Innovation appears to be a priority issue for the present Queensland Government, as shown by the theme of its 1999-2000 budget, Queensland: the Smart State ⁽¹⁾.

This paper reviews a related plan, Innovation - Queensland's Future. It suggests that the recognition which the draft plan gives to the economic importance of knowledge and innovation is long overdue in Queensland. Thus the proposal is potentially of great symbolic value. However the actions proposed in the draft plan appear unlikely to achieve their goal.

Innovation - Queensland's Future: What It Says

An outline of the Department of State Development's draft plan has been produced. .

Innovation: Queensland's Future has many interesting features including:

• an overall framework for innovation in Government and reference to several other initiatives ⁽²⁾. These show that this issue is central to the Government's goals;
• the Government's vision and goals for innovation (ie to establish Queensland as a global leader in innovation), and six key objectives ⁽³⁾ derived from this;
• a workman-like description of the economic role of innovation (p7-8) - which appears to be based on a deeper-than-presented ⁽⁴⁾ understanding;
• an outline of the more knowledge-based of Queensland's existing industries (p9), and some comments on the character of industries likely to show innovation (p10);
• a constructive emphasis on innovation as a path to sustainable development ⁽⁵⁾ (p10)
• some (unprovable) assumptions about future key industries ⁽⁶⁾ (p11)
• an outline of some of Queensland's research and educational institutions (ie 9 universities, state agencies, 11 headquartered CRCs (and others); and 4 government technology parks);
• endorsement of the role of Cooperative Research Centres (CRCs) (p13), and proposals intended to enhance their role and effectiveness;
• an outline of the importance of technology diffusion (p15), with an emphasis on government institutions intended to promote this ⁽⁷⁾ and proposals to create a strategic framework for those institutions as well as a technology incubator program (for start-up businesses);
• a statement concerning technology / science parks (p18), which suggested reasons for government involvement and the need (and proposals) to refocus Queensland's four parks whose performance has been disappointing;
• a focus on enterprise education through many educational institutions (p22-24);
• a discussion of financing of innovation (including the role of venture / seed capital and business angels; and the need for appropriate taxation) and of the possibility of a Queensland Entrepreneurship Centre;
• an outline of government assistance measures - for R&D and for investment readiness; and the use of the Internet; and expansion of help in gaining government assistance;
• endorsement of the need for an innovative culture (p32), and of the role of State Development Centres in this, and proposals for initiatives to promote innovation;
• a discussion of the need for public sector innovation (p35), and of the development of a strategic framework and vision for Queensland with an innovation focus;
• a proposal for a Queensland Innovation Council (p37);
• a discussion of methods for implementing the plan (p39).

An Innovation Statement is Long Overdue

As the draft plan states, innovation (which involves the application of new knowledge) is of key importance to economic competitiveness. Acknowledgement of this is long overdue ⁽⁸⁾.

Queensland has long given economic priority to securing capital investment - without complementary efforts to acquire the knowledge assets now usually required for investment to be highly productive ⁽⁹⁾. For example, investment has been cultivated in (often) low productivity sectors such as tourism ⁽¹⁰⁾, resource extraction ⁽¹¹⁾ and basic mineral processing ⁽¹²⁾.

Queensland has thus under-performed economically (despite its fast overall growth due to increases in labour and capital inputs). Per capita income has continually declined, relative to leading international trends. The quality of available jobs has frequently been poor ⁽¹³⁾. Many regions and individuals have suffered from under-employment ⁽¹⁴⁾ and high unemployment. Also Queensland's per capita contribution of Australia's current account deficit (which potentially constrains growth) has probably been relatively high ⁽¹⁵⁾.

The draft plan formally states goals often suggested over the past 10-15 years which have been difficult to accept politically - presumably because they implied requirements which were seen to be too hard for the traditional economy (and the established interests involved in it). Official analyses of Queensland's economic performance have often been distorted ⁽¹⁶⁾ - to show how 'well' the state was doing, rather than to show the possibility of doing better ⁽¹⁷⁾.

Thus symbolically, the draft plan has the potential to be of considerable value.

The Practical Benefits may be Limited

However making a statement is quite different from getting practical and productive results.

The draft plan can not actually change the state into a 'global leader' in innovation ⁽¹⁸⁾. For example, it seems to have technical limitations, ie

• its strategic 'planning' method has a history of failing to advance economic capabilities;
• commercially relevant support for innovation gets less emphasis than public programs;
• innovation support would be fragmentary, rather than grown as an integrated system;
• 'picking winners' is proposed, which is likely to prove costly and counterproductive; and
• the (implicit) theory on the economic role of innovation may need to be improved.

