Business 21C - Published by UTS Business

Australia has to get its act together or it will fall further behind in the innovation race, writes Professor Roy Green.

In the 1970s, Holland celebrated the discovery of natural gas in the North Sea. A boon to the country’s GDP, the Dutch figured they would no longer have to toil in factories to manufacture exportable goods to get rich; now they would simply be able to tap their gas wells and pipe the money straight into the economy.

That is, until the rush to buy guilders pushed Holland’s currency to highs that made it difficult for all those not involved in the production of natural gas to make a living. The country’s manufacturers, forced to pay for imported inputs with newly expensive guilders, and unable to export their now expensive products, found themselves in a hole. The Economist dubbed the problem – which also afflicted other resource-rich economies – ‘Dutch disease’.

Every now and again, it is a disease to which Australia falls victim, with our abundance of coal and iron ore, and wheat and wool before that; and we are about to again with the prospect of becoming the source of liquefied natural gas (LNG), as well as abundant coal and iron ore, for Asia and the world.

We are, of course, the lucky country: blessed with such seemingly limitless natural resources. This has driven our economic prosperity over the last decade, particularly as China’s growth kicked in strongly in the early years of the new millennium. But it has come at a significant cost.

Over the past fifteen years, Australia’s competitiveness as a source of innovation and knowledge has taken an intense beating. In measure after measure of our effectiveness as a knowledge producer, the deterioration has been stark.

After being one of the world leaders in productivity growth in the 1990s, since 2003-04 Australia’s productivity growth rate has declined to a level that is no better than what we were achieving in the 1960s. Compared not only with famously creative social democracies such as Denmark, Finland and Sweden, but also commodity exporters such as Canada, OECD data shows that we invest a significantly smaller proportion in knowledge drivers, such as higher education, research and development (R&D) and software.

Australian exports are dominated by resources, to the detriment of our manufacturing and services industries, and we sit at the very bottom of the OECD in the contribution of medium and high technology exports to our total manufacturing exports. Our trade balance is deteriorating in the very areas, such as information and communications technologies (ICT), which are fastest growing in world markets, and which are highly value-adding.

On top of this, the data also shows that product innovation by Australian firms lags the world, with Australian firms of all sizes having less new-to-market products than comparable firms in just about any developed economy we might care to name.

This is grim news for Australia. Innovation is the source of more than simply new products. It creates wealth through productivity growth, social inclusion through expanded personal opportunities, and it directly contributes to environmental sustainability by improving factory productivity and adding to the country’s store of environmental knowledge.

This is an urgent issue and one that the country cannot ignore. The good news is that, with the Cutler Review into Australia’s innovation system, Venturous Australia, we have identified what has been sorely missing in the Australian innovation environment: any kind of national innovation system in which things are connected.

Government and public agencies, research and education institutions, finance and venture capital – none of these have operated in any coherent relationship with each other.

With the innovation review and the follow-up white paper, Powering Ideas: An innovation agenda for the 21^st Century, published by the government with the Federal Budget in May, the pieces of the innovation jigsaw are being put together. Crucially, we are starting to look at new sources of innovation over and above the traditional, linear approach of funding public research in the hope of transferring scientific discoveries to the market – important as that is.

In particular, Terry Cutler and his team highlighted the role of people and organisations, and of strengthening innovation management inside organisations, including leadership and culture. The challenge now, with most innovation these days being non-R&D, is to promote new business models in niche markets and the successful adoption and diffusion of high performance work systems.

Why? Because innovation isn’t just about promoting science and technology. And nor is innovation policy just about better public research. It’s also about better organisations, organisations that can make use of research, something increasingly recognised as the challenge of ‘innovation absorption’. We need not only to be technology makers or technology takers, but also to be systems integrators, bringing together people and technologies in new ways.

Powering Ideas picked up on the national framework idea, and identified that public research and business innovation are underfunded in Australia. It also promoted an expanded role for Enterprise Connect, a government organisation designed to provide advice to companies, and to bring them together with skills, finance and supply chains. For the first time in Australia, the government has recognised the importance of collaboration and networks, of building innovation capacity and performance at the enterprise level.

It is increasingly understood that there are many pieces to the innovation puzzle, each of which must be worked on independently and as part of the larger whole. Australia must continue to boost its investment in innovation, in our public research, R&D and commercialisation. Equally important, however, is the need to invest in the capabilities and skills that are necessary to translate innovation priorities into action at the company level. Without that, innovation cannot get traction. Finally, we must focus on the management of innovation.

Business schools have a vital part to play in this, with more integrated approaches to research and the teaching curriculum, and an increasing role for creativity and design thinking in graduate attributes. And so does government, so do industry associations, so do leaders and managers themselves in engaging with universities and training agencies, in unlocking workforce talent and in devising their own strategies to transform the productive performance of firms and organisations.

With Powering Ideas, the Australian government has made a significant start to developing a new long-term policy framework and agenda for the management of innovation. Being a commodities producer should not be a barrier to success. Look at Norway, which has used its North Sea oil and gas revenues to invest in a knowledge-based future, for when the revenues no longer flow and the world may have adopted alternative energy sources.

Australia has the skills, ingenuity and the resources to be a world leader. It should not be satisfied with being a laggard in innovation. A resources boom is only beneficial if it makes us stronger, not more vulnerable to international trends and business cycles. Government can set the direction, but companies and organisations must set the pace.

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ROY GREEN | HOW HAS AUSTRALIA BECOME AN INNOVATION WEAKLING?

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