Australia’s long run of economic growth from the early 1990s to early 2020 inspired much boasting by incumbent politicians.
But behind the hubris and headlines lies a less flattering story — about Australia riding a wave of dumb luck, with exports to China and relatively high levels of immigration masking mundane economic performance.
The most obvious expression of this is investment by Australia’s private sector — overwhelmingly made up of small-to-medium size (SME) enterprises — in innovation.
The sector’s expenditure on research & development — measured as a percentage of GDP — is middling at best. After increasing to match the OECD average of about 2.2% in 2008, it slipped to less than 1.8% in 2017. This compares with more than 4% for the two top-ranking nations, Israel and South Korea, and more than 3% for Taiwan, Sweden, Japan and Germany.
But with some fine-tuning of policies and incentives in this area, our analysis suggests the federal government could turn around Australia’s performance on research and development within a decade.
We can’t rely on China and immigration
Australia’s ability to keep relying on booming Chinese demand for minerals and the stimulatory effect of high immigration rates pushing up GDP is unclear at best.
Though exports to China are at a record high, this is overwhelmingly due to demand from Chinese steel makers for iron ore, and to a lesser extent wool. By most other measures, however, our relationship with China is troubled.
Housing unaffordability and congestion in our major cities means there will be political pressure to moderate post-COVID immigration rates.
Of all the alternative ways to improve our economic security, the potential of small and medium size businesses to innovate stands out.
Since 2011 the federal government’s primary mechanism to encourage companies to invest in innovation has been its research and development tax incentive scheme. This provides tax offsets for eligible R&D activities. It has some solid features, in common with schemes in other countries. But the statistics suggest it has not delivered.
Business R&D expenditure as a percentage of GDP
- ^ the OECD average (dx.doi.org)
- ^ our analysis (www.deakin.edu.au)
- ^ To become an innovation nation, we really need to think smaller (theconversation.com)
- ^ a record high (www.theaustralian.com.au)
- ^ Morrison's dilemma: Australia needs a dual strategy for its trade relationship with China (theconversation.com)
- ^ research and development tax incentive scheme (www.ato.gov.au)
- ^ 1.79% in 2017 (data.oecd.org)
- ^ Want more research commercialisation? Then remove the barriers and give academics real incentives to do it (theconversation.com)
- ^ in our report (www.deakin.edu.au)
Authors: George A. Tanewski, Professor in Accounting, Deakin University