The main risk is that the draft plan may achieve its political goals (ie convince community leaders and the media that enough is being done about innovation) whilst merely creating a 'toy' innovation capability for the political system to play with ⁽¹⁹⁾.

The plan envisages government / business partnerships in implementing the plan. Yet, unless such partnerships are strongly market oriented, they are unlikely to be economically productive (despite their political benefits). However, at best the private sector is being consulted about this plan. A market focus is not leading the agenda.

There is also a risk, that such an initiative could discredit its highly desirable goals - by making excessive claims, consuming more money than practical results justify, taking resources away from other functions, and merely creating 'toy' innovation infrastructure. At worst, a political drive to 'reposition' the economy could be as damaging to the professional capabilities required for innovation, as it has been to the Public Service.

Overall the purpose of the draft plan appears constructive, but the proposed means to achieve this seem technically weaker than much earlier proposals to stimulate development of market based (rather than public sector based) infrastructure to support innovation ⁽²⁰⁾.

J. D. Craig 

Centre for Policy and Development Systems

14 October 1999 

NOTES

1. Queensland: the Smart State includes provisions related to: development of human capital; nurturing of emerging knowledge based industries such as bio-technology through research investment; promoting communication and information industries; developing an industry culture focussed on innovation; applying technology to cultural expression; and enhancing public service delivery through new technologies.

2. Innovation links to Queensland Government priorities in terms of: (a) three of the 'Premier's 7 priorities' (ie more jobs; building the regions; and skilling Queensland) (b) government election commitments (c) the Department of Premier and Cabinet's whole-of-government policy / theme / vision / strategic direction for Queensland in the new century involving building on existing directions whilst repositioning Queensland to take advantage of the information age (d) an R&D strategy being developed by Treasury to set broad policy settings favouring innovation (e) DSD's strategic plan (f) DCILGP's draft Communication and Information Strategic Plan. Outcomes are expected in terms of: an internationally competitive economy; sustainable high value jobs; regions capitalising on their strengths; ecologically sustainable use of resources; and an innovation culture.

3. Objectives related to innovation involve: (a) creating a conducive environment; (b) invigorating research, and providing necessary infrastructure (c) encouraging research commercialisation (d) reducing impediments to innovation eg funding and tax issues (e) creating a skilled knowledgeable workforce (f) promoting innovation in government, and internationally competitive public policy (g) building a culture of innovation in the community.

4. Economic Role of Innovation: A technical account of this would have useful as an Appendix, because (while the draft plan appears to be based on a fair interpretation of current theory) it may be that:

• a technology-push rather than market-pull philosophy may underpin its suggested programs. This is suggested by emphasis on research being followed by commercialisation, whereas the order is typically best reversed to maximise economic benefits (ie research must usually be directed to solving market problems);
• scope for making real progress might be increased by advancing that theory.

5. Sustainable development would be promoted through innovation in: traditional primary industries (DPI, DNR, EPA); reducing waste; natural ecosystem restoration; economic diversification; and the use of information / communication technologies for regional development.

6. Assumptions about future key industries: included reference to ASTEC's identification of six generic priorities including: the environment; transport; information and communication; genetics and biotechnology; advanced manufacturing; and new materials. Reference was also made to Queensland initiatives / capabilities related to: renewable energy; transport infrastructure; light metals; information and communication technology; biotechnology; materials technology; and advanced manufacturing.

7. Government institutions include: Queensland Manufacturing Institute; the Clunies Ross Centre; Institute for Molecular Biosciences; and the Queensland Centre for Advanced Technologies

8. An emphasis on innovation has been needed because:

• the benefits from natural resource based industries (which Queensland has traditionally relied upon) have been declining. Commodities' overall growth has been slower than many other (manufacturing and services) sectors; the competitive position of commodity producers tends to be weak (see Note 11);
• the need to diversify Australia's economy was seen in the 1980s, and sought by economic liberalisation (ie financial deregulation, reduced tariffs, competition policy) and various economic strategies. However
• the standards to be met in diversification were (at the same time) being raised from capital intensive to knowledge intensive industries. This resulted from improved transport and communications and from aggressive strategies in developing countries (especially in Asia) which led to: a shift in the location of capital intensive mass production from developed economies (Europe and North America); reduced ability to gain high value added from capital intensive production (because of low wage competition); and a need for developed economies to diversify (which they found required a shift into knowledge intensive areas);
• innovation can allow productivity to be increased, by providing a source competitive advantage.

