How to deliver a bigger economic R&D bang for taxpayer bucks

The ARC’s objective is that “new knowledge” is about “creating jobs, economic growth (and) enhanced quality of life”. Picture: iStock

The reason universities’ research is changing is there is less interest in abstract knowledge and more focus on finding ways to grow the economy and improve our lives.

The problem is coming up with ways to turn results from the $40bn that government, universities and businesses spend on research and development into products and services.

The solution may be to think small.

That is not something likely to occur to federal Industry and Science Minister (at least until Saturday) Ed Husic. In the 2024 budget he announced a “strategic review” into R&D, maybe to appease academics outraged that there was no new money for them then.

The review is now up and running, chaired by venture capitalist and all-around business achiever Robyn Denholm – chairwoman of Tesla, no less, She has a huge brief but one made easier because Husic makes plain what he wants: an R&D system that will “boost our manufacturing self-sufficiency … so we can compete with the best in the world”.

This is straight out of Labor’s central planning playbook that sets the state centre stage of the productive economy – Husic made a point in his brief of mentioning, “our $23bn Future Made in Australia plan”.

And making it happen will need turning research into a subset of industry policy.

This is all a long way from the original idea of university research, where scientists pursued knowledge for its own sake and if discoveries turned out to be useful, well that was a bit of luck. A sure way to a shot liver is to drink every time there is a mention of how wi-fi emerged out of CSIRO radio­astronomy research.

While what is still called pure basic research is not as big a deal as it used to be, it is still more common here than in comparable countries. According to Mary O’Kane and colleagues’ recent report on redesigning higher education, 22 per cent of Australian research is in the basic categories, compared with 13 per in Japan and 15 per cent in the US.

But change of the sort Husic will surely welcome is on the way. The Australian Research Council, the peak funding agency for everything that is not medicine, wants to rejig funding schemes to focus on research that has a specific economy-growing, lives-improving “tangible benefit” for taxpayers.’

Peak lobby Universities Australia is not having it, arguing that basic research is fundamental and must be funded. But ultimately pragmatists in the research establishment will follow the money and get on board with the ARC’s objective that “new knowledge” is about “creating jobs, economic growth (and) enhanced quality of life”.

It’s a goal that suits the times. Australians are way more willing to turn to government to protect us from all sorts of threats than a decade back – Covid and the Chinese navy practising live-fire drills in the Tasman Sea explain why.

As retired major general Mick Ryan said last week, “Overcoming the predations of vicious techno-authoritarians this century will demand not that we outspend them but that we out-think them.” And that will require research that is targeted to policy outcomes. The culture shift that is starting makes Denholm’s job way easier than it would have been if academics had chained themselves to their metaphoric lab benches and stuck to the old ideal.

But she and her colleagues still have to find a way to deliver a bigger economic bang for the research buck. As a discussion paper for her review points out, Australia pumps out 3.5 per cent of the world’s research papers but 15 per cent of them are in the global top 10 per cent. The problem is, “much of this research rarely addresses the needs of the main users of research and innovation in Australia – industry, government and the community”.

So what is to be done? Probably not much by spending a bucket of money on a giant new university-industry funding scheme.

The last Coalition government created a research commercialisation scheme, Australia’s Economic Accelerator. Some of it is under way now and may work – although the Denholm review discussion paper warns that “programs linking researchers to business have barely changed the dial”.

The obvious answer is for the government through grants, its own outlays or the tax system to do what the research establishment demands and increase the R&D spend on GDP to 3 per cent. On the most recent Australian Bureau of Statistics figures (from 2022) it is 1.68 per cent, compared with the OECD average of 2.7 per cent.

But increased funding for more of the same in itself will not solve anything. According to business lobby Australian Industry Group, this would be “divorced from economic reality” because business needs a simpler system to make investing feasible.

There may not be a capital strike on R&D but there is certainly a go-slow.

According to Frank Larkins from the University of Melbourne, in 2023 the average share of R&D spending by business in the US, Britain, China, South Korea and Japan was 76 per cent – 25 per cent higher than Australia.

Plus there is business and then there is small business.

Closeup of a male researcher looking through microscope

Entrepreneurs and their accountants are keen on incentives to keep the cash flowing until they have a product to take to market, which is what the Research and Development Tax Incentive helps with, costing $4.5bn or so – a third of total federal R&D spending.

It is hated by the public research sector as consuming cash it thinks it would spend better but incentives are standard across the OECD, accounting for 55 per cent of government support for industry across member countries.

In a speech in 2024 Brad Jones from the Reserve Bank argued the R&D Tax Incentive was “arguably the most valued and direct source of cashflow support for innovating small and medium enterprises”.

And given the size of the SME sector, “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.”

Jones also argued that there was more to innovation than huge investments, that “adaptation and diffusion of other cutting-edge ideas and processes” expanded the economy. (Anybody heard how Husic’s big commitment to a quantum computer to call our own is working out?)

As the Productivity Commission reports, “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”.

The whole command-economy approach of a national innovation system may turn out to be oxymoronically overblown.

But don’t hold your breath waiting for the government to throw entrepreneurs the red meat of deregulated research and development funding – big science partnered with big government will not welcome that.