due largely to capital intensity and the cyclical ups and downs observed in the mining industry, the total primary sector is unlikely to contrib- ute more than 10% of the nation’s GDP for dec- ades yet. While several other goods-based indus- tries will continue to be important to Australia’s economy – including the construction industry, which is also experiencing the ups and downs of a 40-year life cycle – service industries will con- tinue to dominate our GDP. What does all this suggest for future innova- tion? In the main, Australia will need innova- tion in the purely domestic industries to keep pace with the growing standard of living in other developed nations. But we need to be espe- cially innovative in the export sector and over- seas expansion by emulating, if not exceeding world’s best practice technology and systems. For example: • We need our mining industry – which cur- rently generates half the nation’s exports – to become the world’s lowest-cost pro- ducer, and to perhaps generate greater val- ue-added with world-competitive smelting (manufacturing) in due course. • We need to rejuvenate our currently tiny agriculture industry – which currently con- tributes just 2% of the nation’s GDP – to play a role in feeding the growing Asian megaregion. • Having become a more significant compo- nent of Australia’s exports activity, service industries – particularly in tourism, educa- tion and health – will also form part of the new innovation drive. The productivity challenge Productivity – measured as the growth in outputs
per hour worked – is one of the main benefi- ciaries of innovation. The below chart points to a regrettable slowdown over the past decade. Productivity growth over the past decade has averaged less than 1.2% p.a., compared with 1.6% p.a. in the Infotronics Age (since 1965) and 2.1% p.a. in the Industrial Age (1865–1964). This slowdown is, in part, seen as a general malaise. Australia has not experienced a wake-up call in the form of a recession for nearly 30 years – or, in other words, for more than a generation.
But innovation equates to much more than R&D, as we see below. It has multi-faceted ele- ments – in fact, R&D is estimated to account for less than a quarter of all innovation in Australia. The above chart points to an estimated inno- vation spend of more than 4% of GDP in 2020, most of which is derived from a range of activi- ties including start-ups, software (including AI), service products, systems and processes (plus a large amount of uncounted innovation). The message is clear: let’s forget our his- torical, or narrow, definitions of innovation. That said, it’s encouraging to see in the below chart that we are increasing our expenditure on enterprise R&D (albeit in a cyclical pattern), even though we have a long way to go to match world’s best practice, which, when measured as a share of GDP, equates to over twice what we are currently investing. The growing importance of intellectual property (IP) In an increasingly competitive world, businesses are increasingly focused on the importance of unique- ness – in products, systems, long-term achievable strategies and organisational culture. These make up what is known as intellectual property, or IP. Although generally accepted accounting princi- ples (GAAP) dictate that IP is not acknowledged in a company’s audited balance sheets, investors have come to value IP far more than a company’s pas- sive assets (land, buildings, equipment, stock and debtors). This is clearly demonstrated in the below chart, which traces the increased importance inves- tors have placed on the IP of ASX-listed companies over several decades. Clearly, the accounting profession has not yet come to grips with this reality. But the main lesson
is that a business’s growth and profitability – and even its survival – depends increasingly on its IP. This is what innovation is all about: it leads to higher productivity, greater international compet- itiveness, and a better deal for customers, employ- ees and society at large. So, beyond 2020? It will be a fascinating journey. As previewed, we are now in the Asian Century, where the East has already overtaken the GDP of the West, and where the two most populous nations – China and India – are regaining their historical eco- nomic supremacy. By integrating our immigration, tourism and trade, as we have been doing for dec- ades, we are showing our willingness to be part of this new world order. With service industries now dominating our eco- nomic structure – as is the case for all advanced economies – we will probably find our innovators coming from a much wider base than in the 20th century. Hopefully, health will continue to be one of these sources; but other innovations and start-ups will come from a very diverse range of industries. Indeed, innovation itself is undergoing a
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