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Fostering an environment that enables Australian firms to innovate and be globally competitive is key to a resilient economy, yet Australian business investment in innovation continues to lag leading innovation nations. The gap may widen unless timely action is taken.

Traditionally, business expenditure on R&D activities have been used as a measure of business innovation. However, innovation is broader than R&D. Exhibit 1 provides an overview of the four types of business innovation identified by the OECD.[9] AlphaBeta and ABS survey data shows that Business Expenditure on R&D (BERD) is not a strong predictor of business investment in innovation.[10] AlphaBeta’s analysis also indicates that sectors where many firms actively innovate are likely to be more productive, whether or not they conduct R&D.[11]

Exhibit 1

The four types of business innovation are Product, Process, Marketing and Organisational. Product is defined as a product or service that is new significantly improved, e.g. significant improvements in technical specifications, software, user-friendliness or other functional characterisitcs. Process is defined as a new or significantly improved production or delivery method. Marketing is defined as a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. Organisational is defined as a new organisational method in business practices, workplace organisation or external relations.

Table 1 provides a list of non-R&D innovation examples and highlights how intangible asset investments, which are frequently associated with such activities, are being leveraged in each case to drive faster growth.[12]

Table 1: Examples of non-R&D innovation and the types of intangible asset investments made to enact the innovation.

Examples of non-R&D innovation

Non-R&D intangible asset investments

Mechanisms of growth for the investor in the asset

A car-sharing platform helps people get access to cars without having to cover the up-front costs.

Software (including internally developed and purchased).

Improved process efficiency, ability to spread process innovation more quickly, and improved vertical and horizontal integration.

A startup fintech firm delivers financial products to customer segments that are not served by traditional providers.

New or significantly improved product designs.

Access to new/larger markets. Reduced information asymmetry and monitoring costs.

A dairy business uses culturally sensitive branding of a new fresh tasting long-life milk product to sell into major supermarket chains in Asia.

Enhanced brand, including positioning and awareness.

Improved consumer trust, enabling innovation, price premium, increased market share and communication of quality.

A large, traditional firm adopts a new project management approach across the entire organisation.

New or significantly improved organisational capability.

Internal improvement in decision making and business processes.

To examine the critical role innovation plays in driving a productive, resilient and prosperous nation, the Minister for Industry, Science and Technology, the Hon Karen Andrews MP, asked ISA to provide advice on opportunities for increased business investment in innovation. In developing this advice, ISA has:

  • undertaken a study of the drivers for, and barriers to, increasing business investment in R&D and emerging technologies, and in other activities that support innovation including systems, processes and skills
  • identified the needs and opportunities of firms in existing and emerging areas of the economy, in response to technology disruption
  • analysed issues faced by firms that operate predominantly within software environments, and options for addressing them
  • considered the role of government, including direct and indirect interventions, and identified opportunities for greater industry-led initiatives.

ISA used both quantitative and qualitative analyses in compiling this report. The quantitative work highlighted the implications of Australia’s industry mix in the economy, the importance of macroeconomic conditions and their impacts on the trends in innovation investment in Australia (see Appendix A).

The qualitative work used human-centred design methodologies and a collaborative design process involving over 180 business stakeholders from across Australia (see Appendix B).

Drawing upon the findings of the quantitative and qualitative analyses and the experience of ISA Board members, this report develops four strategic recommendations for increasing business investment in innovation.

For each recommendation, ISA suggests ways to implement it using examples of government-led and business-led initiatives. These examples are based on insights from the analysis and international best practice and do not constitute a definitive list of potential measures. While consideration of detailed funding arrangements is beyond the scope of this report, these examples could be funded from a combination of savings achieved through streamlining innovation programs and new investment to stimulate greater business innovation.

Footnotes

  1. OECD. (2005). Oslo Manual - Guidelines for collecting, reporting and using data on innovation, 3rd edition.
  2. AlphaBeta. (2019). Australian business investment in innovation: levels, trends, and drivers, p. 24.
  3. 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.
  4. Table 1 is not an exhaustive list of intangible assets investments and often businesses will also invest in more than one type of intangible asset to enact a non-R&D innovation.