2012 JJC Bradfield Institute Lecture by Dr Chris Roberts, CEO Cochlear Limited, with Comments by Paul Fletcher MP: 'Innovation in Australian Business'

By Dr Chris Roberts, CEO Cochlear Limited, Sydney, 23 October 2012

It is a pleasure to be with you today delivering the 2012 JJC Bradfield lecture on the topic of “Innovation in Australian Business.”

It is a particular honour, given John Job Crew Bradfield was an Australian engineer who contributed so much to building Sydney.

I’ve been asked to give this lecture, I believe, because innovation is an important topic and because our experience at Cochlear Limited gives me some useful perspectives on it.

The importance of the topic is seen in current economic policy debates. Some commentators fret that Australia’s economy is too narrowly based on resources. As technology advances at an extraordinary rate, we are not establishing and growing enough companies in Australia with technological capabilities. Others point to our declining productivity performance – and productivity is really just the other side of the innovation coin.

As to my perspective on the topic, I am in the fortunate position of leading a company which has innovation at its very heart. We were established over 30 years ago, to develop, make and sell hearing implants – cochlear implants - a product invented in Australia by surgeon Prof Graeme Clark and his team at the University of Melbourne.

In these thirty years, Cochlear Limited has gone from start-up status to being a major ASX listed company with a strong global market share in the hearing implant category. This is a common story in the high-tech sectors in the US, Israel and many other countries; if we are frank it is a less common story in Australia.

Today I want to look at what innovation means to Cochlear – and then argue that some broader implications can be drawn from our experience.  In particular, the success of the cochlear implant is an exemplar of how value is created through technologic innovation.

I will start with the general: the role of scientific and technological progress in the growth of human prosperity. Next I will turn to the particular: how the technology of cochlear implants has been developed, before and after our company was formed. In each case I will argue that substantial economic and social benefits have followed.

Thirdly, I want to draw out some lessons: what has worked well for us at Cochlear and what has caused some challenges. Finally, I want to link this to some public policy implications: in other words, are there ways to increase the number of companies and the number of sectors where stories like Cochlear’s can be repeated?

Scientific and technological progress in the evolution of human prosperity

Human prosperity has developed over many thousands of years, driven by two factors: the ability to specialise at doing something well, and the opportunity to trade, or exchange, that for mutual gain. This is articulated particularly well in Dr Matt Ridley’s book “The Rational Optimist” - while the book is a counterblast to the current prevailing pessimism, the message on how society creates value is so fundamentally important that it should be taught in schools.

By exchange, humans discovered the ‘division of labour’ for mutual gain. Specialisation encouraged innovation, because for example, it encouraged investment in tool-making. It may sound simplistic that our prosperity has evolved simply by embracing specialisation and exchange (trade), but what makes this so powerful is that so many people misunderstand it, and hence fight it.

Thus the history of human prosperity is also the history of human attempts to constrain prosperity as it evolves, because evolution is also about change.

Bureaucrats, priests, armies, governments, the ruling elite… there is no shortage of groups which over the years have sought to slow implementation of innovation (and hence growth in prosperity). Many people have no idea how society creates value, or if they do, believe it is a zero sum game (where you win at someone else’s expense).

The pace of growth in prosperity has been accelerated over the past four hundred plus years by advances in science, and these advances in science have been paralleled by advances in technology. If one considers “science” as “knowledge” and “technology” as “application of knowledge” it is easy to think of a linear model, where science leads to technology. The truth is very different. The history of Western science teaches that technology often precedes the science. This is because you can build things by experimentation and trial and error.

A great example is the Pelton Wheel, invented in the 1870’s by Lester Pelton. Observing water turbine wheels (in the California gold rush times), Pelton saw a wheel misaligned on its shaft actually spinning faster than companion wheels properly aligned. Through trial and error he developed his water impulse turbine (Pelton Wheel) that uses Newton’s Second Law of Motion to efficiently extract kinetic energy from jets of water.

