Australia has an internationalisation, not an innovation and R D problem

Prime Minister Malcolm Turnbull’s innovation agenda is being questioned again after both the Coalition and Labor agreed to make cuts to Australia’s R&D tax incentive.

Investors say the R&D tax incentive is critical in encouraging startups to channel funds into innovative technology. Yet, international comparisons consistently show Australia does not have an innovation problem, it has an internationalisation problem.

The top ten R&D spenders globally each invest about A$10 billion per year on R&D. Imagine if these companies were only active in the Australian market. It would have been impossible for them to reach the same level of innovation. Research shows companies who are more internationalised are more innovative and perform better.

The recently released Global Innovation Index Report shows that winning at innovation requires joining the global marketplace to find new users for your products, services and technologies and to gain knowledge helping you to further innovate.

Too narrow

Australia is a relatively small market, so profiting from any innovation depends on international markets. Yet, the [Enabling Trade Report ranks Australia 134 out of 138 nations in terms of access to foreign markets. The ABS estimates only 7% of Australian businesses is active overseas.

There is a clear role for government to improve access to foreign markets by negotiating free trade arrangements and simplifying export procedures. It also requires a global mindset of managers and moving away from the “tyranny of distance”.

Take for example Australia’s creative industry. Despite Australia occupying top 10 positions in terms of infrastructure, human capital and online creativity, exports of creative goods and services consist of less than 1% of our total trade. If European fashion retailers and banks such as Rabobank can set up successful businesses in Australia, what is stopping Australian firms from being successful in Europe or Asia?

The benefits of openness

Internationalisation not only leads to new markets for your products and services, it also exposes firms to new insights that stimulate more innovation. Our own research shows that firms using external knowledge sources are more innovative. Research from the Australian Centre for Entrepreneurship Research shows this is most helpful for young firms.

To gain access to such knowledge Australia must continue to open up its borders to foreign products, capital, and knowledge. It currently ranks 134 out of 140 in terms of imports as percentage of GDP.

Given lack of funds is the most frequently cited barrier for Australian firms looking to innovate and grow, it is key to develop policies to improve the low levels of foreign direct investment in businesses and R&D currently finding its way to Australia.

Stop relying on your customers

More than half (56%) of Australian businesses are reliant on a small number of customers and the majority of those would be in significant trouble if one of their clients disappeared.

South Australia had world-class suppliers in the automotive industry and then the car manufacturers disappeared. Professor Goran Roos estimated that about 75% of the automotive suppliers would fail in response to the demise of local car manufacturing. Compare that to Nedcar, which after the demise of the last Dutch car manufacturer became an agile contract manufacturer producing cars ranging from Volvos to Smarts and from Mitsubishi SUVs to the BMW Mini, all in the same factory.

Technology-based firms supplying our mining firms would do well to learn from that example, as they face the same threat. Mining operations in Australia are among the safest, most efficient, and sustainable in the world, not in the least part thanks to a very innovative, technology driven METS sector. With increasing societal pressure to move away from resources such as coal, METS-firms need to start thinking beyond their customers. They should seek markets outside Australia and mining in which they can leverage their excellent technological skills and innovative potential. And there is no time to waste, given it takes about seven to ten years to build up a new line of business.

A critical role for robotics

When we talk to managers we often hear that the key obstacle to competing on the global market is the Australian cost disadvantage. This may be about to change.

Robotics is rapidly becoming a gamechanger for internationalisation by allowing businesses to produce in developed countries for a price equal to or lower than manufacturing in low labour cost countries. Adidas for example recently announced the construction of “speed factories” in Germany and the USA, which will increase production speed and local customisation.

Robotics are no longer reserved for large manufacturing powerhouses. Small businesses are already taking advantage of robotic integration. These days, robotics can be adapted to an infinite number of tasks to speed up work-flow processes, reduce costs, space and time; from the ability to delegate routine and non-routine tasks, to weighing competitive data without complex programming. These technological advancements improve business overall business efficiency and can therefore assist firms in accelerating international market expansion.

Internationalisation no longer denotes larger enterprise on a global scale, micro and small business have the opportunity to reap the benefits of international expansion, with limited resources. Taking a proactive approach to internationalisation will make companies more competitive, successful and robust in the longer term.