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Dr Terry CutlerAustralia

Lima, April 2008(Background paper for CEPAL’s project on alliances for export development)

Australian Innovation Policy and Public-Private Alliances:“Where we were and where we are going".

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Caveat emptor! What shapes my perspectives and observations on this subject ?

¶ Career has straddled corporate and public sector roles

- have sat on both sides of the fence!

¶ Work extensively internationally, especially in Asia

- so interested in differences across national innovation systems - no “one size fits all model”

¶ Background in technology, but also worked extensively in creative industries and their role in innovation

- so believe that a national innovation strategy is more than just a science and technology policy

¶ Currently chairing Australian Government major review of innovation policy for Australia

- so obviously don’t believe we can ever stand still

Dr Terry Cutler

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The pitfalls around country case studies

There is also as much to be learned from policy failures (or mixed results) as from obviously success outcomes

Dr Terry Cutler

For one’s own country:

tendency to overstate the country’s weaknesses and challenges,and to understate strengths and embedded advantages

and

to over-emphasise the short-run at the expense of the long run.

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GREAT DESTINATIONPity about no road!

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What is Innovation?

Innovation = creating value through doing something in a novel way

= ex post, so we need ex ante understandings of the dynamics of socio-economic change

Innovating = creative problem solving

Being innovative = creative problem-solving in order to create value

Dr Terry Cutler

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Originationor adaptation

Deployment

Diffusion andabsorption

Source: Terry Cutler 2007

KNOWLEDGEPRODUCTION

KNOWLEDGEDIFFUSION

KNOWLEDGEAPPLICATION

entrepreneurialism

productivity;competitiveness

creativity;

problem solving

Innovation is a virtuous cycle for socio-economic change and development.

There has been a lack of coherent theories of innovation to underpin development policies

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Creativity-the generation of ideas and inventionsRequires fresh thinking and inventiveness

Public - private linkages for sourcing relevant ideas - needs two way awareness of opportunities and needs

Entrepreneurship andcommercialisation-linking good ideas to the right market opportunities

(Good ideas or patents without customersor users are worth nothing)

Diffusion and adaptation-rolling out high potential innovations across industry or the communityCapturing national benefit

Requires entrepreneurs and risk taking

Support for education and research environments.

Industry should lead, but governments should help reduce barriers to success

Firm-to-firm and firm-to-research provider linkages become increasingly important in an era of open innovation and “markets for innovation”

There are thus three facets to innovation - each needs balanced attention within a national innovation system

Government can assist with awareness and extension programmes - especially for SMEs;

Export facilitation

Dr Terry Cutler

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The triple helix of innovation policy:

(i) market-oriented innovation to increase productivity and improve competitiveness;

(ii) innovations and changes in public policies and service delivery around the production of public goods;

and

(iii) innovations and changes to address societal and environmental aspirations and challenges, and the mobilisation of private and public sector capabilities around these challenges.

Dr Terry Cutler

Dr Terry Cutler

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Communityservice

providers

firms researchproviders

Government

INFRASTRUCTURE

SKILLS

GOVERNANCE

CAPITAL

REGULATION

TAXATION

NATIONAL CHALLENGES

NATIONAL PRIORITIES

PEOPLE COMMUNITY

Innovation occurs within a complex ecosystem of actors, and relationships …. No one innovates in isolation!

Dr Terry Cutler

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• The elements of innovation involve both ‘stock’ and ‘flows’: stocks of knowledge and capability, and the information flows of the innovation capital around these.

• We need to invest in the capabilities required around each element of the innovation system, as well as investing in the linkages and flows between them.

• Resources applied to innovation should be regarded as investment in the future, not as expenditure.

Innovation system = the stocks and flows around innovation

Dr Terry Cutler

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Five key functions within an innovation system

• identification of opportunities

• creating capabilities

• managing risk and uncertainty

• building and maintaining infrastructures

• mobilising resources

Dr Terry Cutler

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Systemic challenges within an innovation system(areas for potential system failure, over and above market failure)

1. Inadequate infrastructure provision

2. Inadequate institutional development and evolution.

3. Lack of skills and learning problems (eg absorptive capacity).

4. Structural adjustment issues and transitional problems in economic change (eg technology lock-in).

5. Networking and collaboration problems (loose versus tight).

6. Heterogeneity and diversification versus specialisation.

7. Imbalances within and across the innovation system (eg. forgoing leverage - in Australia, the parts are better than the whole!)

