AUSTRALIAN BUSINESS FOUNDATION'S SUBMISSION TO NATIONAL INNOVATION REVIEW

The Australian Business Foundation is pleased to make an initial submission to the Review of the National Innovation System in the form of a commentary on key selected Terms of Reference.

Drawing on a decade of evidence-based research on the critical emerging issues impacting on Australia’s competitiveness and prosperity, the Australian Business Foundation’s submission offers insights particularly in regard to:

• principles for the role and participation of the public sector in innovation;

• national priorities for innovation; and

• implications for innovation programs and governance.

Details of the Australian Business Foundation’s body of research substantiating this commentary can be accessed at www.abfoundation.com.au.

Not Supply-Push, but Market-Pull

Fundamental to this commentary is a reality check on innovation itself.

Innovation continues to be commonly misunderstood as the conduct of scientific research and the invention of new technologies. Thus recommended innovation policies focus on boosting the supply of new technologies and promoting the commercialisation of new products.

Important as this is, the reality is that innovation’s greatest value is generated from the demand side:  namely, creative problem-solving that transforms Australia’s capabilities by lifting productivity. Innovation involves the smart application of knowledge that meets the real and changing needs of paying customers and solves real problems in the community.

So, the Australian Business Foundation counsels the Review to redress the balance by concentrating its attention on the demand-pull dimensions of innovation, recognising that in a globalised knowledge-based economy, innovation manifests itself in many forms other than the commercialisation of R&D, such as:

• creative approaches to customer problem-solving,

• unique business models and strategy,

• novel organisation of supply chains, logistics or delivery channels,

creating extraordinary experiences for highly demanding and discerning customers who are directly engaged in designing the products and services they purchase.

Innovation is less about initial discovery and more about learning– learning by doing, learning by applying technology and equipment, and learning by interacting with others.

 Principles for Public Sector Role

The end game of the National Innovation System Review is to increase the level of innovation in Australia – not for its own sake, but to boost innovation-led prosperity.

Innovation is central to enhancing Australia’s productivity, which the Prime Minister in a speech in Melbourne on 27 March 2008 described as:

Productivity is, in the long term, the key to building a more internationally competitive economy… one that can grow faster without fuelling inflation and consequently driving up interest rates.       

The Australian Business Foundation submits that securing the productivity effects of innovation should be the single most important principle underpinning the role of the public sector in innovation.

The Productivity stream of the Australia 2020 Summit identified a number of “priority themes” in the report to the Prime Minister as follows:

• Create new connections and collaborations across our education, business and innovation systems.

• Boost the flow of ideas, imagination, people and capital around our economy.

• Invest more in knowledge, skills, imagination and learning capability.

• Set new standards of excellence and inclusion for participation and learning outcomes.

• Design new forms of institutions through collaboration to provide services and support.

• Build infrastructure which integrates services and encourages shared community use.

• Promote workplaces which value innovation and creativity, which are attractive to employees and demonstrate fair workplace practices.

The Australian Business Foundation endorses the thrust of these arguments and notes in particular that in achieving these goals, the public sector role should be more than just redressing market failure; rather it should actively seek to facilitate market success.

Productivity measures to date have focused on the vertical economy-wide pillars of microeconomic reform, competition policy, labour market flexibility, taxation and macroeconomic settings.  These policies have enhanced productivity by increasing the efficiency and flexibility of the Australian economy.

In a globalised knowledge-based economy, however, the conditions for future productivity enhancement are likely to extend to the dynamics of global market success. In this environment, horizontal policy platforms assume greater significance, boosting productivity by facilitating improvements in business transformation, capability and innovation performance.

