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Australia’s prosperity rests, to a significant degree, on the global competitiveness of its business sector. Business competitiveness is driven by the rate and type of firm-level innovation. Innovation provides the foundation for new businesses, new jobs and productivity growth. Innovative economies are more productive, resilient, adaptable to change and better able to support higher living standards. [1]

On a range of measures, Australia’s business sector appears to be falling behind in the global innovation race. This is a concern for business leaders and policy makers alike.

In February 2019, the Minister for Industry, Science and Technology, the Hon Karen Andrews MP, asked Innovation and Science Australia (ISA) to provide advice on opportunities to encourage increased business investment in innovation. ISA has undertaken both quantitative and qualitative analyses, including engaging directly with over 180 firms, to better understand the current levels of business innovation investment and the drivers of, and barriers to, this investment. ISA has used these findings to develop four strategic recommendations to promote change.

ISA has previously highlighted the importance of business investment in research and development (R&D) to the overall innovation system. International evidence continues to support the importance of R&D.[2] While business investment in R&D remains important, data shows that Australian businesses, like their international competitors, are investing in innovation activities beyond R&D.[3] This has implications for the way government should frame its policy mix.

Innovation (which includes R&D) is defined by the Organisation for Economic Co-operation and Development (OECD) Oslo Manual as “a new or improved product or process that differs significantly from the firm’s previous products or processes and that has been made available to potential users (product/service) or brought into use by the firm (process).”[4] We are defining non-R&D innovation as innovation activities that do not stem from a scientific method or involve R&D. Examples include the development of new or improved business models, as well as organisation and marketing practices (refer to Table 1 on page 9 for further examples of non-R&D innovation).

R&D is generally well measured in advanced economies and a well-established target for public policy. Non-R&D innovation, on the other hand, is less well measured and does not have the same track record of established policy interventions. Nonetheless, our quantitative and qualitative findings suggest that attention must be given to non-R&D innovation to obtain a holistic view of how Australian businesses innovate today.

Internationally, ISA has observed that business value is increasingly being created through asset-light, customer-loyalty focused business models, where investment in intangible assets (which includes those developed through R&D) is growing in importance. Firms in global peer economies are innovating to enhance their competitiveness. Investment is shifting from tangible assets such as factories and manufacturing equipment, to intangible assets such as R&D, productivity-enhancing digital technologies (including software and systems), reconfigured business models, branding and marketing, and new staff capabilities.

This has implications for Australian businesses, because the scalability of intangible assets means that businesses can rapidly grow globally and may even create ‘winner takes all’ scenarios. To remain globally competitive, Australian businesses must invest effectively in all aspects of innovation to keep pace with the innovation performance of international peers.

Our analysis indicates that business expenditure on R&D is not a strong predictor of innovation investment. Analysis for this report shows that sectors where many firms are actively innovating are more likely to have greater productivity, whether or not they undertake R&D.[5] Australian firms that invested in innovation (of any type) had higher revenue and job growth than those that did not.

The quantitative analysis found that, on average, large and small firms that invested in innovation outperformed firms that did not.[6] ASX200 firms in the top quartile of intangible asset investment grew revenue 1.3 percentage points per year faster than the average ASX200 revenue growth and were more likely to survive over a ten-year period.[7]

Small and medium enterprises (SMEs) that accelerated their investment in technology and were more sophisticated users of information technology (IT) had higher revenue and employment growth than firms that did not undertake those activities.[8]

SMEs with high growth in technology spending increased revenue by 3.5 percentage points per year faster and employment by 5.2 percentage points faster than those with low technology spending. Similarly, small firms that adopted at least one business software application in areas such as finance, human resource management, marketing and sales increased employment by 2.2 percentage points faster in that year than others.

Consequently, the traditional focus of business innovation policy on stimulating the supply of R&D should be complemented by measures that stimulate the supply of non-R&D innovation, especially where spillovers are important or systemic impediments exist. Government should also look at demand-side measures (examples include government procurement and missions) to spur greater innovation investment by businesses.

Members of the business community also have a role to play, both through their own investment decisions and through the broader innovation ecosystem they collectively create. ISA’s work has led to four strategic recommendations aimed at stimulating increased business investment in innovation in Australia.

Strategic recommendations

1. ISA recommends that Government rebalance its policy mix to support business investment in both non-R&D innovation and R&D, specifically with significant additional support for non-R&D innovation for a defined period, say, 5–10 years

Australian businesses are increasingly recognising the importance of non-R&D innovation, in addition to more traditional R&D activities. The shift to non-R&D innovation broadens the opportunity for a wider set of firms and industries to grow through innovation. Given the correlations between non-R&D innovation and economic growth and job creation, there is an opportunity for government to rebalance its existing policy mix to support business investment in both non-R&D and R&D innovation. Significant additional support should be targeted at non-R&D innovation (which is predominantly software and digital in nature) for a defined period, say, 5–10 years. The government could encourage and accelerate a shift towards a more balanced approach, rather than focusing predominantly on the supply of R&D activities. This can be achieved by increasing the use of more direct measures (such as innovation grants to high-potential firms) and include approaches that drive demand for innovation (such as procurement and missions).

2. ISA recommends that Government and businesses prioritise the key growth sectors

Australia has already identified sectors of strategic importance where it has or could have a comparative advantage. Key growth sectors such as advanced manufacturing, and food and agribusiness could be prioritised in line with Strategic Recommendation 1, to build and enhance their competitiveness and scale. These sectors will benefit from and stimulate investment in innovation. They will be important exemplars of the balanced approach to R&D and non-R&D innovation recommended in Strategic Recommendation 1.

3. ISA recommends that Government and businesses develop and encourage a 'growth through innovation' mindset and the business processes required to implement this mindset among shareholders, directors and managers

To enhance growth and job creation, government and businesses can work together to develop and encourage a 'growth through innovation' mindset among shareholders, directors and managers. This mindset and associated business processes for investment and decision making are key to maximising a firm’s innovation investment. Political leadership across all portfolios will be required, given innovation will be essential to the sustainable provision of at least current levels of services and delivery.

4. ISA recommends that Government facilitate access to, and attraction of, innovation skills and capabilities

Australian businesses often need to support their innovation investments with skills and capabilities in innovation beyond those available in the Australian market. Government can facilitate access to, and attraction of, these innovative skills and capabilities to further fuel business innovation investment. Attracting skills in high demand to Australia will deliver benefits, including increased opportunities for local skills development and enhancing jobs growth. Where appropriate this process should be accelerated.

Footnotes

  1. OECD. (2015). The innovation imperative – contributing to productivity, growth and well-being, p. 11.
  2. OECD. (2015). Frascati manual – guidelines for collecting and reporting data on research and experimental development, 6th revision - research and experimental development comprises the, “creative and systematic work undertaken in order to increase the stock of knowledge… and to devise new applications of available knowledge”.
  3. AlphaBeta. (2019). Australian business investment in innovation: levels, trends, and drivers, p. 5.
  4. OECD. (2018). Oslo Manual 2018 - guidelines for collecting, reporting and using data on innovation, 4th edition.
  5. AlphaBeta. (2019). Australian business investment in innovation: levels, trends, and drivers, p. 39. and Palangkaraya, A., Spurling, T., & Webster, E. (2016). What drives firm innovation? A review of the economics literature.
  6. AlphaBeta. (2019). Australian business investment in innovation: levels trends, and drivers, p. 35.
  7. AlphaBeta. (2019). Australian business investment in innovation: levels trends, and drivers, p. 35–36.
  8. AlphaBeta. (2019). Australian business investment in innovation: levels trends, and drivers, p. 38.