business conditions. While traditional indicators of innovation – R&D spending, patent filings, labour-force skills, broadband accessibility, startups, collabora- tions between business and higher education – add to our understanding, they often underes- timate innovation by skewing results in favour of large businesses with a structured approach. NAB’s Behavioural Economics team sought to develop a new proxy by breaking down the key drivers of innovation to construct the NAB Busi- ness Innovation Index. Derived from a survey of around 1700 Australian businesses, the annual index is based on the extent to which firms have made improvements that led to greater efficien- cy and cost savings.
I n business, innovation can seem like an ab- stract concept, yet it is common across the entire sector. Many business owners innovate continuously, but few perceive themselves as innovators or call what they do “innovation”. In fact, a vast majority of business owners underes- timate their own level of innovation, and there- fore do not consider Australia to be a “highly” innovative country. This view is particularly prevalent among very large firms and can shape their view of Austral- ia’s short- and medium-term economic outlook. Most businesses also view the culture of innova- tion within their industry sector as being much weaker than within their own business. Impor- tantly, highly innovative firms are typically more optimistic about Australia’s future and their own Dean Pearson and the team at NAB has been following businesses since 2016 in an innovation index. CAPTURING INNOVATION How can we track progress in innovation if we do not have something to measure it against?
“There is no shortage of innovative ideas – only of recognition”
In 2020 we saw innovation ratings tumble to all-time survey lows amid widespread supply chain and cashflow disruptions, forced business closures and labour shedding in the wake of COV- ID-19. Businesses often opted to do nothing rath- er than make drastic or rapid change, a phenom- enon known as status quo bias. Many business owners also considered past choices to be safer based on the principle of loss aversion, which infers that the pain derived from losses is great- er than the joy derived from gains. However, the overall index masked some fundamental chang- es in the way many Australian businesses were operating and adapting.
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