A Case for Innovative Economic Leadership  (2009+)

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Professor Roy Green (University of Technology, Sydney) suggested that Australian firms need to upgrade their ability to innovate out of the severe 2009 economic downturn, and that governments should consider such long term needs in determining their short term responses to the economic crisis ('Innovation the key to recovery', The Australian, 1/4/09)

Outline: Short term gains must be linked with longer term strategies. Without agreement on causes of the GFC, there can be no solution. At present all that is agreed is that government intervention is the answer, and theories of capitalism as a self-adjusting mechanism are challenged. The first response to crisis was based on monetary analysis (involving de-leveraging, lower interest rates, recapitalizing banks). It then became obvious that countries were caught in a liquidity trap like Keynes had identified (ie that the problem was not a lack of credit but of effective final demand). Governments shifted emphasis to short term fiscal stimulus - on the grounds that markets would take too long to restore themselves. However problems facing the world's economies are deeper than financial imbalances and demand deficiency. There is a structural crisis of over-production promoted by over-expansion of credit, and a shift in the distribution of income from wages to profits. Thus short-term stimulus measures need to be linked to building longer-term capacity for innovation and entrepreneurship - so that enterprises can lead recovery. Schumpeter's analysis of creative destruction provides best guidance. Firms now have to create own momentum via innovation, not ride others' waves. Firms need to adapt to markets, and ensure that markets lock into their innovations. This would allow rapid growth even in difficult times. However Australia's productivity growth, boosted by 1990s reforms, has faded. 2008 review of national innovation system showed that revival of productivity / competitiveness depends on knowledge and innovation. Government innovation policy should not focus only on R&D - because 2/3 of firms' innovation spending is not R&D. Management and leadership are key factors. Federal Government has started moving in this direction with its: Enterprise Connect business advisory services; a 'researchers in business' schemes; and specialized innovation centres. This could be extended for more targeted management / innovation capacity in workplaces - and be a cost-effective way of using fiscal stimulus with longer-term benefits. 

Somewhat similar suggestions were offered on behalf of the Licensing Executives Society (eg see Stimulus packages going to wrong spots: attorney, 2/4/09).

The purpose of this document is to propose mechanisms for speeding a transition to a situation in which firms are more able to innovate out of economic downturns.

In brief it will be suggested below that:

  • Professor Green's constructive proposal is made more important by the fact that the global financial crisis (GFC) is exposing, and was partly caused by, poorly-understood structural defects in the world's economy that make it unlikely that sustainable recovery will involve merely reviving pre-GFC economic functions;
  • the need to develop innovative capabilities in Australian firms and regional economies has been recognised for two decades, but progress has been slow - arguably because innovation systems were developed that were politically-driven (ie perceived to be a 'good thing' by influential interest groups) rather than being market-driven (ie meeting the needs of customers);
  • Australia's productivity growth has been hampered by the lack of balance between the strict emphasis on exposing firms / individuals to competition and the amateurish effort to enhance their ability to compete successfully in high value-added activities (eg through effective innovation systems);
  • better means to develop economy-wide support capabilities for individuals and enterprises (such as those needed for innovation) are probably available, but require new approaches to economic leadership;
  • using those methods may allow opportunities to open up for regional economies / industry clusters as a whole that are not available to individual enterprises in the absence of complementary economic functions.

Implications of the Global Financial Crisis (GFC)

Professor Green's article presented a constructive account of how the GFC has appeared and how governments have responded in countries that are like Australia.

However this is only a partial view as there are causal factors and policy implications in (say) continental Europe, East Asia and emerging economies that are significantly different - and these differences have received little attention. An attempt to draw upon information related to significant non-Anglo-zone economies as well is in GFC: The Second Test of Globalization.

Of particular relevance is that there is more to the problem of financial imbalances and a cyclical demand deficiency than the article suggested. There is a critical international dimension related to  economic strategies that have been the basis of East Asian economic 'miracles' (that are macroeconomically-unbalanced because of structural demand-deficits). These have contributed to the financial imbalances that have long put economic growth at risk (see Structural Incompatibility Puts Global Growth at Risk, 2003), and also to the emergence of the GFC (see Financial Imbalances in Global Financial Instability: A Many Sided Story).

There is increased recognition by many analysts of the importance of these financial imbalances and the problem was even referred to indirectly by US President Obama when he spoke of the inability of the world's economy to rely on the US to provide unlimited future demand. However the imbalance issue was not addressed through the G20 summit (see Announcing 'Peace for our Time'). The bottom line is that:

  • recovery from the GFC is not likely through demand stimulation in countries like Australia (especially the US) that have been relied upon to provide the excess demand to counterbalance the demand deficits in countries with export-oriented strategies (like Japan, China, Germany); and
  • for complex cultural reasons, East Asian economic models probably can't be adapted to succeed in a new environment which lacks strong external demand and financial systems (see Are East Asian Economic Models Sustainable?).

Thus (though the possibility is as yet virtually unknown to financial markets and economic analysts) there can probably not be any sustainable economic recovery which merely restores past economic activity. Increasing the ability of firms to find / create new opportunities that Professor Green drew attention to is likely to be critically important. .

The present writer's (undoubtedly inadequate) general speculations about Australia's response to the GFC are in Managing Australia's Economic Crisis. This refers to significantly boosting economic supply capabilities.

Strengthening Innovation Support

Stronger innovation systems are not the only way in which firms' abilities to find / exploit new opportunities could be enhanced. For example, there might be advantages in increased flexibility through better systems for enterprise bargaining and less intrusive regulation through developing ways of addressing social / environmental difficulties with less reliance on government intervention.

However the challenge of creating strong market-focused systems to support innovation by firms in larger cities and to extend this to firms in other regions is a good way of considering the challenge of accelerating the development of high value-added economic production capabilities generally.

Why pursue productivity? The suggestion here about seeking high value-added economic activities might seem obvious, but it is not as obvious in the GFC environment as it might have been some years ago.

The pursuit of financial gains (eg profits) through complex institutional arrangements was a major factor in the emergence of the GFC.  A much stronger role for government is seen as the antidote. However this is not likely to be durable, because governments will be no more able to pick winners in future than they have been in the past - because of their structural inability to get the information needed to do so.

