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Is there any alternative to developing an innovation-driven economy?

Australia’s economic future depends on its ability to embrace innovation. MSClipart

Australia’s long term international competitiveness will depend on its ability to develop an ‘innovation-driven’ economy. This is an economy built on high-value added, R&D intensive, high-tech industries. Countries that have such economies are Japan, South Korea, Singapore, Taiwan, Switzerland, Germany and the United States.

Developing an innovation-driven economy requires strong investment in R&D, innovation and commercialisation by Australian industry. There is also a need to build successful partnerships between industry and publicly funded research centres. This includes our universities and the CSIRO.

Building our national innovation system

Countries that have established innovation-driven economies are characterised by having strong national innovation systems (NIS). This includes a country such as South Korea, which has built a highly competitive economy from the ruins of war in the 1950s.

The 2013 report into Australia’s national innovation system highlighted the importance of linkages between publicly funded research and industry. It suggested that innovation is both a key driver of productivity growth within the economy, and a fundamental determinant of nation’s ability to maintain our standard of living over the long term.

Global measures of innovation such as the Global Innovation Index (GII) framework, the World Economic Forum Global Competitiveness Report, or the IMD World Competitiveness study position Australia as being in the bottom of the top group of countries, but significantly outside the top 10 leaders' group. We are a long way from matching relatively small nations like Switzerland, Singapore, Finland and Denmark. We also lag behind nations like Germany, the United Kingdom, Sweden, Japan, the Netherlands and the United States.

In fact the WEF Global Competitiveness Report of 2013/14 noted that Australia’s economy had fallen out of the Top 20 nations for the first time (down to 21st), while New Zealand had leap-frogged Australia by five places to 18th.

Despite this, Australia performs well within the Asia Pacific region on the GII framework. Key strengths were found in terms of Australia’s human capital and research inputs. The quality of its universities is also considered a major strength. However, there can be no room for complacency as the competition for enhanced innovation within the world’s economies is now intensifying.

Where does Australia rank in the innovation stakes?

At the international level Australia currently performs well on many key indicators of national innovation activity. However, it lags behind many of the higher performing countries.

This is illustrated in the following table, which compares Australia against Switzerland, South Korea and the OECD average for a number of key indicators of national innovation.

OECD innovation statistics for Australia and selected countries. Original data sourced from OECD

Areas where Australia is performing well are in terms of the quality of its universities and their ability to generate research papers published in top-tier academic journals. Compared with the OECD average Australia performs quite well.

However, when compared with Switzerland and South Korea – two of the top ranked innovation-driven economies – there are some noticeable gaps. For example, labour productivity growth is lagging well below the OECD average. This is a trend that has been noticeable in these statistics for some time and has seen Australia’s productivity ranking falling steadily since the mid-1990s.

Gross expenditure on R&D (GERD) as a proportion of GDP is lagging behind Switzerland and South Korea, even if it remains around the OECD average. The proportion of GERD funded by government is also much greater in Australia than in the two other countries.

What is also worth noting is that R&D expenditure within the higher education sector (HERD), as a proportion of all R&D expenditure (GERD), is much lower in South Korea. However, the proportion of HERD that is funded by industry as a % of GDP is much higher in that country. This reflects a stronger level of collaboration between universities and industry in South Korea.

Engaging universities with industry for innovation

The need to enhance the level of collaboration between Australia’s universities and industry over innovation has been debated for decades. It is also a challenge for many countries.

In 2008 a major review of the Australian national innovation system was undertaken by Dr Terry Cutler. This report made a large number of wide ranging recommendations.

However, in relation to university-industry collaboration the report noted that evidence from the United States and the United Kingdom had suggested the contribution of universities to the national innovation system was more indirect than direct.

Cutler found some technology licensing and spin-off activities between Australia’s universities and industry. However, most of the real impact was in the universities traditional roles as educators and public-good researchers.

The development of human capital in the form of trained scientists and engineers who can work in industry was one example. Also, the universities ability to expand the overall knowledge of a field of scientific inquiry and disseminate this in peer reviewed literature was another.

