Address to the 2013 Kickstarter Conference

February 20, 2013

One of the big questions we face in this country is why a non-deferential culture such as Australia does not feel that it is doing a good enough job at innovation, and does not feel that it is doing sufficiently well at commercialising our R&D. That is a real challenge because we have most of the ingredients that you would need to do that.

Just generally in terms of innovation, and I know many of you are involved in start-ups, or would like to be involved in start-ups, can I just say that the critical learning from my experience is to be thoroughly resilient.

Do not regard a failure as anything other than a learning experience. There is a tendency to imagine that if an investment fails or if a project fails then that’s some kind of dreadful rejection or judgement on yourself, and it absolutely isn’t.

The critical lesson in innovation is to keep on innovating, and to keep on trying something else. You learn so much more from projects that do not succeed than you  learn from projects that do succeed. And that applies in every field, not just in tech.

And the reason for that is when something works, everyone is too busy celebrating to actually go back and ask why did it work?

But when it fails, often there is appropriately something of a post-mortem and you can actually learn something from it.

The other critical thing of course is to be thoroughly, and really remorselessly open-minded. We are living in a period of enormous change. The velocity of change has never been as great as it is at the present time, at least in my view. We can debate that later, if you like.

And it’s critical if you are making decisions and doing business in uncertain times to give yourself as much optionality as you can — to have a very open mind; be as flexible as you possibly can, because the context in which you make a perfectly sensible decision today may be quite different tomorrow. So flexibility and optionality is very important.

Nicholas Taleb the philosopher who wrote a great book called Black Swan about big, nasty, low-probability risks has written a new book called Anti-fragile, which I really commend to you. It’s worth reflecting on. He distinguishes between things and ideas and businesses and concepts which are fragile and those that are anti-fragile.

Those that are fragile of course, are those that are rigid and are threatened by change. Institutions or businesses or people for that matter who are anti-fragile learn from change, and become stronger as the environment becomes more volatile. So we should aim to be anti-fragile..

Now just in terms of Australia and innovation, since 2004, there has been a broad decline in what economists call multi factor productivity- the overall output per unit of input from labour and capital.

It has been declining an average of 0.4 per cent a year after a decade when productivity growth was averaging almost 2 per cent.[1].

When two Reserve Bank economists looked at this question a few months ago, they examined two of the frequently cited reasons for the slowdown[2].

First of all, the growth in commodity prices has resulted in mining companies extracting less-economic mineral resources — lower grade mineral resources.

Secondly, there has been inefficient investment in utilities.  State governments have implemented onerous energy security standards, which require more investment for declining incremental benefit to consumers.

And yes, despite the wonders of broadband, the NBN is also a utility so overinvestment can create perverse outcomes for consumers – which I will come to later.

But the researchers make the point that these factors alone cannot account for the slowdown in productivity gains.  There are really two things, they argue, that account for rising productivity.

The first is technological change, the frontier of what an economy is capable of.  And the second is the management and adoption of technology, which is how close a particular country is to the frontier.

Now, we do live, as I said earlier, in a time of rapid change – every day old business models are being cannibalised by the new and more efficient.

If you don’t believe me, just talk to any of the print journalists who are here today (assuming they are here).  And if you can’t find one, you could order a cab on your smartphone using GoCatch or Uber, and reflect on just what that means for companies like Cabcharge.

But the fact is that the rate of change – the speed at which we are pushing the frontier ahead; the rate of productivity development – is actually slowing.  In the decade to 2010, 19 of 25 rich countries experienced a slowdown in productivity growth[3].

The good news however is that since opening up our economy in the reform era, Australia has always been relatively close to the frontier. We are early adopters of technology and many of the impediments to change, such as rigid labour markets, have been loosened – at least until quite recently when they have been rendered by the Labor Government more rigid once more.

We are great adopters of technology. Google has noted that smartphone adoption in Australia in the first quarter of 2012 was 52 per cent – the second highest in the world behind Singapore[4].   And an analysis by Booz and Co found that by 2016, they estimate around nine per cent of Australian retail transactions will be conducted online – the third highest percentage in the G20[5].

But there are still many impediments to overcome.

The annual Australian Innovation System report in 2012 found that of the barriers to business innovation, by far the two biggest were access to skilled persons in a particular location, and lack of access to additional sources of funds (particularly when it comes to small businesses)[6].

