# Barriers to collaboration and commercialisation

### Industry Innovation and Science Australia


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#### Contact

Office of Industry Innovation and Science Australia
Department of Industry, Science and Resources
Ngunnawal Country
GPO Box 2013
Canberra ACT 2601
Email: secretariat@iisa.gov.au

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## Acknowledgement of Country

Industry Innovation and Science Australia recognises the First Nations people and their ongoing
cultural and spiritual connections to the lands, waters, seas, skies and communities.

We acknowledge First Nations people as the Traditional Custodians and Lore Keepers of the oldest
living culture and pay respects to their Elders past and present. We extend that respect to all First
Nations people.


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## Table of contents

**Barriers to collaboration and commercialisation ........................................................................... 1**

**Acknowledgement of Country ...................................................................................................... 3**

**Chair’s foreword .......................................................................................................................... 5**

**Executive summary ...................................................................................................................... 6**

Key findings and recommendations ................................................................................................. 10

**Section 1: Market dynamics and innovation................................................................................ 17**

Recommendations and policy considerations .................................................................................. 27

**Section 2: Business composition, absorptive capacity and capability ........................................... 28**

Recommendations and policy considerations .................................................................................. 36

**Section 3: Efficiencies of innovation process ............................................................................... 37**

Recommendations and policy considerations .................................................................................. 42

**Appendix ................................................................................................................................... 44**

Appendix 1: Methodology ................................................................................................................ 44

Appendix 2: Glossary of terms .......................................................................................................... 46

Appendix 3. Revealed Comparative Advantage – top 20 competitive subsectors, 2021. ................ 48

Appendix 4: Industry collaboration with research and higher education institutes ........................ 49

Appendix 5: Composition of Government Expenditure on R&D by socio-economic objective and
distribution of R&D refundable tax offset in priority areas .............................................................. 50

**Reference materials ................................................................................................................... 51**


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## Chair’s foreword

**The Hon Ed Husic MP**
Minister for Industry and Science
Parliament House
Canberra ACT 2600

Dear Minister

I am pleased to present our report on barriers to industry-research collaboration and
commercialisation. You requested this advice through Industry Innovation and Science Australia’s
Statement of Expectations dated 1 December 2022.

Australia is well-known for its world class research performance. However, this is not translating to
commercialisation outcomes to grow and diversify the economy and deliver secure well-paid jobs.
Our insights are grounded in the context of the Australian innovation ecosystem including industry
structure.

Industry Innovation and Science Australia (IISA), with its expertise and connections to businesses and
academia across the economy, has investigated the complex challenges faced in the pursuit of
innovation and commercialisation outcomes. These include the practical challenges of engaging with
research entities, and the barriers within the innovation process in the context of the Australian
industry structure, market dynamics and policy landscape.

In preparing our advice, we have focused on the Australian Government’s overarching policy
objectives of industrial and economic transformation, sustainable value creation, high-value job
creation and economic diversification. We have also considered related reviews and strategies such
as the University Accord review.

Our report provides recommendations and practical actions for your consideration. The actions we
propose are harmonious with the design and implementation of flagship initiatives such as the
National Reconstruction Fund and the Industry Growth Program. We include policy advice to reflect
what is required to build industry capability and capacity to innovate, collaborate and
commercialise.

On behalf of the IISA Board, we look forward to working with you and the department on
implementing these important actions to strengthen business productivity in growing markets and
support the creation of well-paid jobs through the transformation and diversification of Australia’s
economy. Finally, my appreciation to IISA members Ms Lauren Stafford and Dr Doron Samuell for
leading this work and my sincere thanks to the Office of IISA for their ongoing support.

