The current economic crisis in the wake of the COVID-19 pandemic, has exposed the decay in Australia’s manufacturing capability and highlighted the need for increased investment in innovation.
Innovation is crucial for enhancing competitiveness, productivity, employment and economic growth.
Unfortunately, when it comes to innovation-led economies, Australia has shifted into reverse. Our ranking on the Global Innovation Index has slipped over the last 10 years. Australia’s expenditure on research and development (R&D) is 1.8 per cent of GDP, versus an average of 2.4 per cent across the OECD.
There has been a steady decline in the nation’s investment in R&D – business expenditure on R&D has fallen by 12 per cent since 2013. Large corporates such as Samsung, Alphabet and Huawei each spend more than half as much on R&D per year as the whole of Australia.
There is a tendency in free market economies, in the absence of effective government incentives, for firms to underinvest in R&D. A key reason is that individual firms bear all the costs for developing new solutions, but competitors reap some of the benefits by imitating innovations or waiting until patents run out
Currently, Australian government support for business innovation is mainly indirect through the R&D tax incentive scheme, where companies can apply for a tax benefit to offset some of their R&D cost.
Australia stands out in the OECD for its reliance on tax incentives to encourage innovation (88 per cent of government support was tax based in 2017, the second highest in the OECD).
The value of support for R&D through the tax incentive scheme is around $3 billion and proposed changes before Parliament would cut $1.8 billion from the scheme.
While R&D tax incentive schemes can encourage innovation, they tend mainly to benefit larger firms. Many younger, smaller innovative firms lack sufficient cash flow to fund larger scale R&D investment.
R&D tax incentives also increase the potential for cross-border tax planning by multinational firms.
Missing from the current Australian innovation support program is direct R&D funding at a meaningful level. In almost all OECD countries, direct R&D funding forms a much larger proportion of the support for business R&D than in Australia.
The proposed reduction to the R&D tax incentive scheme provides an opportunity to increase direct R&D funding through grants.
Research based on the US Small Business Innovation Research (SBIR) program suggests that grants allow firms to prove the viability of a technology. They enable proof-of-concept work that a firm could not otherwise finance.
The Australian government has historically provided support for R&D through various grant schemes. Schemes such as R&D start provided funding of $1.01 billion to 1134 companies between 1996 and 2005.
These grant schemes which directly funded R&D, were phased out with little quantitative evidence of their impact and effectiveness.
In a recently published study, we examined the impact of Australian government grants on a firm’s engagement in innovation and its ability to attract additional funding from venture capital (VC).
Our study finds that receiving a grant increases a firm’s innovation – measured by R&D expenditure, patents and patent quality (number of citations).
Firms that received grants were also more likely to gain funding from VCs. Grants are awarded in a competitive process with expert referees.
The grant is a visible, external validation of both some level of current success and of expected future success. Thus, grants act as a signal of the firm’s innovativeness which encourages subsequent funding by VC firms.
A grant award can help VC firms to identify innovative companies, whose innovations they can help to ‘bring to market’.
The research also showed that the combination of grant and VC funding provided better stimulus to innovation than grant or VC funding alone. Grant recipients that gained subsequent VC funding, produced more patents and higher quality patents than grant recipients who did not receive VC funding.
An increased number of voices are calling for grant programs that directly fund R&D. These include individuals such as the Chief scientist, Alan Finkel and Chair of the NSW R&D Advisory Council, David Gonski and reports such as the Innovation and Science 2030 report and the Ferris review.
Increased investment in innovation is crucial if Australia is to address the challenges of the next decade and beyond. Grant funding of R&D can boost innovation and enhance the ability of innovative firms to attract additional VC funding. Government grant schemes however require monitoring, with adequate reporting requirements placed on recipients so that the benefits of any grant scheme can be evaluated, and the scheme focus, or criteria adjusted.
R&D grant funding needs to be a part of a broader, evidence based, approach to innovation policy. Government needs to work together with industry to build an innovation infrastructure and culture that drives momentum towards an innovation led economy.
Jo-Ann Suchard is an Associate Professor at the UNSW Business School
Do you know more? Contact James Riley via Email.
Another example of Academia/government wanting to pick winners and directly be involved who should get funding, obviously aimed at larger corporations from the desire to channel more funding that way.
Australia has direct funded grants, that can cover R&D as well as the next stage of commercialisation. The comment above about small business share of R&D Tax incentive illustrates the success of the program to fund SME and step in , hopefully as a minimalist way not distort the market by preferred choices that a government wants to make. You can see the problems caused in renewable energy, where direct funding ends up in just more wind farms and solar farms with very little going to alternative energy R&D.
This seems to be a tendency of governments now wanting to pick winners ( note the Entrepreneurs program of 5 selected industry groups), the recent EMDG review where government will choose how a firm should export and when and where.
By all means, governments should assist Australian companies but stay out of the decisions that the market should make as to what technology will win.
The current R&D and EMDG both, enable any business that meets transparent and uniform rules to be assisted, without interference in the functioning of the business or the market.
Well said. Another significant problem for Oz R&D is our risk averse industry sector. It tends not to invest unless it sees near-term profits and/or patents.
USA’s small business innovation research (SBIR) and small business technology transfer (SBTT) are relatively the most successful public innovation schemes or policy instruments to aid small business enterprises and startups. It is rather disappointing to learn from Jo-Ann that such schemes in Australia, which allocated about $ 1 billion in 10 years (compared to US$ 5 billion for SBIR and SBTT per year in USA) is now phased out. It is rather well known in innovation studies and S&T policy studies, that SBIR and SBTT in USA aided several current global firms in their formative stages of growth. Intel in the 1960s and 1970s; Apple, Microsoft and Qualcom in the 1980s and 1990s; and Google, Amazon and Facebook after 2000.
Another disappointing point is that Australian R&D/GDP declined or stagnated at 1.8%, over the last decade, compared to 4% by South Korea and about 3% by Japan. It is high time the government should wake up before it is too late to draw on successful lessons. Another area in which Australia miserably failed is in boosting tremendous innovation potential that exists in its universities. Compared to USA, UK (at Oxford and Cambridge) and Taiwan, Australia has given residual or very little importance in establishing Science and Innovation Parks involving its leading universities. Taiwan’s global leadership in semiconductor technology is due to Hsinchu Science Park and couple of universities neighboring science park created in the 1990s. University based start-ups have little meaning if you do not care to create science innovation parks and incubation facilities with generous start up grants in those university based science and innovation parks.
Dr.Venni V Krishna, Professorial Fellow, School of Humanities and Languages, UNSW
https://business.gov.au/IC can help eligible SMEs to collaborate with public researchers for R&D. It’s a free service of the Commonwealth Government for SMEs & includes grants to match funding + much more
Direct funding and tax incentives both have their place in supporting R&D. But it’s wrong to suggest that tax incentives “tend mainly to benefit larger firms”, especially when talking about the Australian program. This is really easy to measure with our R&D tax incentive as it is divided into two streams – a stream for small businesses (defined as under $20m turnover) and a stream for large businesses (defined as over $20m turnover). The most recent Science Research and Innovation Budget Papers show that in 2017/18, of the ~$2.6b spend (down from $3b over the last couple of years as a result of compliance activity), spending on the stream for small businesses accounted for $1.92b compared to $0.65b on the stream for large businesses. So, by this measure, it is far and away small businesses that are benefiting from the R&D tax incentive. This is because of the cash flow benefits that the incentive provides to those businesses.