Improving business innovation in Australia: How can R&D and broader innovation drive performance?

Policymakers have for years worked to improve innovation by focussing on private sector research and development (R&D). But R&D is only half the innovation story.

Our new report for the Office of Innovation and Science Australia, ‘Australian Business Investment in Innovation’, puts business innovation under the microscope. It shows that Australia’s low and declining levels of R&D investment can be attributed to its unusual industry mix and the mining exploration cycle. That is not to say that all is well: there is significant room to increase R&D investment across the economy, particularly in sectors like manufacturing and information, media and telecom that drive business R&D globally.

But R&D is only half the innovation story. For every Australian firm that invests in R&D, 5.5 times as many invest in innovation more generally. Small firms are more likely to invest in non-R&D innovation than in R&D. Productivity growth also tends to be stronger in sectors where more firms invest strongly in innovation, even if they are not doing much R&D. Firms that invest in innovation are more likely to survive and grow.

Since 2013, the share of firms investing in broader innovation has risen. However, Australia also lags the world’s best in broader innovation, just as it does in R&D.

This data brings Australia’s innovation challenges into greater focus. First, Australia’s unique mix of sectors results in a significantly different pattern of innovation investment to global peers, both in R&D and beyond it. Second, innovation beyond R&D plays a key and perhaps under-appreciated role in many sectors. And third, firms of different types innovate in different ways.

For policymakers, the findings emphasise the need to lift both R&D investment and non-R&D innovation investment. The policy mix required to achieve this will be shaped in part by three key choices:

  • Should policymakers rebalance support for R&D and non-R&D business investment in innovation?
  • Should policy focus on growing our activity in the most R&D-intensive sectors, namely Manufacturing and IMT, or in other sectors, and if so which ones?
  • Should the innovation policy mix be customised based on firm characteristics, capability, and strategy?

Read our report here. Read Innovation and Science Australia’s ‘Stimulating Business Investment in Innovation’ report, which includes recommendations for policymakers, here.

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