White Paper or Blank Page?

Many years ago, Chicago Mayor Richard J Daley launched an international physics conference organised by the University of Chicago. “Hizzoner” wished the delegates well and hoped that the University and the City of Chicago would “rise to higher and greater platitudes”.  The Mayor might well have said much the same for the “Australia in the Asian Century” white paper and the Australian people.

Perhaps the outstanding example of the platitudes littering the document concerns innovation:

Australia will have an innovation system, in the top 10 globally, that supports excellence and dynamism in business with a creative problem-solving culture that enhances our evolving areas of strength and attracts top researchers, companies and global partnerships.

We might well end up in the top ten as it is difficult to find “innovation systems” and others may not go looking for theirs. There are inventors, patent attorneys, people with money, and markets. But trying to organize them is like herding cats.

Innovation is a bit like a random walk. Who would have predicted in 1969 that the ARPANET, funded by the US Department of Defence, would have evolved into the Internet, providing access to a universal memory bank and becoming a threat to established publishing and entertainment corporations. A government might encourage innovation but the creative destruction that may go with it does not always suit the politics de jour.

Governments frequently overestimate their ability to influence events and innovation policy with its justification for funding universities and research organisations is a perfect example. Over 90% of innovations come from business with in-house ideas, company rivalry and interactions with customers being the main sources. Indeed a survey by the Australian Bureau of Statistics showed in 2006-07 that only 2.6% of ideas for innovation were sourced from universities and 4.1% from government agencies. These numbers are not unique to Australia.

In 2008-09 the total Australian spending from all sources on R&D was $28 billion, with $17 billion from business and the balance came from government expenditure in universities and government research institutions. Government institutions and universities don’t give much bang for the buck, with 38% of Australia’s R&D expenditure generating only 6.7% of the ideas.

This is a little unfair on universities, as they do play a key role in educating accountants, lawyers, engineers, scientists, doctors and many others who make innovations in the companies where they work and may have even founded. The universities are also in the business of publishing results and holding conferences so that research information can enter the public domain.

The white paper presents a grand design based on the idea that the CSIRO should be a centre piece of business innovation. But in the last fifteen years CSIRO has not managed to increase the direct funding of its R&D from industry. In fact it has declined by 33% in real terms — this while universities have received a sixfold increase in industry funding.

As in the past, Australia will continue to create new businesses, new processes and new products, but where and how is unpredictable. In the last twenty years there have been great successes in the healthcare sector.  CSL (CSL.AX), Cochlear (COH.AX) and ResMed (RMF.F) are all examples of remarkable business development — and not without running substantial financial risks during product development and business expansion. But many of these businesses are now multi-national. ResMed is based in San Diego, CSL operates in Australia, the United States and Europe and Cochlear operates worldwide. However, the total sales revenue for the three was $6.4 billion in 2011-12, while mining and oil and gas revenue was $180 billion. So the idea that innovations will generate new business opportunities that make a significant reduction in the risk to the Australian economy of falling demand for minerals and energy exports is quite implausible.

In another market, there is a remarkable statistic. From the count of the top 100 companies filing patents in the USA for 2011 an Australian based company, Bayer Crop Science AG (Australia), was number 98. This must be the result of the excellence of the Plant Industry Division of the CSIRO and the benefits go to a foreign multi-national with $230 million revenue for 2011.

The white paper points to the growth in the numbers of patents filed by Asian businesses. Patent filing, just like counting published scientific papers, can be misleading. The United States remains the most innovative market on the planet, while a lot of patenting from Asia might be termed “patent flooding” as companies seek some purchase on the base patents. Patent disputes are the result of these intellectual property manoeuvres.

The path to new business happiness is not simple. A good example is Biota, the developer along with GlaxoSmithKline of the first of the broad spectrum influenza drugs. Initially Biota and GSK were outsmarted by Gilead Sciences and Roche Pharmaceuticals. However, Biota, joining with Daiichi Sankyo, now has a shared interest in a long-acting influenza drug on the Japanese market. This drug has so impressed the US health authorities that they awarded a $230 million contract to Biota to manufacture the drug in the USA and take it through the FDA clinical trial process. At the same time Biota has left its original home stock exchange, the ASX, for a new life on NASDAQ in New York. So you have a triangular settlement with an Australian and a Japanese business seeking US markets.

Another and more perplexing example is the development of laser enrichment of uranium by Silex Systems (SLX.AX). This process has been licensed to GE, and approval has been given for the construction of the first US plant. This and other nuclear fuel-cycle opportunities, such as Synroc, in the billion-dollar revenue range are presently out of bounds for Australians in their home country!

Even in the Asian Century we will remain a country with a small population and innovations and business opportunities will be taken and businesses grown where they find major financial support for their particular needs and where there are attractive markets.

One can only hope that the innovation system does not get in the way.

Tom Quirk trained as a nuclear physicist. He has been a Fellow of three Oxford Colleges and has worked in the United States and Europe. In addition he has been through the Harvard Business School and worked for Rio Tinto and for James D Wolfensohn in a New York based venture capital group. He was an early director of Biota