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Building the knowledge economy

Ian Marsh, Information Age

16/04/2004 12:40:37

A subtle shift seems to be occurring in official approaches to industry strategy. Australia, in common with European and East Asian states, is increasingly adapting policy frameworks directed at what is loosely termed the “knowledge economy”. This catch-all term embraces two principal developments. On one hand, it refers to the adoption of enabling information and communication technologies (ICT) in a diverse array of businesses. On the other hand, it refers to the development of science-based industries such as biotechnology, nanotechnology and new materials.

ICT Australian governments, at both state and federal level, have been concerned to build awareness of the potential of CT. Victoria has named its economic development ministry the Department of Innovation, Industry and Regional Development. From Jeff Kennett’s premiership on, Victoria has been the most proactive among the states in promoting institutional initiatives. The Federal Government gestured in a similar direction with the establishment of the National Office of the Information Economy.

However, it is easier to talk up the general potential of ICT than to determine how it will leverage productivity in particular cases. ICT is an enabling technology that has application to businesses from commercial fishing, wine growing and auto parts to banking, teaching and medicine. In each case, innovations and applications are specific to a particular business or function. Development of competitive and less regulated markets, the dominant thrust of policy since 1983, remains a powerful stimulus to adoption and adaptation of ICT. However, Australian governments have been reluctant to embrace the other robust policy instrument that might facilitate dissemination of CT, namely clustering.

Working within a market framework, clustering refers to the development of linkages and alliances between industry, educational institutions, research organisations and other relevant partners. Clusters deliver a range of benefits that would not otherwise be realised. For example, the wine industry has achieved its outstanding performance partly through establishing cluster relationships in areas such as R&D and marketing.

In a paper prepared for the British Government and published in May 2003, Harvard guru Michael Porter develops the case for a more proactive approach by government in this area.1 In an analysis that is equally apposite to Australia, he writes of the challenges of moving from an emphasis on cost containment (based on microeconomic reform) towards a strategy based on innovation and value creation. In his words, the move is from ‘a location competing on relatively low costs of doing business to a location competing on unique value and innovation’ (p5).

Porter focuses on the synergies that linkages can generate in particular business sectors. He has been one of the major proponents for clustering as a primary strategy for upgrading competitiveness — and this theme features prominently in his recent report to the British Government.

Biotechnology The development of science-based industries constitutes a second dimension of new policy approaches. An Australian academic, Jonathan West, currently leads the Harvard Business School research program in this area. On a recent trip home he spoke forcefully of the distinctive challenges for a small country like Australia. In particular, he pointed to the disruptive potential of biotechnology for most of Australia’s major exporting industries, through the development of new materials, biologically engineered fibres and biologically-based energy sources, with the IP held by a few dominant companies. Whereas ICT technologies enable, biotechnology may threaten, and this potential threat needs to be recognised in Australia’s own biotechnology strategy.

While Australia has strong scientific positions in some areas of biotechnology, the translation of scientific achievement into commercial products is a complex and multi-faceted process. Governments everywhere now seek to stimulate the appropriate linkages and frameworks. Singapore is a case in point.2 In Australia’s case, however, it is not clear that the areas of scientific excellence receiving the lion’s share of research funding align with areas of business capability offering the most commercial potential — for example, agricultural or environmental business areas rather than their medical and pharmaceutical cousins.

According to West, there are at least three distinctive and related challenges for Australian policy-makers. One involves the management of risk. On average 33 000 laboratory investigations are required to yield one new commercial drug. The rewards for success are enormous — but the likelihood of failure is colossal. In this context, special arrangements are required to recognise the risk — reward profiles. Treasuries vigorously resist discriminatory tax arrangements. But without recognition of these special circumstances in taxation arrangements, the funds available for R&D are unlikely to match the potential needs of the industry.

Second, imaginative instruments or approaches may be required to mobilise sufficient local funds. Like star athletes trained at public expense, there seems to be no reason why the few winning companies achieving spectacular success should not be contractually bound to return some proportion of their gains (a version of the HECS scheme). If this culture could be developed, public support for public investment might be significantly enhanced.

Third, it is important for a small country like Australia to retain activity as far as possible within Australian-owned entities. The earlier that activity moves offshore — regardless of the immediate returns for investors — the less likely the country as a whole is to realise the full potential of its large and increasing national investment.

Some of these issues are currently under review. Science Minister Brendan Nelson has established three task forces exploring aspects of Australia’s ‘innovation systems including the links between universities and public research laboratories. For its part, the CSIRO seems to have been reorganised almost annually as governments have sought to link it more closely to commercial imperatives.

If West is right in his assessment of the strategic challenges (both threats and opportunities) posed by biotechnology, then policy is only at the beginning of a long road. In recognition of the significance of these issues, CEDA has established a research project titled “Innovating Australia” that will explore the broader strategic canvas.

The project will examine a range of factors, including P0 experience in Australia, whether research funding is dominated by scientific rather than commercial considerations, and the strategic outlook for biotechnology.

The research group includes Jonathan West, as well as Keith Smith, of the United Nations Institute for Advanced Technologies at Maastricht; Michael Vitale from the Australian Graduate School of Management, UNSW; John Daley, ANZ Bank; and Ben Rimmer, Victorian Premiers Department. The project report will be published in early 2004,as part of CEDA’s annual policy review series Growth.

1 Porter, Michael E.& Ketels, Christian H.M.,2003, “UK competitiveness: Moving to the next stage”. Available on the Department of Trade and Industry (UK) Web site: www.dti.gov.uk.

2 See www.mti.gov.sg/public/ERC/frm_ERC_default.asp?sid=1 50

Dr Ian Marsh, Australian National University And Director of Research, CEDA

This article is reprinted by arrangement with CEDA