Dr Terry Cutler Australia Lima, April 2008

1. Australian Innovation Policy and Public-Private Alliances: “Where we were and where we are going". Dr Terry Cutler Australia Lima, April 2008 (Background paper for CEPAL’s project on alliances for export development)

2. Caveat emptor! What shapes my perspectives and observations on this subject ? • ¶ Career has straddled corporate and public sector roles • have sat on both sides of the fence! • ¶ Work extensively internationally, especially in Asia • - so interested in differences across national innovation systems - no “one size • fits all model” • ¶ Background in technology, but also worked extensively in creative industries and • their role in innovation • - so believe that a national innovation strategy is more than just a science and • technology policy • ¶ Currently chairing Australian Government major review of innovation policy for Australia • - so obviously don’t believe we can ever stand still Dr Terry Cutler

3. The pitfalls around country case studies For one’s own country: tendency to overstate the country’s weaknesses and challenges, and to understate strengths and embedded advantages and to over-emphasise the short-run at the expense of the long run. There is also as much to be learned from policy failures (or mixed results) as from obviously success outcomes Dr Terry Cutler

4. GREAT DESTINATION Pity about no road!

5. What is Innovation? Innovation = creating value through doing something in a novel way = ex post, so we need ex ante understandings of the dynamics of socio-economic change Innovating = creative problem solving Being innovative = creative problem-solving in order to create value Dr Terry Cutler

6. There has been a lack of coherent theories of innovation to underpin development policies Innovation is a virtuous cycle for socio-economic change and development. KNOWLEDGE PRODUCTION creativity; Origination problem solving or adaptation productivity; competitiveness Diffusion and KNOWLEDGE absorption DIFFUSION entrepreneurialism Deployment KNOWLEDGE Source: Terry Cutler 2007 APPLICATION

7. There are thus three facets to innovation - each needs balanced attention within a national innovation system • Creativity • the generation of ideas and inventions • Requires fresh thinking and inventiveness Support for education and research environments. • Entrepreneurship and • commercialisation • linking good ideas to the right market • opportunities • (Good ideas or patents without customers • or users are worth nothing) • Public - private linkages for sourcing relevant ideas • needs two way awareness of opportunities • and needs Industry should lead, but governments should help reduce barriers to success Firm-to-firm and firm-to-research provider linkages become increasingly important in an era of open innovation and “markets for innovation” Requires entrepreneurs and risk taking • Diffusion and adaptation • rolling out high potential innovations • across industry or the community • Capturing national benefit Government can assist with awareness and extension programmes - especially for SMEs; Export facilitation Dr Terry Cutler

8. The triple helix of innovation policy: (i) market-oriented innovation to increase productivity and improve competitiveness; • innovations and changes in public policies and service delivery around the production of public goods; and • innovations and changes to address societal and environmental aspirations and challenges, and the mobilisation of private and public sector capabilities around these challenges. Dr Terry Cutler Dr Terry Cutler

9. SKILLS REGULATION INFRASTRUCTURE CAPITAL Community service providers TAXATION GOVERNANCE research providers firms NATIONAL CHALLENGES NATIONAL PRIORITIES Government COMMUNITY PEOPLE Innovation occurs within a complex ecosystem of actors, and relationships …. No one innovates in isolation! Dr Terry Cutler

10. Innovation system = the stocks and flows around innovation • The elements of innovation involve both ‘stock’ and ‘flows’: stocks of • knowledge and capability, and the information flows of the innovation capital • around these. • We need to invest in the capabilities required around each element of the • innovation system, as well as investing in the linkages and flows between them. • Resources applied to innovation should be regarded as investment in • the future, not as expenditure. Dr Terry Cutler

11. Five key functions within an innovation system • identification of opportunities • creating capabilities • managing risk and uncertainty • building and maintaining infrastructures • mobilising resources Dr Terry Cutler

12. Systemic challenges within an innovation system (areas for potential system failure, over and above market failure) • Inadequate infrastructure provision • Inadequate institutional development and evolution. • 3. Lack of skills and learning problems (eg absorptive capacity). • 4. Structural adjustment issues and transitional problems in economic change (eg technology lock-in). • 5. Networking and collaboration problems (loose versus tight). • 6. Heterogeneity and diversification versus specialisation. • 7. Imbalances within and across the innovation system (eg. forgoing leverage - in Australia, the parts are better than the whole!) Dr Terry Cutler

