Australia’s road obsession is holding back productivity

Investing in more roads might help boost economic growth, but getting knowledge infrastructure right could take it to a new level. Image sourced from Shutterstock

Commentators continue to call for new infrastructure to lift Australia’s flagging economic growth, yet there is a significant lack of awareness over what constitutes infrastructure. Infrastructure is not limited to bridges, roads and electricity poles.

Australia needs more knowledge infrastructure: that is, public-private partnerships in research and technology to translate ideas from research into new products and processes for industry. Although poor and insufficient infrastructure can undermine productivity, recent calls for governments to invest more need to pass the evidence test. And the evidence is clear. Whereas there has been strong growth in the building of roads, bridges, water and electricity over the past decade, spending on knowledge infrastructure has been desolate.

There is clear, consistent and robust empirical evidence (over 50 studies) around the developed world that R&D and knowledge generation activities have large spillovers to other businesses in the surrounding local economy. That is, when one business introduces a novel new way of doing something, their local competitors watch, imitate and often improve upon the original idea. The business taking the risk on innovation does not get all the benefits - hence they will under-invest in innovation.

These 50 or more studies show that whereas the returns to the firm investing in research and development (for example) is of the order of 20%, the returns to the whole economy, which includes the firm and other competitors, suppliers and customers is about 40%. Knowledge infrastructure represents the low-hanging productivity fruit.

For many decades, canny countries such as the USA, Germany and the low lands of Belgium, Netherlands and Denmark have been operating schemes that underpin the risk of innovation for business and create networks of trust and collaboration between the research sector and businesses.

The rise and dominance of Silicon Valley would not have happened without the US Departments of Defence and Energy DARPA and ARPAe projects. The Small Business Innovation Research (SBIR) programs in the US are legendary for co-investing in the successful commercialisation of frontier technologies. The Fraunhofer Institutes make Germany a leader in applied research as well as encouraging a flexible, autonomous and entrepreneurial approach to the society’s research priorities. Recently, the UK has embarked on similar schemes.

Australia is a minnow in this competitive race (see the figure below). We have some similar schemes but as a portion of our GDP they are miniscule.

Direct government funding of business R&D as % GDP

OECD, Main Science and Technology Indicators (MSTI) Database, June 2012; OECD R&D tax incentives questionnaires, January 2010 and July 2011, and national sources, based on OECD (2011), OECD Science, Technology and Industry Scoreboard 2011, OECD, Paris.

Although we have a science and research sector that is acclaimed internationally, it is not well exploited and used by our industry. Overseas companies have recognised our local talent. Many of them have set up talent scouting offices in Australia. These offices identify the best research people in the world and hook them up to their companies back home. Australia is a net exporter of research. We are prepared to pay A$9 billion a year for research but not worry about whether it is used and who uses it. Investment in knowledge infrastructure is needed to help maximise the return to Australian companies from Australian research.

There is a growing rumble of discontent over this situation. Numerous reports have been written recently extolling the need for more public-private partnerships in research and technology consortia to translate ideas. There are several ways this can be done. And some businesses are lining up to work more activity with universities, research institutes and hospitals. However, across the world the model that succeeds is the tripartite model where the research sector, business and government all commit funds.

Unfortunately, Australian governments appear to be going backwards and are withdrawing funding from knowledge infrastructure. This is very short sighted. As the long-term outlook for our coal exports start to dwindle, we should be gearing up the only truly sustainable form of comparative advantage: the brilliance of our people.