«International comparisons of Australian business innovation. A model of the relationship between total factor productivity and different types of innovation»

Australian Government: Department of Industry. The Australian Innovation System Report 2014

«International comparisons of Australian business innovation

»Broad international comparisons of innovation by sector are limited by a lack of finely disaggregated data. The ABS and other national statistical agencies do not collect sufficient surveys of businesses to allow reliable subsectoral averages, and are no longer able to provide sectoral data on innovation novelty. For example, although we may know what proportion of businesses in the manufacturing division are innovation-active, we can’t tell how innovative large businesses in basic chemical manufacturing are, or how novel those innovations are relative to other countries. Limited country by sector innovation data are presented below.

»Most OECD countries collect three-year aggregates of business innovation activity, while Australia reports annual data. The likely consequence is that Australia’s innovation performance will appear lower compared to other OECD countries, such as seen in Figure 2.10. ABS analysis suggests this is not a significant effect; however, other studies using a similar definition of innovation show a much higher proportion of businesses innovating. We believe that this requires further investigation.

»Australia businesses show variable performance on innovation and related indicators compared to other OECD countries (Table 2.1).

»Australian SMEs are highly innovative by OECD standards, ranked 5th out of 29 OECD countries (Figure 2.10). This is a positive result for innovationdriven domestic competitiveness, given that SMEs account for 56% of industry value added. However, SMEs account for only 34% of investment in R&D and approximately 5% of direct exports. In contrast, our 4000 largest firms, which account for 66% of investment in R&D, 44% of industry value added and around 95% of exports, are relatively poorly ranked at 21st out of 29 OECD countries (Figure 2.10).

»Australian manufacturing is ranked 4th in the OECD on the proportion of innovative businesses (Figure A.8). It is important to remember that cross-country and cross-sectoral comparisons typically involve comparing averages for a sector. The high proportion of SME innovation (Figure 2.10) translates into the relatively highly ranked manufacturing and service sectors innovation because Australian averages are dominated by SME results. Previous analysis shows that small and medium-sized Australian manufacturers have relatively high levels of innovation (ranked 2nd and 5th) compared with their EU counterparts (see Box 2.4 for a case study).

»Large Australian manufacturers, by contrast, ranked 20th against 30 EU countries. The large proportion of SMEs in manufacturing in Australia may be a barrier to the development of innovative projects as they struggle to fund R&D.Figure A.8 does not immediately suggest this as a major impediment to innovation per se. However, this depends on your perspective of innovation. More collaborative, new-to-market innovation may drive more participation in global value chains where, in general, Australian manufacturing rates poorly by OECD standards.

A model of the relationship between total factor productivity and different types of innovation

»Innovations can disrupt competitive markets with radically new goods and services, or make incremental improvements. Both types of innovation can lift productivity. Experimental data suggest that innovation investments and their spill over benefits could account for up to 62% of labour productivity growth in Australia from 1994–95 to 2005–06. Higher productivity in turn gives businesses a competitive advantage in the market.

»Market disruption comes from new goods or services, and business model innovation. Firms that deliver highly novel new-to-market goods and services create temporary monopolies that drive up profits for the firm. A competitive edge requires the production and marketing of new goods and services that are unique, not easily reproduced and that create value to the customer or capture value for the firm (Figure 1.1).

»In the case of more incremental process and organisational innovation, the firm gets a cost advantage over its competitors by using resource inputs more efficiently (Figure 1.1). This allows a business to gain a higher markup at the prevailing market price, or to use a combination of lower price and higher mark-up than its competitors to gain market share and higher profit margins.

»Competitive advantage at the firm level has been defined as the ‘value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering either lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price’. In this way, innovation, productivity and competitive advantage are linked.

»“Productivity is the ratio of a firm’s sectors or economy’s outputs to inputs. There are a number of ways to measure productivity. Labour productivity is where the only input being considered is labour (e.g. hours worked). Total factor productivity, or multifactor productivity, typically uses just labour and capital inputs. The KLEMS total factor productivity uses a more comprehensive account of inputs relating gross output to primary (capital and labour) and intermediate inputs (energy, materials, and other intermediate goods and services). Productivity growth occurs when growth in industry outputs exceeds growth in inputs.”

»Just as effective innovation can be a source of competitive advantage to a business, a high-performing innovation system can be a source of competitive advantage to the Australian economy. Research shows that in competitive markets innovative businesses out-compete other businesses by achieving higher rates of firm survival and growth in employment and profits. Uncompetitive firms fail and their resources are re-allocated to these more productive and profitable business, resulting in allocative efficiency and, hence, increasing aggregate productivity growth across the economy.

»Exposure to international markets through export or import competition further encourages Australian businesses to continuously maintain and grow market share by being more productive. According to Lydon et al., firms with international exposure have more than double the rate of productivity growth, better management quality, and greater and more novel innovation than their domestic counterparts. Trade also exposes businesses to a much wider range of ideas and solutions. By exposing themselves to the world market, innovative businesses learn from international competitors, suppliers and customers, and bring that knowledge back to Australia. This in turn generates more innovation. International research also shows that innovation is a fundamental tool for establishing and maintaining export relationships, particularly where market churn and demand for large variations in product design is high.

»Just like productivity, innovation is not a means to an end. Wealth, health, employment, social inclusion, social equity and environmental sustainability are facilitated by innovation in its broadest sense. It is worth briefly touching on economic and social outcomes, as they will, in part, reflect past performance on innovation. Australia performs well on many economic and social outcome indicators, but often poorly on environmental performance (Table 1.1).»

Innovation Typologies
Thematic Readings

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