Here we go again.  The Albanese Government will initiate another review into Australia’s R&D system as a ‘deal’ it seems with Universities concerned that reduce revenues from full-paying foreign students will undermine funding allocated to research. Putting aside these concerns, the real question is whether we need another R&D review.

A few facts serve as useful context:

1.  Measuring business spend on R&D as a % of GDP is a self-defeating exercise. The big service sectors in the Australian economy – health delivery, aged care, education, welfare, travel/hospitality and the public service do not undertake R&D in any relevant sense.  If these sectors grow BERD falls automatically.  If commodity prices rise, the value of new exports rises and GDP rises and BERD as a % of GDP falls.

2.  R&D Tax Incentive claims have risen by $2.3Bn.  Some commentators have labelled this a “blowout”, but this reflects the rise in the value of R&D being undertaken in the economy.  If BERD is declining, how should this be measured if  ‘% of GDP’ is not a useful indicator?  The level of business R&D spend is also a function of business entry and exit, market demand, access to capital, general economic conditions domestically and in export markets.  It is also a function of business structure and where they choose to locate manufacturing and R&D operations as they expand.  The BERD statistic is an aggregation of rational individual firm decisions which affect the decision to invest in R&D but masks the true drives of firm decisions to invest in R&D or to invest in other business activities etc.  Until we truly understand the micro-economic decisions that drive firm decisions to invest in R&D changes in the BERD statistic are not actionable.

3.  Universities already take a large slab of Government R&D funding every year through NHMRC, MRFF, ARC and other general Commonwealth (eg. ARENA, CEFC, CRC’s, R&D Corporations etc) and State Government grants.  They also attract considerable external investment funding.  Its hard to see that they are underfunded.  The University challenge is that the more researchers they employ in basic research the more hungry they become for more Government support.  It is not clear that they have a sense of funding prioritisation or treat research capital as a scarce resource.  How can Universities be more efficient so more funding can be allocated to research (if that is a priority)?.How can R&D conducted in Universities be funded differently?  Necessity is the mother of invention.  Until University research funding is capped, no one will know.

If an R&D Review is to proceed, what could it focus on?

A substantial part of this review could examine the business parameters that innovative business say retard investment in R&D.  These include high labour costs, high energy costs, high regulation, transport costs.  If conducting business in Australia is uncompetitive, why undertake R&D at all? This includes embedded taxes (payroll tax and diesel fuel taxes) and inefficient practices that are embedded in supply chain costs. Making a great product is pointless unless it can be produced at a cost and sold at a price that customers want to pay and can deliver a margin that can sustain business growth and ongoing investment in R&D.  Equally, if the cost to conduct R&D in Australia is higher than it is offshore, then a firm will rationally decide to move offshore.  And finally, if markets are not large enough or sufficiently competitive domestically, the incentive to invest in innovation rather than some other aspect of business operations is much reduced.

The review could also examine the efficiency of University research funding.  Just saying.

Who should conduct the R&D review? 

The Productivity Commission might be a sound starting point.

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