Ghosts in the corporate machine:

Science and technology at the board table.

Dr Terry Cutler

National Press Club, Canberra

2 August 2000

 

The other day I was reading a book - ironically it was The Good Citizen - and came across a wonderful sentence: To be part of the democratic tradition is to be a prisoner of hope. I suspect that Australia's scientists, technologists, and innovators can relate to that expression: prisoners of hope.

If Australia is to have any future in the new global economy of this 21st century then we will have to liberate our talent and our ideas, and establish this country as an innovative, entrepreneurial, technology hot spot.

There are two key warning messages for Australia as it enters the 21st century; two key facts of life.

Survival Message One:

Science means business.

Technology based firms, technology enabled firms, are the firms that are driving business growth everywhere around the world. For example, in the US between 1995 and 1998 the IT sector - despite contributing only 8% of GDP - accounted for 35% of the nation's economic growth.[1]

Survival Message Two

Businesses that do not tap into science and technology-based innovation probably won't stay in business.

When we look around corporate Australia, scientists and technologists, using these labels in their broadest sense, are merely ghosts at boardroom tables. They are not there.

They are hiding out in universities and research institutes, and as a country we are not funding enough of these centres for ideas generation.

What they are not doing in these places is commercialising their ideas, putting them to work.

A recent and important survey by the Australian Research Council and CSIRO shows that Australia is falling further and further behind in its share of the world's patented ideas.[2]

As a consequence, Australia is in real danger of simply stockpiling, sitting on its intellectual capital and knowledge.

This rich mine of ideas and potential innovations could be quarried to build globally significant businesses and to transform the competitiveness of our existing industries. It is worth remembering that unused ideas wither. Therefore we also need to keep reinvesting in this stock of intellectual capital. People do not have the shelf life of rocks or farming land.

But there is evidence that we continue to under-invest in human capital, our knowledge stock for technology intensive industry [3]and innovation.

This question of the role of science, technology and innovation is crucially important just now because Australia is at a crossroad.

We are in the middle of a turning point between an old world economy and the new global information economy being created by the digital revolution.

This new economy is technology based and technology enabled.

Skilled people and clever ideas are now key national resources. Human resources and intellectual capital are what create the new firms, the new jobs, and new exports. If we know that science and technology drives innovation, and hence economic prosperity, then why aren’t scientists and technologists at centre stage?

I suspect the reason that scientists are not centre stage is simply because we have got our priorities wrong, because we have fallen into bad corporate habits and corporate shortsightedness, and because we believe we can continue to coast along on the strength of our traditional commodity businesses.

We always need to remember that Australia is a rapidly shrinking 2% of the global marketplace, with an increasingly adverse balance of trade. The only way to reverse the slide is to build the new companies and industries of the future, and to renovate our existing industries to outperform the global competition.

Australia has an image as an Old Economy.

In May this year we had reports that Australia's old economy image amongst Wall Street analysts was dragging down the $A.[4] In the same vein Ira Magaziner, formerly one of President Clinton's key advisers, has commented that "there are some vital pieces missing from the Australian policy jigsaw, and one of them is a 'modern economy' image".[5]

We may not like hearing Australia described as an "Old Economy" but this perception, and the level of the Australian dollar, is cause enough for a serious stocktake. Taking stock shows we have some real problems, both structural and - I believe - self-imposed. Both affect Australia's ability to punch above its weight in the new global information economy.

Taking stock: the industrial landscape

When I survey Australia's industrial landscape, what I observe is that most sectors across the economy have the same pattern of a few large dominant firms, then a small cadre of eager SMEs with growth potential, and a large tail of microbusinesses. In the area of high technology industries, Australia has few locally grown large companies. The bulk of our so-called knowledge industries are largely in service industries with a mainly local market orientation.

It is, therefore, not surprisingly, a fact of life that our current industry R&D and innovation relies upon:

Taking stock: the lack of high technology firms

So one reason why scientists are the ghosts at the corporate boardrooms is that there are too few of those sorts of companies who really know they need scientists.

