The Economic Futility of 'Backing Australia's Ability 2' (2004)

Outline

A package of measures, which some have labelled Backing Australia's Ability 2 (BAA2), designed to support R&D and innovation was announced by the federal government in May 2004. Features of BAA2 include:

• focusing funding to universities on commercially and economically relevant R&D;
• promoting partnerships between researchers and business; and
• funding to promote commercialization of publicly funded research.

This package reflects the institutional weakness which seems to determine Australia's approach to economic  strategy because the 'tail' (publicly funded R&D) is being expected to wag the 'dog' (the innovation capabilities of Australia's business and industry).

However the issue may have broader implications because Australia's failure to create an effective innovation system, the need for which has been obvious for two decades, arguably illustrates even more fundamental defects in the methods and machinery used to develop the economy.

Boosting Innovation?

Australia is not succeeding with innovation (see Commentary on Smart State) - though this is vital to:

• future economic competitiveness and a high value-added economy; and
• enabling Australia to benefit (rather than be at risk) from ongoing economic change .

BAA2 seeks to boost Australia's innovation capability [1, 2] by requiring that publicly funded research have a strong economic / commercial focus and encouraging partnerships with private investors. This amplifies trends towards economically-relevant R&D established under BAA1 [1, 2], which have also applied to CSIRO's work [1]

Various observers have noted that BAA2 will reduce the total level of publicly funded R&D [1, 2, 3]. And its has realistically been pointed out that trying to force economic gains will damage the integrity of the basic process of discovery through research [1, 2, 3]

However these are not the major deficiency of BAA2.

Leveraging Economic Gains off Public Funded R&D

What the federal government is currently trying to do (ie leverage business successes off publicly funded R&D) parallels what Queensland (and perhaps other states) have sought to do.

A critique of Queensland's approach from the viewpoint of developing innovation capabilities is in Commentary on Smart State - and there seems little practical difference in the BAA2 agenda.

Both are futile because economically productive innovation must primarily emerge from organizations focused on market demand (rather than from those focused on the technical issues of research). Undertaking R&D is an indicator, not in most cases the source, of successful business innovation. Likewise having an effective system to commercialize publicly funded research is an indicator / component, not the prime cause, of an economy-wide innovation capability. It is moreover unlikely to constitute more than (say) 10% of any properly developed innovation system.

An observer with business experience described government efforts to promote the commercialization of R&D as an 'ideological frolic' and suggested that it was likely to be far more useful to develop innovation capabilities in existing industries which have markets, brands and distribution networks [1]

Current programs are the result of: thinking in terms of inputs to the economic system (which are likely to be introduced as disconnected fragments rather than part of an integrated, functioning economic system); and limiting concern to government programs.

The  alternative is to stimulate changes in the economic system directly (eg in the innovation system as a whole, rather than just in 10% of it).  

Changing the Economic System Directly

The primary problem to overcome is that the mainstream business community lacks the motivation and ability to succeed with innovation [1, 2, 3, 4] (eg innovation is seldom a focus of business strategy, and business investment on R&D is thus miserably low by international standards).

To overcome this requires stimulating systemic changes in the mainstream economy (eg in the  ability of mainstream companies (especially SMEs) to profit from innovation - and thus at some future time to perform internal R&D and to value publicly funded R&D). How this capability could be stimulated in practice and at low cost is suggested in Commentary on Smart State. 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, whose overall impact is to provide a supportive internal and external environment for business innovation.

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 much). And unless addressed, it is this systemic constraint which will ensure that the R&D expenditures which governments are currently making will achieve little. However if this was addressed then:

• the benefits of publicly funded R&D would be much greater - because there would be many more firms who need to make use of it; and
• the relative amount that government would need to spend would be reduced as business generally would increasingly be motivated to increase its spending.

Various analysts have suggested the sorts of changes that are probably needed [1, 2] (eg establishing financial and organizational vehicles to manage risk; venture capital; public risk sharing; broadly based innovation orientation and capabilities [1]) - but they has not suggested how such 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 unsolved.

The problem will continue to remain unsolved if all that is done (as some analysts have suggested [1]) is to improve integration between publicly-funded research institutions and a business community which remains unfocused on market opportunities for gaining competitive advantage through innovation.

Innovation can be driven by 'technology push' or 'market pull' - and both are equally viable if a well developed innovation system exists. However to develop an immature innovation system, emphasis on 'market pull' seems far more likely to generate the necessary energy and realistic sense of direction. Moreover, by emphasis on building an innovation system off existing economic capabilities by following 'market pull', business would be given the opportunity to crawl before it was expected to run.

Breaking the Iron Triangle

In order to overcome the problem due to Australia's traditional 'technology push' strategy, there is first a need to break the 'iron triangle' which has dictated the ineffectual character of Australia's efforts to develop its immature innovation capability - namely:

• lobbyists for science and technology institutions seeking increased government funding - who believe that this can best be achieved by presenting research as the starting point for (rather than as just one component of) successful innovation;
• business and professional groups whose members want at all costs to avoid having to take responsibility for real-world leadership in the development of industry clusters; and
• an economically and commercially naive political establishment.