Importantly Lester Pelton did not learn Newton’s Laws of Motion and then set out to design a water turbine based on theory. He did it by observation and trial and error. Theory (Newton’s Second Law) can explain why it worked.

The other important lesson from the history of science is that progress is more often than not made by step by step building on what has gone before, over long time frames. The history of Western science is not about a string of special geniuses possessing unique insights into the world, but rather the step by step building, by ordinarily clever people, on what has gone on before them.

Developing the Technology of Cochlear Implants

What do we learn when we think about the history of cochlear implants? First, the long time frames involved. Electrical stimulation of the auditory nerve goes back hundreds of years to Professor Alessandro Volta. Volta, an Italian physics professor was a master of electrochemistry, and built the first battery (galvanic cell).

With his galvanic cell, Volta experimented with electrical stimulation on all sorts of objects. He also experimented on himself. He placed an anode in one ear and cathode in his other ear. Presenting to the Royal Society in 1800 in London he reported, “I received a jolt to my head…. I began to feel a sound, or rather a noise in my ears….it was a kind of bubbling…which I feared might be dangerous such that I did not repeat the experiment”

No much happened for another 50 years, until Brenner in 1868 studied alternating current (as opposed to Volta’s direct current) as sound is an alternating disturbance in an elastic medium.

The twentieth century saw the development of electronic components, for example, the amplifier, such that electrical stimulation could be more precisely controlled, and there was extensive experimentation in the 1930’s and 1940’s.

In 1957 there was a landmark study by two French researchers, Djourno and Eyriès: they showed that a patient who received electrical stimulation could obtain auditory perception - that is, detect a sound. This was extremely significant, although detecting a sound is a long way from speech understanding.

In 1961, two Californian researchers House and Urban, implanted single electrode devices in 3 deaf patients, for approximately 3 weeks. These patients experienced hearing sensations. This was over 50 years ago, and 17 years before Professor Graeme Clark implanted his University of Melbourne prototype in Rod Saunders and was able to demonstrate speech understanding.

There were many groups around the world working on cochlear implants in the 1970s when Professor Clark was developing his device. Professor Clark succeeded, where many other groups failed, for a number of reasons, including the extensive multidisciplinary nature of the team he assembled (and that he could communicate with these different scientists on their level) as well as important inventive steps.

Thus the history of cochlear implants is the history of many groups around the world working on building blocks of components and knowledge. Professor Clark was able to take that knowledge as a starting point, add his own thinking, and make his break through prototype demonstrating significant clinical advances. One of his key steps was moving from a single electrode system to a multichannel (22 electrode) system.

Since that breakthrough in the seventies, the march of progress has continued. Over the last 30 years we have seen significant advances in cochlear implant technology – and in turn improvements in hearing outcomes.

Let me give two examples – which I think show how the progress of technological innovation in cochlear implants mirrors the broader experience from the history of science I discussed earlier.

The first example is neural response telemetry (NRT), which is a non-invasive way of determining how much current from a specific electrode is required to stimulate neurons. The technique involves stimulating an electrode at ever increasing current levels until a nerve is activated. This can be detected non-invasively through measuring an action potential from the stimulated nerve; the resultant activity is wirelessly telemetered from the implant.

This NRT capability was first designed in an integrated circuit (chip) over 15 years ago. Since then it has evolved over multiple generations of implants, for example, by being automated (across all electrodes), and by using very low noise amplifiers (that can very sensitively detect an activated nerve).

Today Cochlear is clinically testing an automated method for programming cochlear implants – so it can be done by pressing a single button. Presently, this programming work is conducted by highly trained and experienced audiologists using sophisticated computer programs. Once we introduce automated programming, it will increase patient access to cochlear implantation, and it will free up valuable audiologist time to deal with more difficult cases.

It has taken several different elements to arrive at this point. One is the continuing advances in NRT technology; another is improvements in other technologies (such increased computational power): a third is years of clinical experience.

