Policy: Australia at an industrial crossroad

Australia’s quest for national prosperity and high standards of living and wellbeing revolves around whether Australia can be a maker or a taker of industrial policy.

That is, a choice for government between being hands-on and activist in selectively supporting local industries, or being minimalist, getting the factor conditions right (such as trade liberalisation, capital flows, microeconomic reform) and getting out of the way.  

The latter approach has been favoured in recent decades, with Australia being a taker – that is, doing what it is good at, and buying in the rest. There are signs now, however, that the tide is turning. 

The pandemic demonstrated that it is important to be a country that makes things. Not just being agile and capable in rescuing the nation from a crisis, but in investing in the skills, capability and infrastructure for the industrial transformation that underpins resilience. 

Political and community expectations are shifting towards government leadership, making and shaping industrial policy by more decisive and direct spending and intervention to safeguard local jobs and create new economic opportunities. But, this approach – ‘picking winners’ – is often said to run the risk of distorting markets, becoming a hidden form of protectionism and tempting self-serving industries to game the system. At the same time, various reputable rankings and analysts of Australia’s economic performance show that its orthodox approach to industrial policy has failed to produce the promised results.  For example, Australia’s productivity growth has declined since the 1990s and lags the performance of comparable countries.

Harvard’s Atlas of Economic Complexity ranks Australia 93rd in the world for the diversity and knowledge-intensity of its export mix. Australia’s industrial structure is ‘hollowing out’ and the economic contribution of its advanced industries is well behind other developed nations.

How can Australia simultaneously mitigate the risks of ‘picking winners’ and also engage in more robust industrial policy that results in improved productivity, economic complexity and resilience?

The literature and practice of innovation management has lessons to make it more likely that activist industry policy can avoid the traps and succeed in lifting the nation’s enduring economic performance and social wellbeing.

What is innovation management?

Innovation management has been defined as “the strategies and practices that can be used to improve organisational (and community) benefits from innovation” (Dodgson et al, 2013).

Innovation management covers a wide research field, drawing from an array of perspectives including science, economics, engineering and psychology. Similarly, innovation covers a broad sphere from the traditional topics of R&D, intellectual property, technology and creativity to the emerging initiatives in design, social networks, open and social innovation, and innovation in business models.

Innovation management studies seek to explain how value from innovation is created, captured and deployed. From a wealth of research and experience, Bessant (2022) summarises understanding of the dynamics of innovation as making change happen and creating value from new ideas.

Innovation management highlights the experiences and performance of business enterprises. But this is now being extended to innovation practices in non-profits, public policy, public sector service delivery and solving large complex societal challenges.

In short, innovation management is the study of how innovation works to make a positive impact on organisations and the community at large.

Innovation management and industrial policy 

Innovation management is relevant to industrial policy as it is how manufacturing enterprises, and the industry as a whole redress decline; develop more productive and valued business offerings; open up new market opportunities and revenue sources; and become more technologically adept.

The federal government has established a $15 billion National Reconstruction Fund (NRF) providing investment in priority Australian manufacturing projects through loans, equity and guarantees.

It has also announced a feeder initiative, the $392 million Industry Growth Program (IGP) providing grants and professional advice for young start-ups and SMEs, as a pipeline for investment-ready projects for the National Reconstruction Fund.

These are significant initiatives aimed at a more potent industrial policy for Australia.

These initiatives are at a relatively early stage of development and the Commonwealth Government has invited input into their scope and implementation. At the same time, the Commonwealth has set out clear non-negotiable elements for both programs.

In particular, targeting specific priority areas for the National Reconstruction Fund where Australia has existing competitive strengths, such as in:

• renewables and low emissions technologies
• medical science
• transport
• value-add in the agriculture, forestry and fisheries sectors
• value-add in resources
• defence capability
• enabling capabilities.

Similarly, the Industry Growth Program is tailored to bridging early-stage funding gaps for innovative projects by SMEs committed to growing and scaling their enterprises. The aim is to expand the availability of investment-ready projects aligned with and feeding into the National Reconstruction Fund.

These program features define ‘what’ and ‘who’ the NRF and the IGP will focus on. However, defining ‘how’ these programs will operate for maximum impact and effectiveness is crucial. This is where the lessons from innovation management practice offer valuable insights.

Lessons from innovation management 

The first insight is about innovation itself. Innovation cannot be equated just with high tech advances nor with creative, entrepreneurial ideas. Innovation hinges on execution. New technologies or ideas must be put into action, so they create new capabilities and make an impact.

Innovation is not an end in itself and must be managed as a vehicle for addressing issues that matter and needs that are unmet.  Put simply, innovation is defined as creating value by doing something new, which is needed, useful and well-executed.

