Necessity: mother of innovation

By Paul Jensen and Elizabeth Webster

The Australian Financial Review
25 August 2008, p. 63

Policymakers need better data on what innovation incentives work, write Paul Jensen and Elizabeth Webster.

There are only two ways a country can sustain increases in productivity over time: through enhancing its skill base or by innovating more successfully. While Australias performance on skill development is indifferent, the state of our innovation system puts us well below the rich-country Organisation for Economic Co-operation and Development club. Australia ranks 22nd on the World Economic Forums innovation performance index behind Israel (fifth), Korea (eighth) and Malaysia (21st).

So it is not surprising the Rudd governments National Innovation Systems Review has attracted so much attention, with 600 or so submissions from the public. As Innovation, Industry, Science and Research Minister Kim Carr is painfully aware, the situation is serious and the ramifications for the Australian standard of living will be felt, perhaps not immediately, but in the decades to come, as countries that have invested more successfully in the fundamentals of an innovative economy surpass us and relegate us to middle-income status in the world.

The bad news is that the lacklustre innovation system does not appear to have turned the corner. According to the recently released IBM-Melbourne Institute Innovation Index, Australias innovative performance grew by only 0.7 per cent in 2006, a figure that is about one-third of our long-term average growth rate. This index covers a wide range of innovation areas from research and development (R&D) spending, to patents and organisation. Although we dont know what the optimal innovation growth rate is, the fact that Australias innovative activity has fallen as the economy has softened should have alarm bells ringing.

This slowing down of the intensity of innovation (that is, innovation as a proportion of overall economic activity) is consistent with the academic literature that finds innovation is pro-cyclical. That is, innovation moves in concert with the business cycle. The simple reason for this is that innovation is risky many innovation investments fail in the sense that they dont give any tangible output. When aggregate demand softens, firms tend to contract their investment in risky innovation.

The good news is, some industries performed well in the innovation index. Mining, communication, and finance and insurance performed well above the average. But this is tempered by a slump in innovation in key industries such as manufacturing, construction, and business services. This is a concern for the government, especially Carr, who has explicitly (and with good reason) identified manufacturing as a key industry in Australia since it can substantially exploit value-adding opportunities.

Recognising the need to improve our game is necessary but not sufficient. We must know which policies are successful: Should we increase the level of public sector research spending? Should we put more resources into public-private sector collaborations? What are the most cost-effective policies to aid the commercialisation pathway?

Unfortunately, we do not at the moment have the scientific evidence with which to answer these questions. There is an abundance of anecdotal evidence on what worked for one company or one project, but we do not have results that we can generalise to the whole of Australia. If the government is serious about evidence-based policy formulation on innovation, then it needs to stimulate research on these issues.

Moreover, we have limited (and now dated) information on the success of the R&D tax concession. The key question to answer here is whether the concession just subsidises R&D activity that would have occurred anyway. We also dont know whether the use of public money to subsidise public-private collaborations has been necessary for successful commercialisation. We do not know whether we should be spreading public money broadly on a multitude of technologies and industries or whether we should behave more strategically, as countries such as Singapore and Israel have done.

Although the reviews final recommendations are unknown, early indications are the government will look to ways to stimulate further private R&D expenditure and enhance the synergies between public R&D and industry. Although the devil may be in the detail, its encouraging to see the government clearly on the front foot with regard to putting innovation policy on the agenda.

Paul Jensen is a senior research fellow and Elizabeth Webster is director of the Intellectual Property Research Institute of Australia, University of Melbourne