Dr Roy Green, Dean of the Business School at the University of Technology Sydney makes some excellent points in his assessment of Australia’s manufacturing industry at the government’s Future Jobs Forum, but he misses the main one: he completely ignores the need for Australian SMEs to develop an intellectual property culture. In a global market, Australian manufacturers need to incorporate intellectual property as part of their business model. The lack of R&D spending and innovation is one reason why Australian manufacturing struggles and why jobs are being lost.
Writing in the Australian Financial Review on October 6, Green makes the good point that the mining boom has devastated manufacturers, partly because of the exchange rate appreciation but also because there are limited opportunities for downstream processing and supply chain access. Recruitment by mining companies also contributes to a skills shortage.
As Green says, it is a problem that cannot be just written off as just a case of “structural change”. “While it is easy to say that a commodities boom is the kind of problem other countries wish they had, it is nevertheless a real problem for our non-mining trade-exposed industries,’’ he writes. “They require a policy framework that enables them to restructure and reinvent themselves to enhance their competitiveness during the boom and ensure has Australia has a balanced and diversified economy when the boom comes to an end, as it surely will.”
He is right, but his policy solution falls short. Green argues that the policy should cover three main areas: intensifying the engagement between industry and the research and education institutions, enhancing the “absorbtive capacity” of firms so that they are better able to seize on new information, apply it to their business and commercialise it, and finally, he says, there needs to be renewed emphasis on good management and workplace innovations.
None of these can work without a culture of research and development. Indeed, Green has ignored one glaring gap: Australia is a laggard in the OECD when it comes to R&D. We need policies that encourage R&D and creating intellectual property. The figures speak for themselves. In Australia the proportion of total R&D expenditure undertaken by the manufacturing sector has fallen from 30.3% in 2006-07 to 25.8% in 2008-09. In Victoria expenditure on Research and Development in the manufacturing sector declined from $1.721 billion in 2007-08 to $1.626 billion in 2008-09. The proportions of Gross State Product were 1.45% and 1.41% respectively, and what is happening in Victoria very much reflects what is going on in the rest of Australia. The OECD average for patents filed per million people between 2007 and 2009 was 38. For Australia, the figure was just 14, right down among the lowest. By way of contrast, Switzerland filed 115 patents per million people during the same period. For Japan, the figure was 107 and for Sweden it was 100.
Significantly, the second annual Australian Innovation System report released by Innovation, Science and Research Minister Kim Carr in July is another case in point, demonstrating that Australian companies are much more likely to take something that has already been developed and adapt it than invent something themselves. In other words, the report suggests that innovation in Australia is largely second hand. And while &D budgets here are expanding, we are still not getting “first mover advantage”. This is particularly important with the high Australian dollar as that puts a premium on unique products.
According to the report, gross expenditure on R&D reached $27.7 billion in 2008-09. It grew at a compound annual growth rate of 12 per cent over the decade to that year. As a percentage of Australia’s gross domestic product, the report found that that R&D spending rose from 2 per cent in 2006-07 to 2.21 per cent in 2008-09. This was 95 per cent of the OECD average. It also revealed that spending by companies grew at a compound annual rate of 14 per cent over the decade to 2008-09, and by 6.7 per cent to $16.8 billion in 2008-09. Significantly, companies were spending even as the global crisis was raging. They accounted for 60.5 per cent of the total R&D spend, compared with only 44 per cent in 1992-93.
So far so good. But the report points to significant gaps. Spending as a percentage of GDP was still 41 per cent short of the OECD’s top five R&D spending nations — Israel, Finland, Sweden, Japan and South Korea. At 1.35 per cent of GDP, R&D spending by Australian businesses in 2008-09 was still below the OECD average of 1.63 per cent. Australia ranked 12th out of 33 nations. This was two places better than a year earlier and a sign that things are improving but there is a long way to go. While it was ahead of countries including Britain, France, Canada and Belgium, the second hand culture here is still strong.
The report also revealed that Australia does not have that many “new-to-market” innovators. There are few companies here that develop an innovative product themselves, and then market it. Instead, they rely on what’s already been invented.
It showed that only 2.4 per cent of Australian businesses had taken new-to-market innovation to international markets. In Britain, it was 32.2 per cent, in Sweden it was 25.3 per cent, in Germany 22.1. South Korean manufacturers boasted an impressive 31.4 per cent. The report suggests Australia is a significant laggard in the area of new to market innovation.
