Getting the Most out of our National Innovation System

In a globalised world, innovation is vital to increased competitiveness for business. For the economy as a whole, innovation lies at the heart of productivity growth. The National Innovation Summit held in February 2000 examined the fundamental question of how Australia could obtain maximum economic and social benefit from our National Innovation System.

There have been numerous studies on R&D, technology uptake, higher education research and other aspects of the Australian innovation system over the last ten years. Most have not resulted in the implementation of policies to improve economic growth. However, business, governments, the research community and academia should collectively develop measures that address impediments to making the most of the existing system and to prepare strategically for future industry and community needs.

Principles of Innovation Policy

It is widely accepted that innovation is the key to success for the modern economy. The OECD has estimated that innovation accounts for 50% of long term economic growth in advanced industrial countries. Innovation is the major determinant of enhanced productivity and competitive advantage at both the firm and nation level.

Innovation can be defined as applying new ideas to products, processes, services, organisation, management or marketing. But newness by itself is invention – it only becomes innovation when it yields market value.

Innovation policy first emerged as a concept towards the end of the 1970s. Early models tended to stress innovation as a simple linear sequential process with R&D playing either an initiating (technology push) role, or a reactive (market pull) role. More recent analysis has stressed that innovation involves much more than R&D – such as the integration between R&D, manufacturing and marketing inputs, the importance of strong linkages with suppliers and leading edge customers, and the use of collaborative research and marketing arrangements.

Successful innovation requires:

• a good working interaction between the science base and the business sector
• competitive markets to force firms to innovate more rapidly
• networking and collaboration between firms
• an education system that underpins an innovation culture and promotes linkages between the research and industry sectors
• a strong and reliable system for the protection of intellectual property rights.

Within our innovation system there are many players involving complex interactions between business, researchers in bodies such as CSIRO and in the higher education sector, financiers and customers. The key to performance is the linkages and communications between them.

A properly structured innovation policy should:

• be integrated into economic and industry policy
• be implemented as part of a whole of government approach – across Commonwealth and state jurisdictions
• recognise the special needs of small and medium enterprises
• incorporate public funding of R&D in universities and research institutions which recognise both the importance of industry focused applied research and the need for general ‘pure’ research
• emphasise co-operative approaches
• develop human capital through education and training
• increase ‘user’ input into evaluation processes of government programs
• include means to measure and benchmark innovation
• ensure that government assistance is defined by innovation activity not by business characteristic or market. Innovation assistance should be open to all business irrespective of size, sector, location, export focus etc.

Policy Objectives

The overall objective of innovation policy should be to improve Australians’ quality of life and standards of living. These benefits flow from improvements in the range, quality and cost of existing goods and services, and from the development of new products and services. This requires a policy framework which ensures the Australian businesses are not impeded in their search for innovation which improves competitiveness, quality and service and provides appropriate government support for research and networking activities which yield benefits to the community but which businesses might not be willing or able to undertake.

To underpin innovation a proper system of legal protections for intellectual property rights is necessary as is removing barriers to the international and national flow of ideas, technology and people, except for such restrictions as are deemed to yield a net benefit to the Australian community.

Innovation policy should focus primarily on creating an environment in which new ideas are generated and translated into new products, services and processes by the private sector.

Access to the World’s Ideas

Even if Australians prove hugely successful as innovators in future, it will remain the case that the vast majority of the world’s new ideas and products will be developed elsewhere. Ensuring that Australians have access to the benefits of those innovations will be even more important for our future welfare than the ideas and products we develop ourselves.

There is little governments can do to enhance the international exchange of ideas.

Australia should minimise its own barriers to trade and be an active advocate of trade promotion through agencies such as the World Trade Organisation.

In addition to the long established benefits of free trade based on comparative advantage, new growth theories suggest two other benefits – larger markets provide greater incentives to innovate, and importing other peoples’ products and services gives us access to the ideas and innovations those products embody. This is even more the case for overseas investment, which allows Australia to use and imitate technologies and processes developed overseas.

Perhaps the most important policy role for government is to facilitate change at the broadest level. While it is clear that a public innovation policy can assist firms, governments can ultimately act only in an indirect way, as it is firms not governments that deliver innovative products, processes and services.

The Policy Framework

The importance of innovation as a key driver of economic growth and the role of government in creating an environment in which innovation is fostered are increasingly being recognised by economic theories.

By creating the right environment, specific policy outcomes to enhance Australian innovation could include increasing the attractiveness of R&D investment as a home for venture capital from the financial community and ensuring public sector spending in research institutions and universities on R&D is relevant to industry through improved and increased linkages and supporting policy initiatives to increase linkages.

As the Industry Commission in its 1995 report, Research and Development, rightly concluded there is an economic justification for a government role in funding R&D as there is public benefit with externalities for the economy and spin off benefits as a result of the R&D.

To date innovation has not been widely measured around the world with the exception of one of its elements – R&D expenditure. In comparison to other OECD countries, public spending on R&D in Australia is above average. But Australian business expenditure on R&D remains below average and dropped in 1997-98 and again in 1998-99.

Against this framework, the following issues need to be addressed either by Government and/or business:

• a national vision of the nature and importance of innovation (the Innovation Summit in February 2000 was a positive initiative)
• further development of private/public sector cooperation to sustain competitive R&D across all sectors of the innovation system and to foster commercialisation of public sector R&D outputs including a greater focus of higher education research on industry needs and priorities
• design of cost effective public R&D support
• opposition to the transition of R&D assistance towards outlay-funded programs as this is likely to be inflexible and costly for business and government alike, as well as inconsistent with development of commercial capital markets
• direct funding (possibly coupled with matching funds) of industry R&D which has clear community returns
• indirect support (i.e. through higher levels of R&D tax concessions) to industry R&D as it is recognised that net community benefit will eventuate
• sufficient funding, with minimal bureaucratic impost, for both the R&D Start and core schemes to satisfy the R&D and venture capital needs of business especially SMEs including at the development phase of near commercial projects
• supply of skilled manpower and appropriate signals to the education and training system
• support for the Prime Minister’s Science Engineering and Innovation Council and its committees
• support for monitoring and evaluation of performance, e.g. maximising the extent to which existing ABS data can be used.

The imperative for these measures is clear. Innovation is essential if Australia is to achieve ongoing improvements in living standards and quality of life. A systematic and coordinated innovation policy which identifies and advances the appropriate roles of the private and public sectors would represent a major contribution to Australia’s economic future.