• Paul Jensen, Elizabeth Webster

Photo: Istockphoto Internet

28 August 2008New figures reveal a very patchy performance, write PAUL JENSON and ELIZABETH WEBSTER

THERE are only two ways a country can sustain increases in productivity over time: through enhancing its skill base or by innovating more successfully. While Australia's performance on skill development is indifferent, the state of our innovation system puts us well below the rich-country OECD club. Australia currently ranks 22nd on the World Economic Forum's Innovation performance index - behind Israel (5th), Korea (8th) and Malaysia (21st).

It is not surprising therefore that the new Rudd governments National Innovation Systems Review has attracted so much attention, including 600 or so submissions from the public. As the Minister for Innovation, Industry, Science and Research Senator Kim Carr is painfully aware, the situation is serious and the ramifications for the Australian standard of living will be felt, perhaps not immediately, but in the years and decades to come as countries which have invested more successfully in the fundamentals of an innovative economy surpass us and relegate us to middle income status in the world.

The bad news is that the lacklustre state of our innovation system does not appear to have turned the corner. According to the recently released IBM Melbourne Institute Innovation Index, Australia's innovative performance grew by only 0.7 per cent in 2006, a figure which is around one-third of our long-term average growth rate. This index covers a wide range of innovation activities from R&D expenditure, to patents and organization innovation. Although we don't know what the optimal innovation growth rate is, the fact that Australia?s innovative activity has fallen as the economy has softened should have alarm bells ringing. This slowing down of the intensity of innovation (that is, innovation as a proportion of overall economic activity) is consistent with the academic literature which finds that innovation is pro-cyclical. That is, innovation moves in concert with the business cycle. The simple reason for this is that innovation is risky ? that is, many innovation investments ?fail? in the sense that they do not result in any tangible output. When aggregate demand softens, firms tend to contract their investment in risky innovative activities.

The good news is that some industries performed well in the Innovation Index. In particular, the mining, communication, and finance and insurance industries all performed well above the average. However, this is tempered by the fact that innovation in key industries such as manufacturing, construction, and business services slumped. This is a concern for the government, especially Minister Carr, who has explicitly (and with good reason) identified manufacturing as a key industry in Australia since there are substantial opportunities for Australia to exploit value-adding opportunities in the manufacturing sector.

Recognizing that there is a need to improve our game is a necessary but not sufficient condition for succeeding. We must know which policies are successful: Should we increase the level of public sector research spending? Should we put more resources into public-private sector collaborations? What are the most cost effective policies to aid the commercialisation pathway? And so on? Unfortunately, we do not at the moment have the scientific evidence with which to answer this raft of questions. There is an abundance of anecdotal evidence on what worked for one company or one project, but we do not have results that we can generalize to the whole of Australia. If the government is serious about evidence-based policy formulation on innovation, then it needs to stimulate research on these issues. Moreover, we have limited (and now dated) information on the success of the R&D tax concession.

The key question to answer here is whether the concession just subsidises R&D activity that would have occurred any way? We also don't know whether the use of public money to subsidise public-private collaborations has been necessary for successful commercialisation. We do not know whether we should be spreading public money broadly on a multitude of technologies and industries or whether we should behave more strategically, as countries such as Singapore and Israel have done. Although the final recommendations of the Review are still unknown, the early indications are that the government will look to ways to stimulate further private R&D expenditure and to enhance the synergies between public R&D and industry. And although the devil may be in the detail, it's encouraging to see that the federal government after only nine months in office is clearly on the front foot with regard to putting innovation policy on the agenda.

Paul Jensen is a senior research fellow and Elizabeth Webster is the director of the Intellectual Property Research Institute of Australia, University of Melbourne