What are the right incentives for innovation?

Smarter resources could help Australia develop an economy that will thrive long after its mineral riches have diminished

Australia has long prided itself on being a clever country that encourages innovation. Think the bionic ear, the black box flight recorder and the cervical cancer vaccine, to name but a few inventions.

However, with the resources boom showing signs of another spike, some critics fear the nation is becoming little more than a mining quarry. What will it take to become a truly innovative country? The Gillard government hopes the National Broadband Network can spark a digital revolution, while Shadow Minister for Communications Malcolm Turnbull has flagged tax and workplace-relations reforms while calling on start-ups to better promote their own successes and engage in more capital-raising initiatives.

Traditional levers such as tax breaks and market development grants remain valid ways of fostering innovation, but CSIRO chairman Simon McKeon has warned against a recent big business push to slash research and development tax incentives to fund broader corporate tax reductions.

As Australia seeks to compete in the Asian Century, a change in mindset is required to avoid the risk of becoming a peripheral player, according to the preliminary findings of the Australian Competitiveness Survey undertaken by University of Hong Kong’s Professor Michael Enright on behalf of CPA Australia.

Creating an innovative country has arguably never been more important. INTHEBLACK canvasses the views of three experts on the vexing issue of appropriate incentives for innovation.

Veena Sahajwalla, MaRT@UNSW

Veena Sahajwalla, [email protected]

Veena Sahajwalla

Engineer and inventor
[email protected], www.smart.unsw.edu.au

All the incentives in the world count for little unless great ideas become genuine solutions. Professor Veena Sahajwalla believes strong partnerships between science and industry are the key to success.

“The best ideas can only remain in the lab if you don’t put that next level of effort into making them into real-world ideas,” Sahajwalla says.

She speaks from experience. Sahajwalla and her colleagues at the University of New South Wales (UNSW) teamed up with manufacturer OneSteel to ensure their research became a viable commercial reality. The breakthrough of their patented green steel invention dates back to 2003, when Sahajwalla pursued the proposition that plastics and tyres – a huge landfill burden – could be used to ease the fossil fuel load. It has resulted in rubber partially replacing coke in electric arc furnace steelmaking.

Sahajwalla says innovation investment in Australia is “quite significant, with a clear rising trajectory for R&D funding from business”.

“It’s really about how we can get some of these great, innovative ideas that are developed in R&D labs, whether in unis or research institutions, to become realities,” she says. “That’s part of the challenge.”

This demands partnerships between industry and the research sector that grow from respect and understanding of each other’s visions. This has occurred with OneSteel, with more than 1.5 million tyres recycled by the steelmaking giant.

While government incentives and grants are important factors behind innovation, Sahajwalla says companies often need to show a long-term commitment to an idea without the guarantee of financial returns. She notes OneSteel started with the goal of using waste resources as raw materials in the steelmaking process, with a view to helping the environment. “I [wasn’t] telling them on day one you’re going to save a dollar. If anything, they knew it would be years before they’d see any economic benefits.”

Nevertheless, Sahajwalla says businesses must understand what will provide them with competitive advantages and help them achieve long-term profitability. Researchers must also appreciate that reality.

She says Australia has a reputation for not doing enough to translate brilliance in the laboratory into patents and commercial profitability. Overcoming this will require the wise use of government incentives and grants to kickstart innovation, followed by persistence and engagement between industry and researchers. She adds that business partners do not always need deep pockets to drive innovation. “You can invest in research by supporting people and encouraging engagement.”

For example, engineers can engage smart researchers through PhD scholarships, or early career researchers. Sahajwalla’s own first engagement with OneSteel was modest. “That initial investment in R&D was partly supported by government and partly by industry, but it wasn’t as if it required millions of dollars of investment on day one to see it happen.”
Sahajwalla says Australia has the skills and facilities to punch above its weight in innovation, but it needs to think big and have a long-term vision. She applauds businesses supporting R&D that may not return immediate profit. 

Professor Veena Sahajwalla is director of the University of NSW’s Centre for Sustainable Materials Research and Technology, [email protected] She was recently appointed to the Australian Government’s Climate Commission.
Sebastien Eckersley-Maslin, BlueChilli

Sebastien Eckersley-Maslin, BlueChilli

Sebastien Eckersley-Maslin

Investor and engineer
BlueChilli, www.bluechilli.com

Imagine a government offered a million-dollar prize to whoever came up with the best software to overcome, for example, traffic snarls or e-health dilemmas.
Sebastien Eckersley-Maslin predicts such a move would encourage a cohort of talented entrepreneurs to burn the midnight oil to pursue the prize. It could also be a cost-effective way for countries to encourage new businesses and solve infrastructure and social conundrums.

“The government gets 100 submissions for each of these ideas and it hasn’t cost anything yet,” Eckersley-Maslin says. “So what happens is suddenly the winner gets this capital for a business they’ve just created without realising they’ve just created a business.”

Out-of-the-box incentives for innovation do not have to cost an inordinate amount of money, he says. “I’m a relatively simple sort of guy, so I look at simple incentives to derive simple outcomes. Basically what you’re doing is using a carrot to tease out these innovative people who form natural alliances. And the model, while it hasn’t been provided in a government space, definitely works in terms of driving competition.”

