SMEs now the ‘engines of innovation’, RBA says

Despite the growing importance of smaller firms in lifting Australia’s woeful productivity, banks are refusing to lend to them, the RBA’s assistant governor says.

Small and medium-sized firms have emerged as the engine of innovation. Picture: Dylan Coker/NCA NewsWire

Small and medium-sized businesses have become the “engines of innovation and dynamism” in the Australian economy, spending a record 25 per cent more on research and development than large companies.

In a speech to the COSBOA national summit on Thursday morning, Reserve Bank assistant governor Brad Jones said despite the growing importance of smaller firms in lifting the country’s woeful productivity performance, banks were generally unwilling to take the risk and lend to entrepreneurs.

“Our national living standards will turn in part on the propensity of firms to generate and rapidly integrate innovative practices into their operations,” Dr Jones said.

“It has been troubling therefore to observe that our aggregate productivity outcomes have been lagging for a considerable time,” he said.

“We should also be under no illusions that financing constraints for many SMEs remain substantial.

“And they can be even bigger for SMEs that are trying to innovate aggressively, with little in the way of tangible collateral to pledge as security for financing and where it can take years to generate positive cash flow on the back of investments in greenfield ideas and untried technologies.”

“These types of investments are not for the faint of heart.”

The speech comes as Anthony Albanese told the Council of Small Business Organisations Australia summit that the May budget would contain further support for small business owners struggling through a difficult operating environment and surging costs.

Dr Jones presented an array of evidence showing that large companies’ appetite to spend on R&D has withered over the past decade, among SMEs it has boomed.

Real R&D spending among large firms has dropped back to the levels recorded in the mid-2000s, for SMEs it has doubled.

In the most innovative industries – those within professional, scientific and technical services – SMEs account for more than a quarter of the national total, against just 8 per cent for big businesses.

While much of innovation is about adopting emergent technology and ideas, often from overseas, SMEs are almost twice as likely to have introduced world-first innovations versus large firms, Dr Jones said.

SMEs now account for 85 per cent of patents filed by residents and 99 per cent of trademarks filed by residents in Australia, he said.

“Labour productivity in Australia is around 30 per cent higher in the median patent-holding business compared with the median business without patents”.