In terms of educating our workforce, there is evidence that we are starting to fall behind the world in key areas.

Australia’s Chief Scientist recently wrote that globally, graduates in the so-called STEM fields – science, technology, engineering, and mathematics – account for 26.4 per cent of all graduates.  But in Australia, the ratio has fallen from 22.2 per cent in 2002 to 18.8 per cent 2010.

The report concluded “the fall reflect[ed] the halving of graduations in Information Technology” in the last 10 years[7].

Another barrier to innovation is access to technology.  Now the narrative that Labor has created here is that the National Broadband Network will alleviate all of our problems and create a digital nirvana for young entrepreneurs.

To illustrate this, last week in an estimates hearing Labor Senator Lisa Singh from Tasmania asked Communications Minister Stephen Conroy about the NBN rollout in Tasmania.  She asked him: “Do you think Tasmania could become a ‘Silicon Island’?”[8]

Everyone wants to be a Silicon-something, even if the silicon’s a bit soggy. Now, at the outset, I want to say that there is no one more committed to delivering fast and affordable broadband to all Australians than I am.

My chief criticism of the way the Government is going about it is that it will take too long and is costing too much, which will translate into higher prices for consumers.

But there are two other key points about this proposition about Silicon Islands and silicon beaches put by Stephen Conroy and Senator Singh in Tasmania.

Firstly, Australian companies are five times less likely to nominate access to technology as a barrier to innovation than the factors I’ve already mentioned — about labour force and capital.

So while upgrading our infrastructure is an urgent and a very important task, it is not a panacea.

Government needs to be more engaged with how the pipes are being used than simply making sure the pipes are there in the first place.

And secondly, participation in the digital economy doesn’t just occur at the cutting edge of technology.

Even if Tasmania doesn’t turn out to be the next Silicon Valley — the ‘Silicon Island’, that doesn’t mean there isn’t still a huge benefit to people throughout the economy, including in Tasmania, being better educated and engaged online.

The productivity challenge isn’t just about finding the next Mark Zuckerberg; it’s also about finding the plumber down the street who is able to create inventories and send bills on a tablet or smartphone — or take a photograph of a damaged part; a leaking pipe; or a broken pump, and email it using his wireless device to a supplier, so that the supplier can then send him exactly the right part that he needs.

To that end, part of the challenge with the National Broadband Network is ensuring that its benefits are enjoyed by as many people as possible. And many of you would have seen the recent report in the United Kingdom that focussed — and this is an insight which is no more than a penetrating glimpse of the obvious, but one which is almost invariably overlooked.

The report, put out by the Policy Exchange, underlined the fact that the productivity uplift with broadband comes from it being ubiquitous — getting everybody online — and that the focus of government policy should be on universal accessibility which of course means affordability, rather than being obsessed with very high headline speeds.

And so it was rather ironic that on the very day Senator Singh asked her question, the NBN Co’s Chief Executive flat out refused to answer the question of how many people in Tasmania are actually using the network. That, apparently, is classified information!

And you see, that’s really the issue. One of the things that is forgotten is that the biggest barrier to accessing the Internet is not technology, it is lack of income. The lowest percentage of people online are in the lowest income brackets, and so affordability is absolutely critical.

Now one of the challenges, and it’s obviously something I used to be very familiar with because of the business I was in, is the difficulty of obtaining start-up capital and venture capital in Australia. It’s a complex problem and there was a very interesting White Paper put out recently by Pollenizer and Deloitte, which identified what they called a ‘capital chasm’ between the early stages of a start-up and maturity.

They demonstrate that in the early phases of a small business’s life, an Australia start-up is raising on average $1 for every $4.80 by its counterpart in Silicon Valley.

Businesses in Silicon Valley grow much quicker and have much more capital also, when it comes to the scale phase[9].

Obviously, Silicon Valley is well-established. There are very experienced and capable, deep capital markets there, and specialised capital markets. And Australian start-ups and entrepreneurs find the American market very, very accessible.

Obviously, we speak the same language, after a fashion, it’s not that far away, communication whether it be electronic or physical is relatively cheap and so it’s often much easier to raise money in those deeper markets. But we really need to do a better job at commercialising our technology here in Australia.