The OECD estimates that foreign affiliates account for 30% of Australia's R&D. This reflects a growing global trend to cross-border R&D, and this is really important for Australia at the moment. But I don't think we would be wise to rely upon this R&D quarrying as a long term future. The immediate challenge is how to capture the maximum benefit from this international trade in intellectual capital, and to maximise the spillovers for local innovation. At the same time we need to be rapidly building up our local high technology base.

Taking stock: our lack of critical mass

Outside of resources and commodities, Australia's chronic problem has always been one of scale and critical mass. We are a small economy, a long way from anywhere. We can too easily fall into the trap of deluding ourselves that we are doing well by reciting good sounding trend figures based on percentage growth rates and per population achievement. When we use these figures we suppress the harsh reality that these statistical sugar pills disguise low base figures and disguise the small absolute numbers involved. High percentage growth off a really low base is still a really low outcome![6]

Performance indicators show that Australian industry as a whole is not doing well in research and innovation.

When I was chairing the Industry Research and Development Board a few years ago, I was always conscious of just how few companies the Government's programmes seemed to be reaching. Let's do the maths.

Take the pool of businesses as measured by the Bureau of Statistics. Take out the farmers and other agricultural businesses, and owner-operated businesses not employing staff. According to the Bureau, in 1999 there were slightly more than half a million businesses employing staff.[7]

Now the ABS figures for 1999 tell us that there were just 3170 businesses doing R&D.[8] That is, we could multiply the people in this room today by 15 and we would have Australia's hardcore industry R&D. This represents 0.6% of our pool of Australian businesses employing staff. Not enough are doing enough to build critical mass or to change our industrial landscape.

High technology companies on the Wired Index in the United States had an average investment in R&D of 14.6% of their 1999 sales. The average spend of our Australian companies is 0.5% of turnover.

For three years in a row we have seen business investment in research and development falling: we have slipped back to where we were ten years ago, at the same time as the rest of the world is moving rapidly ahead.[9] Ironically, at the same time as this slump the IR&D Board appears to have stopped publishing its R&D scoreboard.

Downsizing off a low base

Some of Australia's traditional industry supporters of R&D like BHP and Telstra have drastically downsized their R&D. In Telstra's case, R&D appears to have plummeted from 2% to 0.2%[10] of turnover in less than a decade. Overall, over the last three years a net 3300 research posts have been cut from government, business and private non-profit research institutions. We are downsizing our future.

Moreover, we have recently had a resurgence of the "brain drain" debate. Whilst it is crucial for bright people in science and business to become globally connected in our internationalised economy, to be globally networked, we need people buying return airfares, not one way tickets out of the country. It would be a sad commentary on our future prospects if they simply have nothing to come back to, no one left here to work with. This intellectual trade balance issue is becoming a serious matter.

Industry's links with science and technology remain poor, and do not promote innovation.

Because we have inherited a low-tech economy, we do not have a culture of active interchange and interaction between industry and researchers. The exception is in the areas of biotechnology, agricultural research, and innovation in primary industries. In most other areas, business and researchers continue to live within their self-contained silos. Some programmes like the Commonwealth's Co-operative Research Centres have started to open up dialogue, but we seem to still be a long way from breaking down the innovation apartheid of a silo - like culture. The blame for this cross-cultural stand-off is not one-sided with business. In my view, higher education's labour market structures and intellectual property policies do not make the ideal settings for entrepreneurial researchers or for cross migration with industry.

We know that the Australian economy performs least well in the more technology intensive industries. We also know that the new technologies will cause a lot of established firms to fail unless they catch the new wave and reinvent themselves. Scientists and technologists have the keys to this success and survival, and every company in the spotlight of technology change needs them on board, literally. I am not a fan of DIY management text books, but there is one book every business leader in Australia ought to read and think about: Clayton Christensen's 1997 book The Innovator's Dilemma: Why technology causes great firms to fail. The key message is in the title.

Let me give you a few examples of this innovation dilemma from my own personal experience in the information and communications sector.