Through his technology development company, BlueChilli, Eckersley-Maslin and his team launch an average of two businesses a month. He believes Australians are naturally entrepreneurial and creative, particularly in the technology space.“We enjoy making light of hard work by looking at innovative ways to do things. What we’re now realising is that we’re good enough. We’ve got more confidence for the technology community to be able to build our own innovations.”

That said, he believes government procurement rules in Australia are very risk averse. “That’s in the interests of government because they’ve got to protect public money. Unfortunately, it means you’re precluding any small business from entering into government procurement.”

Eckersley-Maslin encourages governments at all levels to relax some rules for projects in a bid to help promote innovation. He cites a “fantastic program” – the Australian Government Defence Materiel Organisation’s Capability and Technology Demonstrator – which allows industry and researchers to put forward technology solutions that can be used in the defence sector.

“It takes about a year to apply, but if you can demonstrate you’ve got the ability to do it then you’ll get the cash and you can set up a team and go for it. It’s solving real-world problems, there are real dollars behind it and the most important thing is everyone accepts that the project might fail.”

In the private sector, Eckersley-Maslin says a strong angel investor culture supports innovative start-ups in many Australian states. However, within big corporations innovation can be difficult to foster.

“When you’ve got that many layers of structure it’s difficult for them to have innovation,” he says. “Because innovation means breaking rules, taking risks and doing everything a corporate doesn’t want to do.”

For companies trying to embrace innovation, Eckersley-Maslin suggests two approaches: seconding a group of people “and taking them outside that corporate environment and allowing them to fail”, or engaging entrepreneurs to do the innovation for the company.
“But innovation to inspire internally is a cultural shift; it’s about people, not necessarily ideas. They need to accept risk, accept failure and maybe isolate it to a small team with a bit of a budget.”  

Sebastien Eckersley-Maslin is the founder of BlueChilli, a Sydney technology and software development company that creates web applications and invests in software development for online start-ups. He is a former Royal Australian Navy weapons engineer.

John Bessant, University of Exeter

John Bessant, University of Exeter

John Bessant

Professor of Innovation and Entrepreneurship
University of Exeter, www.exeter.ac.uk

Australia is a fascinating laboratory for innovation, according to Professor John Bessant. He warns, however, that with abundant mining resources it is easy to become complacent.

“If you just scratch the ground and sell what you can dig up that’s great in the short term, but it doesn’t necessarily build for the long term,” Bessant says. The British-based professor argues stimulation of ideas is what will help Australia and other countries into the future.

“It’s a huge challenge for us in Europe because for a decade now people have been talking – politicians and industry people – about becoming a knowledge economy,” Bessant says.

Many thought this would result in Europe doing “the smart stuff” and countries such as China and India handling manufacturing and production. But Asia has developed a strong knowledge economy of its own, forcing Europe to radically reassess where its growth will come from. “It is really beginning to focus the mind strongly on the innovation question, which is about turning knowledge into value of some kind.”

Evidence shows innovation is closely linked to economic growth and incentives from governments, trade bodies and companies can foster innovation. “But one size doesn’t fit all,” Bessant says. “There is no magic bullet, although politicians would love to find it.”

He says organisations differ in how capable they are of managing innovation incentives. Some smart global corporations use tax incentives for “slightly more radical research and development”, while many small businesses struggle to utilise such inducements.

“I know there was a lot of work in Ireland before the crash – R&D subsidies, tax incentives and so on – for small and medium firms. But a lot of them didn’t take them up. Their needs were much more basic.”

Bessant suggests providing assistance for smaller businesses to implement an innovation strategy. Tax incentives must also be targeted, but not too narrowly confined to areas such as manufacturing alone.

Governments can also fast-track broader innovation through the provision of infrastructure such as high-speed broadband and support for regional initiatives. However, these should not be relied upon as the sole funder and driver of innovation. “One of the big things that is happening now

is called open innovation, which is the notion that knowledge is very widely distributed and available. The problem becomes how do you make and broker those connections?”
Government aside, Bessant says trade associations and other organisations and individuals should seek to become such knowledge brokers to help small and large businesses make connections.

“In a knowledge-rich world you don’t need an R&D facility any more if you know how to connect to someone who’s got one,” he says. “Brokering becomes a key policy instrument for a variety of players.”

There is also a public and private sector role for funding innovation, not just providing venture capital for start-ups, but supporting what he describes as the “teenage phase” as a maturing project needs cash.

“But overall, it’s less about money than it is about information.”
Professor John Bessant holds the chair in Innovation and Entrepreneurship at the University of Exeter, UK. A fellow of the British Academy of Management, he has advised the UN, World Bank and OECD.

Key takeaways

  • Traditional government incentives for innovation have included tax breaks and market development grants.
  • Governments are being encouraged to open the way for more entrepreneurs and smaller companies to compete in procurement processes.
  • Partnerships between industry and researchers are crucial to turn ideas into real-world solutions.
This article is from the March 2013 issue of INTHEBLACK.

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