13. Putting Australia into context - the innovation challenge of a small economy ¶ The tyranny of distance ¶ The tyranny of low density (sparcity) ¶ The impact of trade gravity ¶ The opportunities from natural endowments (seas, space, land, resources, biodiversity, isolation) ¶ The challenges of federated, distributed systems Dr Terry Cutler

14. AUSTRALIA’S ECONOMIC PERFORMANCE - SCORECARD Strong GDP growth Low unemployment, with skill shortages But … all fuelled by commodities boom. National savings through pension fund scheme Reasonable productivity growth since mid-1980s (impact of micro-economic reform agenda)* Challenged agricultural sector - 10 year drought, fuelling longer term climate change fears *The sustained productivity gains in the agricultural sector have been more long-run High household debt, and housing affordability challenge highly skewed exporting base Inflationary pressures Low trade intensity across economy as whole (despite having doubled over past three decades- a function of the scale of the services sector?) Dr Terry Cutler

15. Analysts often forget that technological innovation is especially important for resource based economies “Most of Australia’s massive deposits of minerals were of no use until new technology liberated them. In the last two centuries Australia has depended as much on the rise of new technology as on its own soil, grasslands, minerals and other resources” Geoffrey Blainey, A Shorter History of Australia, p.24 Dr Terry Cutler

16. EVOLUTION OF AUSTRALIA’S ECONOMIC DEVELOPMENT 19th century Superior economic performance to US - off back of mining (gold) and wool 1901 - Institution building around new Commonwealth of Australia; key role for government enterprises; 1914-1918 war - Disruption to civil imports; lack of local defence materiels 1900-1920 Push for greater local industrial self sufficiency, defence industry and public health capabilities 1920-1940 1940-1960 Sunset of Imperial influence: shift from UK to US alliance. Post war reconstruction, industrialisation: “nation building” projects - including discussion of nuclear futures (off uranium resources). Manufacturing stagnates behind protectionist barriers; beginning of second mining boom (iron; coal; uranium) 1960-1980 Internationalisation of economy (with reduction of tariffs and floating of currency); programmes for structural adjustment and micro-economic reform; privatisation of government enterprises. Focus on new ICT and biotech technologies. Strong productivity growth. 1980-2000 New challenges from global warming, energy futures, terrorism and preventable diseases focus new national priorities; emergence of competition from BRIC economies; China now key trading partner 2000 - Dr Terry Cutler

17. Some special innovation challenges for Australia: Industry structure dominated by a very small number of big companies (many MNCs) and a long tail of SMEs Previously protected manufacturing sector now at risk of being hollowed out by North Asia Windfall mineral export earnings subject to external factors outside our control (limited counter-cyclical safety nets) Services sector traditionally very domestically focused (with oligopolistic industry structures in telecommunications, banking, retail …. ) Domestically focused services sector now facing global competition (eg India) Ageing population - increased health spending and future skill shortages

18. Commonwealth Serum Laboratories Establishment Change or major review CSL Pty Ltd Termination THE INSTITUTIONAL EVOLUTION OF AUSTRALIAN DEVELOPMENT AGENCIES Not comprehensive 1920-1940 1940-1960 1900-1920 1960-1980 1980-2000 2000 - 1926 CSIRO 1936 NHMRC Statutory incorporation 1930s RR&DCs 1953 ANSTO Aust Research Grants Commission, 1965 ARC ASTEC CRCs R&D Tax Concession AMC IIF Austrade NCC Tariff Board, 1928 Industries Assistance Commission Productivity Commission De-regulation & privatisation Corporatisation Govt enterprises Dr Terry Cutler

