Analysis and Commentary

Few Australian companies even perform R&D – R&D scorecard

Analysis and Commentary

The Australian government used to publish a Business R&D Investment Scorecard, providing insight into how companies are investing in their future. Here John H Howard, Victor Pantano and Cameron Begley produce their own scorecard – which suggests fewer Australian companies are bothering with R&D.

R&D scorecards are vital tools for policymakers. They provide essential data that guide strategic decisions, stimulate investments, and foster an innovation-friendly environment.

These tools help ensure that R&D efforts align with broader economic and social goals, ultimately driving sustainable growth and competitiveness.

The Australian Government, through the Industry Research and Development Board, last published the Business R&D Investment Scorecard in 1997.

This publication provided detailed insights into the research and development investments by the top Australian companies.

Since its discontinuation, information on business R&D investments in Australia has been reported by the Australian Bureau of Statistics (ABS) and the SRI Budget Tables published by the Department of Industry.

However, these publications do not provide information on R&D investments by individual companies. As a result, we know very little about the companies investing in R&D in Australia.

Analysis of ASX listed companies

An analysis of the 2,200 ASX-listed companies undertaken by the Acton Institute for Policy Research and Innovation reveals that only 353 Australian-headquartered companies reported expenditure on R&D in 2022-23.

A further 54 companies, headquartered overseas and also listed on the ASX, report R&D expenditures. Most of these companies are headquartered in the USA, Israel, Ireland, Singapore, and New Zealand.

In 2022-23, the total reported R&D spend by companies listed on the ASX amounted to $14.7 billion, compared with $20 billion reported by the ABS in the previous year.

Therefore, there is a gap between what companies report publicly and what is collected through confidential surveys conducted by the ABS.

Australian company Atlassian, with headquarters in Australia, is not listed on the ASX, preferring to list on NASDAQ and other overseas exchanges.

In 2022-23, the company reported an R&D spend of $2.8 billion on revenues of $5.307 billion. The company’s annual report suggests that a large part of this spending is incurred overseas.

The overseas listing data of NASDAQ, the NYSE, and the LSE indicate that numerous highly research-intensive global corporations have a marketing, sales, and representation presence in Australia, but it is not known how much of that R&D is undertaken in Australia.

The ATO and AusIndustry would have data for overseas companies not listed on the ASX but who undertake R&D activities as Australian subsidiaries (with an ABN) and are eligible to claim the R&D Tax incentive. But at the moment, that data is confidential.

Many of Australia’s largest companies, including BHP, Telstra, Qantas, the four big banks, and the big retailers, do not report any R&D in their financial statements and, consequently, do not provide R&D data to the ASX. There are many possible explanations for this:

  • They have shifted their R&D focus to the “D” component, where some innovation-related activities might not qualify for inclusion in the official R&D statistics
  • Companies may not consider undertaking R&D a core business; although almost all businesses today are technology-intensive, many prefer to acquire software, hardware, and systems from specialised external vendors rather than develop their bespoke solutions
  • Companies are not undertaking a large amount of R&D, preferring to invest in other capital expenditure areas
  • The boards of these companies are focused on compliance and shareholder returns rather than engendering an innovation mindset and investment in R&D to support future products and services
  • Companies tend not to invite non-executive directors to join their boards who are committed to the discipline of innovation—contributing to finding new areas of opportunity
  • NEDS should be able to see innovation opportunities within the company or industry and in the broader social or demographic trends
  • Market analysts see R&D as risky and mark down the share price
  • Or boards prefer to allocate profits to dividends and share buybacks to satisfy institutional investors and keep the share price high.

These hypotheses, if in any way correct, do not bode well for the sustainability and growth of R&D in Australia. The first point above is an indication that the way R&D is undertaken is changing.

BHP stopped reporting R&D in its financial statements in 2019. The was part of a broader move to simplify financial reporting and to integrate R&D costs into general operating expenses rather than itemising them separately.

The change reflects a trend among some large corporations to streamline their financial disclosures and focus on core financial metrics that align more directly with shareholder interests and operational performance metrics.

However, the decision makes it more challenging for policy analysts, market observers, and other stakeholders to track the company’s specific investments in R&D.

The following trends in corporate R%D are in play:

  • Some companies, particularly in the pharmaceuticals sector, are continuing with a vertically integrated R&D process, from discovery through scientific research, clinical trials, distribution, and sales
  • In other sectors, as the BHP example demonstrates, the once-large centralised corporate R&D labs are disappearing, and R&D is becoming more distributed through a range of innovation sourcing strategies. This focuses more on the Development aspects of R&D
  • In some other sectors companies are moving away from investing in R&D (the creation of knowledge) towards “Innovation” (the application of knowledge), which is associated with very strong commercial metrics. Public policy/innovation policy has encouraged this.

The first category (develop/implement) spans both the “R” and “D” elements of the R&D spectrum. The second category is firmly at the “D” end. The third category relies on innovation—ideas successfully applied—to create new or improved products, processes, marketing methods, or business models. Ideas may or may not be generated through R&D

For Australia’s industrial future, more companies are needed to engage in ‘Real R’—that is, risk-taking, exploratory research where it might fail.

Businesses must invest in this sort of research if they are going to create new products and services rather than simply being fast-follower adopters.

Innovation sourcing comes with its own set of problems. Companies that source innovation externally can run into absorptive capacity problems due to the absence of experienced R&D managers who can interpret and apply ideas in an overall business context.

There are numerous examples of where externally sourced R&D fails to get traction in implementation. It is OK to “source” innovation, but if a company does not have the capacity to implement it due to its previous hollowing-out strategies, there is a problem.

These developments highlight how little systematic knowledge we have of the R&D performance of companies investing in R&D in Australia.

While we know about trends at the industry level, we have very little knowledge of which companies have leading roles and impacts in R&D investments.

This is particularly significant given Australia’s current very low level of business R&D investment.

The research for this Paper has provided insights into the R&D expenditures of Australian-listed companies and overseas companies with marketing, sales, and distribution activities in Australia.

The information can serve as a focus for strategies to encourage overseas-headquartered corporations to undertake more of their R&D in Australia. However, a much greater commitment to preparing and publishing an R&D scoreboard is required.

Download the full version of this paper here: Where is Australia’s RD Scorecard

Picture: BHP media release/BHP stopped reporting R&D in its financial statements in 2019

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