2017 Australian Innovation System ReportThe Office of the Chief Economist (OCE) has just released the annual Australian Innovation System Report. You can download a copy here.

The OCE has published a complete set of innovation indicators on its website, relating to activity, outcomes, entrepreneurship, collaboration and engagement, framework conditions, and skill sets.

It offers useful data on investment in research, research workforce, research quality and research commercialisation. You can also view selected innovation indicators in the Australian Industry Monitor.

This year’s Australian Innovation System Report focuses on high-growth firms (HGF) and their relationship to innovation, debunking myths about who they are (spoiler alert: very few are tech-driven startups).

And some readers may be surprised to discover what the evidence really says about innovation integration as an economic driver across all size enterprises and industry sectors.

We’ve extracted some key points from the report, identifying what Australian innovators are good at and where we need to lift our game to be globally competitive. Jump straight to a topic if you prefer:

Who’s innovating  ~  Entrepreneurship  ~  Strategy  ~  Collaboration  ~  R&D  ~  Funding  ~  High Growth Firms  ~  What’s working  ~  How to grow faster with innovation impact

Who’s being innovative?

Nearly half of Australian businesses are innovation-active, increasing from 44.9 percent a decade ago to an estimated 48.7 percent in 2015-16.

By international standards, that’s relatively high.

In 2015–16, almost 50 percent of Australian businesses attempted to develop or introduce an innovation and these firms were distributed broadly across all industries, with the highest proportion found in Manufacturing.

However, over the past decade the industries with the highest increases in innovation-active firms were Arts and Recreation (from 44.4 to 57.9 percent); Health Care (from 35.7 to 47.5 percent); and Construction (from 31.1 to 41.1 percent).

Large firms (200 or more employees) reported the strongest increase in innovation activity – from 70.8 percent in 2007–08 to 77 percent in 2015–16. That’s nearly twice the rate for microbusinesses (0–4 employees).


Australia’s level of entrepreneurial activity ranks highly compared to other developed economies.

In 2015–16 over 50,000 businesses took Australia’s business entry rate to its highest point in six years.

Approximately 14.6 percent of the Australian adult population (or 2.2 million) were early-stage entrepreneurs actively engaged in starting new businesses last year.

Construction saw the largest increase in the number of new firms (11,967). Financial and Insurance Services firms increased by 8,705; and Professional, Scientific and Technical Services by 5,826.

Agriculture, Forestry and Fishing, however, recorded the largest decrease, falling by 2,737 firms (1.5 per cent).

The Report suggests that perceived business opportunities and entrepreneurial skills are driving the high quantity and quality of entrepreneurship in Australia. Nearly half of the Australian population in the datasets perceive opportunities to found a start-up to be positive, and 52.3 percent believe they have the necessary skills to start a business.

Despite these above average scores compared to other innovation-driven economies, 42.9 percent of non-entrepreneurial Australians claim a fear of failure prevents them from starting their own business. That’s about 10 percentage points higher than our UK and US peers.

Australia ranks third behind only Canada and Estonia when it comes to female entrepreneurship, but there’s still a glaring gender gap: our female entrepreneurial participation is only 65 percent of male participation.

Innovation strategy

Australian firms are better at modifying innovations introduced by other domestic firms before commercialising them than we are at new-to-market innovations.

It’s a simple strategy that some will argue is one of the strengths of Australia’s innovation system.

But because domestic modification involves a lower degree of novelty than other strategies, that’s not always good for Australia’s global competitiveness.

Collaboration and networks

Maybe if we collaborated more, we’d have the wherewithal to rank higher than 23rd of 31 OECD countries for the proportion of firms focusing on new-to-market product innovation.

Sadly, Australia ranks in the bottom half of the OECD for collaboration too.

The Report suggests that this is because the business sector is not good at connecting with the research sector, so we’re missing out on the benefits of such collaboration.

A recent study of 7,000 Australian SMEs found that collaborative innovation increased annual productivity growth by 4.1 percentage points. Meanwhile, an estimated 86.3 percent of Australia’s innovation-active businesses didn’t collaborate at all.

Growth in business R&D

High R&D intensity firms enjoy an impact on turnover and wages growth of up to 7.3 times higher than low R&D intensity firms.

