Strategic recommendation 2

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

A critical mass of key sectors is important for firms to drive innovation

Businesses are more likely to grow and invest in innovation where they have the support of a thriving industry ecosystem. The bigger the industry ecosystem, the lower the costs for businesses to access resources (including specialist services), the higher the probability of valuable knowledge spillovers, and the lower the risk for businesses to invest in innovation.

Australia’s current approach to allocating resources is to support a broad cross-section of businesses. The Australian Government and business need to focus on achieving a critical mass of sectors where Australia has (or could have) a comparative advantage.

Analysis by AlphaBeta shows the strongest predictor of productivity growth in a sector is the share of innovation-active firms. That is, the scale of innovation within a sector is a key determinant of its success (see Exhibit 3).

Australia has already identified sectors of strategic importance—or where it has or could have a comparative advantage—through its investment in these sectors.[38]

Exhibit 3: Five year multifactor productivity (MFP) growth vs. measures of innovation investment by sector MFP Growth, Annual, 2012–13 to 2017–18, per cent.

Source: ABS (2019) 8158.0 and 8104.0; AlphaBeta analysis

*BERD intensity is BERD/GVA and is the average for 2011–2016; Broader innovation intensity is a measure of innovation based on the BCS survey, also expressed as a percentage of GVA in 2016–17. This measure is likely to have significant measurement error, as firms only report their expenditure in ranges. Share of firms innovating is the percentage of firms that spent money on innovation in 2016–17.

In the near term these key growth sectors (which include Advanced Manufacturing, and Food and Agribusiness) should continue to be the primary focus of the government for encouraging R&D and non-R&D innovation investment, enhancing global competitiveness and ensuring appropriate scale.

In the longer term, the government should develop a rigorous process to review how these sectors are identified and supported. This will ensure they continue to represent suitably prospective sectors, given the inevitable evolution in sector performance.

Peer economies are prioritising and fostering innovation in key growth sectors

Many countries are taking an increasingly proactive approach to supporting business innovation. The governments of countries that rank highly in innovation investment commonly have mechanisms to provide funding directly to industry, through either direct co-investment or risk guarantees for private investors.

Funding is typically provided through co-investment programs. The Finnish Innovation Fund II and the Startup SG12 equity fund in Singapore are examples. A key feature of these programs is the targeting of innovative enterprises that operate in a designated sector or meet the strategic needs of the nation.

Although governments in Australia have adopted some of these approaches, fewer resources have been allocated than our international counterparts. Also, the programs have not been sufficiently focused on particular sectors or industries. Australian policies have tended to have broad eligibility, which has not resulted in the appropriate scale to ensure accelerated growth in sectors where Australia has a comparative advantage.

Australian governments must deliver effective policies to help level the international playing field. Without more active, well-targeted engagement to foster business innovation investment, Australian firms risk falling further behind their international competitors. The Australian Government should continue to commit to and concentrate its support for key growth sectors that have built, or are likely to build, our comparative advantage. This could be achieved by expanding the current sectoral policy approach and considering investment in new and emerging growth sectors.

For each of the existing key growth sectors, the government should implement measures that support both non-R&D innovation and R&D. These sectors will be important exemplars of the investment balance established in Strategic Recommendation 1.

Australia’s sectoral innovation mix has distinctive characteristics

Using sector-level BERD data, AlphaBeta has highlighted the role of Australia’s industry mix as an important driver of the apparently low aggregate level of R&D investment by Australian firms.[39] Much of the gap between Australian and higher international BERD levels could be attributed to the fact that Australian manufacturing and information, media and technology (IMT) sectors account for a smaller share of the economy than peer economies. Furthermore, Australia’s R&D intensity in those sectors is comparatively low (refer to Exhibit 4).

Manufacturing drives 70 per cent of BERD in peer economies (such as Canada, the US, the UK, Korea, Japan and Germany), but accounts for only a quarter of BERD in Australia.

