Home > Reports and submissions > 1997

SUBMISSION TO THE REVIEW OF BUSINESS PROGRAMS
17 February 1997

1. Introduction

Innovation involving research and development and the exploitation of science and technology will be central to international competitiveness, particularly as Australia improves its work, management and marketing practices towards world-best practice. Science and technology are also essential components for human health, a sustainable environment, and the nation's security and standing in the world.

The current trend towards short-term decision-making risks under-performance of research and development. Governments of developed and developing countries have recognised that they must support the whole continuum of research from basic research to commercial development. Without government support in various forms, national economies under-perform in research and development, so limiting the national capacity to innovate.

2. Market failure and spillover benefits

The argument for government intervention to stimulate business research and development rests on the concept of "market failure" which occurs when the parties conducting research cannot capture its full benefit, thus limiting their research and development investments and, as a result, the benefit to third parties. This role for government is widely acknowledged throughout the OECD as detailed in a recent report (1). Incentives to stimulate private sector research spending are a significant element of technology and innovation policy.

For example, in 1993 the US Government decided to transfer about 10% of the very large government expenditure on defence research and development to support civilian research and development. The objective is to capture more benefit for the USA from the very substantial investment of the US Government in basic research. More funds are being made available to promote closer interaction between the universities, government laboratories and industry.

An important component of Australia's industrial research and development effort is the research of local subsidiaries of large multinational corporations. Traditional attitudes about all research and development having to be done in huge facilities close to head office are changing. Australia is increasingly being seen as a low-cost research and development provider of excellence by some of these companies. An encouraging and consistent attitude towards multinationals willing to invest in local research and development is advised. The highly successful Factor (f) scheme for the pharmaceutical industry is one example.

The Factor (f) scheme has been a significant element in the increased momentum of the pharmaceutical industry in Australia. During the last few years this industry has achieved an impressive increase in its exports, in its research and development and in its capital investment. A strong pharmaceutical industry in Australia not only has benefits in terms of contributing to better health outcomes but also is important to the development and strengthening of pharmacological, pharmaceutical and chemical research and development in Australia. Australia has strengths in its research base relating to the pharmaceutical industry. The Academy is also concerned that absence of a Factor (f) type scheme will seriously threaten a key source of funds for Australia's scientific research community at a time when research funding from other directions is under pressure.

Benefits of this type of scheme include increasing the commercial focus of Australia's research community, providing employment opportunities for highly skilled research scientists and thereby generating a greater return to Australia from the public investment in the education of its medical scientists and in the provision of medical research facilities. The Academy prepared a submission to the Industry Commission Review of the Pharmaceutical Industry in 1995. A copy of the submission is enclosed as the issues are relevant to this study.

The December 1996 National Science and Industry Forum report on Enhancing Australian chemical manufacture: reversing the chemical discusses a similar challenge to policy in another industry.

3. Basic and Strategic Research

It is vital for Government to maintain a strong basic and strategic research effort in the universities and government research agencies both for research outcomes and for research training of scientists. It is also essential to maintaining awareness of advances in technology needed for technological innovation in industry, in the national interest. A strong national effort in basic and strategic research enables Australian researchers to maintain contact with the world research community and gain knowledge of overseas developments in research, in advance of publication, and early indications of advances in technologies.

Research of international standing in a university is essential for the training of graduate students to the high standards required to meet the future skills demanded by the public and the private sector.

It should be stressed that by performing 2% of the world's research, Australia gains access to much of the other 98%, provided that our researchers are able to work at the forefront.

Most of our basic and strategic research is performed in the universities, CSIRO and the research institutes. The plurality of funding sources supporting their work, including the Australian Research Council, Commonwealth direct funding, the National Health and Medical Research Council, Departmental and industry funds, is an essential contributor to Australia's success in this research. Government policy should be to enhance our existing performance while fostering linkages to the application of knowledge and skills in industry and government.

The declining infrastructure of our publicly-funded research effort, and the diminished career prospects of our best young researchers, threaten the capacity of our basic and strategic research to support our economic and policy needs.

CRC Scheme

The Cooperative Research Centres Scheme is a most important Government initiative to strengthen cooperation between universities, government research agencies and industry or other users of research results. Another objective of the scheme is to achieve critical mass of research resources for leading edge research in areas of national importance.

The Academy strongly supports the CRC Scheme as an effective mechanism to promote greater research networking, enhance linkages between universities, government research agencies and industry and improve the commercialisation of research results.

The CRC program is changing the culture of researchers and their institutions. Researchers and their students are benefiting from interaction which should lead in the future to a greater mobility of scientists and engineers between the public and private sectors.

In order not to inhibit increased interaction of industry with the existing CRCs, either as new partners or by contracting research and development, it is essential to maintain a research and development taxation concession for industry contributions to CRCs.