But Australian businesses spent 12 percent less on R&D in 2015–16 ($16.7 billion) compared to the previous year ($18.9 billion).

The majority of Australian businesses conduct their R&D in-house and don’t partner with other organisations.

Australia ranked 29th of 29 OECD countries for the proportion of SMEs collaborating with non-commercial research organisations such as universities. Large Australian firms ranked 27th.

With less than 10 percent of innovation-active businesses saying it’s a lack of access to knowledge or technology that’s delaying innovation, the Report suggests that most businesses either don’t perceive it’s beneficial to them or they just don’t realise how big a difference collaboration might make to their business performance.

But… Australia is more generous than many other OECD countries when it comes to funding the public research sector. We rank 7th out of 32 OECD countries (ahead of the US) for the percentage of government expenditure on R&D financed by industry.

We also have the third highest number of researchers in the government and higher education sector per thousand workers. We have more PhDs per thousand people in the working-age population. Yet, only 4.7 per 1,000 employees in Australian industry are researchers.

Australia’s R&D in business as a share of GDP has declined sharply over the past decade, and it’s no longer the domain of Mining and Manufacturing. High R&D growth is now much more evenly distributed across industries, with mature firms and SMEs dominating.

The proportion of R&D HGFs that were SMEs has increased steadily from 2005 to 2015, from 69 to 85 percent; the ratio of SMEs registered under the R&D Tax Incentive program is similar.

How is innovation funded?

In 2015–16, more than 21 percent of innovation-active SMEs said the lack of additional funds was a barrier to innovation, especially for risk capital and building better matched skillsets.

Only 12 percent of microbusinesses, 19 percent of small businesses and 24 percent of medium-sized enterprises sought external funding: 94 percent chased debt finance (88-95 percent success rate) and only 24 percent pitched for equity finance (50-53 percent success rate).

While AVCAL claims that 2015–16 recorded a 48 percent increase in venture capital investment ($233 million in 2014–15 to $346 million in 2015–16), ABS data tells a different story, swinging from $295 million in 2013–14 to $383 million in 2014–15, then down to $223 million in 2015–16.

The Office of the Chief Economist found that the largest share of venture capital investment goes to firms aged five years or older, not startups.

Meanwhile, direct foreign investment has increased by 150 percent in the past year to $64.8 billion, pushing Australia’s rank up from 10th to 4th in the OECD. Only 39 percent was invested in the Mining sector, and service industries are steadily attracting a greater share.

High Growth Firms

HGFs are businesses that experience rapid growth of an average of 20+ percent per year over three consecutive years in terms of turnover, employment, and R&D spend.

From 2004–05 to 2011–12, HGFs contributed nearly half of the nation’s net positive employment growth (despite representing only 9 percent of all firms with five or more employees) and contributed about 66 percent of the net positive sales growth, plus 63 percent of the net positive value-added growth.

Growing policy interest in HGFs has created a mythology about them, like they’re all tech start-ups. But most Australian HGFs are medium-sized firms both by employment and turnover growth. And most of them are in Construction.

The Report suggests that HGFs are not an actual type of firm, but rather a phase that some experience during their life cycle. Few new ventures can sustain high growth beyond four years.

So, what’s working?

HGFs focusing on goods and services innovation have seen a turnover growth rate of 7.4 percentage points. Across all firms, innovation in goods and services has boosted growth by an average of 3.3 percentage points. Marketing innovations have increased turnover growth by 4 percentage points.

Organisational/managerial and operational process innovations have a negligible independent impact on turnover growth.

Businesses that include innovation measures when assessing their business performance are more likely to increase their turnover growth rate by an average of 4 percentage points.

Businesses incorporating data-driven innovation have raised productivity faster than non-users by as much as 10 percent. Income generated over the internet grew from $144 billion in 2010 to more than $320 billion, in 2015-2016.

How can you grow faster with innovation?

Impact Innovation can help you improve your innovation activity with strategy, training, connections (especially for collaborating with research organisations), technology commercialisation (new-to-market innovation), business model design, and confidence to seek debt financing alternatives to fund your plans.

Just call us on + 61 (07) 3041 1128 to find out what’s within reach.

– Brian Ruddle, Managing Director

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