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  • Writer's pictureDavid James Connolly

Australia’s dud report card on innovation and entrepreneurship

The data doesn’t lie.

Amid profound questions about where the productivity lifts to support real wage increases are going to come from, the latest Swiss-based World Competitiveness report has ranked Australia third worst of 64 countries when it comes to entrepreneurship.

The core reason Australia ranks so low around ideas and innovation is the lack of what is known as economic complexity. It measures the productive capacity of a region or country based on the number and complexity of the products successfully exported.

CSIRO chief Larry Marshall told The Australian Financial Review’s Entrepreneur Summit that it was CSIRO technology that “invented” Wi-Fi. Michael Quelch

The Swiss report ranked Australia sixth last. Traditional industrial powerhouses Japan and Germany lead the rankings, whereas Australia sits with the miners and farmers – as we have since at least World War II.

It is one data point, but the lack of any deep sovereign innovation capability can be seen in what is shipped out of the country. Australia’s tech exports measure $9.3 billion each year, a third of Sweden’s and half of Denmark’s. Both countries are significantly smaller than Australia. Sweden’s population is 40 per cent of Australia’s and 23 per cent of Denmark’s.

Booming resources kept Australia’s overall “competitiveness” rank plateauing at around 19th best, but notably the country is now down by 10 places from the mid 2000’s. Innovation drives productivity, so there were no surprises when the competitiveness index also showed the country ranked 46th when it came to productivity.

Industrial capacity goes south

Like many developed countries Australia has essentially outsourced its manufacturing to Asia, with the country’s manufacturing sector now sitting at around 5 per cent of the economy, roughly a third of the size it was 40 years ago.

That was the same time CSIRO radio physicist John Sullivan was assembling his Wi-Fi team to develop their path-breaking wireless network technology. In a harbinger of things to come, CSIRO didn’t make any devices from the tech. Instead, it belatedly sued various US firms for what was claimed to be patent breaches, after a tech standard that had been established well before CSIRO’s researchers got Wi-Fi going.

That didn’t stop outgoing CSIRO chief Larry Marshall from yet again claiming CSIRO had “invented” Wi-Fi at The Australian Financial Review’s Entrepreneur Summit this week.

Marshall has been very much the standard-bearer for what might be called Malcolm Turnbull’s innovation agenda. He leaves CSIRO a very different organisation than the sleepy government labs culture it previously had been.

Ironically, some of the Wi-Fi patent funds went into the newly formed Main Sequence venture capital initiative. In two tranches the $490 million public VC fund has supported researchers across their funding “valley of death,” making CSIRO an important incubator for Australian scientific entrepreneurial talent.

The end of cheap money has seen tech values collapse, and amid a sharp pullback of venture capital, Main Sequence becomes even more vital to the thin Australian start-up space.

Venture capitalists become sensible

At the height of the boom, over $10 billion was raised in 2021. On this year’s run rate only a quarter of that will be available to founders this year, as the local VC market goes back to being “sensible.”

Start-ups and step-ups are being told they need to “wash their own face”, code for generating enough revenues to cover costs.

At the same time whatever state government grant money was available to help seed funding and the development of minimal viable products is being heavily scrutinised by Treasurers looking for any measures to pull back COVID-19 debts.

NSW’s entire innovation grant program is frozen, pending a whole-of-government budget review by the new Minns government.

R&D in the doldrums

Every bubble has to burst and as the tide goes out, there are sober questions about what will drive the already faltering innovation and productivity engine of the economy.

Former Labor Industry Minister, and now Monash academic, Kim Carr was this week pointing out the inconvenient truth that despite all the exuberance around local unicorns, the reality is Australia is a laggard when it comes to R&D investment.

Investment NSW’s Innovation and Productivity scoreboard was prepared by the NSW Innovation and Productivity Council last year. It shows Australian R&D investment stalled at around 1.8 per cent of GDP, well below leading economies such as South Korea (5 per cent) Germany (3.2 per cent), the US (3.1 per cent) and the OECD average (2.5 per cent).

More sobering are the graphs showing business investment in R&D trending downwards across the previous decade, while government and university at best have flat lined.

Carr noted figures which show the average ASX 200 company spends just 3 per cent of revenue on R&D, in comparison to the international average of 6 per cent for listed companies.

Business goes missing

At a high level, much of the issue is tied up with business incentives that encourage shorter-term share price improvement over longer-term investment-driven growth.

The net result, as iconoclastic fixed-interest portfolio manager Chris Joye has pointed out, is that Australia has recorded the weakest sustained peacetime growth in its capital stock since the 1930s depression. A major reason why national labor productivity is going nowhere.

This in turn drives a cultural aversion to business innovation. COVID-19 impacted the numbers, but according to the Australian Bureau of Statistics, only one in five of all companies introduced any goods or services innovation for the two years to June 2021.

Amid a rapidly slowing economy these investment and innovation numbers are likely to get worse before they get better.

Cash-strapped governments also mean universities are inevitably going to have to rely on international student fees to subsidise research, a volatile base on which to finance long-term basic research.

Carr also noted just how fragmented government business R&D and investment efforts are, claiming there are over 200 plus programs across 13 different portfolios.

This is exacerbated by the need to spread precious funding across the nation to satisfy the political need for federal balance. Rather than consolidate and focus efforts around key initiatives such as space and quantum, this is seeing money spread across already thin ecosystems.

At the same time, the $530 million flagship R&D tax incentive scheme remains a vital, but controversial, foundation for the innovation world. The scheme is essentially demand-driven, with about a third of concessions going to manufacturing and the rest spread across a long tail of sectors.

Sovereign dream

Prime Minister Anthony Albanese has big ambitions to rebuild sovereign manufacturing capacity. While he and Carr are not great political mates, Carr’s call this week for a whole-of-government, root-and-branch national inquiry into the country’s poor R&D performance was well noted in Canberra.

Faltering venture capital markets, mediocre R&D spending, industrial capacity at historic lows, business pulling the breaks on already low discretionary investment spending, and government efforts highly fragmented, have all combined to create a perfect storm.

Ford’s cutting of its product development and design teams in Geelong on Thursday is a pragmatic reminder that when manufacturing leaves, so does innovation. The issue of Australia’s industrial capability—be it in critical minerals processing or advanced manufacturing—is sure to be actively debated at Labor’s upcoming National Conference.

Industry and Science Minister Ed Husic knows the issues and challenges very well. All eyes are on Husic’s new $15 billion national reconstruction fund, which hopefully will be the catalyst that resets the national innovation agenda that lost steam and direction after Turnbull departed politics.

That fund will take time to establish itself in the innovation ecosystem. In the meantime it will take strong leadership and a whole-of-government, truly federated focus, on how to redesign the strategic incentives that have conspired to cause Australia to languish at the bottom of the innovation league tables.

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