For a while there, Australia was known for innovation – celebrating David Unaipon as a ‘renaissance man’ for his early developments in perpetual motion and flight, lauding the teams behind Cochlear implants led by Professor Graeme Clark in the 1970s, and calling Professor Fiona Wood’s spray-on skin technology “the gleam of a miracle”.
Our scientific institutions are now leading the world in silicon-based quantum computing research, and Australia has enjoyed success in the application of blockchain in finance and the Internet of Things in agriculture.
Scientific institutions and universities are still highly ranked, but, while Austrade would be keen for Australia to be recognised as ‘one of the most innovative countries’ overall, innovation is concentrated in those institutions. Small businesses have not been able to keep up with other countries like Germany and the United States.
“Where Australia lags is in new ideas and products that allow SMEs to grow, develop and eventually unseat larger businesses,” says Associate Professor Edward Podolski, Department of Finance, Faculty of Business and Law, Deakin Business School.
Productivity Commission research backs this up, finding that only 1–2% of Australian businesses actually create ‘new to the world’ innovation. Those new ideas and products are central to boosting productivity, which is sitting at a 60-year low.
Machinery and equipment investment, which typically embeds new knowledge and best practices, has collapsed as a share of GDP. Meanwhile, investments in software, R&D, and other intangible capital have stagnated according to the report.
“So too has the degree of churn in markets as measured by the generally falling rates of firm entry and exits. This is concerning because business exits and entries underpin an entrepreneurial culture and uptake of innovations, and shift resources into activities more likely to generate value and productivity.”
Creating an innovation ecosystem
The Productivity Commission suggests trade and competition policy, skill formatting settings, immigration and foreign investment policy, and linkages with overseas firms, are all areas that can benefit from government reform.
However, Podolski says the bigger issue is the failure of public and private funding, as well as the business and societal cultures used to support innovation.
“There needs to be an appetite in general to take risk and we need to support the venture capitalist market (that invests in start-ups that drive innovation) through our business cycle.”
A 2022 report by the Australian Investment Commission found partnering with private capital firms can help businesses unlock growth and expansion opportunities through active asset management in a way that public markets simply cannot, offering smart, patient capital.
However, while funds under the management of Australian-based private capital funds, including private equity, venture capital, corporate venture capital and private credit (collectively, private capital), topped $89.9 billion in 2021, contributing approximately 2.6% to GDP, they have since fallen sharply.
“High growth in 2021 – around four-fold from 2019 levels – was mostly driven by the cheap money environment in the wake of the COVID-19 pandemic,” says Podolski.
“Since then, venture capital investment has gone off a cliff and is back to around where it was pre-COVID. It is also important to note that the significant increase in capital investments was not driven by anything structural.”
Decline in venture capital investment will have significant consequences for aspiring and established entrepreneurs in Australia, says Podolski.
“While it is natural that during economic downturns investors tend to avoid high-risk investment in early-stage enterprises, this leaves a funding gap that governments could fill.”
Economic downturns, Podolski says, are characterised by abundant human capital and active entrepreneurs, so encouragement of new business formation is likely to offer greater rewards. Government support for venture capital, including funding, can optimise the opportunities.
“Bridging the funding gap would also stimulate creative reconstruction, fostering innovation and economic growth.”
Helping MSMEs recognise innovation opportunities
While the pandemic did accelerate progress in technology-driven transformation, particularly in digital health, advanced manufacturing, and IT, Australia now needs to capitalise on these opportunities as well as boost the transition to a low-carbon, knowledge economy, according to the AIC.
However, for MSMEs the pandemic did not drive the growth in e-commerce innovation that genuinely contributed to overall business growth, says senior accountant Justin Enright, managing partner of Morse Group.
“Micro businesses in particular are not shifting to digital business models and platforms, often because they don’t know where to start,” he says.
Brian Ruddle, managing director of Impact Innovation Group, an end-to-end innovation and commercialisation consultancy, agrees on the enormity of that first barrier. He sees businesses from micro to medium struggle to identify which opportunities offer the greatest value.
“That’s where we tend to focus first, evaluating two or three ideas that may have been generated through interaction with staff, clients or even universities, and deciding what presents the right opportunity,” Ruddle says.
Enright suggests that understanding a client’s business model, market dynamics, and competitive landscape can also help accountants provide valuable insights about how to leverage skills and new technologies to create a competitive advantage.
Estimating ROI is a big part of assessing innovation value, adds Ruddle.
“It determines where you are hunting for ideas, how much time you spend on them and how much you invest,” he says. “From an accounting perspective, it’s also important to understand that not all ideas have the same evidence or readiness level, including financial, technology, supply chain or market readiness. An opportunity might appear risky but that is no reason to immediately dismiss it. Instead, the focus should be on gathering evidence to determine if the idea has merit or not.”
As chair of the Innovation Management Standards Committee for Standards Australia, he suggests the ISO 56000 suite of innovation standards can provide organisations (and their accountants) with a shared definition and vision for innovation as well as improve confidence in decision making.
Developing innovation skills
An accountant’s role in driving innovation is multifaceted. Aside from the ROI assessments that are so important to guiding efforts, accountants can also help clients access funding from investors by partnering on business plans, financial forecasts and investment proposals that effectively communicate the potential value of proposed initiatives, Enright says.
Accountants can also lead a business to innovate, he says, with budgets allocating a portion of revenue to building competencies that drive innovation value.
Change needs to come from the top, so empowering senior leaders to spearhead the design of innovation strategy, scope and intent is essential.
A study co-authored by Podolski found firms that have better skilled managers at the helm generate significantly higher volumes of patents and patent citations than those with less skilful leaders.
Ruddle suggests that MSMEs map the unique competencies needed at every stage of innovation to succeed, and identify critical gaps and how they will be filled.
“Think data and insights, marketing and technology analysis, facilitation, stakeholder management, partnership brokering, communications, business case development, commercialisation, legal… the list goes on.
“While this could include training, not just for managers but for the whole team, it could also involve partnering with organisations that bring specific expertise, such as universities, suppliers, vendors, manufacturers or other key stakeholders.”
