My innovation is bigger than your innovation

By Ken Wolff

Malcolm Turnbull launched his ‘National Innovation and Science Agenda’ on 7 December last, three days after Labor had launched its ‘start ups’ policy, ‘Getting Australia Started’.

The launch dates for the policies mean little as obviously before such a launch there has been considerable background work and consultation – by both parties. So, if they have both done the work beforehand, do they come to the same conclusions and have they found and addressed the real issues facing us in our future ‘innovation economy’? It should be noted, however, that Bill Shorten had raised innovation, STEM, and ‘a nation of ideas’, and outlined some aspects of his innovation policy, in his Budget Reply in 2015, months before Turnbull became prime minister: so there is an argument that Turnbull was playing catch-up and that even the catch-phrase for his policy, ‘The Ideas Boom’, was born in Shorten’s speech.

It wasn’t, however, only the political parties doing the work or engaging in the debate. At Parliament House on 27 November the Australian Council of Learned Academies (ACOLA), which comprises the Australian Academy of the Humanities, the Australian Academy of Science, the Academy of the Social Sciences in Australia, and the Australian Academy of Technological Sciences and Engineering, launched its report, ‘Translating research for economic and social benefit: country comparisons’. Also at Parliament House, six days later – a day before Labor’s policy launch – the Senate Economics References Committee released a report, ‘Australia’s Innovation System.’ So in the space of ten days there was a lot happening about innovation.

The Senate Committee recommended:

• adopting a target to lift investment in R&D to 3% of GDP
• establishment of an independent body to administer and coordinate innovation policies and programs
• measures to enhance collaboration between universities and the private sector
• the commonwealth and state governments collaborate to support the role of local and regional innovation ecosystems
• education be a central focus, recognising ‘the central importance of the interplay between the STEM subjects and the humanities, social sciences and creative industries’.

Labor has committed to devoting 3% of GDP to R&D by the end of the next decade but I have not been able to find a similar commitment from the Liberals. R&D is central to innovation and adopting the target can help bolster R&D in Australia, particularly given, as shown later, that we are currently overly reliant on public sector research.

The Liberals’ address the second, third and fourth recommendations. Its approach to the fifth is more limited than recommended.

For Labor’s response there is a need to look at both ‘Getting Australia started’ and ‘Powering Innovation’. When both are considered Labor is also addressing the second, third and fourth recommendations and has a greater emphasis on the fifth recommendation, particularly if its approach is read in conjunction with its education policy, the second sentence of which reads:

Improving education is the key to opportunity, to innovation and to the future economic and social prosperity of our nation. [emphasis added]

The differences in detail reflect the differing philosophies of the parties. The Liberal approach basically builds on existing business capabilities it sees in the economy and proposes measures to unlock and leverage those capabilities. Labor’s approach builds from the ground up. That is clearly shown in the approach to start-ups and STEM education.

As regards start-ups, the Liberals offer a 20% tax break for early stage investors and some tax cuts through the existing Small Business and Jobs Package. Otherwise its approach is legislative, to support business through reforms to employee share schemes, removing rules relating to depreciation of non-tangible assets (such as patents), reforming insolvency laws and relaxing the ‘same business test’ for tax losses.

Labor offers a $500 million Smart Investment Fund from which government will co-invest, with venture capital and other investors, up to 50% of start-up capital but otherwise its focus is educational – supporting a ‘start-up’ year of accelerated study or involvement with a university for those involved in start-ups and providing HELP loans for those completing university degrees to undertake an additional business-focused year.

For STEM, the Liberals support reforming the Australian Curriculum to provide more teaching time for science, maths and English and will ensure that primary teachers graduate with a specialisation, with particular support for STEM subjects. It will also support coding and computing in schools.

Labor proposes a National Coding in Schools centre where business and industry can connect with teachers. It will also provide scholarships for 25,000 teachers over five years to be trained in STEM, and for 100,000 graduates in STEM, also over five years, who will have their HECS debt written off on graduation.

In a piece in The Conversation, Anand Kulkarni and Travers McLeod suggest that a ‘beyond STEM’ approach should be taken that recognises:

… the interdependencies of scientific research and non-research forms of innovation such as design and organisational systems, together with the social sciences pivotal role in driving prosperity within innovation ecosystems.

So simply addressing STEM may not be enough, although it is apparent that we do need more people skilled in these areas. In April, Matt Barrie, a tech entrepreneur, pointed out that the number of young Australians involved in the tech industry had fallen dramatically and there had been a reduction of between 40% and 60% in those studying IT in the past decade, yet this at a time of a boom in technology.

The parties have a similar approach to overseas recruitment with both offering new entrepreneurial visas with options of fast-tracking permanent residency.

Questions have been raised about the emphasis both parties place on start-ups. ‘Stilgherrian’ writing on ZDnet in September last year asked for:

… a conversation about innovation and the future that isn’t solely about the kind of high-risk fast-growth business models run by youthful technophiles that venture capitalists prefer.

Labor’s Kim Carr, speaking at an engineers’ forum on 20 November last said:

In Germany, the innovation system integrates all sectors of the economy.

That is in contrast to, say, the US, where there is great emphasis on ICT start-ups and the provision of venture capital, but where old industries are too often allowed to die out.

Germany, however, aims to renew them through a broad view of innovation.

As is often the case, it seems we are following the US model of start-ups and venture capital when there are other approaches to innovation which may better suit our economy. One can only hope that Kim Carr’s approach has more influence when Labor gains government.

