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Letter + Attachment

6 May 2004

Dr Bruce Flegg, MLA
Member for Moggill

In my letter of 15 April 2004, I outlined representations which I hoped that you could make on my behalf in relation to a damaging abuse of natural justice - involving the Department of Premier and Cabinet's refusal to allow professional merit to be considered in relation to making a senior policy R&D appointment.

I also tried to communicate an understanding of a technical / merit issue (ie a breakthrough in understanding economic development as a systemic issue) which was a core part of the background to that abuse.

I don't know whether the latter explanation was clear, but in case it was not I should like to have another go (see Attachment) by drawing your attention to the implications for gaining far greater benefits from what is currently the relatively ineffectual expenditure of billions of dollars in taxpayers funds.



In order to further illustrate the significance of the merit issue which is part of the background to my dispute with the Department of Premier and Cabinet, consider the following:

A current proposal: Prime Minister will announce $700m innovation and commercialization fund designed to kick-start research spending. This will be part of $5bn science and innovation package - along with $1.5bn boost in agricultural R&D. Building on Backing Australia's Ability, universities will get incentives to collaborate with publicly funded research agencies and industry groups. To stimulate chronic under-investment in research, fund will encourage companies to lift research spending. Universities and publicly funded research agencies can access expanded industry grants if they form partnerships with private investors. (Maiden S. '$700m to kick-start research mega-fund', Australian, 5/5/04)

Australia is not succeeding with innovation - yet this is vital to future economic competitiveness and a high value-added economy. A major symptom of the problem is that business investment in R&D is low - reflecting the fact that businesses generally do not have innovation as a feature of their competitive strategies.

A diagnosis: Australia's market-oriented economic policies do not generate successful innovation - according to Professor West (Harvard) in one of six CEDA papers on innovation. Australia did not establish strong positions in recent technological revolutions - and faced this risk again in biotechnology. Failing to establish financial and organisational vehicles to manage risks of innovation is the problem. No successful innovating country relies on free markets alone to finance innovation - as markets do not allow innovators to capture enough of the benefits. Australia has little venture capital. The largest companies are low R&D spenders, and governments do not share risk except in programs to help start-ups. Governments could help with tax concessions or preference for local suppliers. Government policy is focused on science-based innovation models - rather than encouraging application of existing technologies and their dissemination through existing industries. The latter would give immediate payoffs, and might be arranged through 'innovation clusters' - such as in wine industry (Roberts P. 'Economic policies retarding innovation', Financial Review, 29/4/04).

Yet the federal government is now proposing a large scale version of what Queensland has been doing through Smart State - ie boosting publicly funded R&D and seeking to leverage business successes off this.

This is the wrong way to go about it - and results from thinking in terms of government making inputs to an economic production function.

The alternative, which the breakthrough described in my letter of 15/4/04 highlights, is to stimulate changes in the economic production function directly.

In practical terms the latter means stimulating changes in the mainstream economy (eg in the desire and ability of mainstream companies to profit from innovation - and thus to perform internal R&D and to value publicly funded R&D). This would involve a form of strategic management leading to a 'systemic' shift - resulting in simultaneous changes in many different types of enterprises within industry clusters and also in public policies.

Such systemic changes can not occur quickly through a 'free market' (because all actors face a 'chicken and egg' constraint which prevents them individually from doing anything). And unless addressed, it is this systemic constraint which will ensure that the huge expenditures which the federal and state governments are currently making will achieve little. However if this was addressed then (a) the benefits of publicly funded R&D would be much greater - because there would be many more firms who were able to make use of it and (b) the amount that government would need to spend would be reduced as business generally would be motivated to increase its spending.

Professor West's diagnosis (above) suggests the sorts of changes that are probably needed (eg establishing financial and organisational vehicles to manage risk; venture capital; public risk sharing; broadly based innovation orientation and capabilities) - but he has not suggested how such broad options could be refined and changes achieved in practice. Moreover similar diagnoses were put forward by many analysts in the 1980s, and the problem remains.

However the theory and methods which I developed show how this change could be accelerated - and at a fraction of the cost of existing programs (see Attachment to my letter of 15/4/04). Moreover the same theory and methods would have very wide application to economic development activities generally.

As noted above, this breakthrough is one of the reasons that it was a gross abuse of natural justice for the Department of Premier and Cabinet to refuse to allow professional merit to be considered in my 1992 grievance about the making a senior policy R&D appointment in its then Economic Development Division.