/university collaboration, compared with $190 million over the same period for the Growth Centre equivalents in Australia.

The US government invests nearly 10 times more than we do as a percentage of GDP in business feasibility studies intended to convert research into proven technologies. The lack of an equivalent to the widely lauded US Small Business Innovation Research scheme here represents a major hole in our innovation ecosystem. That scheme is credited with triggering a fundamental shift in attitudes in US universities towards research being converted into a product or service.

Australia also needs to plug gaps in the innovation pipeline that funds research and technology breakthroughs into commercial applications. The “valley of death” for businesses that have received venture capital is well known, but other gaps exist at the pre-seed, proof-of-concept,  and angel investor stages. The problem can be fixed with improved funding programs run by sector experts, and new taxation arrangements.

Finland, with a quarter of the population of Australia, invests about $200 million a year in young growth companies. In Australia, the closest equivalent program is investing $350 million over 14 years.

Finally, our government could do something really bold with our immigration program. Immigrant-led entrepreneurism is a key ingredient in the economic success of countries like Australia and the US. Immigrants make up 17 per cent of the US economy, yet 50 per cent of business start-ups in Silicon Valley have at least one immigrant as a founder. Nearly all of them are graduates of the US university system.

The evidence in Australia tells a similar story. The University of Melbourne runs the Melbourne Accelerator Program, ranked 13th in the world among university business accelerators. Over the past three years, 46 per cent of the new businesses that have come through the program have had at least one immigrant founder.

The Obama administration has moved to offer overseas graduate students six-year working visas. Australia should match it with something equally brave.

Nicholas Reece is a principal fellow at Melbourne University and a former policy adviser to Julia Gillard, Steve Bracks and John Brumby.

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