Lets go back in time to the early 1980s. At that time I worked with Telecom Australia, now known as Telstra. When Telecom decided in 1981 to invest in a new digital data network there was absolutely no solid business case. No corporate board today would have given the green light to that investment. But Telecom's engineering dominated management team knew that the world was on the cusp of a digital revolution, and how right they proved to be, fortunately. But they took a punt on a technology insight. Last year I had a sense of déjà vu when I chaired the National Bandwidth Inquiry: everyone agrees that high capacity bandwidth is the future, but no one can quite work out the business model. The message is that disruptive technologies can cause great firms to fail because they fail to pick up the signals of change until it is too late.

Even high-technology companies need scientists and lateral thinkers to challenge their own conventional technology wisdom. Fast forward to 1995, and we see that some of Australia's and the world's leading companies nearly missed the Internet revolution. In 1995 both Telstra and Microsoft, to name but two, were adamant that the Internet was a blind alley, and not the future. It is a matter of modern legend how Microsoft then executed a corporate u-turn and took over the Internet browser market.

Bill Gates knows the importance of scientists and technologists, because his empire is based on them. Bill Gates remains the Chief Technical Officer at Microsoft. Another great exemplar of industry innovation is our home grown Rupert Murdoch, using in-house scientists to exploit the impacts of satellite and digital technology on broadcasting and media. I once spent a day with News Corporation's chief scientist in Los Angeles and I witnessed at first hand the role and value of expert advice in a fast moving global corporation. Scientists and smart technology specialists are at the core of these successful corporations, not on the fringes.

Doing more of the same is clearly not an answer for Australia.

More of the same means a worsening balance of trade in the New Economy. This is an issue that merits some particular attention.

In 1997 an important industry report titled Spectator or Serious Player: Competitiveness in Australia's Information Industries, warned that we faced a widening trade gap in the fastest growing areas of world trade: IT&T. Four years later we find that IT&T imports, including services, are continuing to grow at twice the rate of exports. The resulting deficit is the size of our total coal exports (or 10% of our total exports). On current trends it will become $30billion per annum in ten years time. It will get worse: whilst Australians have taken to the Internet at world's best levels, we are not capturing a real share of global e-commerce and are exporting our consumption. We are great consumers of other people's products and services. We are IT'ing beyond our means. And the problem is not limited to IT&T. Across the board, we see that our import penetration is highest in high and medium technology intensive industries[11] - almost double the average for OECD countries.

Import penentration by industry.
(Imports as a % of domestic demand (ie, production plus imports minus exports)

 

High technology industries

Medium-high technology industries

Medium-low technology industries

Low technology industries

 

1990

1996

1990

1996

1990

1996

1990

1996

Australia

61

68

39

52

13

17

14

16

OECD

29

38

26

30

15

16

15

17

Source: OECD, 2000

Doing more of the same will entrench Australia in a "second best" future.

So what is the way out of this innovation dilemma? The first thing for us to do is to really come to grips with the reality that the rules of business and the recipes for success have changed. We need to know absolutely what we need to do. Companies need to come to grips with:

In responding, some of the survival tools for companies and industry will include:

Companies, however, can no longer cover all the innovation bases from their own resources. The OECD's current Growth project is highlighting the importance of industry networking, collaboration and alliances in capturing sources of innovation and in promoting rapid advance.[12] We need an Australia-wide web of innovation linking businesses, research institutes and governments within a creative partnership. And this is where government comes in.

The role for Government is important, even crucial, but it is limited.

Governments can lead the business buffalo to water, but they can't make it drink. To extend the metaphor, government can make sure there is water in the dam, and clear the undergrowth to make sure there is a path to the water. But the buffalo has to want to drink!

But there are three things that only government can do.

  1. Investing in the national "innovation infrastructure".

    The government's role in funding R&D and skills is fundamental. Without serious government funding things are not going to change. Without serious government funding we cannot hope for the necessary structural adjustment in our economy and industrial landscape.

