Election 22 the real issues – Productivity growth by Narelle Kennedy

@AuManufacturing’s occasional editorial series on the real issues in the 2022 federal election continues today. Here Narelle Kennedy looks at Australia’s industry and innovation policies and productivity.

Blind spots in Australia’s industry and innovation policies are hampering productivity gains and here two particular causes of concern stand out.

Firstly, innovation policies have an almost exclusive focus on increasing investment in research and development and advanced technologies, at the expense of building innovation capabilities to solve significant problems for new customers and markets.

In short, there is an over-emphasis on high technology innovation, rather than incentives for enterprises to gain the knowledge and capacity to respond to demand-led innovation.

The second blind spot is equating innovation only with activities in the ‘knowledge economy’ and failure to understand the importance of essential workers and the everyday economy to national prosperity.

Active ingredients of productivity

Both blind spots can be illuminated by looking more closely at the active ingredients of productivity and particularly, the role of intangible assets.

Productivity, put simply, measures the growth in output of goods and services against the growth of inputs, mainly capital and labour.

More specifically, productivity drivers are technological advances, improved ways of running businesses, and improvements in human capital, namely rising education and skills of the workforce and their competence in managing external and internal relationships and flows of knowledge.

Commentators like McKinsey and Company cite research showing increased investment in intangibles (such as know-how, a loyal customer base, proficient management of workforce, customer and supplier relationships, and strong reputation and brand recognition) is linked with growth in competitive advantage and productivity.

Realities of innovation

While investment in advanced technologies and direct R&D is vital, it falls short as a driver of productivity improvement.

For most Australian businesses, success rarely comes from breakthrough technologies or new-to-the-world discoveries.

More likely, innovation capabilities are the result of learning by doing; mining diverse sources of existing knowledge such as through market research, design, licences, prototyping, trial production and experimentation; and learning by interacting with others through inter-firm collaboration, personnel movements, links to professional bodies and the like.

Most importantly, performance and productivity gains are realised when these new approaches are brought together in a transformed business model, which creates superior value for customers by meeting an unmet need and earns a premium for the business in doing so.

Importance of the everyday economy

Knowledge-intensive activities are essential for productivity growth in enterprises and nations. But, it is a mistake to define economically-useful knowledge too narrowly, or to discount social wellbeing as a significant influence on productivity outcomes.

Innovation underpinning national prosperity is not the sole province of knowledge workers and the ‘knowledge economy’.

Attention to the smooth operation of the everyday economy and essential workers like health and aged care personnel, transport and logistics workers, food distributors and retailers, utilities maintenance staff, teachers and child care workers, is crucial, as has been demonstrated in the pandemic.

The everyday economy describes sectors that are immobile and relatively protected from competition, but that provide what has been called the services, production, consumption and social goods that sustain our daily lives.

The activities of the everyday economy include lowly paid, but highly necessary, caring and learning functions.

These are often not captured in productivity measures, but they are central to human connections and social ties that are essential for a sense of belonging, resilience and identity in communities.

As such, they have a part to play in Australia’s productivity efforts.

Recognising our productivity blind spots suggests it’s time for a re-think of Australia’s industry and innovation policies.

Narelle Kennedy AM is an authority on business innovation and emerging business issues and trends. She is best known as the long-serving CEO of Australia’s largest business-backed research think tank, the Australian Business Foundation. Narelle is an adjunct Professor in the School of Business, UTS Sydney and a committee member of Regional Development Australia. She is managing director of consulting and research services group The Kennedy Company.

Picture: Narelle Kennedy

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