Importantly, fifteen years ago, no one said that by 2012 we would have an automated way of programming a cochlear implant, and indeed NRT is only one building block needed for the automation. We knew the right direction to move in, and we invested time and effort at each stage so that we could reach the next stage – building on what we had already achieved.

What we did not know with any precision was what our end point would be – and how long it would take us to get there. In other words, we were prepared to look beyond a three or five year plan!!

The second example is an advance in the sound processor whereby sound is detected through dual microphones (rather than a single microphone). This, combined with advanced digital signal processing, provides the opportunity for pre-processing the sound. For example, you can do a better job of extracting speech from noise, thereby providing clearer and improved stimulation.

This confers a huge hearing advantage in difficult listening environments, such as a noisy restaurant. In independent testing, cochlear implant recipients using this pre-processing in some very noisy situations perform better than normal hearing people!

Cochlear first introduced this pre-processing capability in 2005. Much was learnt from this first version and the second generation was released in 2009 in the Nucleus 5 system, which included improvements both from a technology perspective as well as how patients accessed this hearing benefit (improved useability). The next generation sound processor to be released contains the third generation version of this technology. What this means is that hearing performance will continue improving as the technology improves.

The value proposition of a cochlear implant system is that you have an implant for life, and the sound processor that is external to the body can be replaced as the technology advances. The sound processor detects and processes sound, sending data and power to the implant. Recipients receiving a cochlear implant back in the 1980’s have had multiple opportunities to upgrade their processors and hence hear better then with the earlier sound processor. As we age, our hearing decreases – but for cochlear implant recipients, their hearing improves over time!

I made the point earlier that science (knowledge) and technology (the application of knowledge) are not linear; often technology precedes the science. But in addition they can form a feedback loop. This iterative process can be very important. For example, clinical experience with cochlear implants has led to significant outcome improvements in children through earlier implantation (that is implants at a younger age) as well as bilateral (two ears) implantation. In these examples the technology has not changed per se, but how the technology is used has changed.

What has worked well at Cochlear – and some challenges

I have talked in some detail about the history of hearing implant technology –how it was developed before Cochlear was established as a company and some examples of we have done since that time.

I want to emphasise the point that some parts of the job could only be done by scientists and clinicians in hospitals and laboratories – but there were also some parts of the job that could only be done by a company established with the express objective of generating a profit through finding customers and making sales.

Let me highlight some of the achievements of the commercial business which is Cochlear:

• In the fiscal year just completed we sold over 23,000 cochlear implant systems, and since the company began more than 200,000 people have been implanted with one of our implants. That represents 200,000 people who have been able to hear who otherwise would not hear.
• In the year just completed we spent over $100 million on research and development.
• Since we were founded thirty years ago, we have gone from zero revenue in the first year to revenue in the year just completed of nearly $800 million dollars, and of that revenue, well over 85% was earned from sales outside Australia.
• Today we employ over 2,500 people, over half of them in Australia and many of them in highly skilled and highly paid jobs.

It is a point so obvious that perhaps it should not need making, but I am going to make it anyway: this is a set of highly desirable social and economic outcomes and is because Cochlear is a successful business.

Cochlear could not have succeeded had Professor Graeme Clark and other scientists not done the fundamental research which underpins the technology we use. But it was because Cochlear was established as a global business – and conducted core business functions like sales and marketing, manufacturing, quality, regulatory, research, development as well as finance – that we succeeded in delivering hearing implant systems to so many people, and changing their lives profoundly for the better.

And it is because Cochlear has been able to use and commercialise technology, proprietary technology – because we have products which cannot be easily replicated by a competitor – that we have been able to earn good margins, generate good returns and pay good salaries to over 2,500 employees. I will come back a little later to some public policy implications from these points.

First, though, let me speak about the strategy we have deliberately adopted to maintain Cochlear’s leading position in our industry, through continuing to innovate.

