The last time I spoke to a similar gathering for the Western Sydney Industry Awards was about 15 months ago. On that occasion, I took you on a journey to three parallel universes – We'll All Be Ruined, She'll Be Right, and Give It a Go. Alternative visions of Australian business and community life.

Well since then, the Australian Business Foundation has added to the anecdotes and observations that were at the heart of those three different worlds with some more rigorous research.

• In particular, we have completed a scenario building project, delving into the key trends, forces for change and critical uncertainties likely to impact on business in Australia to the year 2015. And as a result, have imagined four different plausible pictures of the future

At the core of this and other Foundation research is the message that innovation is the critical factor to whether we make the grade in the future.

Innovation meaning:

• doing novel things or scoring breakthroughs;
• doing old things more intelligently;
• turning new ideas into businesses; and
• adapting and gradually improving the way we work and how we organise.

In short, it is about competing on the basis of cleverness and know-how in a world where free and fast information flows reduce the shelf-life of ideas, the duration of first mover advantage, and the product cycles in businesses, making continuous innovation a survival strategy.

So, let's turn to my topic today and the implied question of whether the state of Australian innovation allows us to claim to be the "clever" or the "can-do" country.

Australia has had a tradition of scientific discovery and world class invention. Witness technologies like the anti-counterfeiting process for printing money, the bionic ear, the world's most efficient solar cells and micro-filtration systems, gene shears and nano-machines of molecular scale for bio-sensing.

But, Australia often lacks the scale, markets, capital and industrial structure to gain full commercial advantage from these breakthroughs. Many times we hear the lament of Australian intellectual property, skilled scientists and potential global brands being lost offshore.

In 1997, the Australian Business Foundation study, The High Road or the Low Road?: Alternatives for Australia's Future by Professor Jane Marceau et al at UWS Macarthur judged Australia to be underperforming on a number of indicators associated with innovative, knowledge-intensive economies.

For example, business expenditure on R&D was low by international standards. More low-skill, low paid jobs were being created than the opposite. And, Australia's trade patterns and industrial structure were skewed towards low-tech, low growth areas of economic activity, contrary to trends elsewhere in the OECD.

Last year, the Australian Business Foundation took the view that it was time to stocktake Australia's innovation performance and how far we had progressed down the high road or low road.

It therefore commissioned Professor Marceau and Dr Karen Manley to update their earlier work. The result is the publication, Innovation Checkpoint 1999 examining data on key activities involved in business innovation.

Their overall conclusion is that while Australia has made good progress in some areas, it still lags world-class innovation performance.

Innovation Checkpoint 1999 says Australia has performed relatively well in four key areas.

In recent years, there has been: continued growth in knowledge-based service industries; increasing investment in machinery and equipment; rises in venture capital, helping to turn good ideas into commercialised outcomes; and faster growth of high-skilled jobs compared to low-skilled jobs since 1996.

The report also identified five negative trends:

Innovation Rates – A falling proportion of manufacturing businesses are involved either in product or process innovation. This cuts to the heart of Australia's innovation performance and, if continued, would seriously undermine Australia's position as a knowledge-based economy. The proportion of manufacturing businesses undertaking technological innovation fell by six percentage points, from 32 to 26 percent, between the periods July 1991 to June 1994 and July 1994 to June 1997.

R&D Personnel and Expenditure Levels – Substantial falls in R&D expenditure by Australian businesses since 1995 pose a significant threat to Australia's innovation performance. Manufacturing BERD (Business Expenditure on R&D), as a percentage of value added, fell 9.6 percent between 1995-96 and 1996-97 and 18 percent between 1996-97 and 1997-98. The number of business personnel working on R&D showed strong growth between 1984-95, however a downward trend has emerged with the number of personnel declining 9.5 percent between 1995-96 and 1997-98.

Australian Management Skills – The quality of critical innovation skills, particularly those of Australian managers, is less than optimal. A 1998 investigation by Arthur D Little concluded that Australian managers had failed to appreciate and capture the value of innovation to the same extent as their international counterparts and had overestimated their own innovation capacity and performance.

Industry and Trade Structure – The manufacturing sector accounts for an extremely low proportion of GDP compared to many OECD countries and continues to shrink. This affects innovation because manufacturing still contributes most of Australia's R&D and propensity to innovate. The composition of Australia's manufacturing sector is under-represented in high and medium technology sectors. Across OECD countries, between 1980 and 1996, the high technology manufacturing sector was the only group of manufacturing industries growing as a proportion of GDP. In Australia, this sector was shrinking as a proportion of GDP. Australia's trade patterns are also concentrated towards the lower technology, lower growth areas of economic activity.

