Australia is heavily dependent on trade for its economic well-being. However, with the decline in the terms of trade, Australia will need to find new sources of wealth to continue to prosper.
Recent technology developments have helped global issues (climate change, ageing societies, food security), productivity growth (advanced manufacturing processes and automation) and the creation of new industries (financial technology, big data, Internet of Things). Business competitiveness and productivity will be driven by innovation.
According to the Global Innovation Index, Australia fell two places, ranking 19th overall to fall behind Switzerland, Sweden, the UK and the USA as the world’s most innovative economies.
A key plank of Malcolm Turnbull’s political platform has been Australia’s potential to become an ‘innovation nation’
Despite having a strong science base and world leading universities, Australia’s business expense on research and development (BERD) is modest. According to the G20 Innovation Report 2016, business research and development (R&D) expenditure (per GDP), venture capital (per GDP), top 500 corporate R&D investors (per GDP) all ranked Australia at the OECD median or below. Put simply, Australian businesses are underperforming in innovation compared to our global peers.
The term ‘innovation’ has been front and centre of the government’s political messaging, and with good reason. Innovation and disruptive technologies lead to a more productive allocation of resources throughout the economy by replacing less productive business models. It’s estimated that innovating businesses will have a disproportionate share of the Australian economy’s total income, internet income and employment compared to firms that do not innovate.
Education plays an important role in supporting innovation as we operate in a knowledge-based economy which relies on a highly qualified and flexible labour force in all sectors. Unfortunately, Australia is lagging on a number of key Science, Technology, Engineering and Mathematics (STEM) indicators. STEM university completions are flat, the number of year 12 students studying STEM subjects is declining and businesses are struggling to find STEM employees. Modelling by PwC finds that shifting just one per cent of the workforce into STEM roles would add $57.4 billion to GDP (net present value over 20 years). There is clear evidence that Australia’s ability to increase its innovative capability is dependent on investment in encouraging a STEM-based workforce.
Developing a stronger focus on STEM education will be key to our future, says Paxton Cook
From a business perspective, businesses need to continue to invest in R&D activities. The greatest barrier to innovation for young SMEs remains the lack of access to additional funds. Increasing national investment in R&D requires the combination of public and private efforts.
From a public perspective, we need to spend more on research and development and have greater government support to spur growth and ensure our transition to an ‘innovation nation’ doesn’t fall flat. The National Innovation and Science Agenda’s reduction to R&D funding through the R&D tax incentive program, while an attempt to address the federal budgetary challenges, is the wrong place to look for savings. Increases in public R&D funding followed by periods of rapid cuts, can impact on a business’ ability to innovate by creating adjustment problems and discouraging long-term planning.
There is no automated or mechanical recipe for creating sound innovation but rather businesses need to create a culture that nurtures and facilitates innovative entrepreneurship, such as a culture that is open to new ideas, developing innovation strategies (within a business), capacity and willingness to take technological or commercial risks.
There is no simple solution or panacea when it comes to innovation. Rather, it’s incumbent on private businesses to create a culture that encourages and rewards new ideas and through greater investment into STEM-related education create the next generation of innovators and entrepreneurs. It is also incumbent on the government of the day to continue to support businesses that take risks and undertake R&D activities. Our future depends on it.
Paxton Cook, director, PwC