The Liberals’ approach to collaboration seems to put the pressure on universities to play the more active role in joining with businesses. Its policy suggests that it will refocus a greater proportion of block grant research funding to universities to require collaboration with business. The ACOLA report, however, found that in a number of overseas countries the process is reversed with the incentive provided to businesses through specific or additional R&D tax incentives to promote collaboration. It suggests:

The argument for providing incentives to business to seek out translatable university research is that business will apply the disciplines of the market that it hopes to address. This commercial approach to research collaboration provides a ‘reality check’ which is considered important in separating out research outcomes with real commercial prospects …

It is an issue because, as the ACOLA report shows, in Australia only 4.1% of small and medium enterprises (SMEs) collaborate with researchers and only 3.5% of large firms: that compares, for example, with 16.8% of SMEs and 31.3% of large firms in the UK, and 13.9% and 43.2% respectively in Germany.

Eighty percent of Australia’s researchers are in the public sector (universities, CSIRO, etc). That is the highest proportion in the OECD. The next closest are Chile and the UK with 62%.

Australia encourages R&D by businesses primarily through the R&D tax incentive – what is termed an indirect approach. Other countries make greater use of direct support through grants, loans and procurement contracts to encourage business R&D, including loans and grants for SMEs.

In another recent article on TPS, I quoted Tim Mazzarol from the University of Western Australia who noted from a Business Council of Australia forum he attended:

… there was also a recognition that many large firms, particularly foreign owned multinationals, do very little fundamental R&D in Australia. The pipeline for STEM graduates into industry and the willingness of many large firms to serve a “Keystone” role in local business ecosystems is currently missing.

None of those issues, recognised by business itself, are directly addressed in the current innovation policies.

The Liberal government, despite now expressing hope for greater business-research collaboration has, since 2013, overseen significant cuts in public research funding and even cut $1 billion from the business R&D tax incentive. Innovation requires R&D and there is little point espousing one when cutting the other.

If both parties support spending on STEM teaching, they may need to assist industry to create pathways for STEM graduates into businesses – but that has not been addressed, although the parties may claim that their proposed regional innovation hubs will provide a focus and such a pipeline but it is not clear as yet whether that will be enough.

The last point in Mazzarol’s comment is also supported by ACOLA. It reports that overseas experience shows innovation hubs require at least one large firm at their centre.

But that takes us back to Mazzarol’s first point. Does Australia have a problem because many of our largest firms are actually overseas multi-nationals who, as Mazzarol reports, do not undertake significant R&D in Australia and so do not really have a great interest in supporting other Australian businesses? They may have no interest in acting as the focus of an innovation hub because their focus is to return profit to their home country (or a tax haven). Do we have enough large Australian companies to fulfil that role?

Of course, innovation also requires adequate infrastructure. For the digital age, and for start-ups making use of digital technology, one would have thought the NBN would have been a crucial component. The original NBN may have been but not the second-rate system now being rolled out: in 2013 Australia’s average peak connection speed placed us 30th in world rankings but by the end of 2015 we had dropped to 60th; our broadband connectivity above 4Mbps ranked us only 45th in 2013 but in 2015 that had also dropped to 56th place.

If Australia is to take advantage of innovations in the digital age then, at some point, there will need to be an upgrading of the NBN and elimination of the copper components that slow the current system. Both the Liberals and Labor mention the NBN in their policies but, as yet, without any details for a future upgrading.

Innovation requires risk taking, not merely by the innovators, but by businesses when they consider adopting the new technology – that does not appear to have been considered in the current policies which focus on high-tech start-ups and fail to provide assistance for other businesses to adopt new technology, other than, perhaps, in the innovation hubs. But surely, as Kim Carr said, genuine innovation should spread across all sectors of the economy, including established industries, if we are to be successful.

Elizabeth Webster on The Conversation, suggests we could learn from the Australian primary industries:

Each major agricultural product group has an R&D corporation, jointly funded by farmers and government. It identifies common industry problems, appoints experts to research these problems, translates their findings into practical solutions and then delivers the message to the farmer. The individual farmer does not have to bear the full risk of the innovation – this is shared by peers with joint problems. By the time a proposed innovation reaches the farmer, much of the risk has been removed.

She does not suggest that this model can automatically apply to other industries but it provides elements that should be considered: ‘The R&D corporation model is constituted under acts of parliament. This means their members can think long term with the (near) certainty that their plans will not be scuppered by a change of government or minister’.

Another writer, Gavin Moodie, however, suggests that we can no longer simply follow the linear ‘supply chain’ model of research leading to development and then application in production. He supports the development of innovation hubs with many businesses gathered together but, like ACOLA, he recognises that ‘almost every successful innovation hub involves the participation of big enterprises as hub champions’.

Elements of both approaches seem warranted but so far we have only a commitment to innovation hubs.

One factor that is raised by a number of writers on this topic is the need for patience and consistency (such as provided by the agricultural R&D corporations). Moodie writes that successful innovation can require public and private sector collaboration over periods of 15 years or more.

There are questions whether the focus by both parties on start-ups and STEM teaching will achieve the intended outcomes without other supporting measures and, against the other issues I have raised, the policies of both parties fall short to differing degrees. Plus, when one takes account of the current government’s funding cuts to scientific research and education and the downgrading of the NBN, we have already set the ‘innovation economy’ back a few steps and need to make up that distance again. Labor at least gives greater recognition to those broader issues.

Finally, there is one key issue raised by Kulkarni and McLeod in their article:

… to be credible, innovation policymaking must be located within a long term vision of the structure of the Australian economy we should aspire to.

Do we yet have a long-term plan for the structure of the Australian economy? – I think not. And when governments can undo the changes introduced by previous governments every three years or so, we are a long way from achieving that ultimate vision. Without it, even the best intentions regarding innovation may not achieve their full potential. Or do we just sit back and hope ‘the market’ will get it right.

What do you think?

Will the policies put forward by the parties really achieve an ‘innovation economy’?

Or are the policies only going part of the way and leaving the rest to ‘the market’?

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This article was originally published on The Political Sword

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