Dr Terry Cutler

¶ The tyranny of distance¶ The tyranny of low density (sparcity) ¶ The impact of trade gravity¶ The opportunities from natural endowments (seas, space, land, resources, biodiversity, isolation)¶ The challenges of federated, distributed systems

Putting Australia into context - the innovation challenge of a small economy

Dr Terry Cutler

Strong GDP growth

But … all fuelled by commodities boom.

Challenged agricultural sector - 10 year drought, fuelling longer term

climate change fears

Reasonable productivity growth since mid-1980s (impact of micro-economic reform agenda)*

AUSTRALIA’S ECONOMIC PERFORMANCE - SCORECARD

highly skewed exporting base

Low unemployment, with skill shortages

High household debt,and housing affordability challenge

Inflationary pressures

Low trade intensity across economy as whole (despite having doubled over past three decades-

a function of the scale of the services sector?)

National savings through pension fund scheme

*The sustained productivity gains in the agricultural sector have been more long-run

Dr Terry Cutler

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Analysts often forget that technological innovation is especially important for resource based economies

“Most of Australia’s massive deposits of minerals were of no use until new technology liberated them. In the last two centuries Australia has depended as much on the rise of new technology as on its own soil, grasslands, minerals and other resources”

Geoffrey Blainey, A Shorter History of Australia, p.24

Dr Terry Cutler

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EVOLUTION OF AUSTRALIA’S ECONOMIC DEVELOPMENT

19th century

Superior economic performance to US - off back of mining (gold) and wool

1900-19201901 - Institution building around new Commonwealth of Australia; key role for government enterprises; 1914-1918 war - Disruption to civil imports; lack of local defence materiels

1920-1940 Push for greater local industrial self sufficiency, defence industry and public health capabilities

1940-1960 Sunset of Imperial influence: shift from UK to US alliance. Post war reconstruction, industrialisation: “nation building” projects - including discussion of nuclear futures (off uranium resources).

1960-1980 Manufacturing stagnates behind protectionist barriers; beginning of second mining boom (iron; coal; uranium)

1980-2000 Internationalisation of economy (with reduction of tariffs and floating of currency); programmes for structural adjustment and micro-economic reform; privatisation of government enterprises. Focus on new ICT and biotech technologies. Strong productivity growth.

2000 - New challenges from global warming, energy futures, terrorism and preventable diseases focus new national priorities; emergence of competition from BRIC economies; China now key trading partner

Dr Terry Cutler

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Some special innovation challenges for Australia:

Industry structure dominated by a very small number of big companies (many MNCs) and a long tail of SMEs

Previously protected manufacturing sector now at risk of being hollowed out by North Asia

Windfall mineral export earnings subject to external factors outside our control (limited counter-cyclical safety nets)

Services sector traditionally very domestically focused (with oligopolistic industry structures in telecommunications, banking, retail …. )

Domestically focused services sector now facing global competition (eg India)

Ageing population - increased health spending and future skill shortages

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1900-1920 1920-1940 1940-1960 1960-1980 1980-2000 2000 -

1926CSIRO

1936NHMRCRR&DCs1930s

ANSTO

R&D TaxConcession

CRCs

IIF

NCCAustrade

ProductivityCommissionGovtenterprises

AMC

Establishment

Change or major review

Termination

Tariff Board, 1928

Corporatisation De-regulation & privatisation

Statutory incorporation

Industries Assistance Commission

THE INSTITUTIONAL EVOLUTION OF AUSTRALIAN DEVELOPMENT AGENCIES

1953

Aust Research Grants Commission, 1965

ARC

Commonwealth Serum Laboratories

CSL Pty Ltd

ASTEC

Not comprehensive

Dr Terry Cutler

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1900-1920 1920-1940 1940-1960 1960-1980 1980-2000 2000 -

1926CSIRO

1936NHMRCRR&DCs1930s

ANSTO

R&D TaxConcession

CRCs

IIF

NCCAustrade

ProductivityCommissionGovtenterprises

AMC

Establishment

Change or major review

Termination

Tariff Board, 1928

Corporatisation De-regulation & privatisation

Statutory incorporation

Industries Assistance Commission

THE INSTITUTIONAL EVOLUTION OF AUSTRALIAN DEVELOPMENT AGENCIES

1953

Aust Research Grants Commission, 1965

ARC

Commonwealth Serum Laboratories

CSL Pty Ltd

ASTEC

Not comprehensive

Dr Terry Cutler

A lot of the institutions date back a long time, albeit within an evolving framework;

We tend to forget abandoned institutions or programmes;

Many aspects of the current framework hark back to a verydifferent industrial world - most current programmes wereconceived in a pre-Interent, pe-digital era!

