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People & Ideas

Nov 8, 2010

Terry Cutler: the dearth and decline of innovation

Countries like Norway and Chile are using returns on natural resource exports to create national funds to diversify and future proof their economic base. This is all about national leadership and vision. And when it comes to innovation, we don't have it, writes Terry Cutler.

Three years ago I had a brief flutter of hope that Australia might allow the topic of innovation onto the main stage.

Before the 2007 election the then opposition launched sensible policy statements that tightly coupled the themes of innovation, competitiveness, and productivity.  This coupling was a refreshing focus on just why innovation is important for us all — it is all about wealth creation and our quality of life and community well-being.

By the last election, however, a dismal silence had fallen over all these topics. Dust accumulates on the report of the review I chaired into the state of the national innovation system, Venturous Australia. My perverse consolation is that dust is equally accumulating on the government’s response to that review, Powering Ideas, and on the related reform packages in the Henry tax review and the Garnaut Report.

There had been a glimmer of light under former Finance Minister Lindsay Tanner’s genuine sponsorship of action around information policy and through his support for the work of the Government 2.0 taskforce. On the other hand, the proposal for a radical restructuring of tax concessions around R&D languishes unlegislated.

This is possibly a good thing because Treasury officials have been allowed to take a good idea and strangle it with even more bureaucratic red tape and a hostile narrowing of eligibility criteria. Good policy design has remained more observed in the preaching than the practice. And good public policy needs to be grounded in brutal honesty about industrial and community realities and concomitant challenges, not disembodied theory.

Since the 2008 Review I have been struggling, fitfully, to work to complete a personal manifesto on innovation. The publishing sponsor is not impressed with the slow progress. But an emerging sub-text is about exploring just why it is we make such hard work of the innovation challenge.

Part of the problem is that it is easy and tempting for governments to retreat to a narrow, supply-side focus around innovation. This revolves around traditional science and technology policy and coincidentally the main related policy statement at the last election was on science policy: big science. It is a good thing to fuel or power ideas, but this profits little if there are no paths to impact in the real world.

The reality is that innovation, in essence, is about people seizing opportunities arising in the real world to do things differently, and searching for the tools, the inventions and ideas that help them make things happen. With the great wicked problems that confront us — whether population health, climate adaptation, food security or resource depletion — we need to marshal worldly ingenuity to identify and test possible solutions.

In other words, we need to focus more on a market-pull model of innovation. Innovation and invention are not the same thing.

An innovator is essentially a change agent, challenging the status quo with the uncomfortable notion that we can do things better. For the innovator trying to make things happen on the ground with customers or though endeavouring to reshape market structures, this requires tenacity, drive and passion. Incumbents will always fight hard to protect their turf.

Fred Hilmer, the author of our National Competition Policy in the 1990s, recently observed that one explanation for why Australia’s productivity growth has stalled may be because we have abandoned any active focus on competition policy. And unlike Europe or the US, Australia has never had the weaponry of anti-trust regulation.

We also have a cultural problem. Too many of our business owners or managers have what we might describe as a lifestyle approach to business.  Even many of our so-called success stories look like under-performers when benchmarked globally. This lifestyle model of business strategy imposes a false ceiling on ambition: success is having the designer car in the garage, and the holiday home or two.

Sadly, this is not a caricature. At a recent forum I actually heard people saying they didn’t need to expand or export because they were doing it quite comfortably as things are. I am not making this up.

Cultural change needs to start in our schools and business faculties. I am on the board of a technology university in Malaysia. Their student surveys show that most graduates want to start their own businesses. Not surprisingly the importance of being entrepreneurial is built into the curriculum, along with exposure to business life survival skills.

We also need firms that focus on rewarding workplace innovation and creative problem solving. During the 2008 Review I kept asking people to nominate exemplar firms and it was depressing to watch people struggle to come up with role models. On a more positive note I applaud the recent work of the Australian Industry Group in initiating a major project with its membership around trying to reinvigorate an active discussion around innovation.

There are several smaller and resource-based economies that are doing a much better job of meeting the innovation challenge than we are. Countries as diverse as Norway and Chile are using returns on natural resource exports to create national funds to invest in diversifying and future proofing their economic base. This is all about national leadership and vision.

For me the leadership and vision challenge for Australia is simply about an agenda revolving around four things:

  1. Clear national priorities around which to focus our innovative effort, starting with areas where we do have sustainable competitive advantage or can leverage distinctive capabilities;
  2. Better “whole of government” co-ordination to build critical mass around national challenges and to support investment in cross-sectoral platform capabilities — the alternative is fragmentation of effort and disjointed, wasteful investment;
  3. Recognition that as a small country economy we must become more closely integrated within global supply chains and more adept at accessing — on the best possible terms — and deploying and adapting the 98% or more of innovation and R&D not generated here; and
  4. Recognition that, in the final analysis, it is smart, empowered, confident people who will make the difference.

Each of these areas merits an essay in its own right. We have much work to do in each area to turn things around. We need a coalition of the willing to make a difference. I will feel much more optimistic about Australia’s prospects when I no longer have to refer to overseas role models and success stories.

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27 thoughts on “Terry Cutler: the dearth and decline of innovation

  1. Apathy

    Here, Here.

    Could you put up links to the reports you have referred to

  2. Jonathan Maddox

    I commend those business owners who are happy with the results they are achieving for themselves and their workers, and who do not wish to commit their lives, their souls and their wealth to growth for its own sake.

    If the only priority for every business was growth for growth’s sake, all businesses would have the same culture, and the world would be an extremely dull place.

