Towards 3% R&D – the statistics tell us national innovation is faltering

Launching our new editorial series – Towards 3% – turbocharging our national innovation effort – innovation policy analyst Dr John Howard looks behind the statistics to reveal that Australia’s national R&D effort has slumped since 2009. In this edited excerpt, the first part of a two-part series, Dr Howard shows Australia is falling further behind. The full paper can be downloaded here: The SRI Tables- What do they Really Show Final (2).

In November 2022, the Minister for Industry, Science and Resources Ed Husic announced a target of 3% of expenditure on R&D as a proportion of GDP for Australia.

We are a long way off that target, and since 2008 and the Global Financial Crisis (GFC), Australia has been falling further behind relative to what we consider our R&D investing peers.

Most of leading countries used the GFC as a call to step up their investment in R&D, but Australia did not.

While the 3% target is widely acknowledged internationally, its achievement requires a comprehensive policy framework, collaboration between government, academia, and industry, and a conducive environment for research and innovation to flourish.

For Australia to make the 3% target more than a rhetorical aspiration, serious investments are required by the business and government sectors.

@AuManufacturing will begin publishing contributions for our series – Towards 3% – turbocharging our national innovation effort – next week and we urge you to contribute. Call Peter Roberts, 0419 140679 or write to [email protected].

A possible bright light is higher education investment in R&D, where the Australian investment as a proportion of GDP is among the highest in the world.

Many have observed that higher education is doing the ‘heavy lifting’ in Australia’s national R&D effort, enabled by fees paid by international students and the R&D recorded by overseas PhD and postdoctoral candidates.

Others would argue that the higher education sector is not appropriate for leading Australia’s transformation from a commodity-based economy to a modern, vibrant, and dynamic industrial ecosystem.

It is the business and government sectors that are not pulling their weight. All have distinct but complementary roles in the ‘triple helix’ of business-higher education-government collaboration.

What the budget papers tell us

The SRI Budget Tables report that Australian Government Investment in R&D now stands at 0.49% of GDP.

Investment peaked at 0.73% of GDP in 1993-94, then trended down and up again to a new peak of 0.64% in 2012-13. It then trended down again to the current level—two-thirds of what it was 30 years ago.

Research has consistently shown that public (government) investment in R&D generates a large multiplier effect and positively impacts business expenditure on R&D—much greater than the effect produced by generic public expenditures.

However, in Australia, that commitment has been allowed to dissipate.

The fall in Government investment in R&D, particularly since 2012-13, is a major contributor to the overall fall in Australia’s R&D effort as a proportion of GDP.

This downward trend is a serious concern and does not augur well for building strong R&D collaborations among actors in the national innovation system—industry, higher education, government research, and the broader community.

The effect of inflation on actual R&D expenditure

The SRI Budget Tables estimate an inflation-adjusted increase in R&D expenditure in 2023-24 of 2.9% (based on 2020-21 dollars).

This arises because of the assumption in the Budget that the GDP deflator (generally used to calculate the effect of inflation in the National Accounts) would fall by something in the order of 0.25%.

The Mid-Year Economic and Financial Outlook (MYEFO), published six months after the Budget, revised the GDP deflator to an increase of 2.5%.

This gives an inflation-adjusted increase of only 0.6% in the Australian Government’s 2023-24 R&D investment.

Notwithstanding this marginal increase, there has been a continuous downward trend in inflation-adjusted Government R&D investment since 2011-12 — by 6.3% to 2023-24.

Over the four years since 2020-21, there has been an inflation-adjusted reduction in Government R&D investment of 9.9%.

Business and university R&D

From 1993-94, there had been a substantial increase in business R&D investment.

However, since 2012-13, the level of investment has been falling mainly due to changes in eligibility for the R&D Tax Incentives (RDTI) programme.

There was some increase from 2021-22, reflecting measures to improve access to the programme by small to medium businesses.

There have also been wide fluctuations in the level of Government investment in the higher education sector.

In 2023-24, the investment will be equivalent to the level reached in 2003-04. Higher Education institutions are deeply concerned about this level of commitment.

Investment by the Government in its own research activities (principally CSIRO, ANSTO and the DST Group) has barely moved over the period.

Internationally, government research institutes and laboratories are important partners in industrial research, as indicated by the 72 Fraunhofer Institutes in Germany and the 42 Government
research laboratories in the USA. The Catapult Centres in the UK perform an important role.

There has been a very large increase in what is termed ‘multi-sector’ investment since 2019-20. This covers the NHMRC, the MRFF, the CRCs, Rural R&D, and Energy and Environment investments.

Tomorrow: Towards 3% R&D – why is Australia’s national R&D effort falling?

Dr John Howard is an experienced policy analyst focused on science, technology, innovation (STI) policy and practice, industrial policy, management strategy, university-industry engagement, and regional innovation ecosystems. Dr Howard is Executive Director, Acton Institute for Policy Research and Innovation and Visiting Professor, UTS Institute for Public Policy and Governance.

Dr John Howard’s full paper – The Science, Research, and Innovation Budget Tables,
What do they really show? – published by The Acton Institute for Policy Research and Innovation and @auManufacturing can be downloaded here:

The SRI Tables- What do they Really Show Final (2)

This series is brought to you through the support of our principal sponsor, public accounting, tax, consulting and business advisory BDO, and tax incentive consultancy Michael Johnson Associates.