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nnovation Nation?

Monday 18 August 2003

Produced by Sue Clark

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Summary

Australia is slipping down the ladder when it comes to innovation. A new study ranks us at only 17th in the world and falling. But it isn't all doom and gloom the study also proposes concrete steps we can take to start moving in the other direction.
Program Transcript

Richard Aedy: The Australian wine industry is the most innovative in the world. Over the past 20 years it’s been hugely successful at creating new products, wines, and persuading the world to drink them. Unfortunately, the rest of our industries aren’t nearly as innovative and a new report doesn’t mince words when it comes to pointing out what’s wrong. Australia’s only the 17th most innovative economy and we’re going backwards. Joshua Gans at the Melbourne School co-authored the report. Joshua Gans: On a number of variables, such as total expenditure on research and development Australia’s been growing very, very well. On other areas, in particular, spending on tertiary education and higher secondary education, Australia is falling behind. While our levels spent on those things are in dollar terms, historically high as a proportion of GDP, relative to our other OECD countries, they are stagnant if not declining. Those sorts of areas such as the spending of universities on research, the total number of scientists and engineers actually graduated in Australia and in terms of some of the balance between public and private expenditure on research, we are behind the countries we would now compare ourselves to. And what has actually occurred is in the past countries to move from a second tier to a first tier innovator economy has required a sustained and systematic attempt by both government and business to improve innovative capacity on all its key dimensions. And what we identify in our study is that requires three things. The first is you have to make sure that the basics are there, you have to make sure that there’s the basics of education, ease of access to capital to spend and also, just generally stable institutions that allow an infrastructure to form. You also need to have an environment which encourages the sort of specialised technological improvements, and by specialised I mean specialised to key sectors. Michael Porter has coined the term clusters for these. Generally speaking you can’t expect the Australian economy to be high technology and a technology leader in every sector in the world. One of the things that annoys me – and I saw it in a paper this week – is concerns about our information and communication technology deficit. Richard Aedy: Yes, this is how much we import basically.

Joshua Gans: Exactly. At the moment Australia imports more information and communication technology than it exports. Richard Aedy: It’s about $16 billion a year I think. Joshua Gans: Yes, and people do focus on that number as a concern for Australia’s status in the technology community. But when you think about it Australia’s potential is not necessarily to become a high producer in terms of information and communication technology. In fact it’s far away from our traditional strength in mining, agriculture and now more generally life sciences. So what Australia really needs to think about is encouraging the areas where it actually has a relative advantage as opposed to being concerned about the areas where it does not. Richard Aedy: You’ve mentioned there are three things. So far we’ve talked about two of them. The first one is, as far as I can tell, pretty much improving common infrastructure so things like investment, tax, getting your risk capital there, getting your education level right, those sorts of things. Joshua Gans: There are things that are needed just to generate innovations at all. Richard Aedy: And the other thing you talked about was clusters, with things like medical biotechnology around Melbourne at the moment. Joshua Gans: That’s right. What clusters are, whereas infrastructure is the supply site, clusters are really the demand site. They are areas in which we can focus our innovation for addressing particular needs and particular market niches. Why you want to have a cluster is because it is useful to have many different firms in the same technological area, located close by. Richard Aedy: Silicon Valley is the great example of this isn’t it? Joshua Gans: Yes, but it’s also no accident that a lot of biotechnology firms tend to cluster around universities with strong medical and biological sciences faculty. And so what you have there is you have people working in the same area – clearly being able to have some advantages of geographical links – but also the fact that there might be just a common labour pool to draw upon; that’s where the venture capital’s located and so on and so forth; that’s where the graduates are coming out, that somehow enables more innovation to occur than if all those were spread evenly across the country. Richard Aedy: Joshua, how do we get from the common infrastructure to the clusters, there’s got to be some form of linkages, you can’t just have one independent of the other? Joshua Gans: That’s right, basically you need something to mesh the two together. If you don’t mesh the two together you might have mismatches and this is actually what we have in Australia. For instance in Australia if you look