19. Commonwealth Serum Laboratories Establishment Change or major review CSL Pty Ltd Termination THE INSTITUTIONAL EVOLUTION OF AUSTRALIAN DEVELOPMENT AGENCIES Not comprehensive 1920-1940 1940-1960 1900-1920 1960-1980 1980-2000 2000 - 1926 CSIRO 1936 NHMRC Statutory incorporation 1930s RR&DCs A lot of the institutions date back a long time, albeit within an evolving framework; We tend to forget abandoned institutions or programmes; Many aspects of the current framework hark back to a very different industrial world - most current programmes were conceived in a pre-Interent, pe-digital era! 1953 ANSTO Aust Research Grants Commission, 1965 ARC ASTEC CRCs R&D Tax Concession AMC IIF Austrade NCC Tariff Board, 1928 Industries Assistance Commission Productivity Commission De-regulation & privatisation Corporatisation Govt enterprises Dr Terry Cutler

20. Prime Minister’s Science, Innovation and Engineering Council Dept of Prime Minister & Cabinet National Departments* Agriculture, Fisheries & Forestry Industry, Tourism & Resources Environment & Water Resources Education, Science & Training Foreign Affairs & Trade Communications, IT & Arts Health & Ageing Defence Treasury National Health & Medical Research Council Australian Research Council National Competition Council AusIndustry DSTO Austrade Rural R&D Corporations NICTA Bureau of Meteorology Industry R&D Board EMDG BITS programme Productivity Commission CSIRO EFIC Industry Innovation Funds COMET programme Aust Consumer & Competition Commission ANSTO Invest Australia AIMS Foreign Investment Review Board Auto programmes (ACIS) CRCs Pharma Programmes (P3) Legend: Green: Direct Departmental or Ministerial control Red: Statutory or ‘arms length’ agency Blue: programmes under Departmental budgets Aust’n National University As at 2007 University funding formulae Geosciences Australia Council of Australian Governments: Federal and State co-ordination State Administrations Departments of Primary Industry Departments of Innovation, Industry & State Development Departments of the Environment For eg: CIO, “Multimedia Victoria”, Film Victoria Health Services Education Emergency services Treasuries Trade promotion; Investment attraction Universities Hospitals * This does not purport to be a comprehensive mapping Dr Terry Cutler

21. Many Australian initiatives have focused on strengthening public-private linkages - 4 examples Example 1: Venture Capital The problem: a systemic failure with VC for early stage firms Mid 1990s: Innovation Investment Funds scheme • Licensing of new arms-length private VCs • Began with 2:1 $ incentive • Returns to government capped (upside to VC) • Important aim to attract and build a cadre of skilled professional managers • US experience (see graph) shows that this is not a short-term challenge

22. Many Australian initiatives built around strengthening public-private linkages - 4 examples Example 2: Co-operative Research Centres (CRCs) The problem: Perception that universities and research institutes were not sufficiently linked to industry Early 1990s to date: Co-operative Research Centres • Solicit competitive bids from industry and research consortia for matching funds from government • 7 year funding, with opportunity to re-bid • Over 70 CRCs currently in place • Recent review demonstrated significant RoI to country • Has promoted new collaborative culture

23. Many Australian initiatives built around strengthening public-private linkages - 4 examples Example 3: Rural R&D Corporations In 1989 Government legislated to consolidate special rural R&D schemes that date back to the 1930s. Model: Industry levies on turnover matched by government funds (from 0.5 to 1:1) Industry based Boards manage disbursement of funds to priority research areas for the industry. Complements similar schemes for rural industry promotion and marketing Has facilitated highly networked industry clusters in wool, grains, and wine etc

24. Many Australian initiatives built around strengthening public-private linkages - 4 examples Example 4: Australian Innovation Exchange Network (IXC) Problem: Poor information markets linking organisations with capabilities and organisations with strategic needs and capability requirements. IXC pilot in 2004 - now fully established in 2006 Model of trusted intermediaries as innovation brokers between research providers and firms, and between MNCs and SMEs. The Network of IXC Intermediaries work inside multiple member organisations, under a unique confidential structure, to search for and create connections for business growth. Confidential information is not seen by other members. When an opportunity is found, IXC Intermediaries then help members engage directly through a step-wise disclosure process. International affiliates being established (UK the first) and now our view is to evolve to an IXC International this year.