Cochlear’s approach to funding technologic innovation has been to allocate 12 to 14 percent of revenues to research and development (R&D), which is higher in percentage terms than many established companies.   Given Cochlear’s growth over 30 years, this also means (through the magic of compounding) that more than 50% of the R&D Cochlear has spent over the last 30 years has been spent in the last 5 years. This is exciting as the product pipeline is full! Advances in technology that will be trialled in the next years, including fully implantable cochlear implants (with 24/7 hearing) will continue changing for the better this intervention.

Helping ensure this technologic innovation remains at the leading edge of knowledge, Cochlear has relocated onto the campus of a major Australian university, Macquarie University. A hearing precinct is being constructed on campus where groups (totalling several thousand people) involved in different aspects of hearing will be co-located. From hearing aids to implants, from basic research to applied research, from research to clinical services, the hearing precinct is unique. This is exciting for all stakeholders, from Macquarie University, for the participants, for Australia and for the hearing impaired!

One of the issues which gets debated endlessly when it comes to innovation policy is the importance of clusters. Silicon Valley is the best known example but there are plenty of others: Route 128 in Boston, Cambridge in the UK and Bangalore in India.

I think that with the hearing precinct at Macquarie we are building a similar cluster of organisations and people involved in the technology and business of maintaining and improving human hearing.  

Innovation implies successful commercialisation. It is different from invention – which may or may not lead to successful commercialisation. So innovation is necessarily linked to productivity and cost competitiveness.

Let me spend a moment speaking about the relationship between technology and productivity.

Modern growth theory identifies three key determinants of longer term productivity growth: increased capital, increased labour and technologic change. It is worth remembering that Robert Solow won the Nobel Prize in Economics in 1987 for his findings that technology is far more important than capital or labour in driving productivity growth.

Solow studied all the factors which resulted in a quadrupling of US per capita income from 1869 to 1953. He showed that only 15% of the growth over all those decades was attributed to more inputs, that is, more labour or more capital. These results were tested on the economic growth from the 1950’s through the 1980’s (by Ralph Landau at MIT).   The clear conclusion: economic growth over that century was due primarily to technologic change and its implementation. Other countries may now be growing faster than the USA, but the principle remains.

At Cochlear, we have consistently sought to become more productive – to help us stay internationally competitive in the face of challenges that would otherwise erode our competitiveness. One such challenge for Cochlear Limited has been the relentless appreciation of the Australian dollar over the last decade – having doubled in value against the USD for example. Cochlear’s manufacturing is based in Australia, and to remain globally competitive it has been critical to drive productivity in manufacturing.

Put another way, with over 90% of our sales made outside Australia (and hence not in Australian dollars), but with Cochlear doing its manufacturing in Australia, the appreciating Australian dollar has been a drag on earnings.

To ensure Cochlear remains internationally competitive, we have introduced major productivity-driving initiatives in manufacturing. The result is that cost of goods sold (COGS) as a percentage of sales have been relatively constant over the past 5 or so years. The fact that all foreign sales when translated back to Australian dollars are worth less as the AUD appreciates can’t be helped, but by preserving the gross margin (as a % of sales) Cochlear has been able to remain internationally competitive. The majority of other operating expenses are overseas and hence naturally hedged, so preserving gross margin has been key.

Driving productivity in manufacturing has been a multifactorial exercise, for example implementing “lean”, manufacturing technology, management processes, and employee communication/ engagement.

Also in the past 5 years, the number of people we employ in our Sydney manufacturing facility - in direct manufacturing roles - increased from 185 people to 450 people. Indirect labour increased from 115 to 170 people over the same 5 years. Increases in volume and improvements in yield, coupled with factors listed above driving productivity have truly been a very positive story for Cochlear, and its employees.

In many ways it has been helpful at Cochlear to think of innovation and productivity being twinned. They are inextricably linked. Both must be supported and driven.

You sometimes see it argued, particularly by those who are suspicious of the business sector, that productivity is simply a code word for reducing wages or reducing employee numbers. Cochlear’s experience has been very different.

