ABC Radio National Ockham's Razor Talk: Innovation Policy

You Can Listen to the Full Speech Here.

Robyn Williams: Just two weeks ago the British Chancellor of the Exchequer, their treasurer, told the House of Commons his government’s plans for 2015.

There was an impressive list of cuts, but George Osborne spoke eloquently of the need to protect scientific research, the source of wealth for all modern nations. The Irish, President Obama and most of the time the Australian government feel the same way. And last week the president of the Australian Academy of Science, Professor Suzanne Cory, gave a speech along those lines at the National Press Club.

It’s a matter of innovation. Here’s Federal MP Paul Fletcher with his take on that theme:

Paul Fletcher: Just as every politician is in favour of motherhood, every politician is in favour of innovation.

We look enviously at the powerhouse IT companies of Silicon Valley; at Israel, described in a recent book as ‘the start-up nation’; at the 10,000 PhD engineers graduating in China each year; at the great pharmaceutical companies of Europe and the US; and at the consumer electronics companies of Japan and South Korea.

Before long we are fantasising about our very own Silicon Billabongs and issuing policy papers promising innovation funds and centres of excellence.

None of this is particularly new. Over 50 years ago, British Labour leader Harold Wilson gave his famous speech calling for a new Britain to be forged in the white heat of technological revolution.

Today the returns to intellectual property are even greater.

The world is much wealthier than in Harold Wilson’s time—so the market for a new smart phone, or a new vaccine, or a new genetically modified crop, is larger than ever.

The sources of wealth, and of economic growth, are changing. 

The OECD, in its most recent Science, Technology and Innovation Scorecard, highlighted what it calls ‘intangible assets’ as sources of growth.  These include computerised information such as software and databases; innovative property such as research and development, and designs and copyrights; and economic competencies including brand equity and organisational know-how.

Today, the returns to innovation—and the penalties for failing to innovate—come more quickly than in the past.

After the tablet computer was launched, it took less than three years to achieve ten per cent penetration of the consumer market in the US; by contrast televisions took around eleven years to reach the same milestone.

We have seen new technologies sweep away existing businesses.  The internet destroyed the encyclopaedia business and newspaper classified ads.  Digital technology rendered traditional cameras obsolete—and former industrial giant Eastman Kodak collapsed.

So we are all naturally attracted to the notion of Australian researchers doing world-leading pure research; of Australian institutions and companies taking that research and turning it into commercially useful technology protected by patent, copyright and other intellectual property rights; and of Australian companies taking that technology and selling around the world products and services which embody that technology.

Of course the reality is much more complex than this simple vision.  For one thing, it is neither feasible nor desirable to say that basic research which is done in Australia may only be commercialised by Australian companies.

For another thing, innovation occurs in many different settings—in universities and research institutes, in for-profit companies, and in other places too.  As Australia’s Chief Scientist highlighted recently, Australia compares well to other countries based on the number of researchers per head of population in higher education—but we have a noticeably lower number employed in business enterprises. 

Clearly though there are policy settings which can encourage—or hold back—the amount of activity occurring in Australia at each stage of the innovation process.

This debate tends to default to the most obvious question: how much public money should we spend and how should we spend it? 

According to the OECD, Australia spent 2.2 per cent of GDP on research and development in 2010—close to the OECD average of 2.4 per cent.  Of the countries surveyed, Israel spends the most, at 4.4% of GDP—a fact closely related to that country’s position as a world leader in several high-tech industries.

In Australia, Commonwealth government spending in science, research and innovation totalled $8.9 billion in 2012–13. This included $1.8 billion for industry research and development tax measures, $950 million for the National Health and Medical Research Council and $737 million for CSIRO, and a range of other programs.

Do we get good results from the money we spend in Australia on science, research and innovation?

Certainly, there are some impressive Australian success stories from such funding in earlier years. Hearing implant company Cochlear, for example, had sales of nearly $800 million last year, 85 per cent from outside Australia, selling cochlear implants which use unique, Australian developed technology.

Recently I asked the CEO of Cochlear Dr Chris Roberts to give the annual JJC Bradfield lecture on the topic of Innovation in Australian Business.  In his lecture Chris highlighted the contribution that public funding had made to the company’s growth. 

Critical research by Dr Graeme Clark and his group occurred at the government funded University of Melbourne; early in Cochlear’s life the company received a $3 million government grant; and the Commonwealth has put money into the hearing hub at Macquarie University which will deliver significant benefits to Cochlear.

Of course with the company’s success it now reinvests substantial private money—over $100 million a year—into ongoing research and development.

There are other Australian technology-based companies which have built a global scale and presence: in the medical devices sector ResMed; in blood plasma CSL. 

Australia is certainly not unusual in putting money into high-tech industries. In the US, much of the early research on the internet was funded by grants from the Defense Department.  Israel spends a lot of money on supporting early stage companies, and the chief scientist has a significant budget for this purpose.