However there is another profound (but virtually unknown) challenge to the notion of pursuing financial productivity - and this arises from the economic models that have been used in East Asia where production is coordinated by social relationships amongst elites - with little regard to financial returns. This is seen (by Asian nationalists) as the basis for quite different methods for organising economies and of financial systems which are unlike those used in Western societies. However such alternatives to the pursuit of capitalist profits are also unlikely to be durable for reasons suggested in China: After the Bubble

There is nothing new about innovation support systems. The present writer produced one of the earliest reports on upgrading innovation capabilities in Australia (Towards a Strategy for Technological Development in Queensland, Premier's Department, 1983, unpublished). This identified the fact that such systems had been effective in some of the world's more dynamic economic regions since about 1970. It also revealed that a lack of commercial competency and organization (rather than any shortage of R&D, education or technical skills) was the major obstacle to innovation in Australia,

However, despite the strong in-principle political support that has been given to boosting innovation capabilities in Australia, progress has been very slow (perhaps even negative) because politically-driven rather than market-driven methods have been used (see Smart State: Aiming at the Wrong Target for indicators, and The Economic Futility of 'Backing Australia's Ability 2' for a more general discussion). The political system responded to the strongest established  lobby groups (ie those involved in science and technology) and almost nothing was done to reduce the more important constraints (ie commercial capabilities and organisation).

The economic futility of responding to lobby groups who provide economic inputs to a economic systems that are too poorly developed to use them productively  can be illustrated by the reported inability of highly qualified individuals (in Australia and Canada) to gain appropriate employment [1]

As Professor Green noted, (a) the capability of firms to profit from innovation is important to an economy's productivity; (b) Australia's productivity growth has been slowing; and (c) there is much more to effective innovation than R&D (eg the internal management competencies that his article referenced, as well as many external commercial / production / legal / financial / logistic / etc support services).

One reason for limited progress in boosting productivity is arguably that strategy for boosting the supply side of the economy has been unbalanced. Emphasis has been placed on requiring individuals / firms to compete without doing enough to ensure that they had the systemic support needed to compete successfully in high value-added activities (see Defects in Economic Tactics, Strategy and Outcomes, 2000)

Government policies to increase competitive capabilities have focused on providing inputs to the economic system (eg education / training / research / innovation support services to individual firms such as those Professor Green's article referenced). Unfortunately, because they are not market-responsive and crowd-out the emergence of embryonic market-based arrangements, government-promoted 'assistance' services to individual firms to fill perceived market gaps are a major obstacle to the development of the market-based services which must exist if thousands of (rather than a few) firms are to go down that route (ie government 'assistance' services are the opposite of economic development), A superior approach would be to stimulate  such support services within the market economy, and thus (a) increase the ability of large numbers of firms to profit from innovation; and thus (b) generate a strong demand and productive sense of direction for economic inputs such as advanced education, training and R&D.

Methods to accelerate the development of market-based innovation support capabilities are arguably available through stimulating multifunctional enterprising responses to major new opportunities (eg see Changing the Economic System Directly). This, however, requires rethinking the nature of effective 'economic' leadership. Because of the pressures that they are subject to, politically-accountable entities tend to reflect understandings that are widely accepted within the community. They are thus intrinsically unable to take the lead in promoting changes whose economic value depends on the fact that they are not yet widely understood (see Economic solutions are beyond politics, 1995). Moreover, attempting such initiatives through politically-controlled entities risks attracting rent seekers, and increasing moral hazards and corruption (as 'opportunities are discovered that depend mainly on government subsidies, and government officials are enticed to arrange them). Also, true democratic governance emerged (initially in Britain) at the time of the industrial revolution arguably because it provided a means to redistribute (through public and social services) the wealth created in industrial economies through deployment of capital for mass production. There seems now however to be a need for community leadership within democratic societies which transcends (and thereby protects) the democratic process (as the present writer first suggested in 1993), because:

  • competition from emerging economies in capital intensive manufacturing forced developed economies to specialize increasingly in post-industrial (often knowledge intensive) functions - the most important of which involved the financial services which the GFC proved could generate feedbacks with asset values that proved unstable;
  • many emerging economies that attach less importance to public and social services;
  • substantial debts have accumulated in many developed economies because of: (a) global financial imbalances associated with economic strategies adopted in some (especially East Asian) economies; (b) losses associated with the GFC; (c) the high costs of public and social services. Population aging and the high costs of dealing with environmental challanges and the end of the era of cheap oil, are likely to exacerbate these difficulties.

A practical means to accelerate the development of economic functions such as an innovation system which is based on reasonably-successful past market-driven experiments is speculated in Developing a Regional Industry Cluster (2000).

Examples: A process to boot-strap the development of a more commercially-relevant innovation system (by building off existing capabilities through adding value to particular opportunities) was suggested in 1998 by a Technology Task Force of Queensland's Institution of Engineers. Protocols for private-public partnerships that were developed in the US in the 1990s (eg the Silicon Valley Joint Venture Network Association) might also be worth considering.

Similar methods could be used as an alternative to expensive government investments (ie a National Broadband Network) to develop indicative plans which might show how high speed broadband services could commercially across Australia.

Though attempts to accelerate learning within the real market economy must be inadequate if undertaken by democratically accountable entities, there would be great value in requiring democratic endorsement of the protocols that would be used in such processes to protect the community interest. This would be like governments determining the rules under which companies operate even those such entities tend to be unsuccessful in a competitive environment if subjected to direct political control.

Finally, as Australia's states are the primary level of government that has had nominal responsibility for economic development, there might be value in changes in the national tax system and revenue-sharing systems. At present those systems gives states neither financial rewards for real success nor financial penalties if they merely pretend to take that responsibility seriously, because: (a) state revenues tend to be based on the value of economic transactions, rather than on the economic value-added which determined business profitability, employee remuneration and the federal-government's main tax bases; and (b) revenue sharing arrangements compensate states whose defective economic strategies produce a weak tax base (see Providing Incentives for Economic Development).

