Innovation and the Knowledge Economy in Australia
In 2004 Professor Keith Smith researched and reported on how the knowledge economy was creating value in Australian industry, and how companies were innovating to gain a competitive advantage. His paper The Knowledge Economy in the Australian Context then paved the way for his follow up report in 2005 Promoting Innovation in Australia: Business and Policy Issues in which he looked at the opportunities and challenges facing businesses and governments in fostering innovation to generate business value.
Overview & Comments
The knowledge and innovation that are driving recent economic transformation and business growth may not come from the commonly thought sectors of the economy, according to the latest research by Ketih Smith. His findings demonstrate that innovation is not only from high technology sectors, informal collaborations within and between organisations lead to greater, more sustainable innovations than formal research and development, and businesses need to transform their structure, culture and processes to set themselves up to compete on innovation.Low Technology Industries are Innovators Too
The conventional view of the knowledge economy based on high technology industries and frontier technologies, like biotech and nanotechnology, presents an incomplete picture. Smith's research confirms that in Australia low and medium technology industries in services and manufacturing are innovative, knowledge-intensive and growing steadily.
In Australia, like most advanced economies, high technology or science-based industries and the technologies underlying them are very important, but they are also very small. Such high technology industries account for only around 3 per cent of GNP in most OECD economies.
More significant to our understanding of the knowledge economy is the way innovation and growth occurs in the low and medium technology sectors, which form the bulk of the economy in Australia and in the OECD. These sectors include food processing, metal products, chemicals, timber products, printing and publishing, transport, mechanical engineering, mining, the hospitality industry, financial services, health and the like.
Innovation in such industries is not based on investment in formal research and development, but on the painstaking development of new product concepts that either solve consumer problems or meet market demands. The reality of innovation is that it rests not on scientific discovery, but on learning and problem-solving by firms.
Not Research, But Learning by Doing
Research and development is certainly not the main, nor the most important, ingredient in the production of economically useful knowledge or innovative capabilities in business enterprises. Unfortunately, much of the analysis of innovation in Australia and elsewhere focuses on expenditure on research and development as the main source of knowledge used by firms to innovate by producing novel products and services.
Professor Smith's papers argue against research and development being the most important knowledge input to innovation. To the contrary, he identifies two critical dimensions of knowledge creation, neither of which are easily visible in available innovation statistics:
- Non-research and development inputs and expenditures including market research, design skills, engineering development, in-house training and operational skills related to new capital goods.
- Indirect flows of knowledge, including research and development, into firms from a distributed 'knowledge infrastructure' of universities, research institutes, industry organisations, standards bodies, consulting engineers and the like.
In reality, the knowledge underpinning innovation capabilities in firms is rarely based on direct research and development, but comes from learning by doing, learning by using technology and equipment, and learning by interacting with others.
These flows of knowledge, not the stocks of knowledge in themselves, seem to be most instrumental in promoting and sustaining innovation.
Business Transformation is the Key
Transformation in the capabilities of business enterprises is the key to achieving innovation and consequent productivity and performance gains, both for firms and for nations. Professor Smith's analysis results in a more diverse and complex picture of innovation than just the commercialisation of knowledge from research and development.
This more complex picture of innovation is characterised as:
- pervasive, not just restricted to a small array of high tech industries;
- reliant on collaboration and interactive learning;
- highly uncertain in terms of the risk / return decisions to be made by firms;
- affected by geographical clustering and by the cumulative patterns of industrial and technological specialisations built up over time by regions and nations;
- influenced by a strong interaction between technology and science; and
- systemic, where the innovation behaviour of firms is framed by external factors like social and cultural conditions, regulatory regimes, institutional and organisational governance and infrastructure.
This in turn, rests on deliberate and long term strategies that support investment in the enterprise's tangible and intangible assets eg. training and skills acquisition, risk management, recruitment, organisational design, technology transfer, sales and marketing proficiency, specific production and managerial capabilities and so on.
Both business strategies and public policies must be framed to address this reality of Australian innovation.
Refocus Australia's Innovation Policy
Professor Smith's report concludes that Australia's current stance on innovation policy is excessively focused on high tech industries and frontier technologies and the commercialisation of research, at odds with the reality of Australia's industrial base and pattern of business innovation.
A policy shift is needed towards greater support for alleviation of business risks and obstacles to innovation, and for universities and research institutes in their knowledge support role in business problem-solving.
The case is made that competing by innovation and knowledge delivers economy-wide benefits, not only advantages to individual enterprises. Therefore, innovation is a key issue both for corporate managers and for public policy makers, as it affects both the business performance of firms and the path of national economic development.
But, it is argued that current approaches to innovation policy in Australia lack a coherent perspective, appreciating neither the importance of non-R&D activities nor the characteristics of Australia's industrial structure.
Governments instead should focus and put in place policies to take action on three pivotal policy challenges:
- Helping to mitigate the financial risks taken by innovating firms.
- Re-focusing the role of Australia's 'knowledge infrastructure' like research institutes and universities.
- Establishing a long-range strategic forum for integrated efforts to anticipate, pursue and resource Australia's innovation opportunities.
Your Comments
Members and registered users - log in now to post comments