Innovation for the 98%

26 September 2024

Last year, I attended a tour of the Victorian Tunnelling Centre at Holmesglen TAFE. I admit I did so mainly because giant tunnels are awesome!

However, on this tour, it wasn’t just impressive technology that I got to experience, but also how that technology could be shared.

The Victorian Tunnelling Centre team uses virtual reality (VR) helmets to train new staff to work in the high‑risk tunnel environment.

I was part of a tour organised by an industry association for quarry suppliers and operators. For one participant, seeing this technology in action instantly got his neurons firing. What he saw was the potential for using VR to help customers understand how to use their new equipment.

VR is not new, but it had not penetrated that segment of the quarry industry until that evening. Imagine if that quarry supplier hadn’t taken the tour! A chance to innovate would have been lost.

Innovation spreading from top firms to other firms and other sectors is not automatic; it’s a bumpy and somewhat haphazard process. Yet, as we argue in the Productivity Commission’s five‑year ‘Productivity Inquiry’, there is much we can do to encourage the spread of innovation.

Business growth and improvement is rarely about reinventing the wheel, or coming up with that once-in-a-lifetime invention. It is about small changes that reap benefits by improving the quality or selection of goods or services available, or by reducing costs.

Only two per cent of firms in Australia will produce new-to-the-world innovation. That means that for 98 per cent of businesses, the greatest gains will be made by adopting and adapting existing innovations; however, around three in five firms aren’t innovating in even this manner.

The vast majority of innovations occur outside of Australia, and the productivity gap between ‘the best and the rest of the world’ is growing in nearly every sector, meaning that there are major gains to be had from emulating the best.

Policy to support brand-new innovation is also important, but it’s wrong to think that Australia is doomed unless it develops a new area of competitive advantage built on homegrown innovations.

Australia invests a lot in blue-sky innovation in businesses; the research and development tax incentive alone costs $3 billion per year. But encouraging the spread of innovation requires less money and much broader policy tools to target a much broader set of firms than simply the startups or high-tech manufacturers.

If most innovations come from abroad, immigration and investment policies matter a lot. Firms learn about overseas competitors’ technology by hiring their workers – Canva hiring programmers from Microsoft, or Carlton & United Breweries hiring engineers from Heineken.

Workers also bring general knowledge about technologies and practices elsewhere. The Grattan Institute and the Productivity Commission have proposed allowing employer‑sponsored migration for all high-wage roles, and reforms are underway. If an employer is willing to sponsor a skilled worker and pay a high wage, their knowledge is probably worth a lot.

Meanwhile, if an overseas firm buys an Australian firm or sets up its own, its Australian workforce learns new practices. It’s important to facilitate investment into Australia as a key conduit for innovation.

Skilled managers can recognise a useful innovation and help the firm adapt to it; yet, that skill seems to be in short supply. In a MYOB survey of 1500 small and medium‑sized firms, 59 per cent of those who adopted new digital technologies reported that the new technologies were hindering them, and 42 per cent had given up.

How can policy affect that haphazard process of finding out about innovations? This is harder, but just as important. We can use existing channels: universities could allow faculty to do more consulting, trusted intermediaries (such as industry associations and accountants) can be supported to mediate information flows, and government-funded extension services can be trialled across more sectors. The Australian Taxation Office’s benchmarking service can help firms find out whether they are missing out on new practices that others are implementing, and benchmarking may encourage managers to skill up.

Finally, with gross government spending sitting at 42 per cent of GDP, it’s particularly vital to encourage the spread of innovations that improve performance in government and government-supported services (such as health and education).

Our recent report, ‘Advances in measuring healthcare productivity’, found that our healthcare productivity has grown by an astonishing three per cent per year over the past decade – far better than productivity in commercial sectors. The sector delivered better health outcomes for patients, and most likely by quickly adopting new innovations in cancer treatment and other fields. But we don’t see a similar process of adopting overseas advances in education or aged care.

The Singaporean practice of developing high-quality curriculum materials that are rigorously tested in classrooms has not yet reached our shore. We’ve recommended a redesign of funding to encourage communication and cooperation across organisations, and to reward organisations that adopt better practices.

As the Australian Retailers Association said: ‘If you don’t see it, you can’t be inspired by it.’ I saw it in the tunnels, and it was a timely reminder that we can shine a much brighter light on the diffusion of innovation.