If we want to promote innovation we need to focus on businesses

With all of the publicity about research breakthroughs, it is easy to forget that private companies rather than publicly funded research institutions are the centre of the innovation systems.

Innovation happens in businesses, and most new businesses come from existing ones. If the system is not working at this level, the returns on investment in research are likely to be low.

Pushing more government funding into research in our present innovation system is not the way ahead. Treasury and the Productivity Commission may see this as theoretically sound, but like the mantra of strengthening research-industry links, the limited outcomes point to the need for new more experimental and pragmatic approaches.

The growth of entrepreneurship in Australia and deepening entrepreneurial ecosystems are good news. But how many of those start-ups are based on the commercialisation of public sector research? To my knowledge, only a few. Most respond to commercial opportunity and draw knowledge from wherever they can get it.

Australia is a very small but very capable player in the global research system and that is a great asset, but we have not worked out how to best govern and leverage those strengths. What is missing is a mechanism to stimulate and support innovative demand and to capture this drive in order to develop new products, services and firms.

Demanding innovation

The best recent example of harnessing the demand-side of innovation is – perhaps suprisingly – mining. Over the past 20 years, a dynamic and innovation-based mining equipment, technology and services (METS) sector has evolved in Australia.

By 2013, there were more than 1,000 METS firms with an aggregate turnover in the A$70-90 billion range, employing more than 300,000 people, with exports over A$20 billion and rapid offshore expansion.

In FY2012 the “sector” invested at least A$1.5 billion in R&D, which is more than information, media and telecommunications. Here we see demand from the user sector driving innovation in what are often, but not always, high tech suppliers, in this case often involving new applications of information technology.

It is often the quality of demand, which is related to the competency of the users, that enables innovation. In 2011-12 the mining sector invested almost as much in R&D as did the manufacturing sector. It is now very much a knowledge-intensive industry and a demanding user.

The current downturn in mining sector investment is hitting the METS sector hard. But firms are focusing on innovation and finding markets in other sectors and offshore.

For example, the 2015 survey by the METS industry association, Austmine, found that 44% of survey respondents were moving into other industries and a third had sought new export markets. One in three had also launched a new product or service. National METS Survey 2015 Results

This encouraging story of entrepreneurship and innovation has had little to do with public sector research, venture capital or innovation or entrepreneurship policy.

Despite the strengths of the CSIRO and some universities in these areas, and their important contribution to knowledge and innovation, neither this research nor public policy have been major drivers of the remarkable growth of Australian METS firms over the past 20 years.

Two reforms

Opportunities for demand-led innovation exist throughout the economy. They are likely to be greatest where there is strong market growth, sustained investment and new challenges.

Consider the cities of Australia, which can (and in some cases need to) be transformed through new communication, environmental and transport infrastructure and technologies.

But to do this we need to reform our institutions to develop new forms of system-level governance and policy frameworks that influence both the challenges and solutions. This type of innovation is often harder than technological innovation but is often the most critical for enabling other forms of innovation.

To achieve this, we need two essential changes within government.

First is to strengthen the policy advice available within government. The mainstream economic paradigms that inform Treasury and the Productivity Commission have at best a weak purchase on innovation.

Recent developments in the Department of Industry and Science, with the formation of the office of the Chief Economist and the more systematic work on innovation analysis may be the beginnings of a capable alternative source of advice able to contest the views of Treasury. But much more strengthening is required.

Second is to acknowledge that the Australian Research Council is not fit for this purpose. It is, after all, a research funding organisation run by researchers.

What is needed is a different type of innovation-oriented organisation. It would identify new challenges and help build the capabilities in industry and the research sector to respond innovatively.

But, importantly, it does not allow research organisations to monopolise public research funding, pursue their own interests and so create a commercialisation bottleneck.

An exemplar for this type of organisation is TEKES in Finland. It uses foresight and roadmapping to identify opportunities, and it proactively develops coalitions and collaborations to apply the needed competencies.

Among the critical forms of institutional innovation we need are what Dan Breznitz, in his book Innovation and the State, terms “Schumpeterian Development Agencies” which have wide degrees of freedom to undertake continuous experiment with a wide scope to act, engage, change and redefine.

Don Scott-Kemmis received funding from: United States Studies Centre, University of Sydney Department of Industry, Innovation, Science, Research and Tertiary Education -now Industry and Science Minerals Council of Australia