The Australian Business Foundation further suggests that positive outcomes from public support for innovation are more likely if:

• the current predominance of the ‘science and research push’ approach to innovation, with its locus on universities and research centres, is replaced by one that supports business engagement with customers and markets, located at the level of the firm;

• the key output to be sought is evidence of transformed business models, encompassing not only new products and technologies, but novel processes, work and organisational practices and market and business relationships;

• priority  attention is given to programs that enhance the ability of enterprises to absorb and apply knowledge from external sources, that assist training and skills formation, and that foster reciprocal knowledge flows and working relationships between enterprises, and between enterprises and other key economic actors, including researchers;

• the competitive realities facing business enterprises in appropriating value from innovative activities are recognised and supported, eg. assistance with managing uncertainty, discovery of opportunities, market access, execution of business and management systems and the

• specific attention is given to increasing the global engagement of Australia’s resident firms, including sustaining long term international ventures.

In this way, the aim of public support for innovation can be redefined. Not more R&D and science, but more internationally competitive private firms resident in Australia with superior abilities to absorb and apply economically useful knowledge that transforms their business offerings to better meet market needs.

Innovation Programs and Governance

The foregoing argument emphasising market-driven business innovation and action to capture the productivity effects of innovation leads the Foundation to further suggest that such innovation-led prosperity is amendable to action by governments. One specific action available to governments is to set the design rules for and give priority to innovation support programs that:

• assist the generation and absorption of business knowledge by private firms;

• foster the capacity for innovation at the company level in response to market and customer demands;

• help private firms to reduce transaction costs, to secure returns and to appropriate value from undertaking inherently uncertain innovative business activities;

• facilitate economically useful connections between firms and other institutions for knowledge transfer and capability building;

• extend the global reach and market access of Australian firms; and

• increase the managerial, technical  and collaborative skills and competencies of private firms.

Programs designed in this way would create the environment for enterprises to take risks, access new opportunities and global markets and capitalise on technological advances, knowledge and innovation.

In addition to this role in the design and implementation of innovation programs, there are other implications for improved governance of Australia’s national innovation system. In particular, the Australian Business Foundation points to the opportunity to secure innovation and productivity gains from strengthening three specific roles of government, namely as:

• a demanding leading edge customer;

• a responsive and sophisticated regulator, attuned to the ‘licence to operate’ issue for business; and

• a civic broker and catalyst for industry clustering and for participation in distributed global supply and value chains by Australian firms.

National Priorities for Innovation

The Australian Business Foundation consequently frames its recommendations for national priorities for innovation not in terms of a list of sectors or research domains, but in terms of potent actions most likely to boost innovation-led prosperity in Australia. These actions are as follows:

• Deliberate and integrated action by government on the innovation system as a whole

It is important to invest in all the elements that constitute Australia’s national system of innovation, not just single components like R&D investment or access to venture capital.  This presupposes a ‘whole of government’ approach and a harmonisation of Federal-State relations.

• Capitalise on identifiable and specific patterns of Australian innovation and industry capability

It is important to understand what is possible and appropriate for Australia, given our size and the structure and composition of SMEs and multinational corporations in our economy.  There is an argument for building Australian capability in customised value-added niches, not in low cost high volume segments.

It is also important to recognise and build on the identifiable and specific patterns of Australia’s current innovation and capabilities.  New valuable opportunities for Australia are most likely to be built by exploiting opportunities adjacent to existing capabilities and strengths.  For example, applications in environmental biotechnology might better suit Australia than in pharmaceuticals, as development time is lower and capacity is anchored in local natural resources.

• Increase the innovation yield from economic activities

Innovation should be an outcome of a wide range of economic endeavours, not just confined to explicit areas of innovation policy.  From this perspective, it is possible to gain an innovation yield from addressing significant national problems or stresses in the economy with action to broker market-based solutions to issues like water and salinity; aged and health care, given the economics of an aging population; or Australia’s carbon constraints affecting climate change, energy and environmental sustainability.

These are all areas where Australia has demonstrated strengths, that align with National Research Priorities and where there is a likely profitable market for solutions to these problems, both domestically and internationally.

In making this submission, the Australian Business Foundation declares its interest as an independent spin off company from its founder and principal sponsor, the NSW Business Chamber and as a leading and authoritative researcher on innovation for the last decade. Further, the Foundation’s Chief Executive, Narelle Kennedy, serves as a member of the Expert Panel for this Review.

Thank you for the opportunity to contribute to the Review of the National Innovation System.