9. Competitive Advantages are needed for high productivity. In a competitive environment, the margins between the price a firm receives for goods and services and its cost of producing them, will be continually eroded. Creation of new competitive advantages (eg through innovations which reduce costs; or provide better products) is a constant requirement if higher margins (and added value to provide a good return on capital, and pay high wages and salaries) are to be achieved.

10. Tourism had become Queensland's most rapidly growing industry (Hele M. 'Visitors Flock in Record Numbers', Courier Mail, 4/11/93). It was estimated to become the largest industry by 2000 ('Cabinet Approvals Speed Tourism Package', Queensland Insight, Bailey Davis McPhee, 2/12/93). However, while there has been a deluge of data about tourism and its growth prospects, there is little about factors which enable its strategic value to be assessed. There is no strategic value in an industry with large (and growing) inputs and outputs, unless substantial value added is retained by the community. And tourism appears to be a low productivity industry. For example: (a) mainstream economists do not regard tourism as a basis for economic prosperity (eg Kolson T., 'Conversation with an Ant Economist - Our Trading Partners have it Made', Business Queensland 28/9/92). (b) Analysis of tourist industries in less developed countries show they have less favourable than predicted impacts in terms of: decentralisation; indigenous employment; and income distribution. Critical review of tourism is far more important in a developed economy where there are alternative opportunities (Aislabie etal 'Trends in Tourism Research - An overview' in Tisdell et al, The Economics of Tourism University of Newcastle, 1988, pp1-14). (c) Many employees receive relatively low wages even though a handful of entrepreneurs become rich (Miskinski J., 'The State We're In', Sunday Mail, 3/3/85). Furthermore those concerned with the plight of the unemployed stress job creation in the mainstream of the economy rather than in the 'marginal and less secure' tourist sector. (Queensland Council of Social Services, Begging Behind Closed Doors, 1990). (d) Return on investment is reportedly weak. 'In general fund managers do not believe that the tourism industry will deliver and are sceptical of its forecasts. So while the growth prospects are high once again, fund managers say the industry's optimism is never reflected in the investment returns' (Fry E., 'The Need for Big Investment' Courier Mail, 7/11/91). (e) Nett payments to government by the industry may be low, because one of the major benefits of such investment lies in the tax advantaged treatment of property investment. (f) Devaluation (which reflects a reduction in the relative affluence of the community) has been seen as a prime means to boost the industry (Johnstone C. 'Drop in dollar to bring new wave of tourists' Courier Mail 15/1/91). Furthermore tourism appears to suffer various adverse social impacts. It is criticised as intrusive; noisy; often corrupt and authoritarian; and linked with prostitution (Robinson P. 'Behind the Neon Glow of Tourism', Sun Herald, 21/2/93; and a source of health problems (Kennedy F., 'Tourists make Cairns Sex Bug Capital', W.Aust 14-15/8/93). Tourism has been a suspected target for investment of laundered money by organised crime (Robinson P. 'Former NCA Chief warns that Japan's Gangs also Invest', Age, 23/7/88 - quoting Sir Max Bingham). Hawaii was said in the 1980s to have been dependent on gangster investment, and to be subject to their strong political influence;

11. The Competitive Situation facing Commodity Producers: makes it difficult (though it is possible in some cases) to capture high value added through producing basic commodities, because (a) competition increasingly comes from developing countries with moderate skill levels but low wage rates (which has a large impact even on capital intensive production because of the effect on construction costs); (b) producers who rely primarily on the natural comparative advantages of a region's resources find (in a competitive situation) that prices are bid down to near costs, because they lack the competitive advantages to provide any real market power.

12. Processing Resources does not Automatically Add value: It has become fashionable to encourage value-adding to Australia's resources, without seriously considering whether downstream processing is likely to add-value. Officially the problem has been neatly avoided by (in effect) assuming that processing and value-adding are the same thing (eg Cooper W., 'Minerals Processing in Queensland: Part 1', Queensland Government Mining Journal, Sept 1998). However processing, which increases the price of commodities, only adds value if the increase is price exceeds the costs of the processing. And whether this is possible depends on competitive factors, not simply on production factors. However the latter are all that have been considered officially, and have also (reportedly) dominated the thinking of mining companies (Runge I., Managing Capital Intensive Industry Beyond Y2K, Runge Mining 1998 Senior Industry Function, Brisbane). Returns achieved by resource companies have been very poor for 20 years - and the problem may not be cyclical, but rather a structural consequence of the inability of primarily capital intensive business strategies to create much value when competitors are mainly LDCs (like the situation which required major adjustment in manufacturing in the 19970s and 1980s).

