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Labor’s innovation plan provides hope for Australian manufacturing

The Gillard government’s Industry and Innovation Statement aims to revive an ailing manufacturing sector and address Australia’s flagging productivity. AAP

While its launch in the heat of election battle was hardly propitious, the federal government’s new Industry and Innovation Statement, A Plan for Australian Jobs, is the long-awaited result of a serious and measured consideration of the challenge facing Australia’s trade exposed industries, especially manufacturing.

This challenge, which was highlighted in last year’s report by the Non-Government Members of the Prime Minister’s Manufacturing Taskforce, is to achieve nothing less than a transformation in the competitiveness and productivity of manufacturing firms in the context of an increasingly high-cost economy.

The significance of manufacturing is that it drives technological innovation, accounting for more than a quarter of Australia’s R&D spending by companies, and in doing so provides high-skilled jobs not just within the manufacturing sector itself but in related services and infrastructure. In addition, it contributes to the external account, enabling us to pay for imports that we could not otherwise afford.

It is already apparent that this challenge has been intensified by the simultaneous action of three separate but related forces on the economy.

First, as a number of commentators have warned, the terms of trade effect associated with rising commodity prices, which has contributed around half of the growth of Australia’s national income in recent years, is beginning to taper off. This means that other sources of growth must be found to rebalance the economy, with the emphasis on boosting our productivity performance.

Second, despite a welcome improvement in productivity growth over the past year, the trend over the 2000s has been downward by comparison with the 1990s. Without agile policy intervention, it is hard to imagine that Australia’s productivity performance will recover sufficiently in the foreseeable future to compensate for the further anticipated decline in the terms of trade.

Third, whereas in the 1980s such a decline was accompanied by a significant fall in the value of the Australian dollar, the dollar has now become a “safe haven” currency and remains stubbornly high due to purchases by overseas financial institutions, particularly the Swiss and Russian central banks. Clearly, this makes the competitiveness challenge even more demanding, but not impossible.

The government’s industry statement recognises that other countries have faced this challenge and addressed it successfully. For example, despite the constraints of Eurozone macroeconomic policy, Germany and the Nordic countries emerged in better shape than most from the global financial crisis due to relentless innovation and a focus on creating high skill, high productivity jobs, and President Obama’s administration has similarly begun a major effort to reinvigorate the ailing US manufacturing sector.

The industry statement builds on the long-term strategy set out in Australia in the Asian Century to propose an essentially optimistic vision of “a more productive, dynamic and globally connected Australian economy” with “an innovation system in the top 10 globally by 2025”. However, it is disappointing that the government intends to do so by funding its new initiatives from the R&D tax credits available to some of Australia’s largest and most innovative companies.

This cutback continues the misplaced obsession with achieving a budget surplus at all costs, and it strikes a jarring note for a country with low public debt and access to low interest borrowing for investment in future growth. It was never suggested in previous changes to the tax regime, which were meant to eliminate waste and malpractice, that such tax credits could be dispensed with altogether.

Whatever might be said about this budget neutral approach to funding, the new initiatives announced in the industry statement are overwhelmingly positive and forward-looking. While most public attention has been directed to the expanded opportunities for Australian companies to tender for major resources projects, the real novelty of the statement lies elsewhere, particularly in the proposal for 10 world class “innovation precincts”.

International research and experience has demonstrated over many years the competitive advantage that can be generated for firms through geographically concentrated “clusters” of expertise and capability in deep collaboration with universities and public research organisations. Some clusters like Silicon Valley have become well known, but there are myriad others from Minneapolis to Munich.

The defining characteristics of successful clusters and precincts around the world include “smart specialisation” in key enabling technologies, strong connections to global networks and supply chains and an understanding and application of non-technological forms of innovation such as new business models, design thinking and systems integration. They are usually supported by substantial public research funding and “soft infrastructure”.

Australia’s first nominated innovation precincts to receive public support will be in manufacturing and food, with others to follow on the basis of collaborative bids by industry, universities and public research organisations, including the CSIRO and NICTA. The resources available for these precincts will incorporate funding previously allocated to the Industrial Transformation Hubs program and the Manufacturing Technology Innovation Centre.

Clearly, innovation precincts are not something that can be artificially imposed, though this has not stopped some countries from trying, often with dismal results. No one would expect Australia, with only 2% of the world’s R&D, to be excellent at everything, but it does make obvious sense for us to mobilise our limited resources around established and emerging capabilities with potential for critical mass in global markets and production systems.

Some of these capabilities will no doubt be in manufacturing-related areas, such as robotics and automation, materials science and environmental technologies, but others may be in areas such as the digital and creative industries which are evolving organically in our major cities. An example is the vibrant cluster of large and small businesses, including many entrepreneurial start-ups, around the University of Technology Sydney.

Whether or not companies participate in precinct activities, the drive to improve productivity performance will be further assisted by an increase in the scale and scope of services provided by the highly effective Enterprise Connect program. In addition, a new Centre for Workplace Leadership will help organisations to build management and innovation capability, with an emphasis on engaging the talent and creativity of workforces.

The value of any industry statement will be judged by its impact, and this will require a sustained implementation strategy across not just one term of government but several. It is to be hoped that the next government, whatever its political hue, will be able to pursue such a strategy as part of a shared vision of our competitiveness and productivity challenge.

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