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 Our innovation policy must be innovative, too

by Benjamin Barnett | 14-Dec-2009 | Comments (3) Tags: Economic Development, Innovation  12 ratings. Please log in to rate and comment

Australia is not short of talk, or even money, when it comes to innovation as an important driver of economic development. We have invested billions of dollars in innovation since the 1980s, and hardly a day goes by without government championing its virtues: more jobs, greater export opportunities, and higher living standards.

But while we talk the talk, we certainly don’t walk the walk.

While the US, Japan and Korea continue to capture new forms of economic value through innovation, Australia has largely failed in championing, commercialising and exporting to the world its great ideas. Our economic fortunes are still largely reliant upon industries where we have a diminishing competitive advantage (such as manufacturing), export markets where we are unable to capture the most value in the value chain (wool), or commodities that provide only minor opportunities for innovation and which are dependent on the growth of others (resources).

This economic complacency has meant that, in the last eight years alone, Australia has slipped thirteen spots in the World Economic Forum’s Global Competitiveness Index. It is also hardly surprising that a recent review of Australia’s innovation system concluded that innovation in Australia “seems to have slowed or even stalled”. Australia remains preoccupied with an economy low on innovation.

So how can government facilitate the next generation of Australian innovators? How do we stimulate the big ideas of tomorrow? And how do we capitalise on these ideas and export them to the rest of the world?

In revisiting Australia’s innovation policy, we must begin by reassessing how we understand innovation. It has long been assumed that innovation processes follow a predictable sequence: scientific researchers discover useful things, engineers transform these discoveries into manufacturable products, and marketers sell the results to customers. Research, however, overwhelmingly concludes that innovation usually begins with a customer problem, not a “technical discovery”, and that the innovation process ought to start with the identification of a customer need if it is to become both useful and financially viable. Yet, too often, our policymakers adopt a production-centric mentality that mistakes innovation as a one-off scientific breakthrough rather than a customer-driven business process. We must resist this urge. R&D for its own sake, no matter how large the budget allocation and how creative the disbursement process, is not the panacea for Australia’s innovation woes.

A similar belief held government is that the route to innovation nirvana is through creating “spin off” companies to monetise publicly funded scientific breakthroughs. The theory goes that the best way to exploit a scientific discovery is to create a company solely on the back of this intellectual property. But this approach is also flawed. As internet entrepreneur Evan Thornley suggests, “The hardest challenge wasn’t the capital raising, the management recruiting, or development of the technology or product – it was distribution.” In other words, if you do not have a customer base or an existing product line to begin with, then you are going to be hard pressed to make a profit, employ staff, and repay investors. This is best epitomised by the disappointing performance of CSIRO, which through 100 “spin off” companies has generated returns of only $200 million despite over $6 billion of public investment. While acknowledging that CSIRO has several aims, no shareholder would be satisfied with this return on investment.

Government, in reconceptualising its approach to innovation policy, should therefore move away from a “project-by-project” funding mentality that ignores the necessity of sustainable businesses in the innovation equation. This has already been understood in the most glamorous form of intellectual property commercialisation, the film industry, where government has recently shifted from backing individual projects to backing producers (i.e. businesses). Underlying this approach is an important realisation that the true engine for economic growth is not one-off products that face long development periods and inevitable life-cycles, as the recent collapse of the government-backed Solar Systems demonstrated. Instead, innovation policy ought to be about building sustainable businesses that are underpinned by a portfolio of products and services and who are likely to innovate again in the future.

Government should also consider a shift from being a direct investor in innovation to a procurer of its benefits. Indeed, government ought to be using its purchasing power to demand from the market the commercialisation and innovation of particular products and services. This would assist government to advance other issues on its agenda, such as climate change mitigation. In the world’s greatest cluster for innovation, Silicone Valley, the demand for technology products often came first from government agencies, especially the Department of Defense. This not only created a competitive environment for existing companies to develop new products and services – with significant “spill over effects” such as inter- and intra-knowledge transfer – but it also provided the necessary experience and building blocks for these firms to move onto other forms of innovation.

Finally, government must realise that innovation not only stimulates economic development but can also drive social change. Already through social innovation – where innovation is focused on non-economic returns such as the provision of services to meet social needs – we have had a sneak preview at what the future may hold for the intersection of governments and innovation. Governments in the US and UK are increasingly interested in “social entrepreneurs”, with many projects (such as The Big Issue) proving to be more responsive and dynamic than the capabilities of the traditional welfare state. The opportunities for social innovation are exciting and endless, and it is disappointing that current innovation policy is silent in this area.

Australia, in preparing its economy for the 21^st century, must focus on innovation as a major source of economic growth. While we ought to have a natural discomfort in always deferring to government, Australia’s genuine underperformance over recent decades suggests there is a massive void in our approach to innovation. We therefore require a co-ordinating body to instil focus and strategy, but also discipline and accountability. Most importantly, in stimulating the next frontier of innovation, we require government to display the level of creativity that we have come to expect from our innovators and entrepreneurs.

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