Pros and cons of competing approaches to boost nation’s lacklustre research spending

Australia is allocating insufficient money to research and development.

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A plan to slug big companies up to $12.84bn annually to fund research got a big wrap on ABC TV news last Friday night. According to business journalist Daniel Ziffer, “there are many wonderful things about Australia but our woeful investment in the future is not one of them”.

He was reporting on a proposal from the Australian Academy of Science to “levy” (“tax” is such an unpopular word) up to 0.5 per cent of large corporates’ turnover to fund research and development, offset against their own R&D spending, to help “maintain national competitiveness”.

The underlying argument is that big business spends less on ­research and development than companies in other countries, and because they are not pulling their weight the locals should fund government-funded agencies, generally universities, to do the work.

“Australia’s persistent under­investment in R&D threatens our productivity, limits wage growth, threatens our standard of living, and weakens our ability to respond to global volatility. These threats have consequences for every member of society,” is the pitch.

The academy is right about the overall spend – Australia’s R&D annual outlay is 1.6 per cent, half the rate in the US. And business is mainly to blame. Frank Larkins (University of Melbourne) reports the average share of national R&D spend by business is 76 per cent across the US, the UK, China, South Korea and Japan; it is 52 per cent in Australia.

A study commissioned by the Business Council of Australia acknowledges big companies can do more and proposes encouraging them with the same tax R&D incentive small business gets: an 18.5 per cent tax offset above the company rate and an end to the $150m cap on research investment.

The BCA report also agrees to a long-time proposal from university lobbies, a 20 premium for firms collaborating with them.

Smart move. The scientists don’t state large companies are free-riding, although they argue “those best positioned to invest, innovate and profit contribute less despite significantly benefiting from publicly funded research and tax incentives”.

The BCA proposal would cost the taxpayer $1.4bn, way better for big business than the $12.8bn the Academy of Science wants firms to cough up.

But both lobbies assume that what is good for them is good for the country while ignoring the nature of the economy.

Australia does not have a manufacturing base that drives innovation, at least as measured. And productivity-improving innovation – by miners chasing operating efficiencies, for example – won’t always show in stats for ­publicly funded R&D.

The research record also reveals industry just getting on with work while ignoring the research establishment. Paul Harris and Cameron Neylon report “many” companies receiving $100m plus from the commonwealth’s $4bn R&D tax incentive have “have no visible interactions with the research sector”.

And so the Academy of Science wants industry to invest in research, just not on projects of its picking. What the academy calls for is for the levy to go to the public sector agencies that know best – no wonder the story got a good run on the ABC.

The scientists propose two ways of spending the levy, which at the top end of what it could raise would almost double the national spend. One is to split it between the two big funders of university research. While there are at least a dozen commonwealth programs, the Australian Research Council is the big research backer of everything that is not medicine. The ­National Health and Medical Research Council, (with the $20bn endowed Medical Research Future Fund it administers) does the other stuff. The alternative proposal is to create the equivalent of the MRFF – which at $10bn a year would quickly create an enormous power base for public research ­decision makers.

This could be good for productivity across the economy. The ARC proposes a new funding model that focuses on research to expand the economy and improve all our lives. The MRFF’s brief is to bring technologies and new medicines to market.

But both approaches make who gets how much to spend on what a gift of government – and the academy is ambivalent, at best, about small and medium enterprises where R&D growth is happening (they account for over half the business spend). “Relying on SMEs is unlikely to bring the investment needed to grow industries at scale,” is the argument.

The BCA agrees, justifying its call for more R&D money for its members: “Large companies do not just conduct research, they generate knowledge spillovers that build innovation capacity across the entire economy.”

But tech start-ups in the vibrant drug development and med tech field are also too independent to suit peak bodies and ministers used to doing deals that apply nationwide and thinking government-funded breakthroughs can transform the economy. As former industry minister Ed Husic put it in a 2023 speech, “we need governments that lean in and help, rather than stand back and hope” – as he did by backing a $1bn public sector spend to build a quantum computer in Brisbane.

But the productivity benefit might come from companies that work out ways to use new technology, rather than create their own. The research establishment detests this “diffusion” approach as being unpatriotic.

“Without developing Australian research and skills, we place our national sovereignty at risk. In this world, there is no safe space for a nation that leaves itself dependent on where other countries choose to invest,” the academy warns.

However, the Productivity Commission argues most businesses do not operate at the technological frontier and government policy needs to help the 98 per cent of businesses that adopt technology wherever it comes from, “supporting the diffusion of existing good ideas and effective business models will increase economy-wide productivity”.

As Jens Goennemann, from the government-funded Advanced Manufacturing Growth Centre points out, 90 per cent of local companies employ 20 people at the most. “Governments naturally want gleaming programs with seemingly large cheque sizes” (but) “growth in size (quantity) and industrial capability (quality) will only come from helping smaller manufacturers scale with right-sized funding tools, targeted skills initiatives, allowing for better collaboration with big industry and supply chains,” he says.

It’s not a message likely to appeal to the Albanese government which likes to work with business and union peaks. Nor to research lobbies that assume the science establishment knows how best to grow the economy, with other peoples’ money. And it probably won’t appeal to big business, which just needs tax concessions.

And all they need is billions of public dollars.