Why the Australian innovation system needs Fraunhofer Institutes

Australia’s innovation system is constrained by a persistent failure to translate world-class research into industrial capability and commercial outcomes. Drawing lessons from the German city of Kaiserslautern and its transformation through Fraunhofer Institutes, this article argues that Australia must have applied research institutes dedicated to bridging the gap between universities and industry.

The Fraunhofer model, built on public-private partnership, applied research excellence, and ecosystem catalysis, provides a credible pathway to sovereign capability, economic growth, and regional transformation.

Strategic establishment of Fraunhofer-style institutes, leveraging existing assets and the CSIRO, would address Australia’s innovation paradox, grow industrial competitiveness, and ensure economic and strategic benefits for future generations.

Kaiserslautern, a German city of just 100,000 residents, demonstrates that geographic scale is not a prerequisite for innovation leadership. Despite its modest size, this southwestern German city has created one of Europe’s most successful technology ecosystems, anchored by two Fraunhofer Institutes that have helped to translate world-class research into commercial success.

The city’s transformation from a traditional industrial centre to Germany’s premier hub for applied mathematics and software research offers compelling lessons for Australia’s innovation policy. At the heart of this success lies a proven model: applied research institutes that systematically bridge the gap between university research and industrial application.

For Australia, grappling with its own innovation challenges while seeking to build sovereign capability and drive regional economic development, the Kaiserslautern experience provides a roadmap for success that’s both scalable and replicable.

Australia’s Innovation Paradox

Australia faces a well-known and frustrating innovation paradox. Our universities consistently rank among the world’s best in research output and quality: they rank as fifth globally in research citations per capita and eighth in the Global Innovation Index for innovation inputs. Yet we consistently underperform in research commercialisation and industry collaboration, ranking 25th overall in the Global Innovation Index and struggling to translate research excellence into economic outcomes.

This “valley of death” between brilliant research and commercial application costs Australia billions in unrealised economic potential. The OECD consistently ranks Australia poorly on business expenditure on R&D as a percentage of GDP, and our venture capital investment levels lag significantly behind comparable economies. Meanwhile, our best and brightest researchers often see their innovations commercialised overseas, contributing to the economic growth of other nations rather than our own.

The situation is particularly acute in critical technology areas where Australia desperately needs sovereign capability.

This is precisely the challenge that Fraunhofer Institutes were designed to solve, and Kaiserslautern’s experience demonstrates they can deliver transformational results even in modest-sized cities. Kaiserslautern’s remarkable transformation rests on four critical elements that make Fraunhofer Institutes uniquely effective innovation catalysts.

1. The Fraunhofer-Gesellschaft Benchmark

Fraunhofer has been the backbone of Germany’s advanced manufacturing export-based economy since it was established after World War II. There are now 76 institutes and close to 32,000 employees in Germany. Internationally, they have been invited by numerous national and state governments to set up operations in 30 locations. The UK and US Governments identified the Fraunhofer as the benchmark model to emulate for bridging the gap between research and industrial application.

The UK’s Catapult Network was explicitly modelled on Fraunhofer-Gesellschaft, both in structure and funding design. The government also supported the establishment of several Fraunhofer Centres.

The US Obama Administration, after reviewing the decline in the traditional manufacturing sector, invited and financially supported the establishment of an additional five Fraunhofer Centres to the two that were already in existence. MIT invited Fraunhofer to set up on campus in recognition that the model was better at translating their applied research into industrialised outcomes.

Canada has jointly funded the establishment of a Fraunhofer Project Centre for Composites Research at The University of Western Ontario in London, Ontario.

2. Strategic Public-Private Partnership

The Fraunhofer model represents one of the world’s successful examples of public-private research collaboration. Unlike traditional university research funded primarily by government, or private R&D confined to individual companies, Fraunhofer Institutes operate through a sophisticated funding model that aligns public investment with industry needs.

In Kaiserslautern, this approach has created research institutions that maintain long-term research capability, while remaining laser-focused on industry relevance. The institutes receive base funding from government for fundamental capabilities but earn approximately 70 per cent of their revenue through industry contracts and collaborative projects.

For Australia, this model could revolutionise how we approach research commercialisation and technology transfer.