Productivity improvements in manufacturing have not been about lowering wages. Indeed the wages of our manufacturing staff have risen by 30 per cent over the last five years (driven not just by cost of living increases but by merit increases based on specific skills that drive flexibility and agility in manufacturing).

Some public policy implications

Let me now seek to draw out some broader public policy implications on the question of innovation in Australia business.

An organisation’s ability to drive innovation and productivity is heavily influenced by the environment in which it operates. While many factors influence that environment, government policy is certainly a significant factor. Indeed, the first point to make is that public policy settings are far more impactful over both long and short time frames than is evident from just a casual glance.

So what public policy settings are important? It starts with education: one of the most important things a society can do is to educate its people.   And by education I mean in the right things – not educating yourself into industrial decline like Britain did in the 1900s (albeit not helped by an aristocratic disdain for sources of wealth other than rural estates and investment income). An education system suited to the demands of a modern advanced technologic society, with appropriate emphasis on STEM (science, technology, engineering and maths) and well as the humanities (to develop the art of rhetoric) – at primary, secondary and tertiary level.

Education does need to change. Unfortunately, so much of today’s education is all about the past, all about “what is”. We spend far too little time thinking about value creation and value design. In terms of thinking skills, our education system focuses on critical thinking skills (and very little on other thinking skills such as lateral thinking, creative thinking, design thinking and the like). It is not that critical thinking skills are not important – they are very important – it is that critical thinking is not enough. The weakness of the judgement system is that it was never designed for change. And without change the evolution of our prosperity is truly constrained.

Inevitably, not all of the needs of companies like Cochlear can be met by people educated in Australia. If we are to grow and succeed, we need to be able to access talented people from around the world. Australia has not had a recent history of many of the industries essential to a globally successful Cochlear.

It has been enormously valuable in recent times to bring in people with relevant experience from other countries. Recently, for example, we have found Ireland to be a very good source of talented and experienced people willing to relocate, given the dire economic situation in which Ireland finds itself.

This is one area where being based in Australia is a real strength for a technology company. We are very fortunate to live in a country that is an extremely desirable destination for many people around the world. In the most recent human development index issued by the United Nations, Australia ranks second of 187 countries. This means that when it comes to seeking out international talent, there are plenty of people who have the skills we want – and who want to come to Australia.

Public policy setting also impacts research and development both at a company level and public institution level. Health and medical research in general, and support for research conducted at universities is critical.

A wonderful example of the opportunities from higher education institutions is the hearing precinct being created on campus at Macquarie University, as discussed earlier. Co-locating several thousand people from many disciples and organisations, (including Cochlear), covering hearing in its broadest sense will provide rewards for all Australians. A Federal Government Higher Education Fund grant was essential to Macquarie University constructing this hearing hub building.

In some other ways, though, being based in Australia creates some real challenges. Let me speak for a moment about the way our industry is regulated, including in Australia, and the impact that this has on our export business.

Cochlear’s implant system is classified as a Class III active implantable medical device, requiring regulatory approval in most countries in which it operates (for example by the Food and Drug Administration in the USA). In European countries a Competent Authority – typically a Ministry of Health - appoints accredited Notified Bodies to conduct assessments of devices before they can get the required approval.

Now a key issue for an Australian based exporter of medical devices, like Cochlear, is that in quite a few countries the law requires that a device must have been approved in the country of origin – that is, Australia – before it can be approved for use in the country to which we are exporting.   In fact, there are thirty seven countries which require country of origin approval (that is, approval from Australian authorities) before Cochlear can apply to register the product in those 37 countries. (These are not European countries or the US – which rely solely on what their own regulator determines).

For one recent, but important, product, approval took 14 months longer in Australia than for Europe. That is, after obtaining regulatory approval to sell in Europe, it took 14 more months before Cochlear could even start to apply for product registration in key markets like India. In this case, Cochlear ended up several years behind its European competitor in being able to offer a key product into dozens of markets.

This is not the fault of the relevant regulator, the Therapeutic Goods Administration (TGA) - an organisation staffed by competent and supportive people. Instead, it is a reflection on the legislative framework under which the TGA operates as well as the resources available to it.