Beyond Innovation Systems

The methods suggested here have relevance beyond the development of innovation systems. For example they might constructively be used in Australia's case to explore options for strengthen industrial clusters related to: agribusiness; functions linked to mineral and energy resources; globally-oriented small and medium enterprises; existing embryonic industry clusters in various regions; opportunities in Asia and emerging economies; and functions linked to solving social and environmental challenges.

Australia's declining innovation capabilities

Australia's declining innovation capabilities (email sent 9/11/10)

Dr Terry Cutler,
Cutler and Company

Re: The death and decline of innovation, Crikey, 8/11/10

I noted with interest your comments on the failure of efforts to develop Australia’s innovation systems, despite endless political rhetoric. This is nothing new. I first studied the (mainly commercial competency) requirements for developing Australia’s innovation capabilities nearly 30 years ago, and have observed the futility of politically driven attempts to achieve this ever since (eg see The Economic Futility of 'Backing Australia's Ability 2' and Commentary on 'Smart State', 2003).

Given the relative lack of commercial innovation competencies and organisation in Australia, the politicisation of efforts to develop innovation systems has always resulted in the process being controlled by those who merely seek to gain government funding for their ‘smart’ (ie education and R&D) inputs to such systems, and essentially no realistic progress in developing Australia’s economic capacity to use those inputs productively.

Some suggestions about an alternative approach that might be less futile (because it starts by building capacity to use ‘smart’ inputs productively) are in A Case for Innovative Economic Leadership (2009). This was simply a restatement of proposals that I first put forward in 1983 while working for the Queensland Premier’s Department (in Towards a Strategy for Technological Development in Queensland), which the ‘smart’ lobby groups ensured was not taken seriously because it did not simply propose lavishing taxpayer funds on their projects.

John Craig

Making Australian leadership in innovation a reality

Making Australian leadership in innovation a reality - email sent 17/8/11

Andrew Liveris,
Dow Chemical Co

Re: Australia can be a world leader, The Australian, 13-14/8/11

I should like to endorse the goal of leadership in innovation by Australia that is advocated in the above article, but respectfully submit that what is needed to achieve this is quite the reverse of what was suggested in that article (ie the reverse of government leadership in identifying sectors vital to Australia's future, and government being alongside the private sector in developing and scaling up these industries).

There is no doubt about the critical importance of developing Australia’s innovation capacity (eg see Economic Role of Technology).

However democratic institutions can never identify opportunities when they are still likely to be commercially attractive and economically productive, and are subjected to interest group pressure to ‘pick winners’ favoured by rent seekers (see Economic solutions are beyond politics). Moreover direct government support for private firms is always an obstacle to the development of the economy (ie to the emergence of higher quality, better focused and sustainable support to such firms) – see Problems with direct government ‘assistance’.

What your article suggested corresponds precisely with the assumptions that have been made for decades about the best way to develop Australia’s innovation capacity – assumptions which have seen huge government expenditures on ‘smart’ inputs to economic systems that have stubbornly remained insufficiently developed to use them productively (see The Economic Futility of 'Backing Australia's Ability 2').

An alternative approach that should offer better prospects of success is outlined in Accelerating Market-Oriented Development of Economic Systems and A Case for Innovative Economic Leadership. The latter refers to apolitical leadership, under democratically endorsed protocols, in accelerating the development of market-focused capabilities to support innovation. This involves a process for stimulating productivity-enhancing change in whole economic systems that is equivalent to innovation within enterprises.

[Added later: The need to focus primarily on developing commercial competencies and organisation to support innovation has been obvious since the 1980s. What has been, and remains, missing is commercially credible leadership in doing so]

I would be interested in your response to my speculations.

John Craig

Innovation or Stagnation: Lessons the UK could Learn from Australia

Innovation or Stagnation: Lessons the UK could Learn from Australia - email sent 23/3/12

Mark Dodgson 
University of Queensland

Re: Innovation or stagnation? Lessons Australia could learn from the UK, The Conversation, 22/3/12

I noted your suggestion that Australia might learn from trends in innovation policy in the UK. As I interpreted it, this involved: recognition of the economic importance of innovation; support for universities and research; building institutions; and public procurement.

I should like to submit for your consideration that Queensland’s history suggests that what is being considered in the UK is not likely to be constructive. An informal account of the 30 year history of the state’s efforts to develop stronger innovation capabilities, which resulted from requests from a couple of PhD students, is on my web-site (see Smart State: Some Informal History).

The involvement of the political system in the process biases outcomes towards things that government can do (ie provide education / research funding; ‘assist’ innovators), when the actual problem lies in a lack of commercial competencies and organization to succeed with innovations within the market economy generally. Methods are arguably available to solve the latter problem (eg see A Case for Innovative Economic Leadership, 2009 ), and thereby create a real demand for the education / research inputs that government might provide (and render counter-productive government efforts to directly ‘assist’ innovators clearly irrelevant). However: (a) those methods require leadership by apolitical entities operating under democratically-endorsed protocols; and (b) the more that politicians are encouraged to think that they themselves have to provide the solution, the less likely it is that an economically-constructive solution will be found (see also Breaking the Iron Triangle in The Economic Futility of Backing Australia’s Ability 2, 2004)

John Craig

Investing in science / innovation

Investing in science / innovation - email sent 13/6/12

Alan Dormer

RE: Preparing for the end of the boom: should super funds invest in science and innovation?, The Conversation, 13/6/12

It would make sense for super funds to make investments such as you suggest if serious attention was given to developing Australia’s ability to make profits from such investments. How this might be achieved is suggested in A Case for Innovative Economic Leadership (2009).

By way of background I note that I authored one of the first reports (perhaps the first) on the development of a more knowledge-based economy (Towards a Strategy for Technological Development in Queensland, 1983 - unpublished). The latter took the view that the key to success was to overcome manifest deficiencies in commercial competencies and organisation related to innovation, rather than to (a) simply boost the supply of ‘smart’ inputs to an economy that was unable to use such inputs productively; or (b) trying to overcome the latter deficiency with government ‘assistance’. However lobby groups related to (a) and (b) remain very strong and the leadership needed to develop commercial systems has been missing. There has thus (in my view) been essentially no progress over the past three decades in making it sensible for super funds to invest in science and innovation.

