We need to pick up the pace on innovation, says secretary of prime minister's department

Australia needs to speed up the spread of ideas across the economy in its quest for higher living standards, the secretary of the prime minister’s department, Martin Parkinson, has said.

Addressing the Committee for Economic Development of Australia (CEDA) on Monday, Parkinson said innovation – the creation and application of ideas – was critical in improving living standards.

But “measured innovation has fallen off in advanced economies, including Australia, since the early 2000s. There is some evidence that the pace of diffusion of ideas has been slowing across a wide range of industries.”

Parkinson’s core message was this could be boosted by a reform agenda encouraging openness and competition and by better management in businesses.

He highlighted several factors that could inhibit the take up of new ideas.

Intellectual property rights, which imposed rules on the use of ideas, could restrict their use or put costs on it. It was a matter of balance: “if we get the balance wrong, we stifle innovation – if we get it right, we encourage it”.

“Governments which restrict access to data not only reduce the chances of innovation in public policy, but often reduce political accountability as well,” he said.

Tax and regulatory settings often penalised risk taking, Parkinson said. “Often we impose too many costs on the efforts of those who fail from taking a legitimate risk”, such as when bankruptcy provisions penalised those able to start again. Regulatory authorities had incentives to be risk averse.

There needed to be pathways back from failure, including through retraining and skills development.

Allowing anti-competitive behaviour tended to favour incumbents over more potentially innovative businesses, and always favoured producer interests over consumers, Parkinson said.

“Where governments continue to support loss-making businesses, through protection in its many guises, we inherently stop resources from flowing to more innovative ones.

"Even where we allow government services to be uncontested and directed more by employee interests, rather than consumer interests, we most likely harm innovation.”

Parkinson said that while government had a role to create the conditions, ultimately businesses drove commercial innovation – and here vision and management acumen were important.

He pointed to a study of management practices in manufacturing that showed practices in Australia were mid-range.

“We are well below top performers like the United States, Germany, Sweden, Japan and Canada, but more similar to France, Italy and the United Kingdom.

"There is also significant variation in management performance within countries. Australia, like some other countries, has a somewhat larger tail of companies with relatively poor management performance than the United States.

"Regression analysis suggests that lifting management practices in Australian manufacturing firms to the average level in the US would raise the level of productivity in Australian manufacturing by around 8%.”

Despite the impediments, Parkinson said he was an optimist about the role innovation would play in driving Australian national incomes.

He stressed the importance of competition, which meant businesses were encouraged to get ahead, or adopt others’ innovations. Also, competition meant the resources of unsuccessful businesses were quickly reallocated.

Open trade meant sectors were forced to innovate to keep their advantage over imports.

Parkinson warned of the challenges facing the services sector in the export market.

“More and more it will be service-based companies that are competing in the global market place. Unlike in resources and commodities, Australia has no inherent comparative advantage in the services sector writ large.

"If we are to grasp these opportunities, we will need to work for them and, above all else, innovate to gain a competitive advantage,” he said.

“Open trade, investment, modern communication and data technologies vastly open up the scope for innovative growth across our economy. Businesses now face more price and product competition than ever before.

"Those industries and businesses that are international in their outlook, have looked into global supply chains, embraced change and adapted to the challenges will remain competitive. They will not only survive the structural shifts in the global and national economy, but they will thrive from tapping into the global marketplace.”

It was also vital for the non-traded sectors to be innovating.

“We need to create the conditions for innovation in areas like human services that will become an increasingly large share of our economy as our population ages.” The cost of delivering services to the ageing population was set to nearly double as a share of the economy between 2015 and 2055.