Benefiting from more than a quarter century of continued economic growth, following deregulation in the 1980s and 1990s and a mining boom through much of the 2000s and 2010s, Australia now enjoys high wages and standards of living, as well as a strong social safety net. In order to maintain its productivity and lifestyle, however, Australia has no choice but to embrace innovation.

What does looking at US innovation, compared to Australian innovation, tell us? According to the Global Innovation Index (GII), the world's leading measurement of innovation across more than 80 indicators, the United States is the fourth most innovative country in the world behind Switzerland, Sweden and the Netherlands. The United States is a world-class innovator – attracting much of the world's innovation output, including Australia's. As a close US ally in economic, military, intelligence, and diplomatic spheres, it makes sense to examine what Australia could learn from the United States.

Australia ranks 23rd on the GII, behind New Zealand and China, and has plateaued or fallen in the last three years while the US ranking in the GII’s assessment of innovative performance keeps improving.

Our research, which goes beyond the national coverage of the GII and looks at some of the factors of innovation at a state level, has important takeaways.

Firstly, the US private sector spends far more on research and development (R&D) than Australian firms. As a percentage of gross state product (GSP), New South Wales businesses spend more on R&D than any other Australian state. However, 18 US states spend a higher percentage of their GSP than New South Wales, with business R&D spending in California, Massachusetts and Washington being three times that of New South Wales and Victoria.

Secondly, in terms of the percentage of state exports that are technology – an indicator of whether an economy’s trade is dominated by innovative activities or not – no Australian state does better than the top 40 US states. While perhaps not surprising for Australian states more reliant on natural resource extraction, like Western Australia and Queensland, it’s remarkable that the percentage of technology exports in US states such as Kentucky and Idaho (best known for their bourbon and potatoes, respectively), is more than seven times greater than in Australia’s leading states of Victoria and New South Wales.

Lastly, and perhaps more optimistically for Australia, the state-level data on education leads one to believe that Australia has the potential to become more innovative. Australian exam results in reading, science and maths are overwhelmingly stronger than in the United States, with nearly every single Australian state scoring higher on overall proficiency than any US state.

So where does Australia go from here? From a policy perspective, Australia would benefit from incentivising foreign venture capital firms to be based in Australia; fostering an environment that welcomes both skilled immigrants and anchor firms; increased domestic awareness of the skills shortage in the existing and future workforce; and an international campaign that raises awareness of the role Australia can play in a global innovation ecosystem.