25. An innovation future for Australian industry Australia’s new government has laid out a ten point framework for its innovation policy which addresses many of the identified challenges going ahead: 1. Build a culture of innovation and new ideas by strengthening investment in creativity and knowledge generation. 2. Focus incentives for business R&D to promote global competitiveness, delivering the best outcomes for exports and economic growth. 3. Accelerate the take up of new technology, so Australian firms can access the best ideas from around Australia and the rest of the world. 4. Make Australia’s innovation system truly international, by supporting partnerships, collaboration and foreign investment in Australian R&D. 5. Use government procurement to support innovative Australian firms. Dr Terry Cutler

26. The ten point framework for Australian innovation policy: 6. … develop multiple pathways for industry to access the knowledge and expertise in universities and research agencies. 7. Strengthen the skill base for innovation, including in maths, science and engineering, and professional training for firms to manage innovation. 8. Develop and implement a set of national innovation priorities 9. Strengthen the governance of the national innovation system to support higher expectations of government agencies and industry. 10. Review the bewildering array of government innovation and industry assistance programs to reduce duplication and improve effectiveness. Dr Terry Cutler

27. Dr Terry Cutler

28. Beginning with seven deceptively simply questions … Can we imagine a better world? Are we generating fresh ideas and pushing the boundaries of knowledge? How do we solve the big challenges Australia faces? Can we do everyday things better? Creative problem solving everywhere, and incremental innovation. How do we make better use of available tools and technologies? How do we make it easy for people to adapt and use tools or ideas in new ways? How do we better build and nurture human capital? How might Australia, as a small country, prioritise its innovation efforts?

29. Proposing national priorities for innovation: we can’t be good at everything Some starting points …. 1. Start from leveraging Australia’s natural endowments or built strengths 2. Look to areas where there might be a distinctively Australian advantage in developing solutions to globally relevant challenges or markets 3. Identify opportunities through innovation to transform and reinvent existing industries and service delivery for competitiveness 4. Address the small country challenge in internationalising innovation 5. Maximising impact and national benefit from the supporting investments in national capabilities, facilities and innovation infrastructure Dr Terry Cutler

30. 5 discrete roles within a national innovation system: both governments and business have a direct stake Science intensive innovation Advancing frontier science and knowledge Creating or transforming industries Solving major national and global challenges R&D intensive innovation Knowledge intensive innovation Delivering incremental innovation for industry Delivering community solutions Society oriented (Public good research and innovation) Industry oriented Dr Terry Cutler

31. National policies and priorities Science intensive innovation Advancing frontier science and knowledge Creating or transforming industries Solving major national and global challenges R&D intensive innovation Providing community solutions Knowledge intensive innovation Delivering incremental innovation for industry facilities and infrastructure regulation and institutions Capability building education and training Developing the different roles within a national innovation system Managing an innovationportfolio that encompasses the spectrum of activity from breakthrough science through to incremental innovation, all underpinned by crucial national facilities and capability building Promoting a clear framework for national investment and decision making (and for aligning the objectives and incentives of partners) Dr Terry Cutler

32. Investing in missions and capabilities to address national priorities. Capability is …. Skills, experience and know-how CAPABILITY infrastructure collaborations and relationships (laboratories, equipment …) Dr Terry Cutler

33. Investing in missions and capabilities to address national priorities … Matrix management - matching the right capabilities to priority goals CAPABILITIES PRIORITY actions ‘enduring’ - but evolving • structural • long time scales • ‘irreversible’ decisions • capabilities for future • demands • delivery path to impact • reversible decisions impact goals ‘enduring’ - but evolving PRIORITY NATIONAL OUTCOMES • externality • focus for impact Dr Terry Cutler

34. Some key learnings from our experiences ¶ Important to have mechanisms for promoting a “whole of country” framework - a proactive national innovation system ¶ A proactive approach is facilitated by articulating national priorities and by having an explicit ‘portfolio’ investment model for a national innovation system ¶ Public-private partnerships in innovation will vary by the objective and focus of the innovation activity - there is no “one size fits all” model or approach ¶ Key government role in providing innovation infrastructure and building capability ¶ We must pursue local innovation within a global context ¶ Public innovation initiatives should emphasise: - capability building - clarity of national purpose - strategic leadership - co-investment (to leverage funds and to strengthen industry linkages) - a long-term view of investing in the future

35. We are not in the business of reinventing the wheel…