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The Rudd Government stands a long way from its goal of making innovation its new industry policy, as the Australian Financial Review’s editorial concluded recently.

But the fault hardly lies at Canberra’s feet alone.

Business, universities and policy makers in the states all share responsibility for the fragmented, sluggish state of Australia’s so-called innovation “system”.

Some “system”: lots of pearls but no necklace, many components but no cluster, more stock than flow. Australia’s innovation practices are failing to provide the impetus for our much-needed productivity revolution.

We seem to believe innovation involves nothing more than producing arcane research in a series of silos or laboratories, rather than being a dynamic, collaborative process that ultimately has to prove itself in the workplace and the marketplace, where entrepreneurial firms develop products and services in response to that customers actually want to buy.

This is not to decry the brilliant successes of, for example, CSIRO’s Dr John O’Sullivan whose research into radio astronomy led to breakthrough applications for wi-fi technology and led to his recent nomination as the Prime Minister’s Scientist of the Year.

But enduring productivity gains don’t necessarily require brilliant new research. What’s needed is innovative firms: capable of adapting existing knowledge, responding to changing customer needs in a global marketplace, and themselves providing the lead for the next research agenda.

How do we create a system that works like a system, where the supply of knowledge is less random and more coordinated, and the demand for it is better articulated and more customer driven?

Two developments are needed.

First, deeper research is needed into the innovation process itself. And second, the research needs to be more collaborative and better integrated into the broader innovation system.

This is what the Cutler Review’s venturous Australia report was on about with its recommendation, so far overlooked, for the creation of a National Centre for Innovation Research, responsible for “high quality independent research which is strongly relevant to policy and practice”.

Such a Centre could be the Rosetta Stone for innovation in Australia: allowing researchers in universities to decipher the needs and opportunities presented by customers and producers in the marketplace; providing business entrepreneurs and public sector managers with a key to the laboratories and seminar rooms of the academy; and shining a light for policy makers to help target their regulatory and funding interventions.

A Rosetta Stone for nation-wide collaboration on innovation? It already exists in the UK, where the Government-funded National Innovation Research Centre is backed by Cambridge University and Imperial College. Other countries are also assembling the systemic components to boost their innovative practice.

Australia is lagging. But the opportunity is there: there are well credentialed innovation researchers at a number of Australian universities; a couple of state governments notably Victoria have started coordinating their resources; the Federal Government is well positioned in the wake of its Powering Ideas report.

Businesses must rise to the innovation challenge. According to the latest ABS Innovation Survey, only one-third report undertaking any business innovation over the last year. The 2008/09 World Economic Forum Global Competitiveness Report shows Australia’s innovation ranking slipping over the past 9 years from 5th to 20th. Just this week, a survey of Australian manufacturers found their management practices are globally ranked middle-of-the-field.

But it is also clear, from Australian Business Foundation research, that many Australian enterprises are creating distinctive and lasting sources of competitive advantage by finding new and better ways to serve their customers, by using technology for new capabilities and by going global in high-growth markets like China.

Innovation is a means to an end, not an end in itself.

With a Rosetta Stone in hand, who knows – Australia’s innovation researchers, businesses and policy makers might find a new collaborative approach not just to boost our national productive output but ultimately to list sustainable prosperity and quality of life for all Australians.