Government, the Great Innovator

President Georges Pompidou is said to have warned his Prime Minister, Giscard d’Estaing, that the three dangers for the modern politician were wine, women and technologists. Politicians in Australia have ignored his advice. Here picking winners has always been a bi-partisan sport.

The present government is putting in a gold medal performance. First, the Minister for Innovation, Industry, Science and Research pulled the rug out from under many hopeful emerging companies by cancelling the Commercial Ready grant scheme without offering any immediate alternative. Then the Prime Minister announced a Green Car project to finance a model that at least one car company was already planning. While the Howard government started backing alternative energy schemes where wind farms have been the big winners, the Rudd government, helped by the Garnaut Review, has set a courageous target of 20 per cent renewable energy sources by 2020 but not from nuclear power.

But April brought us the Global Carbon Capture and Storage Institute and the Fibre to the Home Broadband initiative. Here is the government as the commercial innovator.

But that’s not all. The Bradley Review of Australian Higher Education for the Department of Education, Employment and Workplace Relations reported that “universities lie at the heart of the national strategy for research and innovation”. Meanwhile the Cutler Review of the National Innovation System for the Department of Innovation, Industry, Science and Research talked of National Needs and Innovation Councils while mentioning workplaces but thankfully not working families.

Should governments worry about innovation? Australia in the last fifteen years has experienced steady growth, placing it amongst the top performers in the OECD. It is not clear that this growth has very much to do with our innovations, science or research policies in any direct way.

The politicians’ urge to innovate is an OECD-wide disease. Professor Alan Hughes from Cambridge University has diagnosed the original condition. The symptoms develop through emphasising the importance of research and development, then promoting the exploitation of science from research institutions by licensing and spinning out innovations, to ultimately helping to finance the politically correct businesses.

The popularity of this “pipeline” model arises from the view that this is the basis of the superior economic performance of the United States. It is a cargo cult approach, as it is picks out and emphasises some elements and ignores others. Unfortunately the popularity has been magnified by real or imagined threats to life on the planet.

A study of productivity growth in the United States shows that most of the growth in the last seven years came in “low-tech” activities. “High-tech” activity is a small part of the US economy. It is a minute part of the Australian economy. However, what is thought to be happening is the spread of high-tech applications enabling productivity improvements in the low-tech sectors of an economy. In Australia the mining and agricultural sectors benefit from the dispersion of high-tech products. It is the use that counts but the innovations may be sourced worldwide.

Research institutions can be put in context by looking at university patenting, licensing and spin-offs and by comparing the scale of this to the actions within industry. As an example, IBM registered 2941 patents in 2005 while the University of California state system registered 388. As far as spin-offs are concerned, some 500,000 new firms are started each year, while in 2004 462 US university spin-offs were established.

Even more interesting are the sources of innovation for companies. Australian statistics show that the key sources of ideas come from within business or from customers, suppliers, meetings and competitors. Universities score only about 10 per cent and R & D enterprises, such as the CSIRO, even less.

Entrepreneurial spin-off companies are in general not as important as established companies. It is only in sectors where “destructive” technological change is creating opportunities that they have a chance to grow and prosper. The spread of the internet is an obvious example where established businesses are battling with newcomers for news, music, film and the general delivery of information.

However, the universities and public R & D do play a contributing part: the supply of human capital, making a key contribution in producing graduates who will invent, implement and deploy innovations for the benefit of their companies. Published research enables a spreading of information that is a public good. Most importantly, the direct network of contacts from universities to companies and from companies to universities at many levels provides what may well be the key link.

The urge to innovate was seeded by universities. Academics are good at sensing what makes governments fund research—just look at climate change. They are also persuasive in argument, and innovation is a fascinating and important process. If national economic growth could be coupled to innovation and as directly as possible to the role of the university in the community then policy makers and politicians would be more generous in their funding of research.

There is now the view that innovation was not well understood in the 1980s and 1990s. The commercial pipeline has been found to have S bends and even manifolds. So those entering the pipeline need counselling and a roadmap. Much of the local dialogue is sheer nonsense, as the complications of innovation should be well known. Policy makers should worry about the analysis of the innovation system following the American painter Barnett Newman’s famous remark about art critics that “Art criticism is to art as ornithology is to the birds”.

How does innovation happen? In our own lifetime we have seen the arrival of the personal computer and the internet. Both of these developments have the characteristics of a random walk. There are hardware and software contributions from many sources, scientists, engineers and marketers. Professionals and of course hobbyists, often the first customers, have played a leading role too. As the innovation develops the mighty are humbled, new businesses emerge and the products find increasing application that in turn creates new opportunities.

How much does government policy influence innovation? Directly there is no influence but subtly it can make a difference through education, research support and buying power. These three are obvious, but what about business culture?

In a seminal book, Regional Advantage, Annalee Saxenian, a Professor of City Planning at UC Berkeley, discussed the growth of Silicon Valley and compared it to Route 128 around Boston back in 1994. The lesson was the importance of culture. In Silicon Valley the model was co-operation amongst firms, while in Boston businesses were defensive castles with the enemy without. “Tolerance of treachery” is one of the ten commandments of Silicon Valley.

Saxenian, a sociologist, also discussed who set the culture. It is probably, alas, beyond government. It might emerge, as it has in the mining industry, from examples of success. You need clusters of business and experience, and clusters spring up in some university cities. Universities attract students who often stay after graduating to work and some will found new businesses and some will cluster near a university. So universities are important, but it needs more than that. Markets determine success, and one of the difficulties in Australia is the small local market. It is hard enough in California getting going in a big market where there are many imitators and predators, so how can you do it in Australia? Perhaps mining provides a clue. Miners have the sole right to physically use their licensed property. Patents provide the equivalent for inventions but again it is not enough. You need access to skills to take and shape a product through development and marketing. Not all these skills are available in Australia but as we grow we learn and add to our abilities. Patents might give us enough protection to win out occasionally.

So what are the chances of government initiatives succeeding? Wind farms and green cars are not a response to a market signal. In fact they are promoted as fixing market failures but with government financial support. There is supposed to be a learning curve in product development yet the car industry has been subsidised for many years and wind farms are given support for twenty years. Meanwhile the Garnaut Review believes that yet-to-be-developed technology will spring to the aid of a carbon-free society. The broadband proposal is the equivalent of the nineteenth-century promoters’ claims for the railroad.

The Global Carbon Capture and Storage Institute is perhaps an example of what the Higher Education Review wishes to do—create institutions that demonstrate how universities are meeting Australia’s national needs.

Little of this seems to fit the way the world goes about making innovations. Innovations often come from unexpected directions. The greatest contribution by a government would be to ensure that we have a well educated and technically literate community while incidentally developing a major source of foreign exchange through first-class universities.

It is important to distinguish between the “know why” of academia and the “know how” of business. But remember that many innovations have nothing to do with science or technology, just bright people!