Let’s spend one more moment on this and look at the difference between the regulatory model in Europe and for the TGA in Australia.  The TGA is 100% industry funded through fees, however, the TGA has a “public good” role that also has to come out of the same funding pool provided by industry. This takes funding away from TGA activities focused on device/medicine approvals, post market surveillance and the like.

In Europe there is a separation of responsibility for the “public good” role and the product approval/surveillance role. The Competent Authority (eg MHRA in the UK or BfArM in Germany) is responsible for the “public good” role and is publicly funded. The accredited Notified Body that the Competent Authority appoints for the product approval is industry funded.

Structurally, the TGA is not set up to optimally support Australian medical device companies to achieve fast and predictable market access for new or improved medical device products. What is the chance this will change? I am not holding my breath. It goes back to a prior point – people don’t know how society, how business, how governments, create value.

Australia has well over half a million pages of rules and 24,000 licence requirements across the country for a range of activities. Rule making can have a legitimate role, but our governments have lost the plot. According to the World Economic Forum’s Global Competitiveness Report 2012-13, Australia currently ranks 96th out of 144 nations for regulatory burden. There is no evidence that the quality of regulatory interventions or analysis of the need for the regulations has improved. There is certainly no evidence that ranking 96th for regulatory burden helps us to be a productive economy.

Let me go back to the point I made earlier about the desirable social and economic outcomes from Cochlear’s success. I would argue that our public policy settings should seek to encourage many similar stories – with Australian research turning into successful companies improving their customers’ lives with their products, employing thousands of people and earning export revenue for Australia.

Certainly Cochlear’s growth has been aided by government support at key points. Critical research occurred at the government funded University of Melbourne. Early in Cochlear’s life the company received a $3 million grant under a program administered by then Minister for Productivity Ian McPhee. I have mentioned Commonwealth funding of the hearing hub at Macquarie University which will deliver significant benefits to Cochlear.

However I would argue that other public policy settings have created significant barriers to Cochlear – and more importantly have prevented other companies from getting to the point that we have reached. Specifically, I have highlighted our regulatory process to approve therapeutic devices. The design of that process does not recognise the harm done to the export prospects of Australian companies by slow approvals.

In my view this is a specific instance of a more general problem: the increasing breadth and detail of regulation. The social and economic benefits delivered by innovative companies do not come easily and should not be taken for granted. It is very easy for government to load cost and compliance burdens onto business with ever-increasing regulation. As a nation we will pay a real cost for doing so, if we discourage the growth of new companies and thereby miss out on having many more Cochlears.

Conclusion

Let me close by coming back to the question I posed at the outset: are there ways to increase the number of companies and the number of sectors where stories like Cochlear’s can be repeated?

There have been several recommendations, express or implicit, in what I have said:

• Funding for research and higher education, in areas of science and technology, is close to being an absolute good – you can never be sure what will come of it, with scientific and technological progress being so unpredictable, and it often takes a long time to come to fruition, but it really is a must have if you want to have significant numbers of high tech companies in Australia
• Throughout our education system a focus on the STEM subjects is more important than ever as the world’s economy becomes ever more based on technology
• We can leverage the fact that Australia is a highly desirable place to live to attract highly trained and skilled people
• One of the best things government can do is back off – by curbing the instinct to regulate.

I hope that my message is ultimately an optimistic one. Cochlear’s experience shows that Australian science and technology can be world-beating – and can generate large, successful Australian companies with a global presence.

The story of Cochlear is the story in miniature of the story of human economic progress: innovation, and particularly technologic innovation is key to the evolution of prosperity and how society creates value. But we should not be one-eyed optimists, because the history of mankind is also about all the constraints put in the way of further prosperity.

Cochlear Limited is a great example of these points. On the one hand is an advanced technologic intervention that provides the gift of hearing. On the other hand is the gauntlet the company runs meeting the challenge dreamed up by governments.

