Innovation statement: a missed opportunity

Bring on the buzz words. We must get with the new zeitgeist and innovate now. Let’s all be optimistic. There has never been a ‘more exciting time to be an Australian’. Into the world of new and improved messaging, the government has just released its innovation statement.

So how new and innovative is the statement? The answer is: only a bit.

The statement misses the opportunity to be more innovative because it doesn’t clearly state that it is the use of innovation that is more important than the generation of innovation. An innovation that isn’t used is of almost no value. For example, a better record player is of limited value today compared to the 1970s.

How does the statement get this wrong? It focuses on creation of technology, rather than use of technology, implying that the main benefit to Australia from innovation is from local innovation as opposed to overseas innovation. However, this is not correct.

Almost all global innovation will occur in countries other than Australia. And there is no point in Australia trying to replicate these discoveries. We can’t rediscover Google’s PageRank algorithm; we can’t re-invent the iPhone. The same goes for the innovation of Airbnb, Uber, Samsung, and (even) Microsoft. What would be the point? And in any case, it would be illegal under copyright and patent rules.

Recent research by the NSW Department of Industry suggests that 98% of innovative ideas were sourced from overseas; assuming this is correct, then 98% of the benefit to Australians of using innovation will come from discoveries that are made overseas.

Of course, this shouldn’t be seen as a dismissing our own discoveries. Australia obviously benefits from technologies we invented, such as wi-fi. But these are a small portion of total worldwide innovation. It is pie in the sky dreaming to think it could be otherwise. We can’t beat the rest of the world at this game. We just don’t have the population or the economy to achieve a massive increase in our innovation. The innovation statement doesn’t try to do this, and nor should it. Governments have directly tried to encourage innovation in the past, and failed: see how the Australian car industry went.

So the innovation statement should have had a greater focus on encouraging Australian businesses to use innovations, as well as the current focus — which is on generation of innovations. The best thing the government could do is speed up the implementation of the Harper competition reforms. More competition will clearly drive more adoption of innovations. For example, why not fast-track the removal of barriers to Uber and other car sharing options? And why not remove anti-competitive regulations for pharmacies?

The statement also misses opportunities for the government itself to be more innovative. Some improvements are proposed, with the government publicly releasing more data, and making it easier for start-ups to work with the government. However, the opportunities are missed for innovation in how the government interacts with all Australians, particularly through the my.gov.au website or the E‑tax program. Improving how business deals with government is great: but how about innovating how government deals with the public?

The statement contains a number of potentially worthwhile tax changes. A Capital Gains Tax exemption is proposed for investors in eligible start-ups who retain their investment for more than three years. This will obviously encourage more investment in these businesses. However, one could easily imagine start-ups that aren’t very innovative, and established businesses that are. There are good arguments for lower taxes on capital, but it isn’t clear that this is the best way of delivering them. A lower tax on a broader range of investment might be better.

The policy also contains reforms relating to business failure, including reducing personal liability for directors and preventing contracts from being terminated just because a company is being restructured. These changes should make it easier for business to trade out of financial difficulty rather than having to go bankrupt. However, there is a danger that banks may increase interest rates or stop lending to risky firms if their ability to get their money back is reduced. Hopefully this issue has been taken into account in the proposal.

There are many more parts to the announcement, including collaboration in cyber security, migration, and collaboration between businesses and researchers, available from the (fairly innovative) website.

However, the innovation statement is skewed because it misses two important opportunities: improving how we interact with the government; and improving incentives for Australian businesses to adopt innovations, even if they are developed overseas. The statement should acknowledge that the greater benefit to Australia is from encouraging Australian businesses to adopt global innovations than from us trying to beat the world at its game.

Michael Potter is a Research Fellow in the Economics Program at the Centre for Independent Studies