    Businesses do not need to exist only for the sake of growth. They may have other purposes : to make the founders rich is often the reason for setting up a business in the first place, but it’s a legitimate choice for owners not to make profit maximisation their first priority. I understand that the directors of listed for-profit companies have a legal fiduciary duty to maximise profits, but privately-held businesses are not under the same constraint. Nor, obviously, are non-profit organisations.

    Growth is not in itself an evil and it can indeed be a positive good. But it has many possible negative consequences. To date, economic growth has always gone hand in hand with growth in resource consumption; that growth *cannot* carry on infinitely on a finite planet or in a finite universe (as some resources are not renewable and there are limits to the production of the renewable ones).

    Our end-goals should be other, better, higher things than profits. If we’re obliged to pursue economic growth at all costs just to keep pace with other resource-destroying capitalists of our finite planet, we may as well just all kill ourselves now.

  3. Scott

    Beat me to it Jonathan Maddox. To decry business people for putting lifestyle ahead of expansion and profit maximization seems a bit silly to me.

    Innovation has it’s place (especially in regards to ecological modernization) and is important if it gets us where we want to go (or gets us away from an unhappy state), but let’s not forget that it’s a means to an end, not the end itself.

  4. Joe Hoogland

    I am a small business owner with ambitions to be a manufacturer. We have plenty of product development ideas and are currently grateful recipients of an AusIndustry grant. What changes would I like to see to assist industry?
    1. stable government policies for R&D support. There seem to be program changes every couple of years. Planning product development in our case is not just a month to month process – it is considered over a 2-3 year cycle.
    2. a willingness to address innovation and productivity as a national wealth creation opportunity by politicians and media. There is too much media focus on home ownership as a path to riches – this creates zero national wealth. I remember clearly when Beazley released Knowledge Nation in 1999 it was jeered off the public stage by a ridiculous focus on one diagram, yet take a look at the recommendations today and they are still valid. Neither politicians nor media had the courage to address the thoughtful proposals.
    3. banks willing to invest in business. My banker doesn’t lend to my business based on the business risk, it has mortgages over the assets of the directors. The reality is that if I take a risk to develop a new product and that project fails, I lose everything; personal assets, business assets, everything. The current controversy over bank profitability is all about housing, nothing about business.
    4. business organisations such as Business SA have a narrow and short term focus and add little to key debates. Witness the mining tax response here in SA by the business lobby groups – predictable, hysterical, short term, adding zero value to the discussion.
    5. tax policies which encourage idea development rather than speculation. It doesn’t make sense to me to allow negative gearing on housing speculation, yet I can’t offset my business loss against my personal income.

    I could go on but who’s listening?

  5. Gavin Moodie

    The Cutler review was poorly managed, the report was a massive 228 pages, it lacked a clear and persuasive argument or thesis, Cutler & Company Pty Ltd claimed copyright in what was meant to be a government report and the document was locked so it is impossible to copy parts of the text.

    Cutler is fortunate that Minister Carr was able to salvage as much as he did from the review.

  6. the man on the clapham omnibus

    Having worked in a ‘knowledge’ nation in Sweden for several years their focus on innovation, education and lifelong learning leaves Australia for dead. They are also extremely export focussed to go the high road of value added products and services.

    We also lose a good deal of our intellectual brainpower overseas because innovative jobs and R&D does not exist in any meaningful capacity. Talking to PHD students here, they are at a loss as to their job opportunities once they finish, whereas in Germany and Sweden they are pursued by headhunters and highly desirable.

    The seed and VC funds available in the US don’t seem to exist in Australia, perhaps as some posters suggest the financial structures, tax treatment and regulations do not support innovation or startup finance?

    I also notice a difference in corporate culture and management that may be telling. If we follow the U.S lead and head down to following the quarterly reporting cycle and promote the command and control, kiss up , kick down management style there is no surer way to kill innovation of creative knowledge workers who require autonomy, mastery of skills and purpose to prosper.

    @Joe Hoogland

    Would the Entrepreneurs tax offset help?

    http://www.ato.gov.au/businesses/content.asp?doc=/content/00149627.htm

  7. wilful

    At a recent forum I actually heard people saying they didn’t need to expand or export because they were doing it quite comfortably as things are.

    hear hear!

  8. masseyp

    Well said, if the politicians and bureaucrats actually ventured out here and experienced life as an innovator, those that survived more than 2 weeks might have your perspective…this is the problem!

  9. Bigad

    “At a recent forum I actually heard people saying they didn’t need to expand or export because they were doing it quite comfortably as things are.”

    Sounds just peachy! Trouble is, these people almost always find themselves dead and buried within 5-10 yrs of saying this sort of thing, and acting like they have been robbed and the guvvamint shoulda dun sumfink!!!

  10. PaulF

    Great post. Our current batch of politicians seem to be devoid of innovation themselves, let alone being able to create a framework/opportunity to help other Australians innovate.

    When the leading slogan of the opposition is about “stopping the boats” and a couple of thousand illegal immigrants is of key national importance, then you have to think somewhere along the line our political discourse took a wrong turn.

    Both sides are the same, interested in scoring political points and using nasty ways of doing it. There are the occasional gems in there, like Penny Wong and Malcolm Turnbull, who seem to be mostly rational and can argue policy. But ideologues like Abbott and Gillard have taken control. They focus on whatever earns political points and miss these larger topics.

    When a survey/poll or focus groups tells them to back off on a topic they will, that’s why the last election was devoid of genuine constructive debate and why it was all about stopping boats and stopping debt (despite Aust having debt of 6% GDP, very low)

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