Training and Education – The low and falling commitment of employers to staff training is seriously undermining Australia's innovation efforts because of the importance of skills in transforming information into knowledge and knowledge into innovations. Training hours per employee have fallen about 17 percent between 1990 and 1996.

The authors conclude that Australia still has a long way to go on the road to the clever country. They call for sophisticated policy developments and further commitment and investment by both the public and private sectors to make innovation a hallmark of Australian economic, business and educational life.

How can Australia's innovation record be improved? Let me address that question by extending our analogy of travelling towards the high road or the low road.

Firstly, we need to define our destination. To me that means political will and priorities. The vision and leadership of the debate at the political and governmental level.

It means shared vision, bringing the community along and ensuring political buy-in across the spectrum. There needs to be an understanding that innovation can be rising tide that lifts all boats, not just benefits for the scientists, the researchers and the hi tech whizz kids.

Innovation needs to be Australianised, something that defines us, that we are proud of.

Next, the roadmap. A national innovation strategy with all parts working in harmony. This is not a centrally imposed grand plan, but a direction setter that tolerates and accommodates diverse paths and disparate goals. With this strategy should come feasible bite-sized milestones over one, five and ten years.

Accompanying the roadmap is the travel diary and log book in the form of better measurement of our innovation performance. Based on the premise that you are what you count, we urgently need to know more about the actual way innovation works and precisely how innovative Australia is. We need a more comprehensive and official version of Innovation Checkpoint - a full range of innovation indicators, the Australian Innovation Indices, as part of our national statistics.

The next element is the vehicle, whose components are likely to include among others, industry clustering. There is weight of literature that points to the importance of clusters and networks not only between firms, but along the value chain and across industries. These are central to diffusing knowledge and new ideas, transferring technology, sharing risk and costs and allowing firms to access new markets and opportunities.

Another component is skills for the new economy – everything from teacher training on entrepreneurship, better commercialisation of university research, personnel exchanges, incubators, mentoring by successful serial entrepreneurs and more flexible work visas for entry to Australia by skilled people.

Creating global brands from Australia is also critical. Strategic alliances, centres of excellence, skilled nodes, and mechanisms to access, licence and diffuse emergent technologies into Australia as high growth business opportunities. All are key elements of making Australia more innovative.

So too is the need to foster new, agile Australia-born enterprises who have global reach, but who capture value back home in Australia. Our aim should be managing abundance, not scarcity. Let 100,000 flowers bloom in an environment that encourages, generates and supports new business ventures and entrepreneurial effort.

This involves a suite of policies working in concert - on tax, education, immigration, science and technology, strategic industry policy, venture capital, economic and labour market reform and the like.

Finally, to complete our road analogy, the driver. Well, we all share that task. In my view, that means government should stop apologising for itself and its limitations and start governing aggressively in the national interest, being the catalyst for action from all quarters to meet a common goal.

Business needs to replace its cost cutting and downsizing mentality with efforts aimed at creating new opportunities and markets, continually keeping ahead of the game if not as initiators then as fast followers.

Education and research sector - by all means go into bat for more resources, but don't stop there. Make your research, teaching and commercialisation activities harmonise so that we have the skills to attract and retain the emerging industries and enabling technologies of the future.

And, what about some real time, affordable skills transfer from our lawyers and accountants to innovative start-ups and microbusinesses. So they don't get fleeced on their intellectual property and can engage in international joint ventures without selling off the farm or losing the high value adds-on to their work and discoveries.

And, business, industry and professional organisations are not immune. Get out of the junior league and into the major tournaments. Spend less time on yesterday's business challenges and more on tomorrow's unimagined opportunities. Take the lead on innovation audits of your sector and its supply chains, pursue action agendas for new markets and redefined businesses, manage the diffusion of new ideas and technologies gleaned from worldwide scans to all in your sector, even the smallest SME, and foster the collaborative strategic alliances that will bring the best returns both to individual firms and to Australia as a whole.

Australia has not yet lived up to its clever country aspiration, though it has many of the necessary attributes and building blocks.

If we succeed in bringing together the vision, a sense of urgency and deft partnerships between the public and private sectors to make it happen, then I envisage Australia being the "brand" of the 21st century – youthful, energetic, clever, adaptable, inventive and reflecting our cultural values of openness, ingenuity and giving everyone a fair go.