3. Applied Research Excellence

Two Fraunhofer Institutes, the Institute for Industrial Mathematics (ITWM) and the Institute for Experimental Software Engineering (IESE) are in Kaiserslautern. They have become global leaders by focusing on applied research excellence. ITWM is positioned as one of the world’s largest mathematical research institutes, with its research methodology firmly grounded in industrial applications: modelling, simulation, and optimisation for real-world challenges.

This focus on applied research creates a unique value proposition. Universities typically excel at fundamental research but often lack the industry connections and application focus necessary for commercialisation. Private companies excel at near-market product development but rarely have the resources or risk appetite for the longer-term, higher-risk research necessary for breakthrough innovations.

4. Ecosystem Catalysis and Regional Transformation

Perhaps most important for Australian policy makers, Fraunhofer Institutes serve as powerful catalysts for broader innovation ecosystems. Kaiserslautern’s experience demonstrates how these institutions can drive comprehensive regional economic transformation.

In the early 1990s, the city realised it was on the path to becoming a “rust belt” with unemployment at 15 per cent and the loss of 10,000 traditional manufacturing jobs. The turning point came when the city acknowledged the problem and committed to investing in institutional and regional infrastructure, recognising that the future would be increasingly digital.

The focus shifted to digital transformation through software engineering, artificial intelligence, information technology, robotics, and Industry 4.0.

Fast forward to today: unemployment is projected to fall to three per cent, and the city has created over 10,000 high-value, future-focused tech jobs. Sustained and continuous growth has attracted global companies, including John Deere, which established its EU R&D centre there after assessing 28 cities across Europe.

More recently, companies such as Amazon (2,000 jobs), battery manufacturer ACC (a joint venture of Stellantis, Mercedes, and SAFT with over 2,000 jobs), and Corning have also begun establishing operations in the city.

The city now hosts one of Germany’s concentrations of research institutions relative to its population, creating what researchers call “innovation density”, the critical mass of expertise necessary to attract international companies, support start-up formation, and create high-value employment opportunities.

Companies like ThinkParQ (creators of the BeeGFS parallel file system) and LUBIS EDA (semiconductor design software) have emerged from this ecosystem, demonstrating its ability to generate globally competitive technology ventures.

This network effect amplifies the impact of individual institutes, creating research and innovation capabilities that far exceed what any single institution could achieve independently.

The Australian Opportunity: Strategic Imperatives Converging

Australia’s current strategic context creates an unprecedented opportunity for Fraunhofer Institute success. Multiple policy imperatives are converging in ways that make applied research institutes not just beneficial, but essential:

Sovereign Capability Development: Recent global disruptions have highlighted Australia’s vulnerability in critical technologies and supply chains. The government’s Critical Technologies List identifies areas where Australia needs enhanced domestic capability, from quantum computing and artificial intelligence to advanced manufacturing and critical minerals processing. Fraunhofer Institutes offer a proven pathway to building these capabilities while maintaining integration with global innovation networks.

National Development: The $15 billion National Reconstruction Fund represents Australia’s most significant manufacturing policy intervention in decades. The $22.7 billion Future Made in Australia package recognises immense opportunities for Australia and its people lie at the intersection of industry, energy, resources and skills. However, success will require more than financial investment—it demands the applied research capabilities to support industry transformation and technology adoption.

Regional Economic Development: Australia’s innovation ecosystem remains heavily concentrated in Sydney and Melbourne, creating challenges for regional economic development and contributing to skills drain from regional areas. The Kaiserslautern model demonstrates how applied research institutes can create innovation hubs in smaller cities, supporting regional economic diversification while building national innovation capacity.

Industry 4.0 and Digital Transformation: German industry’s leadership in Industry 4.0 and digital manufacturing owes much to the Fraunhofer network’s applied research capabilities. As Australian manufacturers and resource companies pursue digital transformation, they need access to world-class applied research support, exactly what Fraunhofer Institutes provide.

Building on Existing R&D Excellence

Australia has substantial capability in manufacturing research excellence, thinly spread across the country in many innovation districts and precincts, together with a lead role that has been taken by CSIRO over many years in multiple locations. To realise this potential through a Fraunhofer connection, there are potentially two ways to go:

Approach 1. Leverage Current and Potential Capacities and Capabilities in Well-Performing Innovation Districts

Drawing from Kaiserslautern’s success in university research partnerships, industry cluster alignment, and regional development potential, several locations emerge as prime candidates for Australian Fraunhofer Institutes. 

