The Australian: Excessive Regulation an Obstacle to Innovation

INNOVATION is essential for economic growth. Throughout history, scientific and technological progress has underpinned the growth of human prosperity. Economists Robert Solow and Ralph Landau, studying US growth from the 1860s to the 1980s, showed it was largely caused by technological change and its implementation, with the addition of capital and labour being a relatively minor factor.

Scientific and technological progress is not smooth; it can take a long time and many stops and starts before a breakthrough is achieved. And the concern is that the increase in Australian regulation makes this process even more difficult.

To stimulate innovation and productivity across the economy, public policy settings are very important. You need an education system suited to the demands of a modern, advanced technological society, with appropriate emphasis on STEM (science, technology, engineering and maths.) Another key for hi-tech companies is being able to attract people from around the world. This is a strength for us: our country is a desirable destination for many.

Obviously, public policy affecting research and development has a big impact. Health and medical research in general, and support for research conducted at universities, is critical. But in Australia high levels of regulation are a barrier to innovation. The World Economic Forum's Global Competitiveness Report 2012-13 ranks Australia 96th out of 144 nations for regulatory burden. There are also regulatory problems specific to medical devices. The story of the Cochlear implant is a good example of how value is created through technological innovation, but also how regulation can be a hurdle.

Our regulatory processes are slow: for one recent product, approval took 14 months longer in Australia than in Europe. This left Cochlear several years behind its European competitor in being able to offer this product in dozens of markets. In many countries that Cochlear exports to, the law requires a device must have been approved in the country of origin before it can be approved for use in that country. This reflects the legislative framework and the resources available to the regulator. Innovation has been key to Cochlear's growth in the 30 years since the company was set up to make and sell Cochlear implants, invented by surgeon Graeme Clark and his team at the University of Melbourne.

Cochlear has become a major listed company, employing more than 2500 people, with almost $800 million in revenue last year and a strong global market share. More than 200,000 people have received an implant. Cochlear implant technology is underpinned by science that goes back to work by Alessandro Volta more than 200 years ago. Clark built on a substantial body of subsequent scientific work in the field before reaching the point of implanting his prototype in Rod Saunders and demonstrating speech understanding. Since that breakthrough, advances in Cochlear implant technology have continued. Recent improvements in sound processor technology using dual microphones and advanced digital signal processing produce marked hearing improvements in difficult listening environments.

To keep achieving such advances, Cochlear allocates 12 to 14 per cent of revenues to research and development: more than many established companies. To stay competitive, particularly with the high Australian dollar, Cochlear has worked to drive productivity in its manufacturing, which takes place in Australia. It is sometimes argued that productivity is a code word for wage cuts or staff cuts.

Cochlear's experience has been different: in the past five years the number of people in direct manufacturing roles in Sydney has risen from 185 to 450, and manufacturing staff wages have risen by 30 per cent. The social and economic benefits delivered by innovative companies do not come easily and should not be taken for granted.

Governments should think carefully before loading further cost and compliance burdens on to business. Public policy settings should seek to encourage stories similar to Cochlear's, in which research leads to a successful company improving customers' lives, employing thousands and earning export revenue.