In its report ‘New Concepts in Innovation’, the Business Council of Australia argues that a contemporary view of innovation should include almost any strategic or operational business change that delivers new outcomes, and that the traditional focus on research and development (R&D) is flawed. In doing so, the report gives the impression that the poor level of business investment in R&D in Australia is no cause for concern.

The BCA’s view is formed from interviews conducted with nineteen Australian companies. But these hardly represent a typical cross section of Australian firms and their needs: twelve of the nineteen had revenues in excess of $1B per year, and the smallest of the entire sample was Microsoft Australia, with revenues of $262M. Only three - Holden, ResMed, and Telstra - make the list of the top 50 of Australian companies rated by R&D spend, and only the first two were on the list of Australia’s 50 most innovative companies compiled by the Intellectual Property Research Institute of Australia (IPRIA). It is no surprise then that most of the companies interviewed called for broadening the definition of innovation beyond IPRIA’s amalgam of R&D, design, and the number of patents and trade marks!

True, business innovation does occur through a range of mechanisms such as business strategy, management practices, process adaptation, and capital investment in new plant and equipment. To recognise this, the OECD and Australian Bureau of Statistics (ABS) already have measures of non-technological innovation. But there is still ample reason to bemoan the low level of business R&D investment in Australian firms because the evidence is clear. The point is not whether R&D is a true measure of innovation or not; the clear evidence is that firms that pursue R&D are valued more highly, and perform more profitably, than firms that do not.

A study quoted in the BCA report shows that of the 1000 most globally innovative companies, companies in the bottom 10 percent of indexed R&D-to-sales ratios under-perform spenders in both the top 10 percent and the middle 80 percent on gross margins, gross profit, and shareholder returns. Where would the BCA 19 fit in the 1000 global innovators who spend on average $US 384M each on R&D! Australian data is even more convincing: data collected over five years for Australia’s top 50 R&D spenders showed returns of 17.1% on shareholders funds, compared with 7.7% for Australia’s largest 1000 enterprises, more than double!

The innovative capacity of firms is very much dependent on their human capital. This not only requires better education and training systems per se, but also requires a significant general research and development capacity and base in order to produce the people that can really make a difference by way of understanding and adaptation of both domestic and overseas technologies. Information and communication technologies are prime examples.

Some in industry have recently argued that international comparisons should not apply to Australia’s laggard performance in R&D investment because of structural differences in the make-up of business from country to country. The case of Finland and Nokia is frequently cited i.e. Finland leads the world in business investment in R&D because its industry contains technologically based companies like Nokia.

How easy it is to confuse cause and effect! In 1989, Finland was at risk of becoming an economic basket case because it had lost its Soviet markets. Nokia was a mere rubber goods and forestry company. The Finnish Government’s strategic decision that year to begin investing heavily in R&D, and Nokia’s well-timed choice to invest in new product innovation, was to create the most robust of the European economies. Finland would still be in dire straits had it adopted such a ‘contemporary’ view of innovation! The Finnish R&D sector in fact provided a pool of new discoveries that were to become the foundations of successful industry restructuring. This is precisely why governments must play a policy role in industry development in Australia, because to neglect innovation through R&D and its commercialisation only serves to entrench the existing industry structures in Australia that seem to forgo the investment in R&D that is desperately needed but goes unrecognised by them.

The sad truth in Australia is that our universities are too frequently viewed mainly as a source of graduates that can help ease skills constraints, and little else. Contrast this with the phenomenal growth of innovative firms in India, China and South Korea, which build upon those countries' vast quantities of graduate engineers and scientists as well as their strong research investments. South Korea has not mirrored the ‘more infrastructure, tax cuts, and less red tape’ policy recipe suggested by the BCA. Nevertheless it hasn’t stopped Korean companies such as LG and Samsung successfully dominating their global markets through superior ‘innovation’.

In even the best economic times, Australia still imports more than it exports. It would only take twenty new stars to emerge from Australian research to solve this problem. It’s not going to happen by following the BCA prescription.

This article provided by

Dr Rowan Gilmore
Chief Executive Officer
Australian Institute for Commercialisation
Tel: (07) 3853 5225
 

Disclaimer: The Warren Centre publishes articles relating to new technology and innovation that are often based on information supplied by third parties. While an editorial process is applied, we make no exhaustive investigation into the accuracy of the information, thus no liability will be accepted for its accuracy. Please note that in providing this information, The Warren Centre is not supporting or promoting any technology or company, merely seeking to inform. Interested readers should take their own steps to verify the information prior to relying on it in any way.

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(c) The Warren Centre for Advanced Engineering, August 2006