Innovation rules

The global innovation system did not favour Australia in the 20th century.

The successful countries tended to be those close to big, homogenous markets. The companies that flourished most from new ideas were largely concentrated in high-tech mass-scale manufacturing. There was relatively limited opportunity for innovators who lacked scale to break into the vertically integrated value chains of the big innovating firms.

It is becoming increasingly clear that the history of technological advancement through the 20th century does not reflect the trends that we should expect to see in the 21st. Technology isn’t what it used to be. The world is changing in some surprising ways, and the rules of innovation are changing with it.

In my new book, The Australian Miracle, I identify two new trends that are emerging to influence the fortunes of nations. Both stand out for their special relevance to Australian circumstances.

The first trend is that our traditional “low-tech” industries are increasingly becoming high-tech. It is well known that Australians over the past decade have been especially talented at extracting productivity gains through the clever adoption of information and communications technologies (ICT).

But something broader is happening in our society, extending well beyond the use of the mobile phones and the Internet. Australian mining companies now hire maths PhDs and use chaos theory to develop lifetime plans for their mines. The Australian wine industry uses sophisticated forensic DNA typing of grape cultivars.

Only last month, Australian researchers in Queensland announced a genetically modified sugarcane that improves bioethanol production efficiency for use in green fuels.

In short, industries that we denigrated 30 years ago for not being sufficiently knowledge-based are becoming intrinsically technological - and the good news is that these are technologies where Australians are placed to lead the world.

The second trend, which is equally exciting, is the opening up of innovation value chains.

What does this mean? In the 20th century few Australian innovators had the scale to handle all aspects of the product cycle from basic research through to mass distribution. This was significant because the closed nature of global innovation meant there was often no other way to succeed.

Now though, big firms across all areas of the global economy are unlocking their business processes. Instead of trying to do everything themselves, they are increasingly outsourcing globally to find the best suppliers and the best ideas.

This model provides Australians with an entry point to innovation chains that were previously closed, and new opportunities to stake out strong niche positions in global industries.

It is no coincidence, for example, that more than 60 per cent of Australian automotive R&D is now spent by specialised component producers designing niche products such as braking systems, fuel tanks, safety systems and steering systems rather than by mainstream car manufacturers.

While there are many implications of these two trends, two points stand out.

First, the shifting nature of innovation suggests that we should stop worrying about our ability to compete in high-tech manufacturing. The old differentiation between low-tech commodities, such as coal, wool, and iron-ore, and high-tech manufactured goods, like automobiles, computers, and mobile phones, is no longer straightforward.

Indeed the role that manufacturing plays in all societies is changing rapidly. Twenty-five years ago, manufactured goods made up only 25 per cent of exports from developing countries - today they constitute 80 per cent. It is time to abandon our old insecurities about Australia’s industrial structure.

Second, and this is especially pertinent to the Australian research community, I believe we should stop concerning ourselves with building scale around Australian innovations.

Size has become something of an end in itself in the Australian research sector - hence the obsession in recent years with “critical mass” and with “priority setting”. Yet in some respects, size is less important now than it has ever been.

One consequence of the open innovation model is that Australian researchers are experiencing growing opportunities to compete globally without possessing massive scale themselves. Indeed, they are now most likely to find comparative advantage simply by joining forces with, or offering niche products to, organisations that already possess the global scale for themselves.

Australian researchers, moreover, will never really be able to compete on size, only ever on the quality of their ideas - and the two are not always correlated.

In the coming century, the most important aspects of national identity will be those which relate to the ability to have ideas, to seize opportunities, to connect with technology, and to do things in new ways. The opportunities are certainly there for Australia. The big question is whether we’ll seize them or whether we will chain ourselves down with a set of beliefs that are no longer relevant.