Encouraging R&D - forget about it!

One aspect of Australia’s international performance over which commentators occasionally wring their hands, is this country’s apparently poor showing in spending on research and development by the private sector. No spending on research and development means no advanced industries, or so the theory goes.

The Federal Government has, over the years, tried to act on these concerns by granting various tax breaks and was recently trumpeting the fact that tax concessions given to R&D in 2001 had led to a surge in spending on this activity.

Perhaps. But as already noted by other On Line Opinion commentators, there is good reason to believe that the bulk of tax concessions on R&D are a waste of money, with a lot to be said for direct grants to R&D projects. (In fact, government policy seems to be swinging around to this point - it just has a way to go.)

But whatever the government’s policy, it is now broadly recognised that international comparisons of private spending on research and development are of little use by themselves. They don’t mean anything. The amount of money spent on R&D by a particular country is little more than a reflection of that country’s industrial structure, not the cause of it.

To explain. The OECD occasionally publishes international comparisons, with one such comparison being the amount of money spent on research and development as a percentage of gross domestic expenditure. In the latest figures, which are now five years old, Australia is about half way down the list with a score of 1.64 per cent - below Luxembourg (1.75) and a little above Norway (1.61), but well below the leader, Sweden which is a shade below 4 per cent.

This could obviously be better, but essentially all the list is telling us is that those countries have different industries. As a comparison we could look at figures for spending on exploration and mining. Those figures do not seem to be collected but if they were collected and ranked by countries, Australia and Canada would come out near the top. However, all that ranking tells us is that both countries have large hinterlands, with plenty of minerals and not much settlement (native groups aside) to prevent cheap extraction.

Sweden, Finland and Switzerland would be somewhere near the bottom in spending on mineral exploration as Finland and Switzerland, in particular, have few mineral resources.

In contrast, Sweden tops the list of R&D per capita as it has industries which, by their nature, require a lot of spending on development just to stay in the game. Innovative mid-tech companies in Australia - companies that make, say, poker machines or smart parking meters - are unlikely to invest more than 10 per cent of revenue back into research and development. One of Sweden’s main industries, in contrast, is telecommunications, which has a high reinvestment rate. Ericsson is known to put 24.9 per cent of its revenue into research and development. As Sweden is also home to the likes of Saab and Electrolux it is little wonder that the R&D rate is high.

Australia may not have an Ericsson or a Saab, but it does have internationally known swim wear companies - design of clothing is unlikely to count as R&D but maybe it should - as well as companies that make farm equipment for dry soils, or race track equipment. And who could forget the Wiggles - the entertainment group for very young children - which has become an international franchise.

These enterprises may be industries that spend more on marketing than high tech research and development (the Wiggles probably don’t claim much for R&D) because that is the way those particular industries operate.

In a recent report by the Productivity Commission, Public Support for Science and Innovation, March 2007, the commission adjusted the OECD R&D tables for industry structure to find that Australia’s private research effort is in fact, tolerably close to the OECD average - where that average is well up the list. The adjusted figures probably don’t tell us much, but the commission rightly concluded that there was no urgent problem that needed fixing.

All that said, Australia would also like its own Ericsson or Saab, or even an IKEA (also Swedish based), as a further broadening of the economy and, of course, as something we can tell international investors about. Sadly, those hard-nosed investors will be less impressed by The Wiggles than by an international telecommunications company.