Innovation present likely to be all packaging

Most people will be counting the number of sleeps until Christmas. I’m counting the number of sleeps until the innovation statement. I am expecting Father Innovation to have a sack full of taxpayer- funded goodies.

Hopefully, he also will offer some sensible advice.

Now some insightful readers may query the basis of a government issuing an innovation statement. Is this the equivalent of Canberra bureaucrats giving lessons in spontaneity?

When we consider the backgrounds of the responsible ministers, Christopher Pyne and Wyatt Roy, their combined years of experience in business is precisely zero. Arguably, neither would recognise an innovative proposition with commercial potential if it hit them in the face.

It has to be said that the Turnbull government’s foray into government-induced innovation didn’t started well. Check out these admissions from Pyne, recalling his initial conversation with Malcolm Turnbull.

“I’m quite an orthodox politician, quite conservative. Malcolm said: come up with some ideas to bring together a national innovation agenda.

“After our first meeting he said: ‘That’s great, but I’d like you to release your inner revolutionary.’ I said: that will cost money. He said: ‘Let me worry about the money, you get on with the ideas.’

“That’s very exciting for a cabinet minister, I can tell you, when everyone else is being asked to tighten (their) belts.”

Oh dear. National innovation agenda? Hidden revolutionary? Don’t worry about the money?

And whether a trip to Israel taken by Roy really counts as contributing to the national innovation agenda is debatable. The trouble with these fact-finding missions is that there tends to be more spin than substance, more hype than useful lessons.

Don’t get me wrong — I think the Israel experience is a very interesting one.

In many ways, Israel operates a war economy. The fact it has been able to leverage off compulsory military conscription, a large defence industry and a workforce with deep technical and scientific skills to create new companies (indeed, industries) is testament to the resilience and inventiveness of Israeli citizens.

But even on its own figures, the Israeli government’s funding of innovation, of itself, doesn’t appear to yield particularly spectacular results.

One figure that is often quoted is that for every shekel of government research and development money, one and half shekels are spent on private R&D. That looks like a pretty average return. And while Israel’s chief scientist is given a wad of cash to hand out to promote innovation, it is actually a pretty small sum (and not what our ‘‘don’t worry about the money’’ Prime Minister probably has in mind.)

One of the problems of formulating a policy on innovation, assuming for a moment that it’s a good idea, is how innovation is defined. The government seems to be far too keen to link the idea of innovation to start-ups, information technology and science. There also is some confusion between R&D and innovation.

The definition I like the best is along the following lines: the process of translating an idea or invention into a good or service that creates value for which customers will pay or better value for taxpayers. But it is important to note that innovation is not always about new products or services; process innovation is arguably as, if not more, important.

Innovation is not just about commercialising research. It is also about taking new technologies and using them. Australia doesn’t seem to be very good at the former but is good at the latter. That may be no bad thing because we have not borne the costs of developing the new technologies but are happy to implement them. And note that innovation can and does occur in existing firms, not just new ones.

So what should we expect to be in Father Innovation’s sack? The first thing we will have to bear is some long-winded guff about the importance of innovation. My advice is to skip that section of the statement.

Hopefully, there will be a frank assessment of the factors that are holding back innovation in Australia. These include the income tax and capital gains regime; inappropriate and excessive regulation; unsuitable industrial relations laws; and higher education institutions that lack the incentives to be involved with practical innovation. For example, we have not truly sorted out the problems with the taxation of employee share options or crowd-sourced funding.

Share options are used extensively in Silicon Valley to allow companies to save precious cash as well as create strong performance incentives for workers.

Our highly progressive income tax scales mean that if an entrepreneur does succeed, they quickly will be paying nearly 50c in the dollar for all that effort and risk-taking. On top of that, Australia has a high rate of capital gains tax by international standards. Both these factors are likely to be important in determining whether an entrepreneur chooses to locate here.

Taxation arrangements targeting R&D and innovation are likely to figure prominently in the statement. There is considerable disagreement about the extent to which R&D tax concessions really contribute to innovation — or at least spending on R&D that would not happen otherwise.

There is the British experiment with patent boxes in which the company profits attributable to patents and licences are levied at the rate of 10 per cent. But the evidence there is that patent boxes are often gamed by companies with no net addition to the number of patents.

Something that is often mentioned in the context of promoting innovation is the law related to bankruptcy. Should we move to US Chapter 11 bankruptcy-style arrangements in which creditors quickly lose their money but the company can continue to operate?

Irrespective of your take on this argument, the real problem in Australia is how we could move from the present arrangements in which directors are penalised for overseeing an insolvent company and creditors are repaid in a strictly controlled order. Overturning the predetermined privileges of current creditors overnight would create havoc.

Whether a separate bankruptcy provision along US lines could apply only to innovative start-ups is not clear. At least the creditors would go into this arrangement with their eyes wide open. The danger is that a separate provision could lead to a series of unintended consequences.

The Prime Minister has made it clear that he regards our universities as having a central role to play in promoting innovation. But in this regard he has queried the incentives that academics face that value publication of papers in quality international journals above all other activities. To his mind, this has dulled the potential of some academics to develop inventions that could lead to commercially successful new products and services.

To change these incentives, however, would be a quite radical step. And arguably many academics have self-selected and have a strong preference for publishing over invention and entrepreneurship. Even so, we should expect some rejigging of the incentives that universities face in terms of being involved in innovation-­related activities.

So not too many sleeps to go. But just as Father Christmas can disappoint us, it is also possible that Father Innovation may deliver a series of underwhelming but costly proposals.

Whether politicians telling us to abandon our culture of fearing failure really gets us anywhere is unclear. At least talk is much cheaper than some of the other likely offerings.