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Prime Minister’s Science, Innovation and Engineering CouncilNational Departments*

Agriculture,Fisheries &

Forestry

Industry, Tourism & Resources

Environment &

Water Resources

Communications,IT & Arts

Health &Ageing

Education, Science & Training

Defence TreasuryForeign Affairs

& Trade

Rural R&DCorporations

AusIndustry

IndustryR&D Board

Industry Innovation

Funds

InvestAustralia

Auto programmes

(ACIS)

PharmaProgrammes

(P3)

Bureau ofMeteorology

GeosciencesAustralia

NICTA

BITSprogramme

COMETprogramme

National Health

& Medical ResearchCouncil

AustralianResearchCouncil

CSIRO

ANSTO

AIMS

CRCs

DSTO

Universityfunding

formulae

NationalCompetition

Council

ProductivityCommission

Aust Consumer& CompetitionCommission

ForeignInvestment

Review Board

Dept of Prime Minister& Cabinet

Austrade

Council of Australian Governments: Federal and State co-ordination

State Administrations

Departments of Primary

Industry

Departmentsof Innovation,

Industry & State Development

Departmentsof the

Environment

For eg: CIO, “Multimedia Victoria”,Film Victoria

Health Services

Hospitals

Education

Universities

Treasuries Trade promotion;Investmentattraction

Emergencyservices

* This does not purport to be a comprehensive mapping

EMDG

EFIC

Aust’n National University

Legend:Green: Direct Departmental or Ministerial controlRed: Statutory or ‘arms length’ agencyBlue: programmes under Departmental budgets As at 2007

Dr Terry Cutler

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Many Australian initiatives have focused onstrengthening public-private linkages - 4 examples

Example 1: Venture Capital

The problem: a systemic failure with VC forearly stage firms

Mid 1990s: Innovation Investment Funds scheme• Licensing of new arms-length private VCs

• Began with 2:1 $ incentive

• Returns to government capped (upside to VC)

• Important aim to attract and build a cadre of skilled professional managers

• US experience (see graph) shows that this is not a short-term challenge

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Many Australian initiatives built around strengthening public-private linkages - 4 examples

Example 2: Co-operative Research Centres (CRCs)

The problem: Perception that universities and research institutes were not sufficiently linked to industry

Early 1990s to date: Co-operative Research Centres

• Solicit competitive bids from industry and research consortia for matching funds from government

• 7 year funding, with opportunity to re-bid

• Over 70 CRCs currently in place

• Recent review demonstrated significant RoI to country

• Has promoted new collaborative culture

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Many Australian initiatives built around strengthening public-private linkages - 4 examples

Example 3: Rural R&D Corporations

In 1989 Government legislated to consolidate special rural R&D schemesthat date back to the 1930s.

Model: Industry levies on turnover matched by government funds (from 0.5 to 1:1)

Industry based Boards manage disbursement of funds to priority researchareas for the industry.

Complements similar schemes for rural industry promotion and marketing

Has facilitated highly networked industry clusters in wool, grains, and wine etc

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Many Australian initiatives built around strengthening public-private linkages - 4 examples

Example 4: Australian Innovation Exchange Network (IXC)

Problem: Poor information markets linking organisations with capabilities and organisations with strategic needs and capability requirements.

IXC pilot in 2004 - now fully established in 2006

Model of trusted intermediaries as innovation brokers between research providers and firms, and between MNCs and SMEs.

The Network of IXC Intermediaries work inside multiple member organisations,under a unique confidential structure, to search for and create connections for business growth. Confidential information is not seen by other members. When an opportunity is found, IXC Intermediaries then help members engage directly through a step-wise disclosure process.

International affiliates being established (UK the first) and now our view is toevolve to an IXC International this year.

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An innovation future for Australian industry

Australia’s new government has laid out a ten point framework for its innovation policywhich addresses many of the identified challenges going ahead:

1. Build a culture of innovation and new ideas by strengthening investment increativity and knowledge generation.

2. Focus incentives for business R&D to promote global competitiveness,delivering the best outcomes for exports and economic growth.

