Australia’s market-sector labour productivity has steadily fallen behind the United States (US) over the past decade and now trails the US by 12%. Much of this divergence occurs in manufacturing and information where US firms have larger stocks of intellectual property (IP) capital, particularly in research and development (R&D) and software.

This research note explores the productivity gap and finds that in addition to the lower rates of IP investment in Australia, there is also limited diffusion of US knowledge capital to Australian firms and industries.  

Key findings

• Investment gap: US-owned subsidiaries in Australia invest in IP at close to US rates and are significantly more productive than Australian-owned firms in the same sectors.  
• Diffusion barrier: frontier US technology already present in Australia has not closed the productivity gap for domestic firms. 
• IP deficit: this also occurs in other industries, where the Australian firms that fall behind in IP capital intensity also tend to be where the productivity gap widens.  
• Productivity engine: controlling for within-industry differences in IP capital accounts for much of the aggregate Australian productivity divergence this century. 

To meet the productivity challenge, Australia should consider increasing IP investment and improving the ability of domestic firms to adopt and apply existing technologies. To achieve this will likely require management capability, skills, organisational capacity and financing systems that support firms scaling into adoption. Labour market and competition settings that facilitate knowledge diffusion are also likely to matter.