And that really gets back to the question of the links between corporate R&D , innovation and academic or published research such as articles in scientific and technical journals. And  it points to the lack of linkages between start-ups and other important areas of innovation such as universities and larger corporate companies.

Which brings me to two important questions: What can Government do?  And where is Government doing too much?

Few start-ups in Australia look to the Government for help.  A recent white paper by Pollenizer and Deloitte found that of the start-ups interviewed, only 39 per cent had applied to for a Government grant of some kind[10].

But of those respondents who did apply for a grant, more than three quarters were applying for the R&D concession. That was introduced in 1985, but two important changes under the Howard Government in 2001 had a profound effect.

The tax concession was increased to 175 per cent on certain types of R&D expenditure and Howard Government introduced an offset, meaning that small firms who registered a tax loss had the option of receiving an early cash payment instead of the tax concession.

A 2007 study found that changes to the R&D concession led to an extra 1,000 firms a year using it, based on previous trends.  And an average of  $310 million extra dollars of R&D invested per year, above the trendline in the three years following its introduction[11].

The changes had a profound impact in Australia.  In 1998-99, gross business expenditure on R&D in Australia was still only 43 per cent of the OECD average.

But by 2006-07 business R&D spending in Australia was 80 per cent of the OECD average.

The Productivity Commission points out that, adjusted for the structure of our economy –which is skewed more towards resources and less towards manufacturing – Australia’s spend is roughly equal with the rest of the world’s.

Now, I have been critical of the changes to the R&D tax concession introduced in 2010 by the Labor Government.

They narrowed the activities eligible for support.  And although Labor claimed the new regime would be simpler and easier to administer, they actually created uncertainty by changing the eligibility rules – in particular the new distinction between ‘core’ and ‘supporting’ R&D and the ‘dominant purpose’ test[12].

In 2008, the Government commissioned an important review of our national innovation system by Dr Terry Cutler, entitled ‘Venturous Australia’.

The verdict of the Government’s performance since then by Dr Cutler has been scathing.  He wrote and I quote him:

“Officials have been allowed to take a good idea and strangle it with even more bureaucratic red tape and a hostile narrowing of eligibility criteria. Good policy design has remained more observed in the preaching than the practice.”[13]

The Coalition is absolutely committed to making it easier for businesses to get on without excessive regulation.

The Productivity Commission has estimated cutting unnecessary red tape could generate an extra $12 billion a year in GDP.  And we’ve  pledged to cut that cost by at least $1 billion for each year that we’re in office.

But while Australian Government sets important incentives for private research, the vast majority of its spending on research and development—almost $5 out of every $6—is channelled through research institutes, grants, universities or public sector agencies such as the CSIRO[14].

One key challenge for a future Coalition Government is to make this spending more efficient and more effective.

The alarming trend is that over the years Labor has been in power the linkages between private enterprise and our public research institutes have become weaker. And we are also doing worse when it comes to capitalising and commercialising on the budget that is being spent.

Statistics show that 60 per cent of Australia’s R&D spending is in higher education[15].

We are third in the world in a cohort of 13 rich countries when it comes to the number of researchers in higher education per capita – but last in that same cohort in terms of researchers working in business enterprises.

The explanation that Australia has low business R&D investment because of high levels of natural resource rents and ‘natural capital’ ignores the fact that similar countries such as Canada have higher levels of business R&D.

As the Chief Scientist’s report concluded:

“Australia is indeed fortunate to have a strong research base in its universities, government agencies and its not-for profit research institutes. How best to capitalise on this base in order to build more R&D in industry and a more innovation led economy is a challenge that lies ahead.”

Regrettably, the statistics show that Australia is going backwards.

The National Survey of Research Commercialisation, released in December 2012, showed some alarming signs.  It showed that the number of new start-up companies formed each  year by Australian Publicly Funded Research Organisations decreased by 75% in the past decade.[16].

Australian organisations are also less efficient at creating start-ups for each dollar of research funding they spend.

We formed 0.3 start-ups in 2011 per $US100 million of research expenditure (down from 2.2 companies in 2001).

The U.K. by contrast formed 2.8 companies for the same research spend, while in Europe the number was 3.2 and in Canada,1.6[17].

There are still some positive signs. Just last week, NICTA spun off Saluda Medical, a medical device company, with $5 million in financing[18].