3. Accelerate the take up of new technology, so Australian firms can access thebest ideas from around Australia and the rest of the world.

4. Make Australia’s innovation system truly international, by supporting partnerships, collaboration and foreign investment in Australian R&D.

5. Use government procurement to support innovative Australian firms.

Dr Terry Cutler

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The ten point framework for Australian innovation policy:

6. … develop multiple pathways for industry to access the knowledge andexpertise in universities and research agencies.

7. Strengthen the skill base for innovation, including in maths, science andengineering, and professional training for firms to manage innovation.

8. Develop and implement a set of national innovation priorities

9. Strengthen the governance of the national innovation system to supporthigher expectations of government agencies and industry.

10. Review the bewildering array of government innovation and industryassistance programs to reduce duplication and improve effectiveness.

Dr Terry Cutler

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Dr Terry Cutler

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Beginning with seven deceptively simply questions …1. Can we imagine a better world?

Are we generating fresh ideas and pushing the boundaries of knowledge?

2. How do we solve the big challenges Australia faces? 3. Can we do everyday things better?

Creative problem solving everywhere, and incremental innovation.

4. How do we make better use of available tools and technologies?

• How do we make it easy for people to adapt and use tools or ideas in new ways?

2. How do we better build and nurture human capital? 3. How might Australia, as a small country, prioritise its

innovation efforts?

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Proposing national priorities for innovation: we can’t be good at everything

Some starting points ….

1. Start from leveraging Australia’s natural endowments or built strengths

2. Look to areas where there might be a distinctively Australian advantage in developing solutions to globally relevant challenges or markets

3. Identify opportunities through innovation to transform and reinvent existing industries and service delivery for competitiveness

4. Address the small country challenge in internationalising innovation

5. Maximising impact and national benefit from the supporting investments in national capabilities, facilities and innovation infrastructure

Dr Terry Cutler

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Creating or transforming

industries

Solving major national and

global challenges

Delivering community solutions

Delivering incremental

innovation for industry

Advancing frontier science and knowledge

Science intensive innovation

R&D intensive innovation

Knowledge intensive innovation

5 discrete roles within a national innovation system:both governments and business have a direct stake

Industry oriented Society oriented(Public good research andinnovation)

Dr Terry Cutler

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Creating or transforming

industries

Solving major national and

global challengesProviding

community solutions

Delivering incremental

innovation for industry

Advancing frontier science and knowledge

Nationalpolicies and priorities

Science intensive innovation

R&D intensive innovation

Knowledge intensive innovation

facilities and infrastructureregulation and institutions

education and training

Capability building

Promoting a clear framework for national investment and decision making (and for aligning the objectives and incentives of partners) Dr Terry Cutler

Developing the different roles within a national innovation systemManaging an innovation portfolio that encompasses the spectrum of activity from breakthrough science through to incremental innovation, all underpinned by crucial national facilities and capability building

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Skills, experience and know-how

infrastructure(laboratories, equipment …)

collaborations andrelationships

Capability is ….

CAPABILITY

Investing in missions and capabilities to address national priorities.

Dr Terry Cutler

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CAPABILITIES

PRIORITYactions

PRIORITYNATIONAL

OUTCOMES

‘enduring’ - but evolving

‘enduring’ - but evolving

• externality• focus for impact

• structural• long time scales• ‘irreversible’ decisions• capabilities for future demands • delivery path to impact

• reversible decisions

goals

impact

Investing in missions and capabilities to address national priorities …Matrix management - matching the right capabilities to priority goals

Dr Terry Cutler

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Some key learnings from our experiences

¶ Important to have mechanisms for promoting a “whole of country” framework - a proactive national innovation system

¶ A proactive approach is facilitated by articulating national priorities and by having an explicit ‘portfolio’ investment model for a national innovation system

¶ Public-private partnerships in innovation will vary by the objective and focus of the innovation activity - there is no “one size fits all” model or approach

¶ Public innovation initiatives should emphasise:- capability building- clarity of national purpose - strategic leadership- co-investment (to leverage funds and to strengthen industry linkages)- a long-term view of investing in the future

¶ Key government role in providing innovation infrastructure and building capability

¶ We must pursue local innovation within a global context

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We are not in the business of reinventing the wheel…