Study paints sobering picture of abject performance and lost opportunities for Australia in innovation and research and development

Media release

08 July 2021

Australian businesses have fallen further in the global rankings on key measures of innovation and research and development (R&D), threatening future economic prosperity and raising questions about the adequacy of existing Federal Government industry polices, a new study has found.

The study, conducted by researchers in the IPA-Deakin SME Research Centre, found that despite some positive effects from the Government’s R&D incentives system, Australian businesses lag much of the developed world on innovation and research.

"Evidence detailed in the study paints a sobering picture of mediocre performance and lost opportunities for Australia in these crucial areas," said Deakin Business School’s Professor George Tanewski.

"Australia’s mean R&D expenditure as a percentage of gross domestic product (GDP) declined from 2.18 per cent in 2010 to just 1.79 per cent in 2017 – well below the OECD average of 2.34 per cent (2000-2017), and way behind high-ranking countries such as Israel (4.94 per cent), South Korea (4.53), Taiwan (3.46), Sweden (3.32), Japan (3.28), Germany (3.13), Denmark (3.03) and the USA (2.83).

"The country’s worsening performance on business innovation and R&D has left the national economy increasingly exposed to potential downturns in other areas on which it has become highly reliant – notably high rates of immigration and booming exports to China.

"In the face of political pressure to moderate future immigration rates, and amid continuing turmoil in Australia’s political and economic relationship with China, the country faces a pressing need to diversify its sources of growth and prosperity – and ramping up the private sector’s performance on R&D is an obvious place to start."

The study findings are contained in the Small Business White Paper 2021: Post COVID Policy Options to Enhance Australia’s Innovation Capabilities. The paper is based on detailed analysis of a large body of the latest data and statistics relating to R&D activities from Australia and overseas sources.

“This White Paper, the third released by the IPA-Deakin SME Research Centre, builds on the policy success of the previous two White Papers.  The common theme is the need to urgently address Australia’s declining productivity rate through policies which can unleash the economic potential of small business and SMEs (small-medium enterprises)," said IPA chief executive, Andrew Conway.

"The study and eight policy recommendations contained in this White Paper have the ability to make a significant contribution to Australia’s road to recovery.

"However, our future prosperity relies on bold government action and the willingness to tackle our innovation deficit."

The researchers identified a lack of collaboration between the private sector and Australia’s world-class universities and other public research institutions as a key reason for Australian businesses’ worsening performance relative to their global peers, saying a wealth of expertise was "currently locked within the walls of research institutions".

They also found that the exclusion of some software developers from eligibility for local R&D incentives was potentially hampering the competitiveness of Australia’s software industry and denying wider benefits to the national economy.

Professor Tanewski warned that changes to the federal R&D Tax Incentives (R&DTI) scheme commencing in July – ostensibly intended to encourage research – would have the perverse effect of reducing incentives to small and medium companies because of interactions between R&D incentives and company tax rates.

"This would add to the incentive for smaller companies to send their R&D activities offshore to more generous jurisdictions," he said.

"Under the existing system, SMEs are entitled to R&D tax credits of 43.5 per cent. Under the new system, they will get the corporate tax rate of 25 per cent plus 18.5 per cent – which will in effect progressively reduce the benefit to SMEs as slated cuts in the SME corporate tax rate take effect.

"While decreases in the corporate tax rate will be supportive for SMEs broadly, they will increase the effective cost to them of engaging in R&D.

"We believe that eroding the value of the R&DTI for SMEs will disadvantage new, innovative businesses and provide stronger incentives for them to establish R&D operations offshore.”

Despite their criticisms, the researchers found Australia’s existing R&D incentives system had some strong and positive features and have made a series of recommendations focusing on potential enhancements to the system "at its margin", rather than its core.

Some of these enhancements include introducing a small business premium to the R&DTI for research conducted in collaboration with Australia’s world-class research institutions and implementing quarterly reimbursement of R&D offsets, allowing SMEs to more rapidly reinvest offsets in further R&D expenditures.

A copy of the Small Business White Paper 2021: Post COVID Policy Options to Enhance Australia’s Innovation Capabilities can be downloaded here.

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