    To produce results, research and development and high technology capabilities need sustained, long-term commitment. This is not like tweaking interest rates. Capability takes a long time to build up, to build critical mass, but it can drain away quickly. We cannot afford to keep turning innovation policy on and off like a tap.

    To reverse the decline in our innovation infrastructure we need to do more than just restoring old programmes like the 150% tax concession. I think we must become smarter. One way of doing this is to link funding to outputs, not inputs. Reward results, whether they be industry R&D levels, new patents, high technology job creation, and so on. Innovation programmes should create the right incentive systems for all players. Our performance needs to be measured and judged on the outcomes we produce, not just on how hard we try!

  2. Another job for government is to provide leadership in articulating the national interest and priorities and in promoting a new image of Australia internationally.

    Governments play a key leadership role in promoting the whole culture of industry innovation. A recent skills survey commissioned by the Victorian Government has shown that high-technology careers and business opportunities still have a huge image problem among our youth, without appealing role models.[13] I would like to see the day when innovators and technologists feature as prominently as sports people in our national honours lists. The Prime Minister's Science, Engineering and Innovation Council also provides an important peak forum for setting national agendas. But it does not receive the same attention from us as, say, a Board meeting of the Reserve Bank! It should. We really need to work on the sense of what matters, and priorities.

  3. Innovation in the business of government.

    Government has the opportunity and the responsibility to demonstrate innovation in the delivery of its own government services, and in the administration of the tax and business regulation levers it controls which affect the climate for industry innovation. A good example of government innovation as a wider catalyst has been positive impacts of the Australian Tax Office promoting online usage across the accounting industry and now small business through its discrimination in favour of electronic lodgement and its linkage of the Australian Business Number to digital certificates.

In conclusion, we need to be very conscious that Australia does stand at a cross road. We do need to decide whether we want to be a spectator or a serious player in the new global information economy, a knowledge based economy fuelled by high technology industries. We need to acknowledge that we are seriously behind the game in building the industries that are, around the world, creating the new jobs and the new wealth. Our scorecard does not look good.

Forthcoming milestone reports like the Chief Scientist's Australian Science Capability Review, and the action plan arising from this year's Innovation Summit, will tell us just how prepared we are to rise to the challenges of science and technology. Today, as a community, we cannot afford to shackle our scientists and technologists as "prisoners of hope". Just how many gold medals are we going to win in the industry and trade Olympics of the new global information economy? An old Vietnamese proverb provides a timely message for both companies and national economies: "The late buffalo drinks muddy water".

I think we need to get a hurry on before it is too late.

Australia's trade deficit in IT&T

Australia's trade deficit in IT & T

Endnotes.

  1. The Economist, 24 July 1999 [back]
  2. ARC and CSIRO, Inventing our Future: The link between Australian patenting and basic science, June 2000. [back]
  3. Department of Industry, Science and Resources, Knowledge-based Activities: Selected Indicators, February 2000, pp.10,19 [back]
  4. Brian Hale, The Age, 27 May 2000 [back]
  5. Financial Review, 27 May 2000 [back]
  6. In 1997 Australia's share of total OECD country GERD was 1.4% (up from 1% in 1981), and it share of total OECD researchers was 2.2%. [back]
  7. ABS, Small business in Australia 1999, Cat. 1321.0 [back]
  8. ABS, R&D expenditure - Business sector [back]
  9. OECD, Science, Technology and Industry Scoreboard 1999, (www.oecd.org/dsti/sti/stat-ana/prod/scorebd-sum.htm). [back]
  10. IAESR and IBIS, R&D and Intellectual Property Scoreboard 1999 [back]
  11. Department of Industry, Science and Resources, Knowledge-based Activities: Selected Indicators, February 2000, p.9 [back]
  12. OECD, A New Economy? The Changing Role of Innovation and Information Technology in Growth, July 2000 [back]
  13. Hill & Knowlton, ICT Skills Communications Strategy: Interim Overview of Research, Prepared for Multimedia Victoria, July 2000 [back]