Similarly, the IMT sector accounts for 24 per cent of BERD in the OECD, but just 3.5 per cent in Australia.[40] By contrast, Australia’s industry mix and innovation intensity in services—particularly business services—are above international averages.

Exhibit 4: International BERD intensity by sector, 2017–18 or latest

While a government focus on prioritised sectors will be a key avenue to grow the Australian economy, broader support for ICT related non-R&D innovation investment will concurrently benefit all sectors

Exhibit 4 indicates Australia’s IMT sector is comparatively small. It is important to note, however, that all sectors use and rely on ICT to some extent, and many have been disrupted by ICT innovations and benefited through innovative technology adoption.

According to the Australian Computer Society publication Australia’s Digital Pulse 2019, just under half (49 per cent) of all technology workers are directly employed in ICT-related industries such as computer systems design, telecommunication services and internet service provision.[41] The remaining 51 per cent are employed in other industries throughout the Australian economy.[42]

As such, investments in ICT-based innovation not only support the IMT sector, but more importantly offer revenue and growth spillovers associated with innovation in many other sectors.

Australia already has strong capability in niches within the IMT sector, including business-to-business software.Leveraging this capability across multiple sectors could have significant impact.

Work by Data61, in conjunction with AlphaBeta, has highlighted the opportunity available through ICT-focused investment, in a number of areas of strategic importance to the Australian economy. The work estimates this investment could create a market worth $155 billion in our region over the next decade.[43]

In targeting key growth sectors, there is therefore an opportunity to demonstrate, in a focused way, the rebalancing of support between R&D and non-R&D innovation. While both are critical to long-term prosperity, in the near term the opportunities from investing in ICT and software appear particularly attractive.

Examples of government-led initiatives

Example C. Mission-oriented policy

ISA recommends that Government leverage mission-oriented policy levers to solve national problems while stimulating key growth sectors and driving collaborative innovation.

There is a shift in thinking, both domestically and internationally, about the role of public sector institutions from one that is a passive actor focused on predominantly fixing market failures, to one that leads and sets directions in priority areas.

Mazzucato argues that Market Failure Theory (MFT) is less useful when the policy is required to create and shape new markets dynamically; that is, market 'transformation'. MFT is problematic for addressing innovation and societal challenges because it cannot explain the kinds of transformative, catalytic, public investments required to create new technologies and sectors.[44]

Internationally, missions are being used as a mechanism to provide global competitiveness across key sectors. For example, the United Kingdom Industrial Strategy sets out four Grand Challenges,[45] focused on global trends, to put the UK at the forefront of the industries of the future.[46] Each Grand Challenge focuses on a specific problem, bringing government, businesses and organisations together across the UK.

Example D. Easier access to innovation capabilities

ISA recommends that Government explore other models to provide industry with easier access to capabilities within research institutions. For example, consider developing research as a service model, like the Carnot Institutes model in France.

SMEs are often confronted with challenges such as new technology, security concerns, environmental norms, new materials, or the need to innovate their production processes. Most SMEs lack the financial and personnel resources to perform research that would be necessary to tackle these issues.

A study of 7,000 Australian SMEs found that businesses that collaborated on innovation increased their annual productivity growth by 4.1 percentage points.[47] The Office of the Chief Economist also notes that the Australian trend is consistent with international studies that highlight the importance of collaborative R&D on the performance of business.[48]

Countries have fostered research and industry collaborations in several ways. In Australia, the Cooperative Research Centres (CRC) program has been an effective mechanism. International examples suggest there are additional opportunities to collaborate between industry and researchers. A notable international example the Australian Government could consider is the Carnot Institutes in France. Established in 2006, these institutes undertake collaborative research projects and provide SMEs and entrepreneurs with research services through easy-to-use contract models. Their scientific and technological advances enable businesses to innovate and develop their competitive advantage.

