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Smart nation: building the national innovation system

Few would deny that innovation is important to the prosperity and growth of the national economy. Around the world governments are keen to see more innovation occurring with the anticipation that this will boost economic activity. Since the 1980s attention has been given by governments to the enhancement of their country’s National Innovation System (NIS).

The meaning and misunderstanding of the National Innovation System

There are many definitions of NIS but most deal with the existence of a network or networks of institutions across public and private sectors that interact with each other in order to foster innovation and diffuse new technologies. A key part of this process is the role of publicly funded research, and the role of the university sector.

The concept of the NIS emerged from research being undertaken in the 1980s by European and American academics such as Professors Bengt-Ake Lundvall, Christopher Freeman and Richard Nelson. Their interest lay in understanding the interrelationship between investment in science and technology and economic competitiveness. Their hope was to provide government policy makers with new tools and theories with which to manage science and technology policy.

In a paper published in 2007 in the journal Industry and Innovation Lundvall noted that while the concept of the NIS had taken hold strongly since its emergence some thirty years previously, there remain some abuses and misunderstandings. Of concern was the tendency to overestimate the role played by university research in technology transfer. The success of a few high profile cases from the United States in the fields of pharmaceuticals and biotechnology had led many to seek more general relationships between universities and industry.

According to Lundvall universities were being viewed as “immediate sources of innovation” with pressure for them to generate applied outcomes and engage in commercialisation projects. Yet most universities are not configured for such a role and play a potentially more important function via education of future scientific and engineering personnel.

Lundvall also raised concerns over what he saw as “a narrow definition of innovation system where the focus is on science based innovation”. Of more relevance was the need to view the NIS as a much wider system that involves interactive learning and where science is but a part of a much larger context.

At the core of the NIS is how firms within given industries interact and how they adopt and diffuse innovation and new technologies. While invention is important, the willingness to be a first follower or early adopter of new ideas is equally important. As Lundvall noted in his paper: “Early followers and early users have an important role to play in the innovation system as a whole since they host processes that are as important for the overall innovation process as the pioneer firms.

He cautioned against focusing too much on science at the expense of experience-based learning within industry. There is a need for the NIS to focus attention not only on high-technology industries, but also on low to medium-technology sectors.

Measuring NIS performance – GERD, BERD, HERD and GOVERD

The measurement of how well an NIS is performing is complex. Some of the common measures used are investment in research and development (R&D) and the number of patents generated, researchers employed, engineering and science degrees issued and scientific papers published. Also included are measures such as the proportion of firms that generate new technological products and measures of collaboration between firms.

Of the common measures of NIS performance are those relating to R&D. There are four main indicators: i) Gross expenditure on R&D (GERD); ii) Business expenditure on R&D (BERD); iii) Higher Education expenditure on R&D (HERD) and iv) Government expenditure on R&D (GOVERD).

Australia spends around $28.2 billion per year on R&D, or around 2.24% of GDP. Our business community’s expenditure on R&D is in the order of $16.7 billion per annum or about 1.3% of GDP. The university sector’s expenditure is in the order of $8.2 billion per annum and that of government around $3.4 billion per annum.

These figures place Australia close to the OECD average and we rank 12th out of 31 nations in relation to our GERD and BERD, and 9th and 10th in relation to our HERD and GOVERD. As illustrated in the figure below, Australia’s GERD over the past twenty years has been steadily improving.

GERD, as a proportion of GDP, Australia and OECD, 1996-97 to 2008-09. OECD MSTI 2011/12 and DIISRTE 2012

When we look at our BERD performance, as shown in the following diagram, it can be seen that our business community’s investment in R&D has also been steadily rising. However, over the past decade it has lagged behind the OECD average.

BERD, as a proportion of GDP, Australia and OECD, 2000-01 to 2009-10. MSTI 2011 and ABS Cat No. 8104 2009

Mining is no longer a low-tech sector

One of the more interesting trends from an examination of the BERD data is the rising level of R&D investment by the mining sector over the past twenty years. As illustrated in the graph below, the mining industry has significantly increased its level of investment in R&D since the 1990s. Even though this investment experienced a rapid decline in the 2008-2009 Global Financial Crisis (GFC), it has effectively caught up with manufacturing.

Comparison of manufacturing, mining, finance and insurance services BERD: 1998-99 to 2009-10. ABS cat no. 8104.0 2009-10 and DIISRTE 2012

With the advent of major oil and gas projects now emerging side-by-side with mining, the level of R&D investment by Australia’s resources sector is likely to increase. This is particularly the case for offshore gas projects such as are now taking place in Western Australia.