National innovation policy that works

Writing in the journal Research Policy in 2011, Mark Dodgson and his colleagues examined Australia’s national innovation performance and developments since the publication of the Cutler report. They noted that Australia’s performance in innovation has been mixed, although it forms a critical element in our ability to maintain economic growth.

Some of the anomalies they highlighted were a significant decline in government spending on science and innovation from the mid-1990s, and a similar reduction in R&D expenditure by business during the late 1990s. Despite this, GERD was able to exceed 2% of GDP. However, there was a consistent poor performance in relation to collaboration between universities and industry and across industry between firms.

They called for a fresh approach to policy formulation in relation to innovation. It was noted that the more interventionist policies of the 1980s had been followed by more free-market policies in the 1990s. This resulted in a steady decline in productivity and a fall in Australia’s overall ranking in the OECD innovation league tables.

Rather than a return to more government intervention, they recommended a blended approach that embraces market forces, but also recognises that markets “are not a substitute for innovation policy intervention”; they form an “essential component” within the wider system.

What if we don’t build an innovation-driven economy?

Australia is already regarded as having an innovation-driven economy. However, there is no room for complacency and it is not something that should be taken for granted. If Australia cannot keep its economy moving in this direction the only alternative is to fall back onto being either a ‘factor’ or ‘efficiency’ driven economy.

A ‘factor-driven’ economy is primarily engaged in the production of low-value added commodities such as found in countries like Pakistan, Egypt or Nigeria. By comparison, an ‘efficiency-driven’ economy is one that has developed successful low to mid-tech manufacturing industries. Examples included China, Malaysia, Poland and Turkey.

Australia’s ability to maintain its high living standards and relatively high wage levels depends on innovation. Only through enhanced innovation can we retain high skilled, well-paid jobs and rising productivity. The alternative is to see real wages and working conditions fall, and the economy to become poorer.

Note: Tim Mazzarol is President of the Small Enterprise Association of Australia and New Zealand (SEAANZ).

SEAANZ is a not-for-profit organisation founded in 1987. It is dedicated to the advancement of research, education, policy and practice in small to medium enterprises.

Join the conversation

30 Comments sorted by

  1. David Arthur

    resistance gnome

    Thanks for this article, Prof Mazzarol.

    You know what you write is correct, and I agree with you.

    Here in Australia, however, we have belief-driven government.

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    1. Tim Mazzarol

      Winthrop Professor, Entrepreneurship, Innovation, Marketing and Strategy at University of Western Australia

      In reply to David Arthur

      Hi David,

      Thank you for the comment. I'm afraid that you might be right. Ideologies seem to be getting in the way of good decision making. Yet it is also a responsibility of industry and the wider community to start this process.

      I think that Australians are very innovative and that our engineers and scientists are as good as any in the world. Yet we focus too much on short term concerns and protecting the status quo.

      By its nature innovation is about challenging the status quo.

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    2. Michael Ekin Smyth

      Investor

      In reply to Tim Mazzarol

      Tim: Interesting article. Australia has always suffered from too much government rather than too little.
      While it is possible to argue that Canberra and the state capitals should funnel more money toward R&D, the danger of politically chosen 'winners' is always present.
      While South Korea has thrown large amounts at its R&D, it has made some spectacularly bad investment plays - in petrochems and solar panel building. Political technology choice is more often than not a disaster.
      Energy efficiency, biotech, nanotech and robotics (encompassing AI) are the more obvious innovation areas in the coming decades. How these new technologies change existing industries, including agriculture and mining, will be crucial in determining our growth path.
      Any government subsidies should be loosely targeted to general segments so the most efficient technologies win through on their own merits.

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    3. Michael Ekin Smyth

      Investor

      In reply to Michael Ekin Smyth

      Oh, and I forgot to mention 3-d printing (additive manufacturing) which is more of a sector than a single technology. It has been around for a decade now and is really hitting its stride. Why isn't there a high-flying research center dedicated to developing that for all of manufacturing?
      For that matter: why no specialist AI center with a robotics (including micro-robotics) sub discipline?