But the fact that we have to bear in mind is that Australia is no longer a high wage, high skill economy competing against low wage, low skill economies.

We are now a high wage, high skill economy up against low or lower wage, but increasingly higher skilled economies.

Our ability to compete and maintain our standards of living will depend, in large part, on our ability to keep spinning out great Australian success stories like Saluda.

I’ll just make a few comments on the Government’s innovation policy released on Sunday. It largely involved re-badging existing promises.

As you know, they are cutting $1 billion from the research and development tax concession to fund a range of measures, including 10 ‘industry innovation precincts’, which are eerily similar to the ‘industrial research transformation hubs’ promised in 2011 and yet to be delivered.

There’s probably time for them to be re-named again before September. And an additional $350 million will be invested by the Government in the Innovation Investment Fund, which I noted earlier was one of the great initiatives established by the Howard Government.

So far, that fund has been very successful, initiated in 1998, and 2001, and more recently a third round which was initiated in tranches from 2007 to 2010, around $524 million has been committed to the venture capital sector in Australia, of which 57 per cent was committed by the Government and the rest by the private sector.

A review of the program in 2011 found that most of that money has been invested, helping 95 early-stage firms, and so far around $423 million has been returned to investors, including $134 million to the Government.

So can I just conclude before we go to questions as we continue to pursue the important goal of improved productivity, which is very closely linked to a better utilisation of technology and a better ability to commercialise the technology that is developed in Australia, we have to ensure that governments are doing everything they can to make it easier for people to innovate; to start businesses; to raise money, and ensure that the fruits of that innovation and that technology is enjoyed as far as possible by Australians.

It isn’t easy. There are no easy solutions and I have to tell you as somebody who has been involved in a lot of start-ups over the years, some of them successful, some of them spectacularly unsuccessful, I can say that I am not persuaded by the idea that governments and bureaucrats are any good at picking winners. What we really have to do is to make sure we create an environment and some judicious support whether it is by way of R&D concessions or supporting venture capitalists, we’ve got to make sure that what we are doing is really supporting you and your counterparts around Australia because you are the future of the industry.

It’s your innovation that is going to make the difference. And above all, not put any unnecessary barriers in your way. That is where the issues of regulation and red tape are very, very real.

So on that note, over to you.

Click here for a transcript of the Q&A session

[1] D’Arcy, P., & Gustafsson, L., (2012), “Australia’s Productivity Performance and Real Incomes”, RBA Bulletin (June), available online here.

[2] D’Arcy, P., & Gustafsson, L., (2012), “Australia’s Productivity Performance and Real Incomes”, RBA Bulletin (June), available online here.

[3] Ibid, p.29

[4] Google, (2012), “Our Mobile Planet- Australia”, available online here.

[5] BCG, (2012), “The $4.2 Trillion Opportunity”, available online here.

[6] Department of Industry, Innovation, Science, Research and Tertiary Education, (2012), “Australia’s Innovatio System Report”, Available online here, p.10

[7] Office of the Chief Scientist, (2012), “Mathematics, Engineering and Science in the National Interest”, available online here.

[8] Hansard, (2013), “Estimates: 12 February 2013”, p.112.

[9] Morle, P., et al, (2012), “Silicon Beach – Starting Momentum”, a White Paper published by Pollenizer and Deloitte

[10] Morle, P., et al, (2012), “Silicon Beach – Starting Momentum”, a White Paper published by Pollenizer and Deloitte, p.14

[11] Department of Industry, Innovation, Science, Research and Tertiary Education, (2007), “New Elements of the R&D Tax Concession  – Evaluation Report”, available online here.

[12] Turnbull, M., (2010), “Tax Laws Amendment (Research and Development) 2010”, available online here.

[13] Cutler, T., (2010), “The Dearth and Decline of Innovation”, in Crikey, available online here.

[14] Ibid

[15] Pettigrew, A., (2012), “Australia’s Position in the World of Science, Technology and Innovation”, published by Australia’s Chief Scientist, available online here.

[16] Department of Industry, Innovation, Science, Research and Tertiary Education, (2012), “National Survey of Research Commercialisation”, Available online here, p.1

[17] Ibid, p.2

[18] NICTA, (2013), “NICTA start-up company Saluda Medical spins out with $5M in new financing”, available online here.

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