Does innovation need a non-R&D focus?

Denham Sadler
National Affairs Editor

The federal government needs to “rebalance” innovation policies to focus more on non-research and development activities, according to a new Innovation and Science Australia report.

The report, which was commissioned by the Industry department early last year, examines how to stimulate business innovation investment, and saw ISA engage with over 180 Australian firms.

The report found that while many businesses don’t seem themselves as “innovative” and aren’t conducting R&D, many still invest in innovation in other ways. This can be through the development of software platforms, the adoption of new business models to take advantage of digital technologies, or new branding and marketing.

Andrew Stevens: Time to focus on non-R&D activities?

These activities do not qualify for the R&D tax incentive, the government’s main funding mechanism for innovation.

There needs to be a rebalancing of government policies to provide more support to this type of innovation, with a focus on more direct funding through grants rather than the in-direct research and development tax incentive (RDTI), ISA chair Andrew Stevens said.

“Australia has had a long history and focus on stimulating business investment in R&D. We should continue to encourage greater business R&D investment, however, this new research shows the value of additionally encouraging our businesses to invest in non-R&D innovation activities,” Mr Stevens said.

“The traditional focus of business innovation policy on stimulating the supply of R&D should be complemented by measures that stimulate the supply of non-R&D innovation, especially where spillovers are important or systemic impediments exist. Government should also look at demand-side measures to spur greater innovation investment by businesses.”

ISA has made four key recommendations to government: to rebalance the policy mix to support non-R&D activities, priorities key growth sectors, develop and encourage a “growth through innovation” mindset and facilitate access to innovation skills and capabilities.

The report found that Australian SMEs that invest in non-R&D innovation grow their revenue by 3.5 percentage points per year faster, and employment by 5.2 percentage points faster than other companies.

“Similarly, small firms that adopt at least on productivity enhancing software application, in areas such as finance, human resource management, or marketing and sales, increased employment by 2.2 percentage points faster than those businesses that did not adopt any software,” the report said.

“For larger businesses, ASX200 firms that invested in innovation grew revenue 1.3 percentage points per year faster than the average ASX200 firm, based on data from 2005-2016.”

There needs to be a specific focus on increasing direct support for this type of innovation from the government over the next 5-10 years, ISA recommended.

“The government could encourage and accelerate a shift towards a more balanced approach, rather than focusing predominantly on the supply of R&D activities. This can be achieved by increasing the use of more direct measures and include approaches that drive demand for innovation,” it said.

This should be addressed as a matter of “high priority”, ISA told the government. Measures could include a business ICT modernisation fund to help companies move from legacy tech to more modern capabilities.

“Direct support measures can play an important role in providing targeted support for business investments in general-purpose technologies,” it said.

“They have also been shown to be particularly effective for young firms that lack the upfront funds or collateral to finance an innovative project. There is a need to support non-R&D innovation through more direct and targeted support measures.”

ISA has long campaigned for a shift away from the in-direct support mechanism of the RDTI towards more direct measures. Legislation currently before Parliament would make a $1.8 billion cut to the RDTI scheme, but there has been little word on whether there will be more direct support in its place.

These efforts should be focused on key growth sectors including advanced manufacturing, food and agribusiness.

There also needs to be a cultural change, with a “growth through innovation” mindset needed across shareholders, directors and managers, the report found.

“This mindset and associated business processes for investment and decision making are key to maximising a firm’s innovation investment. Political leadership across all portfolios will be required, given innovation will be essential to the sustainable provision of at least current levels of service and delivery,” the report said.

According to ISA, business expenditure on R&D is no longer a strong predictor of innovation investment, with non-R&D innovation now at least as widespread as R&D. There needs to be drastic change to address Australia’s dropping investment in innovation, it said.

“Australian business investment in innovation lags behind developed country averages. Australia’s business innovation as a share of GDP is at 1.9 percent, just two-thirds of the European average of 2.9 percent,” ISA said.

“Given the revenue and jobs growth correlations with business non-R&D investment, there is a case to encourage and accelerate greater non-R&D innovation. There is a role for government to coordinate, facilitate and act as a catalyst for innovation and develop new markets for businesses.

“Given the potential for non-R&D innovation investment to boost productivity, jobs and growth potential, it’s imperative that government supports and accelerates business investment in non-R&D innovation to quickly realise these gains.”

The government should also “leverage mission-orientated policy levers” to address national problems and stimulate growth sectors, and better open up government procurement to innovative SMEs, ISA recommended.

Do you know more? Contact James Riley via Email.

1 Comment
  1. There is a simple solution: include software development into the definition of R&D. Suddenly the percentage of innovation will be more comparable to the percentage of innovation of other countries and our country will support all the companies that innovate through software.

    Across the world, most innovation is happening through software today, just look at Artificial Intelligence and Machine learning, or all the Blockchain startups, Fintech and Healthtech.
    Our definition of innovation is simply outdated.

    When a manufacturing company invests in a new production process, that’s innovation – when a software company invests in a new deployment process, it’s not. We are looking at our industries with the eyes of the 19th century industrial revolution. Well, we’re in the age of the digital revolution. We need to wake up to that.

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