Then business groups (such as the Business Council of Australia [1]) need to redirect their attention from lobbying for government to change institutions such as universities and CSIRO, and give priority mainly to ways to develop the systemic capabilities of the mainstream economy on whose effectiveness their members (and the value of the teaching and research by institutions such as universities) are even more dependent.

The distortion now being inflicted on publicly funded research institutions as a substitute for more broadly based systemic change seems similar to the damage that was done to Australia's system of public administration over the past 10-15 years in misguided efforts to make it 'commercial' and overcome bureaucratic 'resistance' (see Decay of Australian Public Administration). The latter was arguably also based on some misunderstanding of the nature of Australia's economic challenge - and the view that it was government, rather than the effectiveness of community and economic systems, which most needed to be upgraded.

Upgrading Australia's Economic Leadership

Australia's lack of progress in creating an innovation capability illustrates fundamental problems in its approach to economic leadership.

Policy related to technology has for decades been driven by science / engineering interests rather than by commercial / economic considerations – perhaps because:

• many more people know about the former than about the latter; and
• those in business who should know about the commercial / economic aspects have been horrified by any suggestion that they might be expected to compete in terms of innovation in a generally un-supportive environment.

The result was a policy based on prescriptive government supervision (mainly from Canberra) of R&D type issues and a ‘pretence’ of interest in innovation.

The need to change this to develop a strong commercial ability to deal with innovation was recognized by everyone who studied the subject in the 1980s (as many did) – and this could have been achieved (through a ‘learning by doing’ approach) but the message did not get through to enable sufficient practical action, apparently because:

• there was general acceptance that liberal market policies would allow economic growth and productivity to be increased - without considering that a liberal market does not ensure that systemic capabilities (such as the support firms require for innovation) will necessarily exist (see Defects in Economic Tactics, Strategy and Outcomes and Review of National Competition Policy Reforms: A Commentary);
• the Australian community has a high dependence on the political system to lead economic change (in comparison with counterparts in other developed economies where this role seems to be either taken by business, or forced on business by the state). This leads to large delays in dealing with such change because political understanding is intrinsically slow to emerge and not always realistic. For example: Sleepers wake! (1982) by Barry Jones successfully raised public awareness of the importance of a stronger technologically capability - but did so in an unrealistic way from a business / economic viewpoint, often leading to ridicule rather than progress.

Moreover the Commonwealth Government's dominance of Australia federal system might be an important cause of Australia’s problem in establishing an effective innovation capability (and of slow changes to economic systems generally). It can be noted that:

• until federation Australia had a steadily rising per capita GDP by international standards (and at that time enjoyed the world’s highest per capita incomes) – but a marked trend change thereafter saw steadily declining relative income levels (until the 1990s);
• until federation Australia had a world-beating innovation performance – as revealed by per capita patenting [1] – but this performance also declined thereafter;
• innovation capability (one area in which policy remained centally-driven) continued declining in the 1990s;

The explanation could be that:

• in an environment in which (as noted above) the community is highly dependent on the emergence of political understanding to lead changes to economic systems, Australia's federal system shifted responsibility for such issues one step further from the coal face; and
• the Commonwealth Government is singularly ill-equipped to take any leadership role in dealing with economic change because it is subjected to lobbying by interest groups but, because of its location in Canberra remote from serious centers of economic activity, it is divorced from informal information about the practicalities of business and industrial affairs;
• acceptance of the need for change seems to require top-down endorsement in order by OECD – Commonwealth – States, with each stage introducing something like a 5 year lag;
• Australia's unbalanced federal financial system and the horizontal fiscal equalization principles established under Commonwealth Grants Commission arrangements have also discouraged the states (eg Queensland) from taking their economic development responsibilities seriously (ie they protect states from the fiscal consequences of the weak tax base that a low productivity economic capability creates).

In assessing Australia’s failure to deal with innovation in 1990s it needs to be recognized also that (in Queensland at least - and perhaps nation-wide) the political system largely eliminated the skill base required to do so (which had emerged in the 1980s), in order to get unquestioning compliance in implementing their 1970s’ understanding of what was required (see Towards Good Government in Queensland). In practice Queensland then emphasized replicating the traditional national-level ‘government supervision of R&D type issues and a pretence of interest in commercialization’ - a focus which carries over into the (ironically titled) Smart State agenda in the early 21st century.

But there is no reason to suspect that Queensland was unique in that respect. The inadequacy of a purely R&D focused approach to development of technology-based activity was becoming well recognized by national economic institutions in the 1980s, and would never have become the focus of Backing Australia’s Ability if the skill base of those institutions had not also been demolished by political interference in the 1990s.

Faster development of Australia's economic capabilities requires institutions which can take the lead in developing them which are not constrained (as politically accountable institutions are constrained by their popular mandate) to act on ideas about the nature of economic ‘progress’ which were devised 15-20 years earlier and have thus had time to become widely understood. Moreover given a reduced dependence on central funding and control by Commonwealth agencies, universities would be able to play a constructive role in regional innovation systems – given apolitical leadership in creating those regional systems.

May 2004