Could the Australian government do more to support local innovation and grow our own American-style tech giants? We asked leading innovation commentators James Riley and Sandy Plunkett to debate the issue.
8 March 2018
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To listen to a leader in the startlingly ascendant startup sector talk about how ‘government must do more’ is like watching Monty Python ask ‘What have the Romans ever done for us’?
When has the government ever done 'enough' for business or technology leaders? Well, if you ask them, the answer is always going to be ‘never’!
Governments can never do enough. That is the nature of the relationship between governments and the governed: There is always more to do, things can always be better.
When it comes to innovation, however, government not only does enough, but it is critical that it be careful, lest it snuff out creative innovation through the dead hand of direct support.
Australians are collectively afflicted by a terrible 'government must do more' psychosis.
It is a cultural curiosity that runs deep in this country, and applies particularly to innovation policy. This reliance on government has itself stymied better commercial performance of Australian innovation.
In the face of accelerated technology change and the spooling-up of a fourth industrial revolution[^1] — artificial intelligence, machine learning and all that platform tech stuff that Australian businesses are so terrified about — this constant looking to government to 'do more' is a handbrake.
We know from one report[^2] after another[^3] that Australia is pretty good at knowledge creation through government-funded research institutions. To use language Australians can understand, we are 'world-class' and 'punch well above our weight'.
We boast one of the most generous R&D tax incentive schemes[^4] of any country in the developed world in support of private sector research and development. Our government forgoes more than $3 billion in tax revenues to support R&D efforts.
Australia ranks a respectable 11th in the OECD for overall government support for Business Enterprise R&D (BERD). But as this report demonstrates, 88 per cent of that support is through the tax incentive, and has been growing at three times the rate of the OECD median growth rate since 2011.[^5]
The cost of the tax incentive — that is, the investment by government — has grown five-fold since 2000.
Despite this superb research prowess[^6] in our universities and other public-funded institutions, however, the level of private sector collaboration[^7] with these institutions on research projects is exceptionally poor.
The translation of institutional research into commercial outcomes is equally poor.
Despite the generosity of our R&D tax incentives, the level of business investment in R&D has been on the slide for a decade. Australia ranks dead last[^8] in the OECD for the rate of high growth enterprises.
There is a story about leading a horse to water that seems appropriate here. It’s the story about the thirsty horse that kept banging on about how it needs a bottle of Perrier instead of just chugging down the water in front of it.
There is no indicator that looms larger in this debate than economic growth — and specifically the stunning 26 years of consecutive growth that Australians have enjoyed.[^9]
It is simply a remarkable fact that younger Australians have never known a recession (as defined as two consecutive quarters of economic contraction). That’s a 'world-class performance that punches well above its weight' if ever there was one. Surely, we can recognise this?
While GDP growth numbers have limited value in assessing innovation policy, it is worth noting nonetheless. This period of the late 20th century and early 21st century was hardly simple, and included global shocks like the Asian Financial Crisis, the 9/11 attacks and the war on terror, the Global Financial Crisis and the end of the mining investment boom in Australia.
We can chalk this up to dumb luck, or we can infer that generally Australians benefit from good government. Through Hawke-Keating, the Howard era, Rudd-Gillard-Rudd, and now Abbott-Turnbull — the broadest spectrum of political fidelity — economic management has more or less been sound.
Yes, Australia enjoyed a spectacular mining investment boom during this period. It is equally true, however, that the sky did not fall in when the investment boom came to an end in 2014. If the doomsayers were to have been believed, we would all be ruined by now. And yet here we are, 26 years in.
What, exactly, do we expect from our government? Because if we are going to genuinely enquire about what the Romans have done for us lately, we will find a long list of innovation pre-requisites: A politically stable government, exceptionally strong institutions, low levels of corruption. A transparent legal system, and a predictable business environment. A world-class public education system within a population that values investment in education. A top-tier public health system. A generous and forgiving social welfare system.
We have a smart, culturally diverse workforce. We are a nation of immigrants that supports further immigration. We are an open economy with a government that enthusiastically pursues free trade.
These are the base-line macro settings that enable the luxury of a debate about which levers to pull in order to improve sophisticated, high-level innovation outcomes.
These fundamentals have been developed over decades — over generations. They have enabled our successful and prosperous society, and they need the constant nurturing of governments.