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    4. Iain Wicking

      Director

      In reply to Michael Ekin Smyth

      You comment about government is a valid one. The real issue is the lack of co-ordination at all tiers of government. If you look at grant allocation, for instance, multiple funding is available at all tiers of government to try and achieve the same thing. Activities are duplicated and scarce resources are lost via multiple administrations.

      The areas you mention seem attractive but do you know what other nations are doing in those innovation spaces? What is more relevant is what your competitors are doing in the 'technology space' and how you respond to that. This then helps your develop your own areas of innovative advantage.

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    5. David Arthur

      resistance gnome

      In reply to Michael Ekin Smyth

      "Australia has always suffered from too much government rather than too little."

      I'll take that statement on advice, Mr Ekin. I'd suggest that, from the time of the Howard government onwards, Australia's absence of Industry policy has not served this nation well.

      From riding the sheep's back in the 1950's, Australia experienced decades of stagnation in the 1960's and decline in the 1970's before a flowering of forward thinking in the 1980's. By the 1990's, I suggest that internal contradictions…

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    6. Doug Fraser

      policy analyst at UNSW

      In reply to Michael Ekin Smyth

      I really am trying very hard to avoid spluttering, but please… Next time I hear the old chestnut "Governments can't/mustn't pick winners", I think I will start to bang my head against the nearest brick wall.

      The simple truth is that there isn't a free pass-out for governments when it comes to industry policy. Governments which don't have a declared, thought-out industry policy just have an unacknowledged, accidental one. Because at base, no economic policy is neutral in its impact as between classes…

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    7. Michael Ekin Smyth

      Investor

      In reply to Doug Fraser

      Doug: Feel free to splutter away old boy. It is often difficult to deal with realities. But deal with them we must.
      A couple of points: targeting segments has not failed in any way. In fact it is far superior to targeting individual technologies for a variety of reasons: 1. there is, by definition, a smaller chance of failure, and 2. it increases the general skill/knowledge level in the population.
      Solid investment strategies never target individual technologies (and rarely individual companies…

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    8. Michael Ekin Smyth

      Investor

      In reply to David Arthur

      David: some of your time sequences seem a bit recent.
      As I understand it, the first export of any kind following colonization was of coal to China via an American ship in 1795. Don't know where I picked that nugget up but it is probably correct. MacArthur imported merinos in 1804, wasn't it?
      My point being that there is a far longer history to many of these patterns of dependence, of thought and of these industries than you seem to acknowledge.
      Government in Australia, from colonial times on…

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    9. David Arthur

      resistance gnome

      In reply to Michael Ekin Smyth

      An explanation, Mr Smyth: I describe myself as a "resistance gnome" in refrence to David Holmes's article "Astroturfing the climate wars: five ways to spot a troll" (https://theconversation.com/astroturfing-the-climate-wars-five-ways-to-spot-a-troll-19011), which described people such as myself who know enough science to counter as much Climate Denialist "astroturfing" as we have time available.

      Although the image accompanying the article is of a garden gnome positioned atop a patch of astroturf…

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    10. David Arthur

      resistance gnome

      In reply to Jane Middlemist

      Thanks Ms Middlemist.

      From time to time I also appreciate challenges to what I think I know - if I think I know something, and it can be shown to be true, then it turns out that I know something.

      If, on the other hand, I think I know something, and I cannot refer to evidence that it can be shown to be true, then perhaps what I think I know is merely belief. Of course, there are those who argue that belief in something in the absence of evidence, is the greatest gift of all.

      Such people laud each other with sainthoods.

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    11. Jane Middlemist

      citizen

      In reply to David Arthur

      Ah yes, David. I don't believe in any of the great world - organised - religions which, in my view, have outlived their usefulness for social engineering and control of "the masses". But I do 'believe in good quality people, our best hope, I think.
      I have been puzzled by the threads dealing with global warming and the need for a "green economy". The way I see it is that, even if the majority of scientists prove to be wrong and the globe is shown not to be warming, we should still strive for clean…

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    12. Jane Middlemist

      citizen

      In reply to Jane Middlemist

      P.S. I got carried away and off topic but speaking of the innovation-driven economy the govt's desire to demolish the Clean Energy Finance Corporation makes no sense to me.