Some might argue that Australia’s remoteness from key markets is a possible explanation. But then, New Zealand’s “new-to-market” score of 19.8 per cent is eight times Australia’s score.
At 9.6 per cent, the percentage of Australian businesses bringing genuine innovation to the domestic market was also weak by OECD standards. Compare that to Japan at 25.3 per cent, South Korea at 23.6 per cent, Britain at 14.5 per cent, the Netherlands at 12.5 per cent, Sweden at 15 per cent. For that matter, New Zealand came in at 15.4 per cent.
According to the report, Australian manufacturers are good “modifiers”, taking products that have already been developed, modifying them, then marketing them. The report found that lmost two out of three Australian companies surveyed qualified on this score. That compared with 23.8 per cent in Germany, 28.6 per cent in New Zealand, 19.1 per cent in Britain, 13.8 per cent in the Netherlands, and 18 per cent in Sweden.
That said, taking something that has already been invented is not high value work. It is unlikely to produce an Australian version of Apple or Google.
According to the report, businesses that employed 200 or more people accounted for more than 80 per cent of R&D growth in the mining, finance-and- insurance and construction sectors between 1992-93 and 2008-09. Big companies also accounted for 73 per cent of the growth in manufacturing R&D.
It is also important to note that the Australian Industry Group this year predicts that R&D R&D expenditure is forecast to decline 0.7% in 2011.
Clearly, government policies here need to turn that around. With most of Australia’s manufacturers based in the SME sector, more focus needs to be placed on developing R&D spending in small to medium sized businesses.
To an extent, the government has realized this. The Gillard Government’s R&D legislation, which passed through the Senate in late August, is one of the most significant tax reforms since the GST and the most significant change to tax innovation since the original R&D tax concession was introduced in 1986. The reforms put in place a credit system that gives a 45 per cent refundable R&D tax credit to entities with an aggregated turnover of less than $20 million per annum. All other companies will receive a 40 per cent non-refundable tax credit. The Government expects to hand out $1.6 billion in tax credits annually. Instead of passing on the tax credit in an annual lump, the Greens successfully pushed to have quarterly payments in a bid to improve cash flow for companies. The refundable credit will see refunds going to small companies, instead of the large corporations, and spreads the R&D incentives more widely across the economy. The new law actually places no limit on the amount of R&D expenditure incurred. The aim here is simple: it is designed to encourage start-ups to invest far more in R&D than under the original R&D tax concession. And in a departure from the original R&D tax system, companies will be eligible for the credit even where the intellectual property related to the R&D is held off-shore. designed to crack down on big research and development claims by miners and other big corporations. The aim is to send that $1.6 billion R&D kitty to small high-tech companies which some in the government see as the future drivers of Australia’s growth. The legislation favours small companies over larger ones. It redirects the tax treatment away from more traditional industries such as energy and resources and manufacturing and skews it towards SMEs in the knowledge based industries such as life sciences and biotech.
The AMCRC is also working to increase the R&D and intellectual capital development in SMEs. The AMCRC’s Innovativity tool works as an innovation management program specifically tailored for Australian manufacturing SMEs. It helps them become more efficient and more effective in their innovation processes so that they can bring products to market quicker and successfully. SME managers and CEOs attend Innovativity workshops where they are shown the key elements of innovation and taught how to incorporate them into business strategies. That includes everything from idea generation, identifying market opportunities, commercialising the product and IP development and protection. The course is guaranteed to deliver results.
Green overlooks the fact intensifying engagement with universities will not work unless businesses have an innovative culture. Similarly, the capacity to seize on new information and commercialise can only work when there is a culture of research and development. Workplace innovations will not happen unless the company is focused on developing unique intellectual property.
Governments need to wind back their funding of research in public institutions and redirect that SMEs. What’s needed here is a rebalancing of publically funded and private sector research. More needs to go into encouraging private sector research. Incentives and tax breaks would encourage more R&D in all sorts of areas that have global markets, from smart grids to lightweight infrastructure, from energy storage and materials to low impact infrastructure, from new computer technologies to stem cells and tailored medicine.
The bottom line is that we need to get SMEs creating more intellectual property and the need to create a culture of R&D and intellectual property development is the missing part of Green’s vision. The figures in government and OECD reports tell us that this gap needs to be filled urgently to put Australia’s innovation levels in the big league. This can only be done by having a system that create market driven innovation.