Regarding the ‘end of the boom’, some comments appeared in Managing Australia’s Economic Crisis (2008+) and more recently in Autocratic Asian States and Australia's Economic Options (2012).

I would be interested in your response to my speculations.

John Craig

Boosting Innovation and Industry

Boosting Innovation and Industry - email sent 18/2/13

Julie Hare
The Australian

Re: Benefits of precincts ‘a mystery’, The Australian, 18/2/2013

Your article identified both enthusiasm for, and uncertainty about the benefits of, the ‘innovation precincts’ that the federal government has proposed in its industrial innovation statement (see A Plan for Australian Jobs).

In this respect my early study of technology parks (to which ‘innovation precincts’ have been likened) may be of interest (see The Role of Research / Technology Parks in Queensland’s Technological Development, Queensland. Premier’s Department, 1984 - unpublished). This remains relevant due to the lack of serious efforts to boost Australia’s industrial / innovation capacity since then (eg see The Economic Futility of 'Backing Australia's Ability 2', 2004 and The Inadequacy of Market Liberalization, 2004). It concluded that technology parks could be successful in regions with a well-established innovation capability, but would not create this in less-developed regions.

Thus I would suggest that it would be useful to focus on developing regional innovation systems, rather than on providing real estate that they might find useful if they already existed. How the necessary changes might be stimulated in a democratic liberal-market environment (and thus incidentally perhaps create a real purpose for ‘innovation precincts’) was speculated in A Case for Innovative Economic Leadership (2009).

John Craig

Creating a Fertile Environment for Innovation Requires Politics to Take Back Seat

Creating a Fertile Environment for Innovation Requires Politics to Take a Back Seat - email sent 28/8/13

Ben McNeil
University of NSW

Re: Big Ideas Buried in Innovation Graveyard, The Australian, 28/8/13

Your article realistically pointed out that Australia has not provided a particularly hospitable environment for innovation – a fact that undoubtedly has serious economic consequences.

However this constraint was widely recognised several decades ago. ‘Everyone’ who seriously studied the issue in the 1980s recognised that the problem arose from the lack of commercial competencies and organisation within the economy generally to support innovation – rather than from any lack of potentially valuable innovative options. By way of background I note that this became obvious to me while writing one of the first government proposals for diversification of Australia’s economy on the basis of knowledge-intensive functions (see outline of background in Smart State: Some Informal History, 2012).

Unfortunately, after the need to improve Australia’s innovation performance was almost universally accepted, lobbying by established interest groups led often to the use of methods to try to make Australia a ‘clever country’ (or Queensland a ‘Smart State’) that had little to do with overcoming the actual constraint (for reasons suggested in Commentary on 'Smart State': Illustrating Queensland's Lack of Serious Public Policy, 2003, The Futility of 'Backing Australia's Ability 2', 2004).

Lobbying (eg by universities) resulted in a substantial increase in ‘smart’ (eg education and research) inputs to an economy that was insufficiently / inappropriately developed to make effective / productive use of them (as your article again highlighted). Lobbying by businesses seeking to pursue innovative opportunities resulted in ever more government efforts to themselves ‘assist’ innovators – though such direct 'assistance' was an alternative, and an actual obstacle, to the development of an economy that would be able to provide sustainable and commercially relevant support (for reasons suggested in Problems with Direct Government 'Assistance' ).

Some suggestions about how the competencies and organization required for market-driven innovation might be developed in Australia’s economy are in A Case for Innovative Economic Leadership (2009). This basically involves the use of methods (similar to those outlined in Developing a Regional Industry Cluster, 2000) for strategic management of the development of complementary capabilities within regional / national economies as a whole. Reasonable successful experiments were conducted with the use of such methods in the 1980s. But they were different from traditional approaches to ‘industry policy’ that interest groups were accustomed to lobbying for and involved allowing markets (rather than political leaders) to control outcomes.

Australia has traditionally encouraged private enterprise – and governments’ role in this involves creating a system of law which governs how such enterprises operate. But it is recognised that it is more economically productive if what enterprises actually do is driven by market forces rather than by political lobbying. Something similar (ie an arrangement under which the democratic process took a back seat by simply determining the protocols under which leadership in market-driven economy-wide economic leadership could be stimulated) would be very likely to allow Australia’s ability to sustain economically-significant innovation to be dramatically increased. This would not obviate the need for (say) government funding of ‘smart’ economic inputs, but should increase the benefits derived from doing so.

I would be interested in your response to my speculations.

John Craig

Keeping Politics at Arm's Length is the Key to Australia's Innovative Future

Keeping Politics at Arm's Length is the Key to Australia's Innovative Future - email sent 17/4/14

Sam Volkering
Morning Money

Re: Investing in Technology and Innovation is the Key to Australia’s Future, Morning Money, 17/4/14

There is no doubt about the potential for innovation. This has been recognised for 30 years. I wrote one of the first analyses of what this required in 1983 while working for Queensland Government (Towards a Strategy for Technological Development). An account of what happened then is in Smart State: Some Informal History (2012).

The key to achieving a strong innovation capacity in Australia (and thus achieving the benefits that you suggest) is to keep politics at arm’s length (ie don’t expect that getting government approval is necessary or desirable, and avoid reliance on any form of government ‘assistance’). How this might be achieved was suggested in A Case for Innovative Economic Leadership (2009) and Boosting Innovation and Productivity (2013). Related ideas are in:

Any reliance on government / political support will result in offers of ‘assistance’ – and any such ‘assistance’ will block the development of any real economic capacity (see Problems with Direct Government 'Assistance').. Gaining government ‘assistance’ has been the primary goal of business and government in seeking to promote industrial development since the start of the 20th century – and this is the main reason that so little has been achieved. The development of Australia’s innovation capacity must be (and could be) market driven – not politically motivated as it has continued to be for the past 30 years.

The fact that nothing has been learned is well illustrated by your article:

“When will the Australian government get the message? The message I’m talking about is you need to invest in and support Australia’s start-up community. In April last year Google Australia commissioned PWC to look into the Aussie tech scene. They released a paper, The Startup Economy, based on their findings. But the push to get this all done and into the public domain came from a group of tech entrepreneurs who decided enough was enough. The theme behind Google’s paper was ‘How to support tech startups and accelerate innovation.’ In effect Google was doing the work of the government. All that Canberra had to do was listen and take action.”