at our spend of actual financial capital on R & D – most of it’s actually spent in information/communication technology, high-end engineering. But if you at our mix of graduates, among the OECD (we) are unique in graduating more biologists than engineers. Now that’s not an indication necessarily that we should be graduating engineers but what this is all an indication of is some sort of mismatch. And what you need to do is work out policies that can build up linkages between essentially supply and demand for innovations. One such linkage building institution is of course universities themselves. I mentioned earlier that biotech firms tend to be located close to universities. The reason for that is the universities are the place where the basic scientific capital is held and so the people who are developing marketable and commercialisable innovations tend to locate near the universities so that they can draw on that. Richard Aedy: But as we’ve already mentioned the universities, although getting a historically large amount of money, as a percentage of GDP they’re in a bit more trouble. Joshua Gans: The university system in Australia has had in the past difficulties at responding to market opportunity and this happens both in developing new fields for training students or educating them as well as moving into different scientific endeavours. It’s been quite difficult. My more simplistic characterisation of this is essentially the total amount we spend in universities comes from above, it comes from the government. So if universities want to be entrepreneurial, if they want to build up laboratory strengths in a particular area, they have to sacrifice some other discipline. The problem with this it’s very costly, it’s very hard to shift resources around in this way. So universities need a means of being able to respond to opportunities without having to sacrifice other areas of activity which might actually be socially worthwhile because that’s a very hard call to make. If you’re a corporation and you want to launch a new product or pursue a new area you don’t have to close down a department, you can just pursue it. And really we need to give universities that same strength because essentially there’s got to be a way of expanding their total budget. Richard Aedy: This it seems to me is the hardest thing of all. Of the three things that you’ve mentioned, so improving the infrastructure, getting clusterspecific innovation going and the linkages in which universities are going to play a key role, it’s these linkages which are the most difficult to get right. Joshua Gans: That’s right, the trade-offs are difficult, the historical mix of what we’ve done in the past makes it very hard to break them and moreover, in order to get them going, you need a co-operation between the public and private sectors in a way that just hasn’t been achieved in the past. And in fact we also suggest that government initiatives can stimulate certain types of linkage-based R & D. If universities are good for bringing private and public dimensions together to bring in the infrastructure closer to the clusters, then maybe the government’s R & D tax credits should be targeted towards

university based research. Richard Aedy: What is all of this going to take? It seems to me to get it to happen is going to require commitment from the Federal Government and cooperation among the States instead of rivalries. What else is it going to need? Joshua Gans: We’ve done this in the past in Australia. In the last two deCADes we’ve gone through a revolution of microeconomic reform that’s set up key policy institutions designed to make sure that high productivity and competition continue to occur and continue to play a role. The Australian Competition and Consumer Commission (ACCC) being an example. We’ve done this in macroeconomics – following from the depression we set up a monetary authority system that has lasted, stayed the test of time, to monitor that role. So if we’ve got microeconomics and macroeconomics covered we really now need to think if this innovation economy as something that needs to be nurtured. Now while it is good that governments would pay periodic attention to this, through things like Backing Australia’s Ability, what would be good to come out of that are not a raft of projects that can be done with extra government money but instead to set up institutions that would allow that to progress. What is really needs is we need the ACCC or RBA of innovation in Australia, the form that’ll take it’s difficult to see but that’s the kind of policy commitment that’s going to allow this to go through. Richard Aedy: Don’t hold your breath. Joshua Gans is Professor of Management at the Melbourne Business School and co-author of “Assessing Australia’s Innovative Capacity in the 21st Century.”
Guests on this program

Joshua Gans
Further information

Assessing Australia's Innovative Capacity in the 21st Century http://www.mbs.unimelb.edu.au/main.cfm?pid=157&id=4D9CB449-11764EE3-9D340000B3B0A8D1