These projects involve significant technical complexity. This promises opportunities for innovation, R&D and technology transfer. The challenge for Australia is to secure R&D benefits from this investment pipeline rather than seeing all the value added work undertaken overseas.

Australia’s Innovation System – university research

In 2009 the report “Powering Ideas: An Innovation Agenda for the 21st Century” was released by the then Minister for Innovation, Industry, Science and Research Senator Kim Carr. This laid out a strategy for enhancing Australia’s NIS over a ten year period. Seven priority areas were identified.

The first two of these relate to the research capacity and skills base. These refer to the number of world class research clusters operating within our universities. Also the number of higher degrees by research (HDR) completed each year.

In order to measure these areas the government introduced the Excellence in Research for Australia (ERA). This used the now abandoned system of ranking academic journals as the primary means of measuring quality. Assessing our international research performance continues to be fraught with measurement problems.

For the HDR performance measures the process was easier to assess. However, the government’s report on progress published last year observed that Australia would only meet its anticipated research skills demand by increasing the number of international students enrolling in HDR programs.

Whether such students can be attracted to Australia in what has become a more difficult international market for our universities remains to be seen. Further, once they graduate their ability to remain in Australia after graduation and find meaningful places in our R&D system is less clearly understood.

Doctoral students are generally attracted to universities out of an interest in the specific research being undertaken within particular fields. They are seeking not only a qualification, but access to world class researchers from whom they can learn, and the opportunity to link to industry or research projects upon which to build their own careers.

One thing that will be important is the level of research funding for universities and other public R&D centres. As shown in the graph below the level of GERD since the early 1990s has increased steadily. However, continued funding will be required although it is anticipated that there will be increasing competition amongst institutions for available grants and mounting pressure for tangible benefits to be demonstrated.

GERD by type of activity, 1992-93 to 2008-09. ABS cat no. 8112.0 2008

Business investment in innovation and R&D

Within the business community the Australian government’s targets for the NIS are to increase the level of investment in R&D, and to see a 25% increase in the number of businesses engaged in innovation over the next decade. In 2009-2010 the most significant levels of BERD were to be found amongst the manufacturing, mining and financial and insurance services sectors across Australia.

The Australian government uses the number of businesses registered for the R&D tax concession as a key indicator. Innovating businesses are defined as those that have introduced at least one type of innovation during the year. According to the most recently published data around 45% of Australia’s businesses are active innovators in areas such as the development of new products and services, operational processes, management or marketing techniques.

This does not seem particularly high, particularly as the definition of what constitutes innovation activity is fairly broad. As Lundvall observed, there should be as much attention given to fostering innovation in low and mid-tech industries as there is in their high-tech counterparts. Low and mid-tech industries include electrical goods, furniture, motor vehicles, plastics and food processing.

Linkages and collaboration

The success of an NIS is the ability to link businesses together with universities and facilitate the flow of ideas and the diffusion of technology. The Australia government’s objective is to double the level of collaboration between universities and the business community over the next ten years. At the same time they aim to increase the level of international collaboration in research being undertaken by Australia’s universities.

As illustrated in the following graph the proportion of businesses that engage in collaboration with universities and other publicly funded research centres is low. More collaboration can be found between firms and their customers or suppliers, or with outside consultants and even other firms including competitors.

Collaboration by innovation-active businesses for the purpose of innovation, by type of organisation collaborated with in 2008-09. ABS cat no. 8158.0 2008

Australia’s level of collaboration around innovation is ranked highly for SMEs (5th in the OECD), but quite low for large firms (23rd in the OECD). Encouraging greater collaboration between SMEs and universities is going to require some substantial changes to the way in which university research is recognised and rewarded. For example, the decision to reduce the number of ARC Linkage grant rounds from two to only one per annum is not going to make it any easier for SMEs to participate in such projects.

Better mechanisms for enhancing the connectivity between universities and SMEs are needed. Here the focus should not only be on R&D from a relatively narrow scientific perspective. It must, as Lundvall has suggested, focus on the facilitation of knowledge exchange and learning. The owner-managers of SMEs will benefit from industry outreach education programs designed to enhance their knowledge. Such programs need to focus on teaching them about the nature and practice of applied innovation and commercialisation. This is as much, if not more about business skills as it is about science and engineering.

Building a smarter nation

Australia’s economic future will depend upon how effectively it develops its NIS. The challenge is not just in maintaining our international competitiveness in science as measured by peer reviewed publications. It is in how well we connect together the academic, policy and practice communities within our nation. As things currently stand our performance is not terrible, but there should be no room for complacency.

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