For the past ten years the Carnot network, by making strong commitments in favour of the French economy, has more than doubled its turnover with companies.[49] The institutes receive €420 million in research contracts directly financed by companies each year, accounting for over 50 per cent of R&D funded by companies for French public research.[50] This model focuses on putting the needs of the SME first, is customer service driven and combines the capacity to create scale through a decentralised innovation network. This could provide new competitive opportunities for Australian SMEs to access the expertise and infrastructure they need to grow their businesses.

Example E. Align industry skills demand with supply from education institutions

ISA recommends that Industry Growth Centres and the relevant departments work with businesses to reduce the lag between curriculum development and the skills businesses need. A recent example is AustCyber’s work with the vocational education and training (VET) sector.

Businesses are more likely to grow where they have the support of a thriving industry ecosystem. Businesses tend to invest in training when they feel comfortable that there is a pipeline of appropriately trained staff or a pool of talent from which they can leverage.

Deloitte Access Economics has highlighted “the highest policy priority for the digital economy is skills development, and that relying on IT graduates and skilled migration alone is unlikely to meet the significant future demand for technology workers.” It adds that “more people need to consider moving from other occupations to take one of the additional 100,000 jobs that will be created in technology by 2024”.51 The Cyber Security Growth Centres’ (AustCyber) collaborations with industry and the VET sector to develop training that meets the needs of industry is a good example of industry demand being met by education institutions. This should be replicated.

Examples of business-led initiatives

Example F. Increase industry and government collaborations

ISA recommends that businesses work with Industry Growth Centres to further develop sector, cross-sector and export competitiveness plans, articulating how their sector will grow and create jobs and outlining the needs of their sector to government.

Each of the Australian Government’s six Industry Growth Centres has developed a short-term and long-term strategic vision that identifies challenges and opportunities for growth in their sector. This vision is captured in the Growth Centre’s Sector Competitiveness Plan, a ten-year strategy developed in consultation with stakeholders and updated annually to reflect new sector trends.

There is an opportunity for sectors to identify common issues (e.g. impact of emerging technologies) and to pool resources, establish scale and develop innovative solutions with the help of the Growth Centres.

By identifying cross-sector opportunities, articulating these clearly to government and specifying where government support is needed, there is an opportunity to act quickly, as well as forge stronger industry and government collaborations.

Case study 2: Cohda Wireless

Cohda Wireless’s innovation journey demonstrates the need for tailored and holistic government assistance to help Australian businesses take an idea all the way through to commercialisation. Read Case study 2: Cohda wireless.


  1. Australian Government. (2014). Industry innovation and competitiveness agenda – an action plan for a stronger Australia, p. 55.
  2. AlphaBeta. (2019). Australian business investment in innovation: levels trends, and drivers, p. 15.
  3. AlphaBeta. (2019). Australian business investment in innovation: levels trends, and drivers, p. 20.
  4. Deloitte Access Economics. (2019). (external download) ACS Australia’s digital pulse 2019 – blooming today but how can we sustain digital workforce growth?. Website: ACS Australia’s digital pulse 2019 overview.
  5. For example in public administration and safety, financial and insurance services, education and trade, retail trade and manufacturing.
  6. Data61 and AlphaBeta. (2018). Digital Innovation: Australia’s 315B Opportunity, p. 17.
  7. Mazzucato, M. (2016). From market fixing to market-creating: a new framework for innovation policy. Industry and Innovation, 23(2), pp 140–156.
  8. The four Grand Challenges are artificial intelligence and data, ageing society, clean growth and future of mobility.
  9. View more information about the UK Grand Challenges
  10. Palangkaraya A, Spurling T and Webster E. (2015). Does innovation make (SME) firms more productive?
    Paper presented to Reserve Bank of Australia Annual Conference 2015, Sydney, p. 189.
  11. Department of Industry, Innovation and Science. (2017). Australian innovation system report, p. 15.
  12. Inria website.
  13. Inria website.