The Prophets of Doom — that’s the industry groups, from the culturally crusty Australian Information Industry Association to shiny newcomers like StartupAus and FinTech Australia — tell us that we are on the brink of ruination as a result of government ‘inaction’ on innovation issues.
But the evidence tells us we are in the most fertile and abundant period of innovation policy creation in recent history, beginning when the Turnbull government launched its National Innovation and Science Agenda (NISA) in December 2015.
NISA alone has already accomplished quite a lot in a short amount of time.
In 2014 and 2015, one of the biggest complaints from the nascent tech-enabled startup sector in Australia was about the lack of early stage capital in this country. It was limiting the number of startups that could be funded.
The NISA introduced a tax incentive scheme to encourage angel investors and Early Stage Venture Capital Limited Partnerships (ESVCLPs) at an anticipated cost of $106 million.
The measures included a new 10 per cent tax offset to partners in new Early Stage Venture Capital Limited Partnerships (ESVCLPs), increasing the maximum size of such entities to $200 million, a 20 per cent tax offset for startup investors, and a ten-year exemption from the capital gains tax for investments held for at least a year.
Those policy changes resulted in more than $1 billion in venture capital (VC) being raised last financial year in Australia, nearly double the amount raised the previous financial year and more than three times the year before. The size of individual funds has grown (witness AirTree Ventures’ $250 million fund),[^10] more companies are getting funded, and the size of investments has grown.
The early-stage venture funding issue has not been solved, but it has improved dramatically — and quickly — since this targeted government intervention.
Where higher-risk deep science startups had also struggled to attract venture funding, government has also intervened. In addition to the Biomedical Translation Fund aimed at the biotech sector, the NISA funded a new innovation fund within the national research agency, CSIRO. Now established as Main Sequence Ventures, this $200 million fund has already made its first investments, including into quantum computing startup Q-Ctrl.
The NISA agenda similarly earmarked an aggressive agenda in data policy. While government has been actively releasing data sets, it has sharpened its regulatory thinking on Open Data. To mainstream ears, the notion of ‘open data’ is not sexy. To tech-enabled startups, the term is synonymous with ‘massive opportunity’.
The NISA strategy resulted in a federal review of Data Availability and Use,[^11] and the construction of a new Commonwealth data regime. It also prompted Treasury’s just-completed Open Banking Review[^12] and directed the data research unit of the CSIRO — Data61 — to investigate and potentially build the data governance platform.
These are two examples of the Australian government making sober and deliberate policy decisions to move the regulatory levers on large-scale structural issues — and doing so after extensive research and consultation.
In both VC and access to data, these structural reforms have a far-reaching impact on innovation opportunities for Australian business. Just because they don’t excite the mainstream media does not reduce their positive impact.
The second tranche of innovation policies — the NISA 2.0 agenda — is set to be launched by the middle of the year.
The original NISA launch in 2015 picked some low-hanging fruit, addressing some challenges that the industry had been highlighting, such as incentives for investors, changes to crowdfunding laws, an improved employee share scheme environment and better support for the incubator programs.
It funded an accelerator and incubator known as ON within the CSIRO, identified and funded opportunities in cyber security by establishing a new growth centre, and set in motion the development of a new digital economy strategy.
It also established an independent agency to provide advice to government — called Innovation and Science Australia[^13] — and charged its leadership with providing a sober investigation of the challenges and opportunities confronting innovation in Australia.
The ISA delivered a landmark benchmarking study[^14] in 2016 followed by its Prosperity Through Innovation[^15] strategy for Australian government policy through to 2030.
Innovation and Science Australia has recently made 30 recommendations — all of them structural — to improve support for innovation in this country and to ignite further activity.[^16]
We will understand most of what government has planned for these recommendations in May 2018 when Treasurer Scott Morrison hands down his third budget. But we already know the trajectory of activity in this area. Whether it is spruiking its innovation credentials or not, this government has presided over the biggest overhaul of innovation-focused policy in recent memory. The fact that it is not readily acknowledged by anyone other than the government itself is entirely an issue of culture.
We don’t need another benchmarking report to understand that government is doing enough for innovation in this country. The increased intensity of innovation activity across the economy is visibly apparent.
