Australia’s 'broken' innovation system needs bold reform – and fast

Amid global turmoil, the report of the Strategic Examination of R&D (SERD) calls for “bold reform” of Australia’s “broken” research and innovation system. What better time to prepare for an uncertain future.

Ambitious Australia joins a long line of reports stretching back to the Hawke-Keating era, when public spending on science, research and innovation gained a 40 per cent boost in real terms. By the end of the 1990s, knowledge-driven “elaborately transformed manufactures” were the fastest growing component of Australia’s export mix, with productivity growth running well above the OECD average.

We are now in a very different world. If the SERD report did nothing other than highlight the precarious state of Australia’s hard-won prosperity, it would still have performed a valuable service. And on this it does not hold back.

The report notes that Australia’s manufacturing share of GDP is the lowest among developed economies, business expenditure on R&D is also the lowest as a share of GDP and productivity growth is the lowest on average over the past decade for 60 years.

Of course, correlation is not causation. But as manufacturing is the major source of business R&D spending in most countries, it is hardly surprising that its decline is accompanied by the decline of R&D spending and, consequently, sluggish productivity performance – with associated real wage stagnation.

The problem is that in pursuit of “comparative advantage”, successive governments have allowed Australia’s resources exports to crowd out high-value manufacturing from an increasingly narrow trade and industrial structure. Hence, the task of the SERD was two-fold.

First, it had to think through the reconstruction of our entire research and innovation system, including neglected “blue sky” research. And second it had to ensure that the system was “fit for purpose” as part of broader industrial policy to build new areas of competitive advantage in global markets and value chains.

After an extensive consultation process, the report proposes a comprehensive “plan for action” with six elements. The first and most significant element is “greater focus and scale”, recognising that “the system is fragmented, with uncoordinated programs, duplicated efforts across jurisdictions, and inefficient competition for limited resources”.

Echoing previous reviews, Ambitious Australia opts for a National Innovation Council to devise mission-led priorities for the system, safeguard national research infrastructure and coordinate implementation across six “pillars” – health and medical, agriculture and food, defence, environment and energy, and resources and technology.

Each of these pillars is designed to sponsor “national strategic initiatives” which consolidate and concentrate public funding and “engage all tiers of government, startups, small to medium enterprises, large businesses, investors and researchers in high-risk, high-impact challenges”.

The problem here is that while the motivation is sound, the bureaucratic complexity of these initiatives may prove a drawback, especially for industry involvement. Simply replicating program-based models in a new institutional architecture would miss the opportunity for a more grounded approach.

In particular, submissions to the SERD panel proposed a network of collaborative, place-based innovation hubs or precincts, like the successful German Fraunhofer Institutes, UK Catapult Centres and ManufacturingUSA Institutes. This approach accepts that innovation is not linear but thrives in “ecosystems”.

30 years ago, the Innovate Australia policy statement favoured a similar model, with CSIRO and universities as an R&D engine for industrial transformation. But in a story which would repeat to the present day, including for the Rudd-GillardVenturous Australia report, the idea was lost with a change of government.

Other areas in the SERD plan for action are familiar but no less important. They encompass better support for foundational research, changes to the incentive structure for research and innovation, improved startup financing, development of workplace capability and embedding R&D in public procurement decisions.

What do we make of Ambitious Australia? It has assembled a formidable array of recommendations whose time has surely come. But there are also significant gaps for further consideration by the government in the leadup to the 2027 budget, with the next election in prospect.

For example, the report has no view on the cost effectiveness of the demand driven R&D Tax Incentive (RDTI) as against direct targeted funding. Nor has it addressed the critical role of management capability to engage with workforces and build enterprise “absorptive capacity”, including for embodied artificial intelligence in manufacturing.

There is also the vital part Australia’s regions can play in the research and innovation system, as they address the related challenges of energy transition and economic diversification. A separate report on the government’s Energy Industry Jobs Plan goes some way to filling this gap.

The SERD panel has made a welcome contribution to a complex and undervalued policy domain. The government’s task now is to process and integrate this contribution with its wider, transformative vision of a Future Made in Australia.

Emeritus Professor Roy Green is Special Innovation Advisor at the University of Technology Sydney.