It would be a wise government which encouraged its citizens to continue in the quest for knowledge – and find ways to impose fewer constraints on that quest. The benefits to our nation of such a change in attitude would in my view be profound.

Comments on the 2012 JJC Bradfield Institute Lecture

Paul Fletcher MP, Member for Bradfield, Sydney, 23 October 2012

It is a pleasure to offer some comments on the important lecture we have just heard.

Dr Chris Roberts has a message for us which is fundamentally optimistic – in three ways.

Firstly it is an optimistic message about the march of science & technology underpinning human progress. He cites an excellent book, The Rational Optimist’ by Matt Ridley. Let me quote two important passages from that book:

…the vast majority of people are much better fed, much better sheltered, much better entertained, much better protected against disease and much more likely to live to old age than their ancestors ever have been.

Rational optimism holds that the world will pull out of the current crisis because of the way that markets in goods, services and ideas allow human beings to exchange and specialise honestly for the betterment of all.

This message is a very good fit with the life’s work of JJC Bradfield who brought us the Harbour Bridge, Sydney’s underground rail system and so many other achievements – and with the purpose of this annual lecture which is to focus on a topic concerning economic, scientific or technical progress in Australia.

Such an optimistic message is very much needed at a time when the notion of progress is widely contested in public policy debate.   The Greens and many others seem to hanker for some kind of purer, simpler world in which we abandon the notion of growth and progress. For example Greens Leader Christine Milne criticised the notion of economic growth in a recent speech:

If economic growth as it is currently measured isn't actually making us happier, healthier, cleverer or safer then it isn't real growth. If we are growing our economy in defiance of physical limits, that isn't real growth: it's a confidence trick.

Other environmental advocates run similar lines. Canadian David Suzuki said on Lateline a couple of years ago:

Growth has become a driving part of the destruction of the life support systems of the planet. It just can’t continue.

Secondly Dr Roberts has given us an optimistic message about the capacity of business organisations to commercialise technology and deliver it to many people around the world and thereby make their lives better. What could be a more profound improvement in your life than being able to hear when otherwise you would not be able to?

Thirdly it is an optimistic message about the capacity of Australians to carry out world beating scientific and technological research, and to turn that into business ventures of real scale and with a worldwide reach – business ventures which do significant manufacturing onshore here in Australia.

I want to spend a moment to comment on some of the public policy implications of the points which Dr Roberts has made.

First, success in research and development, and its commercialisation, is a huge prize. It should be a clear objective of our policymaking to foster an environment in which more Australian research generates commercial opportunities – and more Australian companies successfully commercialise that research.

Dr Roberts highlighted the public policy benefits which have flowed from the success of Cochlear, including tax revenues and export earnings; over 2,500 jobs, many of them high skill, high pay jobs; bringing in more skilled people from around the world; and around $100 million a year going into research and development –private sector money not money from taxpayers.

In my view this is seriously important stuff – and any government should aspire to stimulating the emergence of a steady flow of companies which can achieve similar results.

The second point which deserves some additional commentary is the role of public funding.

Dr Roberts talked about important ways in which public funding has contributed to Cochlear’s growth:

• Critical research occurred at the government funded University of Melbourne
• Early in Cochlear’s life the company received a $3 million grant
• Commonwealth funding of the hearing hub at Macquarie University which will deliver significant benefits to Cochlear.

If you look at the growth of high technology industries around the world, you find there is often government money in there. Much of the early research on the internet was funded by grants from the US military. Israel spends a lot of money on supporting early stage companies, and the Chief Scientist has a significant budget for this purpose.

This is a topic which requires very careful attention: what is the right way to spend public money with the aim of underpinning a high tech sector, and what is the wrong way?

The wrong way, I would argue, is the Rudd-Gillard Government’s Clean Energy Finance Corporation. This is supposed to be a government funded venture capital business putting $10 billion into ventures that have not succeeded in attracting private venture capital.

