We would be better off if the government stopped meddling in R&D.
Who was in charge of the development of personal computers? The answer, of course, is that nobody was in charge. The evolution of computers is the story of individual firms competing to make better products to meet the needs of consumers.
Politicians and industry lobbyists should remember this obvious truth whenever they talk about the need for national leadership on science and technology. The point about the evolution of computers is made by English economist John Kay in his recent book The Truth About Markets and it highlights the perils of thinking that all that is required to turn Australia into the research and development (R&D) capital of Asia is a little bit of planning.
Occasionally government can assist in commercialising technology. However, most of the time government only succeeds in getting in the way, and indeed this is one of the main findings of a study by the Business Council of Australia released last week. The report found that corporate governance procedures are "killing" innovation and the "accountability industry" is creating a risk-averse culture within companies, while high levels of personal tax restrict the capacity of firms to attract highly qualified people from overseas.
The Productivity Commission's inquiry into science and innovation policy announced earlier this month could take the Business Council's report as its starting point. The issues the commission will examine include the impediments to "the effective functioning of Australia's innovation system" and the impact of R&D spending on the country's economic performance.
The commission might consider whether it is even appropriate for Australia to have an innovation system at all. Innovation is the last thing that can be squeezed into a system -- particularly a system run by the government.
In its first term the Howard government cut back allowable deductions for private R&D spending to stop the rorting of the scheme. The outcry was so loud and continued for so long that in 2001 the coalition was forced to invent Backing Australia's Ability, which promised $50 billion of government spending on science over 10 years. That additional money was far in excess of what had been saved as a result of the coalition's earlier decision.
A draft report from the commission is due within 12 months, although it shouldn't take it that long to establish three basic facts.
First, there is no relationship between a country's spending on research and its economic growth.
According to the Organisation for Economic Co-operation and Development in 2003 (the most recent year for which data is available), Australia devoted the equivalent of 1.6 per cent of its gross domestic product to R&D expenditure. The comparable figure for the United States was 2.6 per cent, for other countries in the OECD it was 2.2 per cent, and in Sweden, usually cited as the paragon of R&D virtue, it was 4 per cent.
However, when it comes to average annual growth rates over the 10 years to 2004 the story is very different. Growth in Australia was 3.7 per cent, in the United States it was 3.3 per cent, and across the OECD it was 2.6 per cent. Sweden's growth rate was little better than average at 2.8 per cent. Australia's record over that decade was no fluke and wasn't simply the result of the mining and energy boom of the past few years. Clearly there are many more factors to economic success than just R&D spending.
Second, the level of national spending on R&D is an outcome of the structure of a country's economy. Australia doesn't have, for example, the high-tech military or aerospace industries that sustain high levels of R&D. For the foreseeable future the services sector will be an important driver of growth for our economy, but on traditional measures, services generate relatively little R&D.
Third, there is no relationship between a company's spending on research and its business success. As the Business Council report recognises, it is one thing to spend money on research but it is an entirely different thing to create wealth from research and ultimately to make a profit on it. The most innovative firms are not necessarily the ones with the largest research budgets.
While it is unfashionable to say so, the best way that government can encourage companies to undertake R&D is to get out of the way. The only problem is that governments find it much easier to spend money than to remove the regulations that prevent businesses from going about their business.
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