Even the driest of economists will generally agree that there is a case for public funding of pure research in universities and other institutions. Such research is what economists call a 'public good' because it delivers public benefits but no one private sector player can capture the returns—and hence the private sector does not have an incentive to fund it.

When it comes to funding later stages of the journey from the lab to the marketplace, the case for public expenditure is more contentious.  What is the right way to spend public money with the aim of underpinning innovative businesses, and what is the wrong way?  After all, industry assistance can easily turn into corporate welfare.

A curious feature of Australia’s current arrangements is that a significant share of funding for innovation is quarantined to specific industries such as the motor vehicle industry.  In my view, when you have politicians specifying which industries and technologies are funded, as opposed to setting perimeters and then giving researchers free rein within those perimeters, you are less likely to generate successful innovation.

While money might be the most obvious public policy lever when it comes to stimulating innovation, it is far from the only one. 

An important factor is attracting key talent to high tech companies—not just from Australia but from around the world. In his JJC Bradfield lecture, Chris Roberts emphasised that Cochlear’s Australian location was a plus in attracting talented people from other countries.

Immigration has played a key role in the growth of the US high tech sector.  Research a few years ago by AnnaLee Saxenian of Berkeley found that 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.

On a recent visit to New Zealand I learned of an interesting policy change in higher education.  Until a few years ago, international postgraduate students paid fees of NZD 25,000 a year, while domestic students paid 5,000.  They decided to drop the international student fee to the same level as domestic fees, with a view to attracting more international students. 

Senior academics at Victoria University of Wellington told me the policy has attracted many high quality international students they otherwise would not have got—and although it is still fairly early, a good proportion seem to be staying in the country once they finish.

Another factor which has consistently been raised with me by IT and other technology companies is that Australia’s tax system makes it very difficult to offer stock options as an incentive to join a start up company.  In the US such incentives are widely offered—but here they effectively cannot be used.

Yet another question is how best to leverage the very large pool of capital—now exceeding $1.5 trillion—in the superannuation system, to increase investment in start-up technology companies. Visiting US venture capitalist Duncan Davidson told me recently that in the US typically there are intermediate funds between the big pension funds and endowment funds on the one hand, and the individual tech companies receiving the investment on the other.  He was puzzled that this level of fund was largely missing in Australia—and saw it as a big reason why start-ups find it harder to raise venture capital in Australia than in the US.

One of the perennial questions in innovation policy is the importance of clusters of expertise in particular industries.  In his JJC Bradfield Lecture, Chris Roberts spoke of the hearing precinct which has been established on the campus of Macquarie University, where several thousand people in a range of different groups working on hearing issues will be co-located.  To quote Chris:

'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!'

In his lecture Chris compared this to some of the world’s well-known clusters, including Silicon Valley, Route 128 in Boston, Cambridge in the UK and Bangalore in India.  Another I have recently been lucky enough to visit is Shenzhen in China. 

This city of 10 million, just across the border from Hong Kong, is home to two of the world’s largest telecoms equipment manufacturers, Huawei (with sales exceeding USD 30 billion) and ZTE (with sales exceeding USD 10 billion.)  It is also the location of the FoxConn factory where over 200,000 people make Apple devices.

A visit to China, or the US, inevitably causes an Australian policy-maker to reflect on the importance of scale. If a company can build scale in a high-tech industry, it is hard for competitors to catch up—because it is hard for them to fund the necessary research and development. 

At a national level, if you have scale in a particular industry, that creates an argument for allocating further research and development funding towards that industry.  Where you have success, it makes sense to build on it.

Taking a longer term view, if we want to generate a steady stream of innovative, high tech companies, perhaps the single most important policy lever is the quality of our education system, especially in key disciplines like science, engineering and maths. 

Many leaders in Australia’s high tech sector have made this point.  Alan Noble, engineering director at Google Australia, had this to say in an article in the Financial Review last year:

'[O]ur 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.'

There is an important related point: there is room for change in our attitudes towards commerce and entrepreneurship, particularly in our education sectors.  In the US, there is a vigorous crossover between the academic and commercial worlds 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.

A related point is the readiness of Australian universities to disseminate their intellectual property.  The University of New South Wales recently moved to a new approach, which it calls 'Easy Access IP', of making research freely available to companies which are in a position to commercialise it, with certain conditions attached. 

Dr Kevin Cullen, CEO of the university’s commercialisation arm, recently explained to me that too much time and effort was being spent on negotiating access to pure research; the new approach is to get it out there and see if it realises dividends. 

There is clearly a very big public policy prize from stimulating innovation—and getting as much traffic as possible on the road that leads from basic research to a large scale business.

Some significant Australian companies have travelled the length of that road—but we would all like to see many more. 

That is why innovation policy will always be a focus for government.

Robyn Williams:  Let’s hope so. Paul Fletcher is a Federal MP for Bradfield in New South Wales.