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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.