Australia is now in a A$1.6 trillion a year global innovation race[^17] for wealth and job creation, sustainable living standards and national security. Despite our record of 26 years of uninterrupted economic growth and oft-touted political rhetoric that Australia punches above its weight in innovative endeavours, numerous global rankings stubbornly say otherwise.[^18]
Innovation and Sciences Australia (ISA), an independent board of leading Australian scientists, venture capitalists and businesses, is responsible for providing whole-of-government advice on all science, research and innovation ecosystem issues. Its recently delivered report states: “We lag behind other nations in the level of our ambition in innovation, the amount we invest in innovation, and the results we get from our limited investments into innovation.”[^19]
Most of the ISA 2030 plan’s 30 recommendations call for increased government funding for research and development, better government digital transformation procurement and implementation, as well as a call to arms for the government to pursue national missions in health and the environment to fuel greater innovation outcomes for Australia and at greater speed. It is the third major review of the Australian innovation system in 15 years. ISA Chair Bill Ferris is urging the government to adopt all of the 30 recommendations by 2022.
There is good reason for the sense of urgency articulated in the ISA 2030 plan. As globalisation and monetary policy have made the availability of capital and technology ubiquitous, countries and companies have pursued a winner-takes-all[^20] strategy leveraging the unprecedented scale effect of the internet and often ruthless, tech-savvy commercial pragmatism. Regionally and globally, public and private investment in the development and commercialisation of new technologies is accelerating and the impact of those technologies is radically altering the world’s socio-economic and geopolitical landscape.
The commercial phase of the internet era since the early 1990s has launched 21st-century American tech giants such as Amazon, Facebook, Google, Netflix and a rebirthed Apple. China and India are also fast emerging as new digital era superpowers.
Innovation-driven wealth creation and societal benefit takes place within a specific industrial structure and cultural context. Innovation outputs are the result of complex interactions and feedback loops between various actors and institutions within the system. These primary actors include large and small enterprises, universities and research organisations and government.
Governments play a critical multiplier role via their policies relating to regulations, taxes, financing, competition, procurement and intellectual property,[^21] for such polices ease or block the various types of interactions, knowledge flows and investment priorities.
It is true that in recent years, the Australian Coalition government has sought to better understand the policy levers, the flows and blocks within the nation’s innovation system: it created the National Innovation and Science Agenda in December 2015 amidst a A$1.1 billion investment[^22] in innovation across four years. The ISA 2030 plan, currently being reviewed by the federal government, significantly adds to that ambition. Its 30 policy recommendations back a goal of launching Australia within the top tier of innovator countries globally by 2030. Unfortunately, however, innovation system reviews in Australia are far more common than adoption and implementation of the policy recommendations they put forward.
With our population of 24 million and a labour force of 12 million, Australian innovation will never lead the world in absolute numbers.[^23] But are we collectively doing what we can? And what role do governments play in that national effort?
For myriad cultural and political reasons, Australian governments have historically rarely prioritised innovation as a path to sustainable growth and prosperity. During a generation of domestic growth driven by the services sector and a Chinese economy hungry for the resources dug-up or grown on our land, successive Australian governments have been mostly uncurious observers of the new laws and mores governing our data-driven global village.
Australia has world class researchers, a few home-grown and globally successful 21st century outlier companies such as Cochlear, ResMed and Atlassian and a reasonably diverse industrial base in need of a good dose of digital era modernisation and global market ambition. Our critical gaps and weaknesses include a lagging performance relative to our global peers in commercialising and exporting ideas, a shallow and declining investment in R&D activity, and a tendency towards incremental rather than new-to-world innovation in business.
There have been some positive results since the launch of the National Innovation and Science Agenda, most notably: Australia’s supply of venture capital for 21st century innovation-driven startups has increased by around 400 per cent[^24] to just under A$1 billion. This came as a direct response to the significant taxation incentives for high net worth investors, improved tax structures in the Early Stage Venture Capital Limited Partnerships program, and the creation of the A$500 million Biomedical Translation Fund.
Still, we keep slipping down the global rankings for innovation activity and commercial output.