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  2. Mike Jubow

    Forestry nurseryman at Nunyara Wholesale , Forestry consultants, seedling suppliers.

    1. "Australia is already regarded as having an innovation-driven economy".

    Who is kidding whom? Australian Industry has to be dragged kicking and screaming towards innovation. Put advanced ideas before the board and they will nod sagely and tell you that it could be premature and that it will be "Looked into". It is even worse when new ideas and processes are put to any level of government. They will be the last to take up new ideas and only then when the rest of the world is asking why they…

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    1. Tim Mazzarol

      Winthrop Professor, Entrepreneurship, Innovation, Marketing and Strategy at University of Western Australia

      In reply to Mike Jubow

      Hi Mike,

      Thank you for your comments. I do agree that many managers, and company directors seem to be unaware of what innovation is, or how it might be applied within their firms.

      I have personally seen small and large businesses without a clear innovation strategies. Most managers don't have it on their list of KPIs. Whenever it is mentioned there is a tendency for people to generate vague "motherhood" statements, but little real action.

      Innovation is also thought of as "technology" or "science" when it is much more.

      Your criticisms seem harsh and may be a bit too negative. I think we have a lot of solid foundations upon which to build. However, I agree that too many managers and politicians don't really understand what innovation is and are complacent about it.

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    2. Garry Baker

      researcher

      In reply to Mike Jubow

      "Australia" - "but it will stay a mediocre country run by mediocre politicians and business men."

      Not for long Mike .... because you also said - "Whilst governments only focus on one income stream for them, (mining for example) "'" ... ie" Selling rocks

      Well you can add to that significantly, because in the last decade or so, asset sales have become a vital part of Canberra's business paradigm... ie: Flog off Australia itself to the highest bidder on the global markets - Rake in some cash…

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    3. Michael Ekin Smyth

      Investor

      In reply to Garry Baker

      Garry: the latest figures I have seen indicate that Australians own slightly more overseas than foreigners own in Australia.
      An open economy is, on balance, far superior to a closed one.

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    4. Garry Baker

      researcher

      In reply to Michael Ekin Smyth

      "" An open economy is, on balance, far superior to a closed one ""

      Well that's theory .. However, when the realities are confronted there's not too many open economies around .. Save for in name only. (The US included). There, they do things to tilt the tables we can only dream of.

      As for what we don't own these days- (Australia, that is) .. The sad truth is not a single government body has a handle on it - They say they have, but two minutes of digging will reveal this harsh reality…

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    5. Michael Ekin Smyth

      Investor

      In reply to Garry Baker

      Garry: No, it is not just theory. It is historical experience.
      If, as you say, Australians don't own Australia, and Americans don't own America, who does?
      You are, I hope not going to come up with the intergalatic lizards theory so beloved of David Ickes and co.
      Road to serfdom is a ludicrously overwrought rhetorical title.
      Perhaps a book on the road to understanding or intelligence is needed.
      On that Age article: that is one of the great fears that has bedeviled the Australian union movement since its creation. Obviously the Chinese, having lost nearly 10 billion on their Sino Iron Ore investment, want to get Chinese workers in. They can understand those types of labor-managment arrangements.
      You should have sympathy for them. They've had to employ drivers at salaries higher than their management earns. It can't be easy for them.
      But, as we both know, it is not going to happen.

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    6. Garry Baker

      researcher

      In reply to Michael Ekin Smyth

      Michael, I was simply using Roger Montgomery's observations on our road to Serfdom .. On balance, he's as good as they come in Australia's financial circles.

      Serfdom it is for us ... Not that many commentators see it at the moment.

      As for FTA's being our salvation ...Well even our experience with the much touted US deal that John Howard made in 2005, has proved to be a miserable outcome.. The score so far .. US 9 ... Australia 1..... Such are the benefits rendered to the US.

      Free trade on paper looks just great, but the harsh reality is a different kettle of fish. And that's where our misfits in Canberra fail us.