Doing again what has been done for the past century will not help. It is PWC / Google that needs to get the message. Keep politics and government at arm’s length – and just get on with it independently. There will be things that governments will need to do (eg investing in education and research). But the institutions which make use of such inputs need to be market, rather than politically, driven if outcomes are to be economically beneficial.

John Craig


Innovation-led Growth Requires Business (Not Government) Leadership

Innovation-led Growth Requires Business (Not Government) Leadership - email sent 5/10/14

Jennifer Westacott,
Business Council of Australia

Re: Growth must be innovation-led: so what are we doing about it?, The Australian, 4/10/14

Your article highlighted both the importance of innovation and the fact that this requires a supportive environment rather than simply government actions (eg programs related to research).

My Interpretation of your article: Future economic growth and rising living standards require embracing innovation. BCA has made a submission to the Senate inquiry into Australia’s innovation systems. For too long this issues has been approached narrowly – without clarity regarding what it means. Innovation is broader than invention / R&D. It involves: the application of knowledge / technology to create value through new products and services; improving existing products and services; and applying business systems and models in new ways. An innovation policy is not enough. The innovation potential of the whole economy must be unlocked. This is not a program that can be delivered. It is the result of thoughtfully designed systems that support people’s capacity to innovate and encourages a demand for innovation. Innovation is the key to increasing productivity in a high-cost economy like Australia. People innovate and workplaces create the culture of innovation. But governments control many of the levers and much of the infrastructure that contribute to innovation systems. BCA is seeking: (a) a broad definition of innovation; (b) recognition of the importance of macro-economic settings; and (c) changes to: create an environment that incentivizes innovation; improve collaboration; ensure appropriately skilled human capital; concentrating R&D on sectors with most economic potential; using regulation to stimulate rather than inhibit innovation. Government also needs to innovate in relation to its own functions. Innovation is not just about people who work in laboratories. It does not require governments to tell people what to do.

However creating a supportive environment for innovation primarily requires business / community leadership because: 

  • most (eg 70%) of the support that potential innovators require comes from various elements in the world of business (eg financial / legal services; production; marketing; logistics);
  • a supportive environment for innovation does not automatically exist because of a 'chicken and egg' constraint (ie supportive activities won't usually be commercially viable until there is a strong demand for them, and that demand can't grow until the supporting environment already exists);
  • while such a supportive environment can be stimulated (eg by means suggested in A Case for Innovative Economic Leadership, 2009) if government tries to orchestrate more support for innovative activity the process will inevitably degenerate into the mere provision of government programs (and regulations) - which are likely to obstruct the development of the commercially-credible capabilities of the market economy that are vital for sustainable success;
  • governments can’t be expected to know what human-resource skills and R&D will contribute most to Australia’s economic potential. The first priority must be to create an environment supporting innovation so that a strong demand for skills and R&D emerges - a demand to which governments (and others with a role in determining human resource / R&D priorities) can then respond; and
  •  governments can only know which of the ‘levers’ it controls need adjustment if gets constant advice from groups who are taking the lead role in creating innovation support systems in the market economy itself.

I would be interested in your response to my speculations

John Craig

Raising Productivity Through Economic Leadership

Raising Productivity Through Economic Leadership - email sent 26/8/15

Sid Maher
The Australian

Re: Productivity the ‘key challenge’ , The Australian, 25/8/15

Your article highlights the undoubted importance of lifting productivity in Australia’s economy – and the fact that achieving this requires access to skilled workers and innovation. You also noted that business (notably ACCI and AIG) argues that the education system is not producing the skills that are currently needed.

However, the innovation capabilities of Australia’s businesses have traditionally been woeful and were getting worse despite near-universal acceptance in the 1980s that something needed to be done about this (eg see Australia’s Declining Innovation Capabilities, 2010). More recently there have been signs that some businesses have been taking the issue more seriously.

However lobbying governments to provide whatever skills are currently seen to be in short supply is a formula for failure. The political process will inevitably distort whatever inputs the market actually needs. And, at the same time, Australia’s main problem will remain – namely the lack of effective commercial competencies and organisation within the market economy to make really productive use of those inputs (see The Economic Futility of 'Backing Australia's Ability 2', 2004).

Since the need for stronger innovation capabilities was first recognised in the 1980s, governments have often responded to lobbyists who encouraged them to provide: (a) ‘smart’ (ie education and research) inputs to the economy; and (b) government ‘assistance’ to potential innovators. This has resulted in: (a) the provision of never-quite-appropriate inputs to regional economies that were never well enough developed to use them productively; and (b) government ‘assistance’ which impeded the development of market-based support to potential innovators.

An alternative approach was suggested in A Case for Innovative Economic Leadership (2009). This involved a way for Australia to have an economic ‘miracle’ by accelerating the market-oriented development of regional economic systems (eg the diverse complementary capabilities and organisations required to support a critical mass of potential innovators). This was an updated form of proposals that the present writer had put forward in the 1983 in one of the first reports on development of a knowledge-based economy in Australia (see CV). Reasonably successful experiments with the use the suggested methods in Queensland in the 1980s were described in general terms in Developing a Regional Industry Cluster (2000). Part of such regional innovation systems could be some arrangement for directly communicating with (say) universities about the skills that businesses are likely to need.

However to achieve the necessary leadership in changing regional economies, business would need to do this itself not lobby governments to provide leadership – as political leadership can never result in productivity improvement (eg see Economic solutions are beyond politics, 1995 and Making Australian Leadership in Innovation a Reality, 2011). There would be need for democratic endorsement of the protocols under which apolitical stimulation of changes to economic systems might be undertaken – but political entanglement in the process itself can’t be economically productive.

In the present unstable international environment, it may be somewhat too late to take the steps that have been needed for decades to really strengthen Australia’s economy. However perhaps better late than never.

John Craig

Accelerating the Emergence of an Innovation System

Accelerating the Emergence of an Innovation System - email sent 25/9/15

Peter Boyce

Re: How to turn innovation possibilities into reality, Business Spectator, 24/9/15

I was interest in your reasonable outline of the sorts of processes that can be involved in innovation – and your mention of the need for an innovation ‘system’.

