Why encouraging R&D is central to lifting Australia’s productivity

Small businesses, not just large companies, should be encouraged to innovate. Picture: Tim Hunter.

Australia needs to kickstart productivity and the science establishment is keen to help itself. But there is a problem with a public sector-driven research-and-development strategy. It can ignore too easily the 98 per cent of businesses that don’t develop technology but adopt new products and services that keep them profitable so they employ more staff. As the Productivity Commission points out: “Where innovation policy focuses mainly on cutting-edge scientific or technological breakthroughs, it tends to miss the way firms in much of the economy are innovating on the ground.”

Given Anthony Albanese’s liking for big government, small business can be missed in the grand schemes. “This is a time when government has to step up, to invest in education and skills and research and innovation,” the Prime Minister said last week. Peak lobby Universities Australia agreed, saying its members “can drive innovation through research”. Tesla chairwoman Robyn Denholm is leading a review for the government on how to grow the economy through the nation’s R&D system. The review is not due to report until the end of the year but a discussion paper indicates its thinking. For a start it suggests Australia cannot just adopt ideas from overseas: “Waiting on other nations to turn our ideas and discoveries into products and services that we then adopt at higher cost is not the path we want or need.” And the people needed to lead and implement it are in big government, big business and big science: “Without the backing of larger companies or public research institutions, the overall R&D output of Australia’s SMEs is unlikely to meet the needs of a rapidly advancing global economy.”

The Business Council of Australia agrees: “Without government action to strengthen small businesses, encourage industry partnerships between small and large businesses and de-risk R&D investment, Australia will struggle.” In its submission to the Denholm review the BCA signs on to two longstanding demands of university and science lobbies. One is increasing national spending on R&D to 3 per cent of GDP, which is average across other developed nations’ spending. Ours is now about 1.7 per cent of GDP compared with world-leading South Korea’s 4.9 per cent. The other demand of universities that is backed by the BCA in its submission is giving the research establishment access to the core federal support for private sector research, the $5.7bn R&D tax incentive, through a 20 per cent premium for companies that work with start-ups, research organisations and universities.

There are two issues with the emerging consensus that economy-growing R&D is a task for government working with big business and big research. The BCA nails one problem, warning “high corporate tax rates”, “punitive regulatory requirements” and workplace laws that are “a barrier to innovation” reduce the ability and appetite of the corporate sector to invest in R&D. According to Frank Larkins, from the University of Melbourne, businesses in the US, Britain, China, South Korea and Japan spend an average of 76 per cent of national R&D outlays. Here it is 52 per cent. A bigger role for government in the future would surely further suppress private sector investment and make it too hard for start-up entrepreneurs.

Another issue would be the unintended consequences of tinkering with the tax incentive. Small businesses, not just large companies, should be encouraged to innovate. As Reserve Bank assistant governor Brad Jones said last year, tax incentives for R&D are “arguably the most valued and direct source of cashflow support for innovating small and medium enterprises … it would only take a small increase in the share of these businesses to successfully innovate to have a material impact on the Australian economy”.

Big government loves big breakthroughs. As prime minister, Malcolm Turnbull had a passion for an Australian quantum computer; so did recently departed industry and science minister Ed Husic. But growing the economy also requires small-business owners to expand existing operations, to create new products and services. When it comes to productivity, Mr Albanese will govern best when he governs less.