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    7. Jane Middlemist

      citizen

      In reply to Garry Baker

      Most upset by that link Garry. If the govt allows the Chinese to send their own workers here I'll be miserable. I wouldn't mind if there were already enough jobs for Australians; but with about twenty workers here for every vacancy, it would be unforgivable if their own govt doesn't put their interests first.
      Though, sadly it wouldn't be the first time.

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  3. Garry Baker

    researcher

    The innovation mindset isn't allowed to prosper here, mainly because we have logs in government who haven't a clue on what sort of playing field is needed for risk takers to do their thing. Indeed, governments won't embrace risk in the least, and certainly won't ease the path for those who choose to take it. Whereas over the decades, America has prospered mightily from risk taking. Sure, 90% of start ups may be considered failures, but the 10% who succeed form the backbone of the US way of life…

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    1. Michael Ekin Smyth

      Investor

      In reply to Garry Baker

      Garry: we know how Bill and his MS crew would have done in Oz from the history of Zardax.
      Zardax was a Queensland product, the best word processor on the market in 1980. It only took up 36K of memory and was a wonder with many of the features than MS Word would not introduce until 1992.
      The problem was the size of the market and no linkage to a major manufacturer. (Both perhaps inevitable by-products of being in Oz.)
      Bill Gates got his start by selling MS-DOS to IBM - even before he had MS-DOS.
      Zardax, as good as it was, never had a chance.

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    1. Iain Wicking

      Director

      In reply to Michael Ekin Smyth

      Fracking is also an environmental disaster as typically with investment decisions like this it is based on finance only and does not include all the 'externalities' - the costs everyone else in society has to pay for the loss of clean water, carcinogenic chemicals in the water table, leaking of a strong greenhouse gas into the atmosphere, increases in seismic activity, etc.

      From an extractive perspective it is an illusion as we are at 'peak oil'. Peak oil is not about oil and gas disappearing. It is about the rise in extractive costs and reduced energy density of what is extracted.

      Still to the simple minded an investment excluding all those externalities looks attractive. Pity the following generations.

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    2. Iain Wicking

      Director

      In reply to Iain Wicking

      Forgot to add - fracking is old technology - value adding innovation would have been to move away from hydrocarbons and innovate around other energy sources/technologies.

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    3. Michael Ekin Smyth

      Investor

      In reply to Iain Wicking

      Iain: Yes, you are correct. Fracking is an old technology. It was first used in Texas in 1947. Pardon my cynicism but I find it strange that a peaker actually knows enough to be accurate about something.
      Is it an 'environmental disaster'? It has environmental costs - as do all other technologies. I was recently strolling about the streets of downtown Hiroshima. There used to be scare talk around about the amount of radiation left after an atomic blast. Now, I didn't check the radiation levels, but I think unlikely that Tokyo would have allowed such an area to repopulate if it was dangerous.And, it is very densely populated.
      You are also right in asserting that the externalities are not costed. Then again, they aren't in any industry. Tragedy of the commons and all that.

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  4. Iain Wicking

    Director

    Australia does not have an effective innovation driven economy. It is a pity as Australia does have good R&D and innovative thinkers. However, throwing money at R&D and hoping that somehow 'tradable' products/services emerge is too hit and miss and is ultimately a mis-allocation of scarce resources.

    A key observation about economies like Germany, South Korea, etc, is that they all use sophisticated national technology planning systems. The systems they use co-ordinate on a national scale resources…

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    1. Tim Mazzarol

      Winthrop Professor, Entrepreneurship, Innovation, Marketing and Strategy at University of Western Australia

      In reply to Iain Wicking

      Hi Iain,

      Thank you for your insightful comments. Yes, there is evidence of well-coordinated NIS being operated in countries such as Germany and South Korea. That was one of the key messages that Mark Dodgson and his co-authors pointed to in their paper.

      The 1980s saw a 'top down' government led approach to innovation during the Hawke-Keating years. The 1990s then led to the Howard-era model of free-market. Neither system was ideal and productivity levels fell from the 1990s and keep falling…

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