In my view some of the key principles are:

• You should aim to concentrate public money on areas which the private sector will not fund, what economists would call “public goods” because no one private sector player can capture the returns – that is the rationale for funding pure research into science and technology
• As Dr Roberts has argued, funding for research by universities and other institutions in areas of science and technology is pretty much an absolute good
• Funding for very early stage companies with the promise of building a technology based business makes sense in my view – that is, small amounts of money distributed to large numbers of businesses. The rationale is firstly that funding at this very early stage can be hard to come by from private sources; and secondly that your policy objective should be a large pipeline of opportunities coming through, recognising that it will funnel down to a much smaller number that will go the distance.

We also need to think about the return we get on using taxpayers’ money to stimulate industrial activity. Does money going to stimulate early stage commercialisation of technology deliver a better payback than, say, the money we put into the car industry?

Today we spend about $700 million a year subsidising the car industry in Australia. In my view this is an industry where you need scale to be world-competitive and Australia cannot achieve the required scale.   We manufacture less than 300,000 vehicles a year; when China makes 18 million a year and each of the US, Germany, Korea and Japan make between 5 and 10 million vehicles a year.

How good is the return we are getting on the $700 million; and how does it compare to the return we would get from reallocating this spending to stimulating early stage companies involved in commercialising proprietary technology? It seems to me unlikely that you get a good economic return on money which is used simply to subsidise industries which are facing fundamental economic challenges to be world competitive.

Dr Roberts’ comments about the value to a high tech company like Cochlear of being based in Australia really struck a chord with me. In other words, immigration policy can be an arm of economic policy.

Australia has a considerable advantage we can leverage: we are a desirable destination in a world where there is a war for talent, and a world where the returns to brainpower are ever greater.

AnnaLee Saxenian of the University of California Berkeley has done a lot of research about the importance of immigration to the growth of the US high tech sector. In a paper written about ten years ago on the economic contributions of skilled Asian immigrants in Silicon Valley, she found that two thirds of the region’s foreign born engineers were from Asia; in 1998 Chinese and Indian engineers were senior executives at one quarter of Silicon Valley’s technology businesses; and many businesses were started by entrepreneurs from Asia.

I think some of the same effect has been seen in the technology sectors in Australia – but I believe we could do more.

The other really powerful point made by Dr Roberts is that our education system is one of the most critical public policy levers if we want to build more innovation-based companies.

With technology at the heart of so much economic progress, it is obvious that we should have as many people as possible well qualified in science, technology, engineering and maths.

Other leaders in Australia’s high tech sector have made similar points.

Alan Noble, Engineering Director at Google Australia, had this to say in an article he published in the Financial Review earlier this year:

Today, it seems like every teenager has a smartphone. In many schools, both public and private, every child is given a laptop to use. The tools for learning and creating are now more accessible than ever.

Yet despite having these tools, our students and our country risks remaining technology consumers rather than becoming the creators of technology. It’s the difference between using a smartphone and creating an app that reaches millions of people.

At Google, we believe education is what will unlock this potential and that’s why we believe there must be a greater focus on science and maths education in Australia.

As an employer of hundreds of engineers in Australia, Google has a front-row seat in the area of computer science.

Right now, we’re seeing too few Aussies studying computer science, resulting in a workforce lacking a key skill.

Dr Roberts also made reference to our attitudes towards commerce and entrepreneurship. Here again I think there is some progress we could make in our education sectors, particularly tertiary education.

There is a vigorous crossover between the academic and commercial worlds in the US that I am not sure we see to the same extent in Australia. It should be more common to see Australian academics stepping out of academia to try and turn their research into a commercial product. Pushing our education system further in the direction of celebrating entrepreneurship – and encouraging individual academics to have a go – would in my view make sense.

Let me close by saying I think this lecture is a really useful contribution in an important area of public policy. There are not too many business leaders in Australia who have the direct experience which Dr Roberts has of leading the growth of an Australian company which is based on innovation and technology – and which has built a global presence.

I certainly hope the observations he has made will provoke some debate on this very important topic.