There are more dimensions to creating value through innovation than commercialisation of high technology or scientific breakthroughs.

Innovation can add value, for example, in customer experiences and services, through better supplier and customer relationship management, in how employees are organised, and in how revenue is earned.

Similarly, manufacturing is more than production. It covers the whole value chain from product research, to design, to prototyping and testing, to after-sales service and product recycling. Value can be created and captured at any or all of these stages, not just in the manufacturing of a product.

A key feature of industrial policy therefore should recognise the broader dimensions of innovation through programs that make it feasible for Australian manufacturers to compete on value, not price.

Other insights from innovation management for Australia’s industrial policy are as follows.

Learning, not ‘light bulbs’ 

The imperative is to ensure a critical mass of adept, agile enterprises, competing globally and able to solve problems that matter to customers or communities.

Success through new-to-the-world technologies and discoveries is rare. More likely, the capabilities that lead to success come from learning by doing; learning by absorbing and using existing knowledge and advanced technologies; and learning by regularly interacting with others, including customers and competitors.

Most importantly, performance and productivity gains are realised when these innovation capabilities are brought together in a business model change, a recipe for giving customers superior value and earning a premium from doing so.

Knowledge flows, better than knowledge stocks 

Innovation in industry development is not a solitary pursuit. Much mission-critical knowledge is held by others. Collaboration becomes a vital skill.

Collaboration covers the ability to share information and to learn, to be outward and forward-looking, and to solve problems by cross-fertilisation of knowledge and expertise. It involves managing relationships, building trust and shared interests, negotiating diverse opinions and outlooks, and brokering industry clusters, innovation eco-systems and communities of practice.

Encouraging flows of knowledge is more important for capability-building than increasing stocks of knowledge held by individuals and organisations.

Don’t forget the everyday economy 

It is important that the benefits of innovation and activist industrial policy extend beyond high tech specialists and knowledge workers to ordinary people in the everyday economy.

Innovation should not be a rarefied concept, either ignored or feared by the public at large, because it is irrelevant or else, brings job losses and service closures.

Innovation must be managed to benefit the wider population, including those who are most likely to become the casualties of economic transformations.

A good starting point is with essential work and workers of the everyday economy, those providing the goods and services that sustain our daily lives. They include nurses, teachers, aged care and childcare workers, those in retail, transport and the like.

The everyday economy impacts on innovation because everyone, irrespective of income, is involved and a significant element of the everyday economy is learning, caring and social support work.

This work reinforces the social ties and human interactions crucial for social cohesion, resilience and a sense of belonging and community identity.

Strengthening the performance of the everyday economy is an innovation strategy—because it unlocks the untapped potential of communities. This has been referred to as ‘the economics of belonging’.

Conclusions 

The key message for kick-starting a robust and transformative industrial policy through the Industry Growth Program and the National Reconstruction Fund is to prioritise the human, user-centred dimensions of innovation, as opposed to just increasing the supply of technology, science and research.

This means a prime focus on demand and capability at the level of the business enterprise, its management and workforce. Key features of this approach include:

• Placing the user, not the producer, of innovation at the centre of the design of industry development programs. Addressing the needs and wants of customers, consumers and communities is critical
• Fostering programs that both access market opportunities for enterprises and communities and build the capabilities of local enterprises to meet this demand in a superior fashion
• Considering the following programs to boost innovation capabilities and response to market needs: Innovation or makerspaces for safe business innovation experiments; business peer learning and mentoring initiatives; work-integrated learning projects for next generation leaders; industry or technology roadmaps; local procurement and supply chain projects; and voucher or grants schemes for access to research and problem-solving resource

Equally important is engagement in a healthy innovation eco-system of other business enterprises, regulators, researchers, customers, suppliers, policymakers and the like for shared learning, cross-fertilisation of knowledge and skills and collaboration.

Further, participation in innovation eco-systems provides an avenue for industry development programs to be designed also to provide social benefits for the community at large.

Place-based economic development projects can serve to link social and economic outcomes for positive impacts for the wider population.

In short, Australia is well-placed to be an intelligent maker of a more activist industry policy, starting with implementation of the National Reconstruction Fund and the Industry Growth Program in a way that has learnt the lessons of modern innovation management.

Author: Narelle Kennedy AM is managing director of her own research and consulting company, The Kennedy Company and former CEO Australian Business Foundation, Australia’s largest private sector partner and funder of policy research into industry and innovation. Narelle has a long-standing commitment to university-business engagement and excels at translating research into practice. She was awarded an Order of Australia for significant service to Australian business.

From: https://www.innovationaus.com/policy-decisions-australia-is-at-an-industrial-crossroad