A suggestion about how the development of such a ‘system’ might be accelerated in a region is referenced in Making Australian leadership in innovation a reality (2011). This involves the use of methods for ‘strategic market management’ that were trialled with some success some years ago (see Developing a Regional Industry Cluster, 2000).

My suggestion does not involve mobilizing support for individual potential innovators – but rather the development of a critical mass of relevant support functions to potentially allow hundreds of innovative enterprises to succeed.

I would be interested in your response to my speculations

John Craig

Towards A Business-like Approach to Innovation

Towards A Business-like Approach to Innovation - email sent 28/11/15

Judith Sloan
The Australian

Re: Innovation statement a great way to waste of money, The Australian, 28/11/15

There is no doubt that your observations about the federal government’s proposed innovation statement are realistic. Available reports suggest that, as your article argued, the innovation statement: (a) is being produced by people with limited understanding of the issues involved; and (b) needs to give more attention to commercial obstacles, rather than to increasing technical inputs to market economic systems that are not able to deal with them effectively.

My Interpretation of your article: The ministers responsible for innovation strategy (Christopher Pyne and Wyatt Roy) have no business experience. Despite this Christopher Pyne was told by the Prime Minister to produce such a strategy, and not to worry if it cost money. A study trip to Israel was undertaken – though Israel’s situation is quite different because it effectively involves a war economy. Also funding innovation by Israel’s government doesn’t seem to yield much benefit. There is a problem in defining innovation – as the government associates this with start-ups, information technology and research. There is also confusion between R&D and innovation. A better definition is that innovation is “the process of translating an idea or invention into a good or service that creates value for which customers will pay or better value for taxpayers”. And innovation is not always about new products or services; process innovation is arguably as, if not more, important. It is not just about commercializing research. It is also about taking new technologies and using them. Obstacles to innovation in Australia include bad: tax regime; regulation; industrial relations laws; and a lack of incentive in higher education institutions.

Some suggestions about a way to develop Australia’s innovation capabilities are in A Case for Innovative Economic Leadership (2009). This was based on the present writer’s authorship in 1983 of one of the first proposals for developing a knowledge-economy in Australia and subsequent study of the repeated failures of politically-motivated attempts to develop Australia’s innovation performance because of much the same weaknesses that your article highlighted about the forthcoming ‘innovation’ statement’. It has been clear since the early 1980s that commercial obstacles to innovation involve not only public policy issues (eg taxes and regulation) but also inadequate development of the diverse competencies and organisation in the market economy that are needed to provide a supportive regional / national environment for potentially-innovative enterprises – ie the lack of effective innovation-oriented industry clusters. It has also been clear on the basis of experience in the late 1980s that methods to accelerate development of such capabilities and organisation do exist that should work in a democratic environment (and which amount to a variation that of the methods that have been used to achieve economic ‘miracles’ in East Asia ).

John Craig

Naivety About Boosting Australia's Innovation Capabilities

Naivety About Boosting Australia's Innovation Capabilities - email sent 4/1/16

Brendan Nicholson
The Australian

Re: Japanese innovation ‘part of deal’ with subs tender, The Australian, 4/1/16

Your article noted that Japan’s Prime Minister has promised to use his countries’ extensive experience to help Australia commercialize its scientific and technological research. Anyone who would believe that the arrangement that seems to be being proposed would benefit Australia economically is naïve.

Examples: Submarine technology would be shared, and Japan was particularly interested in Australia medical innovations. Australia would benefit from Japan’s advances in robotics and battery technologies. Japanese companies (which include some of the world’s most innovative) were impressed by opportunities that Malcolm Turnbull pointed out are available in Australia.

Australia has, and has always had, a strong supply of potential innovative opportunities (as a productive of its citizens’ creativity as well as government funded scientific and technological research). However Australia has been chronically unable to generate significant economic benefits from those innovative options – because of the lack of the commercial competencies and organisation needed to do so.

The deal that Japan’s ambassador is hoping that Australia will accept (and would be linked to commissioning Japan to build submarines) offers major economic benefits for Japan, but relatively few for Australia.

What would happen is that the products of Australian’s creativity and research would be made preferentially available to Japanese companies who are highly skilled in commercialization – and those companies would gain the vast majority of the economic benefits from their ability to do so. Australia’s desperate need to upgrade its ability to commercialize innovative opportunities (and thus its ability to benefit economically from the arrangement) would be severely retarded because: (a) nothing can be learned about this from Japanese companies that would be relevant in the Australian context – because Japan’s business environment is so radically different; and (b) locking a large number of potentially valuable Australian innovations away from those who might finance, implement and market them would severely retard Australia’s ability to develop the commercial infrastructure that is needed to benefit from domestic creativity and research on an ongoing basis.

I trust that Australia’s Government will see through what is being proposed here. Australia does not just need photo opportunities for politicians. Rather it needs to get serious about developing the commercial competencies and organisation required to benefit economically from strong domestic creativity and research (eg by methods suggested in Accelerating the Emergence of an Innovation System and Towards A Business-like Approach to Innovation).

John Craig

Australia is Still Not Serious About Developing Its Innovation Systems

Australia is Still Not Serious About Developing Its Innovation Systems - email sent 20/2/16

Alexandra Meldrum
Engineers Australia

Re: How we can catch up in the innovation race, Technology Spectator, 19/2/16

I should like to try to add value to your article which highlighted the weaknesses of Australia’s innovation performance – despite the strength of its technological capabilities.

Innovation involves the application and commercialisation of ideas. What Australia lacks are the well-developed commercial competencies and organization required to profit from ideas. Developing such capabilities requires building on, and building up, existing commercial competencies relevant to innovation. This can neither be achieved by Governments (who respond to interest group pressure, but not to markets) nor by its Chief Scientist (whose emphasis is on increasing ‘smart’ inputs to the economy).