13. Poor quality jobs: The Working Nation report argued that 79% of new jobs in Australia were in the lowest quartile of full time male earnings (p146). An April 1999 analysis, Australia's Young Adults - The Deepening Divide (Dusseldorp Skills Foundation) argued that, despite the increasing qualifications which they were acquiring, young Australians found that the jobs available to them tended to be of poor quality (low paid, casual).

14. Community impacts: Clusters of ghettos are emerging in Queensland after a doubling of the number of poor over 14 years. One in five households (250,000) now live in poverty, and there are 25 regions where more than 1/4 of the people rely on welfare. Queensland has 20 of the top 40 regions of highest unemployment in Australia, and is regarded as Australia's poorest state. Development in Queensland has been unequal and uneven (Retschlag C., 'Poor one day, poorer the next', Courier Mail, 8/5/99 - quoting a People and Place report by the Queensland Council of Social Services and the Social Action Office). [See also Scott L. `Poverty Clouds the Sunshine State's Wealthy Image', Australian, 14/6/95]

15. Low Productivity and the Current Account Deficit: A current account deficit (CAD) arises because of a gap between national income and the (higher) expenditures which are incurred in generating that income. The difference has to be balanced on the capital account (eg in Australia's case by inflow of debt or equity capital) because international payments must balance under a floating exchange rate system. [The CAD also equals the difference between external spending and income (ie spending on imports of goods and services and exports - with an allowance for financial transfers), as domestic spending and income must be equal. The CAD also equals that between national investment and savings, as capital inflow is typically used for investment.] Regions like Queensland (which generate limited national income in relation to their share of national expenditure, because they have low productivity industries) are likely to contribute more than their population share to the CAD. A relatively large contribution to Australia's export earnings does not ensure a positive current account contribution from Queensland's economy - given the large offsetting large effect of financial transfers, and capital equipment imports, in generating those exports. However, firm data on this question is not available.

16. Distortions in Analysing Queensland's Economy include the emphasis given to aggregate growth, and the traditional failure to refer to weak per capita economic performance - which reflected an economy based on low productivity activities. A positive bias was apparently in the interests of government's credit rating, though it inhibited a proper focus on really strengthening Queensland's economy in the interests of its community.

17. The Need to Raise productivity: A State Economic Development Strategy produced in 1997 (Queensland. State Strategic Plan 1997-2007: State Economic Development Strategy) was the first to be based on the need to boost the productivity (ie the ability to create value-added) of Queensland's economy.

18. Queensland's Innovation Position: is not strong. There certainly are foundations on which it is possible to build. Indications of (hundreds of) enterprises with innovative performance or potential were readily available in the mid 1980s, though support for these was limited and fragmented. And since then successes have emerged (eg in information technology). And the positive features included in the draft plan appear generally accurate. But there are also serious limitations, which the draft plan has chosen to continue the traditional approach to analysis of Queensland's economy by ignoring eg it presents (p8) claims about Queensland's key strengths some of which verge on being false (eg a claimed highly educated and trained workforce - when Queensland traditionally suffers a 'brain drain'; and (as for Australia as a whole) suffers a gap in sub-professional technical skills due to the character of its economy). Other overlooked constraints include:

• very low business R&D spending by national standards (itself low by comparison with developed economies);
• limited access to strategically relevant information (because of the high level of foreign ownership and control, and the lack of market relevant institutions which research commercial, technological or public policy issues). This is important because relevant innovations can only be identified by those with the highest levels of information about the current situation. Also the ability to acquire new knowledge (ie to keep up with competitors) depends on the existing knowledge base;
• lack of a pool of persons with experience in turning innovations into businesses.

The draft plan describes the need for a supportive environment for innovation, but does not suggest what the components of such an environment are - which avoids the need to really assess the current situation.

19. Innovation is not automatically a 'Good Thing': There are many different possible innovations, yet the only ones which will make the community economically better off are those which satisfy a real market demand - not those which planners believe customers OUGHT to want. For innovation to be economically productive it must be undertaken within an appropriate framework (ie where political criteria do not dominate).

20. See for example Towards a Strategy for Technological Development in Queensland, Premier's Department, October 1983. Though out-of-date in terms of specific initiatives, this suggested a basic approach of developing the market based process through which innovation is undertaken - without direct government involvement in providing 'assistance' in individual cases. To achieve the suggested goal requires the development of new institutions (which was not recognised in the 1983 report) because of the inability of governments in Australia to constructively develop the real economy. However as the results which have been achieved have been inadequate over the past 15 years, institutional innovation should be considered.