The 2014 Australian Innovation System Report [PDF, 6MB] from the Office of the Chief Economist has identified Australia as a relatively mediocre innovator compared to other OECD countries.  This lack of innovation leaves us vulnerable to economic shocks as resources play a less dominant role in the economy.

The report finds that Australian levels of so called ‘new to market’ innovation has actually dropped in the last ten years.  Yet despite this, Australian rates of business creation are high by world standards; ranked between first and fifth depending on the measure used.  When surveyed, Australian businesses nominated a lack of funding as the main barrier to innovation, and this is reflected in Australia’s relatively low investment in innovation.  In 2010, the ratio of investment in intangibles (R&D, patents, trademarks and so on) to investment in tangibles was 42% in Australia – just half that of the OECD average (82%) and a mere 20% of the US investment ratio (200%).  Investment in intangibles is seen as a proxy for innovation and its relatively low levels are discussed further below.

Another worrying statistic is that, of the 2 million businesses in Australia, only 9000 undertake R&D.  Overall, Australia spends 1.23% of GDP on R&D which puts us 15th out of 34 OECD countries.  However, this expenditure is concentrated in primary industries and in particular mining.  As a nation, our R&D investment in high tech manufacturing is well below the OECD average. Measured as ‘R&D intensity’ (see Figure A.18 below), the OECD average for manufacturing as a whole is 7.49 compared to Australia’s 4.35, but for machinery and equipment, the OECD average is 19.28 against Australia’s meagre 8.27.

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This relatively poor performance on innovation is put down to:

poor collaboration between entities (business/government/industries) low capital investment in innovation obstructive or non-incentive government policies lack of business culture that values innovation high risk aversion

Australia cannot blame its small size or relative remoteness.  Countries such as New Zealand, Israel and South Africa are also small and remote but are all actively collaborating and innovating.  This shows that the ‘tyranny of distance’ is not a valid excuse.

A common measure of innovative activity is investment in intangibles such as R&D, patents, brand equity and other intellectual property.  The report highlights correlations between R&D, innovation, international competitiveness and business performance (see Fig. A.1 below).  However only one sector, mining, has a labour productivity (competitiveness) that is well above the OECD median.  All others were at the OECD median or below.

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Unfortunately, Australia shows a definite decline in the number of (Australian originating) patents, trade marks and designs filed; especially designs where the number of certifications has dropped 32% in the past year.  From an international perspective, the number of locally originating patent, trade mark and design filings places us in the lower middle range of the OECD.

Figure 2.9 from the report (see below) shows Australia invests relatively little in all forms of inngibles.  While the percentage of intangible capital stock in Australia is growing over the long term (see Fig. A.7 below), the growth rate is about one quarter of that of the US, and about one half of the OECD average.  Worse still, the report shows that the percentage of ‘innovation-active’ businesses in Australia decreased in 2012/13 (42.2%) compared to 2011/12 (46.6%).

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The innovation report also reveals a stark difference in the innovation of SMEs and big business.  Australian SMEs rank 5th out of 21 OECD countries, whereas Australia’s largest 4000 companies are a lowly 21st out of 29.  To address this disparity, the Chief Economist recommends more collaboration between businesses large and small, as well as with research organisations.  Collaboration between organisations for the purposes of innovation provides a mechanism for sourcing the widest possible range of ideas and resources to enhance competiveness.  Currently, Australia is one of the lowest ranked countries for industry/research collaboration on innovation.  And Australia’s policy framework is not helping.  Our government needs to do more as the figures show Australian public sector support for innovative business is the lowest in the OECD.

The Australian Innovation System Report references a multitude of other reports establishing innovation as vital to improving performance and competiveness.  As the mining investment boom recedes, the role of innovation becomes even more crucial.  Despite this, the report finds that Australian business tends not to prioritise innovation or actively promote an innovative culture.  Government has a responsibility to facilitate and encourage innovation, but ultimately the private sector must decide to make meaningful investments in innovation.