Yours sincerely

**Andrew Stevens**
Chair
Industry Innovation and Science Australia Board
25 September 2023


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## Executive summary

This report, through its analysis, provides a new perspective on barriers to industry-research
collaboration and commercialisation. It complements policy discussions that have primarily focused
on supply-side barriers and accompanying strategies designed to increase university research push.[1]
Public policy debate around industry-research collaboration has emphasised supply-side policy
instruments. These include indirect and direct Government Expenditure on R&D (GERD) and other
investments to foster collaboration between the private sector and research institutions.[2]

Our analysis reframes the problem. First and foremost, barriers to collaboration and achieving
commercialisation outcomes should be grounded in an understanding of the need or demand for
these outcomes. This report highlights key barriers on the demand side in the context of Australia’s
industry structure, market dynamics and business characteristics.

Barriers in the market for innovation manifest due to the dynamics of supply, demand and
interventions.

#### Focusing on innovation and commercialisation outcomes

Our investigation on barriers to commercialisation and collaboration was conducted in the context
of the Australian Government’s broader policy objectives to:

 increase collaboration and commercialisation to grow revenue and build industry

competitiveness, and

 develop a diversified industrial base with the scale and economic complexity to create and

sustain secure well-paid jobs.

Commercialisation is the process, or method, of bringing new products and services to market. The
broader act of commercialisation entails production, distribution, marketing, sales, customer
support and other key functions critical to achieving the commercial success of the new product or
service.

Innovation and commercialisation are major levers to increase the commercial success of businesses
through differentiation and competitiveness and thus, at a national level, to diversify, increase
resilience and grow the economy. Creation of secure well-paid jobs occurs where businesses on the
frontier of productivity meet a growing market.

For Australian businesses, commercialisation is likely to be stimulated by increasing aggregate
demand, predominantly from both export markets and transforming internal and emerging markets
that align with decarbonisation, environmental and social objectives.

Research is integral to successful commercialisation. Our ability to leverage relevant, high-quality
research at low risk and friction is instrumental in realising a viable commercial enterprise with the
potential for scale.

1 Department of Education (2022) University Research Commercialisation Action Plan, Australian Government, accessed 25
August 2023
2 See Appendix 5 for detail on the changes in the composition of Commonwealth Government expenditure on research
and development by socio-economic objective between 1993 and 2021.


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#### Our current state

Despite Australia’s relatively high standing in science and research performance, and focused policy
effort to support collaboration and commercialisation, industry-research collaboration and
commercialisation outcomes remain low.[3] Other related metrics, including productivity, industrial
resilience and economic complexity, have also lagged international peers.

Australia ranks as the 93[rd] most complex country in
the Harvard Economic Complexity Index (ECI).
Compared to a decade prior, Australia’s economy
has become less complex, falling 12 positions in
the ECI ranking. Australia’s worsening complexity is
reflected in its lack of diversification of exports.
Australia is less complex than expected for its
income level.

Complexity: more complex products tend to
support higher wages.

**_Source: Harvard Atlas of Economic Complexity (2023)_**

The past decades have seen insufficient business investment in research, development and
innovation. This has arguably contributed to Australian businesses falling further behind the global
productivity frontier.[4] Labour productivity growth in Australia is at its slowest in 60 years.[5]

**Chart 1: Average labour productivity growth in Australia – by decade and 60 years’ average**

Source: Productivity Commission, 5-year Productivity Inquiry: Advancing Prosperity Inquiry report, Volume 1

3 Australia ranks last amongst OECD nations for industry-research collaboration. See Appendix 4.
4 Quinn M (20 June 2019) Keeping Pace with Technological Change: The Role of Capabilities and Dynamism [speech],
Organisation for Economic Co-operation and Development (OECD) Global Forum on Productivity, 2019, last accessed 23
November 2023.
5 Productivity Commission (2023) 5-year Productivity Inquiry report, Volume 1: Advancing Prosperity, Productivity
Commission, page 1, last accessed 23 November 2023.


