As noted earlier, Richard Hayes and I produced a 2006 update of the Innovation Index comparing national performance in investing in innovative capacity. I wrote a little summary for BRW this week: 

Opportunity lost

by Joshua Gans

Business Review Weekly (1st February, 2007, p.49)

Leadership

Innovation moves back on the government agenda with the finalisation of the Productivity Commission’s inquiry into public support for science and innovation. The commission, which looked at whether domestic research and development expenditure increases productivity, found an economic case for continued public support in its draft report. This raises the question of where that support should be directed.

For the past few years, we have been conducting a study into the causes of innovative capacity*. Rather than focus on a specific result, such as patent performance, the study derives an index from broader fundamentals. When the experience of many nations is pooled, it is clear that certain factors play a big role in innovation. While there may be many factors that theoretically inspire innovation, only some are robust and persistent. These include inputs to R&D (including capital and labour) and, more surprisingly, the public share of education in gross domestic product expenditure (rather than overall education), the level of intellectual property protection (stronger is better), R&D funded by industry (as opposed to government) but performed within universities, and the degree of specialisation.

By isolating and updating our measures of these factors, it is possible to calculate an index that shows each nation’s capacity to innovate. It is not a measure of how well they are performing but of how well they are likely to perform in the future. In the latest update, released in December, MBS finds that Australia’s innovative capacity has stalled. While the 1980s and early 1990s brought about changes that increased innovative capacity (and with it its performance), there has been no appreciable improvement since 1998. This is due primarily to reductions in R&D by universities, stagnating funding of R&D by industry and some cuts in public education spending. This is in spite of recent rises in overall R&D expenditure.

Australia ranked 15th on the global table last year, but this masks an opportunity lost as our macro-economic performance has been superior for a decade. It suggests we have failed to translate this into a foundation for solid performance. Hopefully, the Productivity Commission report will spur the government to sensible direction in its policy initiatives.

Joshua Gans is Professor of Management at Melbourne Business School. His report on Australia’s innovative capacity is available at www.ipria.org. Gans maintains a blog on these issues at economics.com.au.

* Joshua Gans, MBS; Scott Stern, Kellogg School of Management; and Richard Hayes, Intellectual Property Research Institute of Australia.