The research awards of students should not be taxed if the students projects are carried out in collaboration with industry partners or are related to industry priorities.

4. Industry's R&D needs

It is generally considered that the main weakness in the innovation system in Australia is the low level of research and development performed in the private sector, work and management practices which are below world-best practice and the shortage of venture capital for innovative start-up companies.

Venture Capital

Start-up companies and many small companies experience difficulties in obtaining venture capital. Financial institutions, including insurance companies and superannuation funds, are generally reluctant to provide capital to small companies which lack a track record of success.

High technology companies with new technology or a new competitive product pose particular problems for the financial institutions which lack either the ability or the experience to assess the technology. There is scope for the establishment of more groups consisting of technical and business planning expertise who are able to make objective assessments and provide advice to financial institutions, including the superannuation funds.

The Review should address the shortage of risk capital and the reluctance of superannuation funds to invest even a small percentage of their funds in high technology ventures.

Tax incentives versus grants

The Academy considers tax incentives as a means of stimulating research and development spending offer several advantages compared to subsidies or grants assistance programs, such as

• less interference in the marketplace, which allows private-sector decision makers to retain autonomy. They do not create artificial markets because firms are free to respond to real demand as opposed to government-created demand
• less paperwork and fewer layers of bureaucracy compared to other incentives. Also, a policy that follows from tax incentives is for the most part more predictable and more stable than one that requires periodic appropriations and is subject to legislative change
• avoiding the need to set nebulous and detailed requirements for receiving assistance

The decision to reduce the 150% tax concession for research and development to 125% means that businesses face greater uncertainty. Any scheme needs to become part of the "fiscal furniture" if it is to succeed. Making changes undermines confidence and certainty.

The recent Price Waterhouse Survey suggests 50% of companies surveyed will reduce their research and development by 20% because of the changes to research and development arrangements.

It is unfortunate that the 150% tax deduction has been reduced as largely through this and other government-backed schemes, Australia had begun to redress its traditional imbalance between fundamental and applied research. Industrial research and development has recently been increasing fairly substantially, although from a small base, as have Australian exports based on high technology. To jeopardize this seems imprudent.

Syndication has been replaced by a new "START" initiative to provide grants, loans and interest-rate subsidies for high-risk research and high research and development spending. Whether this will fill the gap remains to be seen. It is clear, however, that the sums foreseen for Start are much smaller than those saved on syndication. The scheme will also take some time to get going, and in the meantime much momentum will be lost.

Innovation in a global context

Australia can derive benefit from technological innovation without starting new industries in all cases. Innovations backed with patents can become the basis of profitable deals with global companies.

5. Research and Innovation Policy

There is a need for an overall Government policy for research and development, and the setting of broad national priorities for Government-funded research and development over the next decade. The broad priorities for basic and strategic research should be aligned better with national goals and priorities. An important criterion to be considered in setting priorities is the ability of Australia to capture the benefit from the research. Much of the basic and strategic research should underpin the applied research of the private sector or be related to national interest areas, such as the environment or health.

Large or medium firms with substantial research and development establishments are able to maintain an awareness of the technological strengths of their global competitors. They recognise the need for continuous incremental improvement with step-changes in order to remain competitive. These companies benefit from access to the infrastructure and expertise in the universities and government research agencies in appropriate areas of basic and strategic research. They benefit from the training of graduate students and that training itself benefits from the interaction with companies. Industry could have a role in assisting the expansion of research areas in some of the newer universities.

Smaller firms with minimal research and development often require technological assistance or information in their efforts to achieve incremental improvement in their product range. The survey by McKinsey and Company for the CSIRO found that publicly funded research groups were not seen as meeting the needs of the small firms.

Innovative hi-tech firms developing new products or services should benefit from better access to the infrastructure of universities and government research agencies.

Besides their role in industry innovation and competitiveness, research and development are important for the development of management strategies for the protection of the environment, including land and water resources, fauna and flora and the maintenance of biodiversity. Many of the environmental problems are unique to Australia, and solutions cannot be imported directly.

Australia must also maintain a strong medical research and development effort.

6. Conclusions

Australia should note the policies of its economic peers and competitors and strengthen the programs that support technological innovation. In particular the 150% tax deduction for research and development expenditure should be restored or replaced by an equally beneficial tax credit scheme of the kind available in some other advanced economies, and the Factor (f) scheme maintained.

We should also set goals for industry such as the establishment of a pharmaceutical and a chemical industry and regularly review progress towards those goals. Support for innovation is an essential ingredient of such a program.

The publicly-funded efforts in basic and strategic research need to be enhanced as an essential support for a national industry policy based on innovation, and to support other areas of national policy.