As other countries have been forging ahead and improving their structural reform and policy settings in recent years, Australia’s advantage — seen most visibly in its resources boom of the last 20 years — has been eroded while the nation’s appetite for reform has waned. In today’s Australia, wages are barely growing, households carry some of the world’s heaviest debt loads, and productivity gains from the economic reforms of the 1980s and early 1990s have petered out.[^25] And just when the economy needs growth drivers outside of mining, a slide in global rankings for innovation and education suggest living standards could decline amid increasing concerns about inequality.
Successful innovation policy requires long-term commitments and consistent leadership. Unfortunately, however, Australia has had seven prime ministers in ten years; it has had five Industry and Innovation ministers in the last three years — and a period with no science minister at all.
Government and business expenditure on research and development has declined in the past ten years. The most recent international comparisons — for the financial year 2015/16 — paint a sad picture. Australia invested just 1.8 per cent of its national income in research and development, compared to 2.25 per cent just seven years ago.[^26]
Australia’s entire investment in all types of R&D is A$32 billion per year according to the Australian Bureau of Statistics. Digital R&D is a fraction of this amount. By comparison, Amazon alone invested A$22.9 billion on R&D over the 12 months ending March 2017. This one company invests more on digital R&D than Australia. In a fiercely competitive world, Australia risks being sidelined. And while education is the nation’s third biggest export, the number of students studying information technology in Australia has fallen by between 40 and 60 per cent in the last decade. Likewise, enrolments in other hard sciences and STEM subjects such as maths, physics and chemistry are falling too.[^27]
When ISA Chair Bill Ferris, the chief architect of the 2030 national innovation plan publicly admits he is “a glass half full on all of this out to 2030,”[^28] it is hard for other participants in the system to have confidence in governments’ ability to follow-through on its part of that ambition. Why? Because past behaviour is usually a fair indication of future behaviour. Australian governments have initiated deep-dive reviews and recommendations for a whole-of-government national innovation ambition many times before, with little measurable progress to show for them.[^29]
“Ultimately, it’s about what sort of country we want in 2030,” said Ferris. Few could argue with that. However, when I asked Ferris when he could pin-point the last time Australians collectively thought long term about the sort of country we want, he hesitated before replying: “I guess you could consider the early 80s, when the ‘Banana Republic' threat loomed.”[^30]
All Australians want to maintain the high standards of living they have enjoyed for more than a generation. But they don’t equate the risk of losing them with low innovation ambition and achievement. Australian government policy has reflected this disconnect.
In his 2015 book Australia’s Second Chance, Australian cultural and political commentator George Megalogenis argued there have only been two periods in Australia’s modern history that genuinely combined policy innovation, political stability and a shared sense of purpose across the parties of labour and capital: the Curtain-Chifley-Menzies era between 1941 and 1966; and the Hawke-Keating-Howard era between 1983-2007. Each period was preceded by global humiliation for — when it was the crash test dummy for austerity in the Great Depression of the 1930s and when it gained the reputation of being the juvenile delinquent economy of the 1970s and early 1980s.[^31] Given the acceleration of focus and investment on innovation inputs and outputs occurring in other countries, Australia is at risk of falling too far behind.
To be a viable contender in the increasingly crowded and ruthless global innovation race, this government — and others after it — must do what no other previous Australian government since the commercialisation of the internet in the early 1990s has been able to do.
It must demonstrate it has the smarts and the foresight to embrace the innovation imperative as a whole-of-government reform initiative and the long-term political will to execute on the many moving and interconnected parts — competition policy, tax reform, R&D funding, labour market reforms — that can help an innovation system thrive. Can we get there from here? It’s possible but sadly not probable.
Australian business and political discourse about digital era complexity and opportunity has long been stuck in a kind of Lucky Country naivety and complacency. We seem wedged somewhere between the “everything is awesome” refrain of tech-sector cheerleaders, the hubristic complacency of a Baby Boomer political and business leadership raised in the warm embrace of a resources boom and a duopoly and oligopoly market structure, and the “robots-are-winning” dystopian angst of union leaders, ordinary citizens and workers.
As a nation, we are far less prepared for the ongoing socio-economic and geopolitical consequences — both seen and unseen — of this 21st century burst of innovation from outside of Australia. It should be very disturbing for a nation that values the notions of fairness and egalitarianism in our social contract because in the global digital age, no nation is an island and those values — along with an estimated 40 per cent of traditional jobs[^32] — are fragile and under threat in Australia, as elsewhere.
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