Gaps remain in systemic industry partnerships at scale, late-stage scale-up, and full multidisciplinary integration, presenting clear opportunities for Fraunhofer-style applied research institutes to deliver impact through structured, long-term, industry-led research programmes

Below is a high-level mapping of what would appear to be the most relevant districts to a Fraunhofer focus.

Approach 2. A Central Role for CSIRO and CRCs

Ideally, CSIRO would consolidate its assets across Australia and become the R&D engine for specialised stand-alone facilities in conjunction with universities, CRCs, and key industry partners, including knowledge-based FDI companies. This will both require and engender significant cultural change among all stakeholders.

Other models derived from Fraunhofer Institutes could be adapted, including UK HVM Catapults, ManufacturingUSA Institutes and NSF Regional Innovation Engines. 

The organisation’s 100-year heritage of applied and basic research, extensive industry networks conducting over 1,000 projects annually, and proven technology transfer capabilities through ON Prime and Main Sequence Ventures align perfectly with Fraunhofer objectives.

This integrated approach would create a powerful three-tier research ecosystem: universities providing fundamental research and talent development, Fraunhofer Institutes conducting industry-focused applied research, and CSIRO delivering technology transfer and commercialisation pathways.

The result would be uniquely Australian applied research institutes that combine our research excellence with proven industry engagement methodologies, creating the missing link in Australia’s innovation ecosystem.

Universities would contribute world-class research capabilities and talent pipelines, whilst CRCs would provide proven collaboration methodologies and industry networks. Each institute would operate as a joint venture between CSIRO, university partners, and industry, with governance reflecting this partnership.

This model offers compelling advantages: accelerated implementation by building on existing capabilities rather than greenfield development, reduced risk through leveraging proven institutions, enhanced credibility with industry partners, and cost effectiveness through shared infrastructure. Most importantly, it amplifies rather than competes with Australia’s research excellence, creating synergies that enhance the effectiveness of all participants.

Economic and Strategic Returns: The Investment Case

Kaiserslautern’s experience demonstrates that Fraunhofer Institutes deliver economic returns far exceeding their establishment and operational costs. The city’s transformation from a traditional industrial centre to a globally recognised technology hub has created thousands of high-value jobs, attracted billions in investment, and generated export revenues that continue to grow.

The strategic benefits extend beyond direct economic returns. Fraunhofer Institutes would enhance Australia’s research commercialisation performance, support industry transformation under the National Reconstruction Fund and Future Made in Australia, create high-value regional employment opportunities, and build the applied research capabilities for technological sovereignty.

Perhaps most importantly, they would help solve Australia’s innovation paradox—transforming our world-class research capabilities into economic and strategic advantages that benefit all Australians.

The Competitive Imperative: Why Australia Can’t Afford to Wait

As global competition for innovation capacity intensifies, countries that translate research excellence into economic advantage will prosper, while those that don’t will fall behind. The Kaiserslautern experience shows this translation requires more than hope: it requires institutional innovation and sustained strategic commitment.

The Fraunhofer Institute model offers Australia a pathway to transform its innovation ecosystem, building on existing strengths while addressing persistent weaknesses. The question isn’t whether Australia can afford to establish Fraunhofer Institutes: it is whether we can afford not to.

If it is good enough for the US, UK and Canadian Governments, why not Australia? There is a greater imperative for Australia to establish Fraunhofer in the country due to our remote location from major international population-based markets and small population spread over such a large land mass.

Australia must be more committed to overcoming these additional hurdles. Introducing Fraunhofer into Australia’s ecosystem will ensure the world’s best benchmark is operating in the country and instantly connected into the global operations of the Fraunhofer network. Australia will be seen as a more attractive country to invest in technological innovation 

The Kaiserslautern tells us that in the knowledge economy, applied research excellence is the foundation of competitive advantage. Australia has the opportunity to build that foundation. The Commonwealth and the States require the strategic vision and courage to act.

Dr John Howard is the Executive Director of the Acton Institute for Research in Policy and Innovation and a Visiting Professor at the University of Technology Sydney. He can be contacted at john@actoninstitute.au. This story was first published on the Acton Institute website – you can read read the original here.