My Interpretation of your article: Australia struggles to match other developed countries in the application / commercialization of ideas. Australia is always near last in business-research collaboration amongst OECD countries. There is now hope because Australia’s new Chief Scientist (Alan Finkel) is an engineer. Australia’s appetite for risk is lower than in comparable countries – thus startups and early-stage businesses often don’t get capital. And participation in science, maths and computing at high schools is low. The Government and its new Chief Scientist have much too do. A strong focus on science, technology, engineering and maths is needed in schools. Our economy needs more such skills as resources and manufacturing weaken in their role in economy. Now 70% of engineers work in service industries. Engineering-intensive industries employ relatively few. Australia excels in research but fails to translate this into practical innovation. Only a small proportion of researchers are employed in business. Australia has strong tradition of scientific innovation – but great weakness in gaining practical advantages from this. Strong and alert leadership is needed to overcome these challenges.

‘Catching up in the innovation race’ requires: (a) a focus on boosting commercial competencies and organisation; and (b) a change process that is market driven - so as to create innovation competencies that can survive and prosper in a competitive market environment. The objective must be to increase the commercial ‘demand’ for (say) science, technology, engineering and maths – rather than increasing the ‘supply’ of those inputs to an economy that is insufficiently developed to use them profitably.

A Case for Innovative Economic Leadership (2009+), and the other documents that are attached or linked to it, offered suggestions about: (a) what has been wrong with Australia’s efforts to boost its innovation capabilities since the 1980s when the importance of doing so was first recognized; and (b) what might actually achieve the ‘economic miracle’ that Australia now so desperately needs.

The present federal government’s approach to the issue continues to be as naïve as that of its predecessors (see Towards a Business-like Approach to Innovation, 2015).

John Craig

To embrace our future as an innovation nation, we'll need to get politics out of the process

To embrace our future as an innovation nation, we'll need to get politics out of the process - email sent 10/4/16

Elizabeth Webster
Swinburne Institute of Technology

RE: To embrace our future as an innovation nation, we'll need to learn from the past. The Conversation, 11/4/16

There is no doubt that you are correct in pointing out that: (a) reliable information is needed about many different things as the basis for successful innovation; and (b) various methods used to support agricultural / mineral related research and innovation in the past proved effective. In relation to this I should like to amplify a preliminary suggestion that I emailed last December.

In the early 1980s I wrote one of the first proposals related to shifting towards a more knowledge intensive economy (see CV) and this was fairly well received by Queensland’s traditionally anti-intellectual establishment partly because it highlighted the effectiveness of those historic methods. However established interest groups then derailed any possibility of practical progress (see Smart State: Some Informal History, 2012). And there are reasons to believe that this will continue to be the case if politics has a role in the process or in determining outcomes (for reasons suggested in Economic solutions are beyond politics, 1995).

Some suggestions about an apolitical approach to building broadly-based real-world understanding and technological / commercial capabilities relevant to innovative opportunities were mentioned in my December 2015 email (ie A Case for Innovative Economic Leadership, 2009 and Towards A Business-like Approach to Innovation, 2015). This basically involves governments specifying protocols under which a learning process that could lead to the emergence of regional industry clusters with the capabilities to support ongoing innovation would be undertaken. Democratically defining the ‘rules of the game’ would ensure that the result was likely to be in the public interest. However governments would not themselves influence the process so that the outcomes would tend to be market driven (rather than driven by out-of-date assumptions and / or interest group pressures). This would be somewhat like the way that governments establish the rules under which businesses operate – while recognising that companies they themselves controlled would be unlikely to succeed commercially.

The methods you mentioned that were successful in the past were generally applied to agricultural / mineral industries – ie to Australia’s areas of natural comparative advantage. These areas were easily identifiable as likely to be important. However many future opportunities will: (a) require industry clusters not just relate to what could be done by producers in one sector; and (b) be in areas that are anything but obvious to those without advanced technological / market knowledge. Such knowledge won’t be found in the political system (as it largely reflects what ‘everyone’ already knows). Unless politics is kept out of the process of identifying the areas in which market-oriented innovation opportunities should be explored and influencing what is actually done to do so, future progress in developing Australia as an ‘innovation nation’ will be as slow as it has been over the past 30 years.

John Craig

Another Approach to 'My Big Idea'

Another Approach to 'My Big Idea' - email sent 6/6/16

Australian Futures Project

I noted with interest the excellent My Big Idea initiative that the Australian Futures Project has sponsored to mobilize community support for innovative proposals to enhance Australia’s future.

However I would like to submit that to make a major economic difference there is also a need for a much stronger commercial / market-oriented capacity to support innovative proposals within regional economies, and that the Australian Futures Project group might usefully sponsor a process to enhance that capacity (eg for reasons outlined, and using methods mentioned, in Lifting Productivity: Considering the Bigger Picture, 2010 and A Case for Innovative Economic Leadership,2009).

By way of background I note that I had the opportunity to study Australia’s challenges in shifting to a knowledge-based economy in the early 1980s and wrote one of the first reports on how this might be achieved (see CV). Doing so led to an opportunity to identify the hundreds of potentially valuable ‘big ideas’ that existed in the community – and the virtual complete lack of effective commercial organisation and competencies to turn those ‘big ideas’ into successful ventures. It also led to an opportunity to experiment with methods that might enhance the commercial / market-driven capacity of regional economies to turn ‘big ideas’ into internationally competitive enterprises (see Developing a Regional Industry Cluster, 2000). In brief the latter suggested a two stage process (which outlined the thinking behind methods I had experimented with) whereby:

  • A general area of economic opportunity is identified and publicly studied to raise understanding by a network of potential business stakeholders as to how this might complement their existing activities and thus be part of their future strategies;
  • Proposals are then sought for implementing non-governmental initiatives relevant to that area of economic opportunity

Unfortunately this did not get beyond the stage of reasonably successful experimentation because Australia’s politicians developed a passionate desire to themselves be the ones (ie through government agencies) who provide support for ‘big ideas’. Doing so was unfortunately usually incompatible with achieving economically relevant success (for reasons suggested in To embrace our future as an innovation nation, we'll need to get politics out of the process, 2016).

The reason that giving practical effect to something like my suggested methods for enhancing Australia’s commercial / market-driven capacity to support ‘big ideas’ is increasingly important is indicated in Sustainable Growth Requires Ending Low Interest Rates. Australia’s economic future requires much more reliance on ‘big ideas’ - and much less reliance on the ‘big debts’ that have increasingly driven growth in recent years.

