National Reform Summit: how can we ensure Australia remains an innovative nation?

How can we make Australia’s national innovation system more systematic? This was a key question addressed by the National Reform Summit sponsored by the Australian Financial Review, Australian and KPMG. The answer has proved elusive for public policy.

The current Senate innovation system inquiry has found at least 60 reports addressing this question over the past 15 years. That’s a lot of reports for limited return in the overall coherence of the system and the contribution of innovation to our productivity and international competitiveness.

While there are celebrated examples of success, most of these reports indicate a broader failure in our policy settings and in firm-level innovation capability and performance. The list is now a familiar one – failure to turn public research into commercial outcomes, to generate higher levels of business R&D, to adapt and diffuse new technologies and skills, and to participate effectively in global value chains.

Nor is this just a matter of public funding. According to 2015-16 Budget tables, the Australian government will provide $9.7 billion for science, research and innovation. The problem lies deeper. It is more an issue of the allocation of expenditure, the priorities and incentives embodied in this allocation, the low industry contribution and the absence of coordination of various elements of the system.

Commonwealth innovation funding is an aggregation of 120 individual line items of expenditure, spread across 13 portfolios. Over half is allocated to public research agencies, medical research institutes and universities. A further 30% goes to business through R&D tax measures. But comparatively little funding is available to support research engagement between business, universities and research organisations.

For example, the Cooperative Research Centres (CRC) program makes up just 1.5% of total support for science, research and innovation, and the recently revamped Entrepreneurs’ Program accounts for 0.4%. State government initiatives, such as Innovation Vouchers, are also sparse. Little wonder that Australia lags at the bottom of OECD rankings for business-research collaboration.

Leaving aside R&D tax measures, most Commonwealth support for research and innovation is directed to health, agriculture and university funding schemes. Within these schemes, health research accounts for over 30% of the total, followed by the environment. Less than 6% of funding goes to manufacturing and less than 4% to ICT, reflecting the low level of business investment in university research which is increasingly reliant on student fee income.

The picture is not dissimilar when it comes to State and Territory governments, albeit on a smaller scale. According to ABS estimates in 2012-13, these governments invested $1.28 billion in research, of which again almost 35% was for health and 40% for agriculture. Less than 1% was allocated to manufacturing and ICT. Is this optimal preparation for a post mining boom economy?

The Productivity Commission has been keen to highlight manufacturing subsidies but not the comparatively insignificant expenditures on research in this area that would transform prospects through “smart specialisation” in global markets and value chains. Nor is it mentioned that these expenditures are dwarfed by subsidies and tax concessions for mining, health insurance and superannuation.

It’s true that the “science push” or “linear flow” model for translating research into business applications has delivered some significant commercial successes in the health and biomedical sector. Prominent examples include ResMed, Cochlear, Gardasil, Sirtex, Universal Biosensors, Mesoblast and Monash IVF. But the model cannot be generalised to other areas where the pathway to research adoption and application is more interactive and collaborative.

While the supply side of research, particularly publicly funded research, will always be important in the development of a knowledge-based economy, there should also be an increased policy focus on the demand side, including the “absorptive capacity” of firms, so that they are able to access and invest in fundamental research. This will require a new approach to collaboration and longer term engagement in innovation “ecosystems”.

Collaboration is critical in exploring opportunities for the development and application of key enabling technologies, including nanotechnology, micro/nanoelectronics, semiconductors, advanced materials, photonics, analytics, artificial intelligence and design. In these areas collaboration underpins the business and industrial transformation that will generate competitive advantage in a global context.

Apart from CRCs and the ARC Industrial Transformation Research Hubs and Training Centres, there has been little attention given to the development of collaboration models that are fit for purpose in an Australian context. At the very least, shouldn’t R&D tax concessions be conditional on collaboration with research and education institutions? And there may be other tax measures that could be deployed to encourage technology investment.

In addition, these collaboration models should also encourage non-technology innovations such as new business models, systems integration, industry clustering and high performance work and management practices. The Industry Growth Centres initiative is an important start in building such models through partnership between business and research organisations.

Innovation policy should strike a balance between funding for public research, support for business R&D and support for the translation of research outcomes into business contexts. It must also address industry relevant funding, particularly in relation to enabling technologies that are at the heart of industrial production and technology intensive businesses.

The challenge is to build management and innovation capability through a more effective national innovation system and localised ecosystems. These will include an increasing emphasis on entrepreneurial start-up activity through networks of incubators and accelerators but without losing sight of the imperative of wider industry transformation to which start-ups can contribute.

Roy Green is expert consultant to the Senate Economic References Committee Innovation System Inquiry and participant in the National Reform Summit.

John Hamilton Howard does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.