Australia’s prosperity rests, to a significant degree, on the global competitiveness of our business sector. This is largely driven by the rate and type of business-level innovation which provides the foundation for business success and resilience. We know that business innovation also encourages the creation of strong and lasting new businesses and the creation of new and better jobs, which together support a move to higher living standards.
Innovation investment by business is crucial to our ongoing prosperity. But on a range of measures, Australia’s business sector appears to be falling behind in the global innovation race. This should concern everyone, not just policy makers.
In recent decades, government support for business innovation has focused on encouraging businesses to invest in research and development (R&D). In our report released this week, ‘Stimulating Business Investment in Innovation,’ we reveal that only about one in three Australian businesses spend any money on innovation (which includes R&D and non-R&D based innovation activities). In fact if we look at all our businesses, only six per cent invest in R&D alone.
While business investment in R&D remains important, data shows that Australian businesses, like their international competitors, are shifting their innovation investment towards non-R&D innovation. This has implications for the way government should frame its policy mix.
We have found that investment in non-R&D innovation activities leads to higher revenue, job growth and higher rates of business survival. Non-R&D innovation activities don’t stem from a scientific method or involve R&D. They include investment in productivity-enhancing digital technologies (including software and systems), reconfiguring business models, branding and marketing, and developing new staff capabilities.
This investment in non-R&D innovation is very important because, across the world, business value is increasingly being created through tangible asset-light, platform-based and customer-loyalty focused business models, where investment in intangible assets (which includes those developed through R&D) is the value driver.
Our analysis of small and medium businesses that invest in non-R&D innovation reveals they grow their revenue 3.5 percentage points (ppt) per year faster and employment 5.2ppt faster than other small businesses.
Similarly, small firms that adopt at least one productivity enhancing software application in areas such as finance, human resource management, or marketing and sales, increase their employment 2.2ppt faster than those businesses that do not adopt any software.
For larger businesses, ASX 200 firms that invest more heavily in innovation grow revenue 1.3ppt per year faster than the average ASX 200 firm, based on data from 2005 to 2016.
If we could achieve these uplifts across the whole economy Australia would be the envy of the world economically and our wages and living standards would be higher.
The view of the ISA Board is that too few Australian businesses are innovating and government support needs to be better balanced to encourage innovation in whatever form it takes, be it R&D or non-R&D activities.
Australian business investment in both R&D and non-R&D innovation still lags behind that of other developed countries. Australia’s business innovation investment as a share of GDP is only 1.9 per cent, just two-thirds of the European average of 2.9 per cent.
Given that revenue and jobs growth correlates with business non-R&D investments, there is a case to encourage and accelerate greater non-R&D innovation. Non-R&D innovation investment also complements investment in traditional R&D.
Based on this analysis we recommend government re-balance its policy mix to support business investment in non-R&D innovation, while continuing to support business investment in R&D. We recommend government focuses significant additional support for non-R&D innovation for a defined period, around five to ten years. Action is needed now for the competitive impact to occur quickly.
Government is well placed to adopt additional initiatives that support the entire innovation spectrum, complementing existing R&D support mechanisms with measures to encourage non-R&D innovation investment.
These findings paint a powerful picture of the growth potential for Australian businesses and this reality is within reach.