Politicians extolling Australia’s virtues often say the country is a font of innovation, that we are a nation of inventors, and cite the black box flight recorder, wi-fi, the cochlear implant. However, the list of Australian innovations that has made it to the global market is so far unimpressive by international standards. The most recent Global Innovation Index, produced by the World Intellectual Property Council, ranks Australia 16th on innovation inputs, but just 30th for innovation outputs.
Many Australians, from prime ministers to research leaders, have sought to improve the nation’s innovation record over the past 40 years. Often their ultimate ambition has been to recreate, on a smaller scale, the wild success of California’s Silicon Valley.
Yet to date, these attempts at transformation have not paid huge benefits. And some analysts now suspect we may be missing an important piece of the innovation puzzle. Instead of concentrating on cutting-edge research to create more Australian-based global giants, they suggest we should pay more attention to spreading best-practice techniques amongst big, medium, and small businesses.
Today’s innovation model: Cutting-edge thinking
For decades, innovation thinkers have prized universities, research institutes and “innovation systems” that commercialise these institutions’ cutting-edge ideas. On this view, Australia might be expected to become an innovation powerhouse; the Global Innovation Index, for instance, places our tertiary education system fourth in the world.
Reports such as 2023’s Bionics Institute White Paper [DJW1] Building Australia Through Innovation argue this model of Australian innovation can still succeed if it uses more and better tools. They include:
- More precincts and hubs which can bring together innovative researchers and businesses in one place;
- More support for the skills that innovative manufacturers need; and
- Taking greater advantage of mentorship and partnerships to help small and medium enterprises (SMEs) develop quickly.
Other suggestions directed at cutting-edge thinking include more research and development grants and tax credits, intellectual property law reform and support for so-called moonshot projects to encourage leading-edge success.
Australia’s cutting-edge disappointments
But so far, attempts to exploit leading-edge Australian research have not delivered many big wins. Most government policymakers don’t seem to know how to change that.
As economist Nicholas Gruen of Lateral Economics puts it, successful cutting-edge innovation is “just a very hard thing to get some real policy purchase on”. A 2023 report by Industry Innovation and Science Australia underlines the problem. It sums up: “Despite Australia’s relatively high standing in science and research performance, and focused policy effort to support collaboration and commercialisation, industry-research collaboration and commercialisation outcomes remain low.”
Veteran research and development strategist Thomas Barlow, author of Australia Can Compete, says that while US giants dominate new fields like artificial intelligence, even fields more friendly to smaller players haven’t provided Australia with many wins. In pharmaceuticals, for instance, big firms often provide big paydays for small-firm investors by buying the smaller firms’ inventions (or the small firms themselves). Yet Barlow says small Australian innovators have not thrived. “We certainly haven’t been able to create a vibrant SME biotech sector that is capitalising on all that investment in Australian universities.”
Innovation model 2: Innovation for the 98%
A different model is represented by the Productivity Commission’s 2023 report, titled “Innovation for the 98%”. This model starts with the obvious truth that most businesses – the “98%” of the Commission report’s title – don’t invent cutting-edge new products. This 98% are mostly smaller: SMEs dominate most nations’ list of businesses, but they are particularly strong in Australia. When these businesses try a new idea, they’re usually learning from what others have already tried elsewhere. Rather than being new to the world, the innovation is new to that business.
The Productivity Commission argues that if we want to lift Australia’s growth rate, most of the important change will happen within this 98%. In the Commission’s view, what matters is spreading new ideas into all sorts of businesses, a concept which economists have dubbed “diffusion”.
“Policy has traditionally been focused on cutting edge invention,” said the Commission’s deputy chair, Alex Robson, during the report’s development. “But there are likely to be bigger gains in encouraging everyday, incremental innovation across the vast majority of Australian businesses”. This majority will include small and medium businesses that might normally not be a target of innovation policy.
The Institute of Public Accountants has been one of the first organisations to back this idea. Its 2023-24 pre-Budget submission publicly supported the Commission’s enthusiasm for diffusion of new ideas. The submission asked government to increase its support for incremental innovation; it pointed to the Commission’s argument that “diffusion has the potential to lift the performance of over a million businesses”.
The diffusion push
It’s not hard to see why organisations like the Productivity Commission and the IPA have begun pushing to recognise the need for innovation diffusion. But if diffusion matters, what can Australia do to help the process along?
The Productivity Commission notes that diffusion needs less specific policies than those associated with cutting-edge innovation. Nevertheless it lists several pro-diffusion policies which can help spread ideas. For instance, government can encourage laws which let workers spread new ideas by moving between firms. Pro-diffusion policies will favour bringing in skills and capital from outside the country – so that Australia should favour generous rules on both foreign investment and skilled migration.
And the Commission points out that “the education system is almost all about diffusion”: it both spreads the new ideas that exist now, and prepares people to absorb more new ideas over time. So greater investment in transferable skills should pay off.
Finally, the Commission wants Australia to do more to diffuse best practices and approaches throughout government.
It seems at least possible that by thinking about innovation across the economy, Australia might improve innovation itself.
David Walker is a former head of policy for the Committee for Economic Development of Australia and contributed to the Federal Government’s 2008 Venturous Australia report on innovation.