I would be interested in your response to my speculations

John Craig

Achieving What Australia Needs from Innovation

Achieving What Australia Needs from Innovation - email sent 23/7/16

Ron Johnston
Australian Centre for Innovation
Sydney University

Re: What we really need from innovation in Australia, The Conversation, 22/7/16

Your observations about the difficulties of upgrading Australia’s ability to gain increased economic benefits from innovation seem appropriate. On the basis of three decades of involvement in, and study of, this challenge (see Smart State: Some Informal History, 2012) I should like to suggest that faster progress could be achieved by reducing / eliminating reliance on the political process to establish the effective R&D / engagement / commercialization systems that your article mentioned – see reasons suggested in To embrace our future as an innovation nation, we'll need to get politics out of the process.

My Interpretation of your article: Comments on innovation as centre of government policy has turned negative. Did innovation have potential to transform Australia's economy? Innovation is critical to modern economy (because of competitive pressure) but hard to manage. There are no simple rules for success - as it always involves doing something different. At national level establishing effective R&D / engagement / commercialization systems is difficult. Australia performs poorly in innovation. It is least complex economically of OECD economies - and has low levels of analysis and policy reform. Innovation requires creativity, space to experiment and fail, modest financial support, supportive environment and risk taking. However is political context the meaning / role of innovation is complex. While Australia depends on innovation, few know anything about it. It is only ever a means to an end (new products, jobs, growth profitability). However it is often seen as end in its own right. To get public understanding, there is a need for presenting innovation in broader context than facilitating start-ups and venture capital investment.

Suggestions about a primarily-market-rather-than-politically driven way to develop the capabilities and systems needed to support innovation are in A Case for Innovative Economic Leadership (2009) and Towards A Business-like Approach to Innovation (2015). Those suggestions are based on methods that I had reasonably-successful opportunities to experiment with in the 1980s (eg as in Developing a Regional Industry Cluster, 2000). A 1998 proposal for a primarily-market-driven method to ‘bootstrap’ more effective support for innovation was developed (in vain) by a task force of the Institution of Engineers (Queensland) – see here. This included suggestions related to one key point your article noted (ie about how the benefits of innovation might be publicly presented) - see The Economic Role of Technology (1998). More recent suggestions about a possible way to accelerate progress through collaboration with another non-political process are in Another Approach to 'My Big Idea'.

John Craig

Strengthening Innovation in Australia By Challenging Interests Who Resist Change

Strengthening Innovation in Australia By Challenging Interests Who Resist Change - email sent 10/2/17

Professor Ron Johnston,
Australian Centre for Innovation,
University of Sydney

Re: Australia’s innovation report card shows the nation can do better, and hints at how, The Conversation, 9/2/17

Your article pointed to Australia’s continued woeful performance in the transfer and application of knowledge despite its ongoing excellent performance in creating it.

Suggestions about how to remedy this problem were outlined in A Case for Innovative Economic Leadership (2009). This advocated the strategic management of change in economic systems as a whole, and involved methods that I had experimented with (more or less successfully) on behalf of the Queensland’s Coordinator General’s Department / Premier’s Department in the 1980s (see Developing a Regional Industry Cluster, 2000).

It had been obvious to everyone who studied the issue in the 1980s that Australia’s main problem was the same as your article highlight now (ie a very limited ability to commercialize the huge numbers of apparently reasonable opportunities for innovation that were and are available).

However there has been resistance to overcoming this problem for reasons suggested in a Queensland context in Appalling Queensland Governments (2016). ‘Industry’ departments saw their role as providing ‘assistance’ to potential innovators – and this was inconsistent with, and an obstacle to, developing the capacity of the market economy to do so. Politicians wanted to be able to ‘announce things’ (eg spending vast sums on providing ‘smart’ inputs to economic systems that were insufficiently developed to use them productively). Also, to develop the ability of the market-economy itself to support innovation, the key requirement was that politics be kept out of the process to allow outcomes to be market driven (see To embrace our future as an innovation nation, we'll need to get politics out of the process , 2016). Influential business leaders were highly dependent on exploiting Australia’s natural 'comparative' advantages (ie land, minerals, energy, environment) and on political lobbying to access those benefits – and resisted any suggestion that a different approach (and business, rather than political, leadership) was needed to create 'competitive' advantages. State Treasuries reinforced the bias of influential business leaders because they gained revenue mainly from activities involving economic turnover rather than economic value added (because of massive imbalances in Australia federal fiscal system and the nature of federal / state revenue sources). Economic options based on natural ‘comparative advantages’ maximized direct state revenues, while creating ‘competitive advantages’ (eg though economic systems capable of commercializing innovation) would have maximised federal government revenues (see Providing Incentives for Effective Economic Development, 2009).

If the interest groups who have resisted the development of Australia’s ability to commercialize innovation were challenged, there would be no problem in achieving the desirable goals that your article mentioned.

John Craig

Increasing The Return on State Funded University Research

Increasing The Return on State Funded University Research - email sent 26/4/17

Ian Jacobs,
University of NSW

Re University Research Repays its State Funding in Spades, The Australian, 26/4/17

Your article realistically noted that economic and other benefits are likely to result from state-funded university research.

I should like to suggest however that there is a pressing need to ensure that those benefits are maximized by enhancing Australia’s ability to commercialize the products of such research.

In the 1980s, while working for Queensland’s Coordinator General, I had an opportunity to write one of the first Australian reports on developing a more knowledge based economy (Towards a Strategy for Technological Development). A literature study at that time showed that ‘everyone’ who had seriously studied the issue believed that the problem was not the absence of potentially valuable ideas, but that the commercial competences and organisation needed to exploit these were weak.

China has now reportedly beating the US at innovation because it has done what Australian analysts had believed in the 1980s was most needed (ie it is directing a lot of resources towards commercializing research - see China's Secret Weapon?).

In the 1980s I was able to experiment with methods which might have strengthened the commercial competences and organisation needed to commercialize research. However this is not what has happened over the past 30 years. What might be done to significantly increase the economic return on state-funded research and some suggestions about why this has not happened yet are outlined in Strengthening Innovation in Australia By Challenging Interests Who Resist Change.

John Craig