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Australia’s manufacturing landscape has simplified over the same period, in part due to our reliance
on primary industry and globalisation with the replacement of local manufacturing by imported
goods. The reduction in manufacturing has, in turn, reduced Australia’s industry capabilities.
Australia shows one of the highest levels of import penetration and lowest levels of competitive
industrial performance among OECD countries.[6]

**Chart 2: United Nations Industrial Development Organization (UNIDO)’s Competitive Industrial**
**Performance Index vs Manufacturing Import Penetration in OECD countries, 2018**


0.50

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0.00


DEU

KOR USA

JPN IRL

NLD

FRA

BEL AUT GBR

SWE CZE
ESP CAN

MEX DNK

POL

FIN HUN

ISR

PRT **_AUS_** NOR

LTU

GRC LUX LVA

NZL

COL CHL ISL


10 20 30 40 50 60 70 80 90


**Import penetration (%)**

Source: UNIDO and OECD Trade in Value statistics
added

#### Our approach to analysing barriers


In developing our advice on barriers to industry-research collaboration and commercialisation, we
have framed the problem to better understand the forces impacting business innovation and
commercialisation. We have taken a market model approach, examining the factors through a
framework of supply, demand, and efficiency of the innovation process.

The Australian Government is supporting conditions to de-risk innovation and commercialisation
through supply-side initiatives such as concessional finance and patient capital, advisory services and
grants. Although this contributes to supporting industry transformation and competitiveness,
equally important is boosting demand for innovation in industries that currently do not perceive the
need to innovate, or have the risk appetite, capacity or capability to undertake transformative
activities. We have applied this market model approach in the context of Australia’s industry
structure.


6 UNIDO’s Competitive Industrial Performance Index measures each country’s effectiveness in engaging with industrial
production and can serve as a rough proxy for a country’s industrial capabilities. The Index includes six indicators that cover
three dimensions: a) Capacity to produce and export manufactures, b) Technological deepening and upgrading, and c)
World impact.


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Australia’s industry structure comprises 1,004,180 employing businesses of which 93% are small
enterprises of 1 to 19 employees and 6% are medium-sized enterprises of 20 to 199 employees.[7]

**Chart 3: Number and proportion of employing business by size – all industries, June 2023**


800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000


70%

23%

6%

0.5%


1–4 5–19 20–199 200+

**Size of business by number of employees**


Source: ABS (2023) Counts of Australian Businesses, including Entries and Exits, Cat. No 8165.0. Table 1

By international comparisons, Australia’s industry structure is heavily skewed toward micro
businesses employing 1 to 4 people. Comparable data from the OECD shows that 94% of businesses
in Australia employed 1 to 9 people in 2017. For the same employment range, this was 62% in
Germany, 64% in Canada and 67% in the USA.[8] Limitations in data standardisation make direct
international comparisons difficult. However, available data also indicates that Australia has a lower
proportion of businesses in the 20 to 49 employment size than other jurisdictions. In addition, the
proportion of medium-sized businesses (20 to 49 employment size) decreased in Australia between
2006 and 2017, while in it increased in Germany and remained stable in the UK, Canada and the
USA.[9]


We have also focused on understanding the growth trajectory of businesses and the value added
generated by businesses of different sizes. Australia’s small and medium-sized businesses are not
growing and generate less value added than the OECD average. The implications of this trend on
capacity and capability to innovate are discussed in detail in Section 2 of the report.

Revealed Comparative Advantage is one of several analyses that we have undertaken. The analysis
contributes to the understanding of how industry structure and dynamics impact competitiveness
and the need or impetus for innovation in different priority areas of the economy. In addition to
economic and market analysis, insights were drawn from interviews and direct engagement with
business leaders and international experts in manufacturing, industry-research collaboration and
policy development. A detailed methodology is provided at Appendix 1.


7 As at 2022–23, Australia had a total of 2,589,873 registered businesses, of which 1,585,693 were non-employing (i.e.,
sole traders and partnerships without employees). Of the employing businesses, 703,467 businesses employ 1 to 4 people;
231,259 businesses employ 5 to 19, 64,559 businesses employ 20 to 199, and 4,895 employ more than 200 people. ABS
(2023), Counts of Australian Businesses, including Entries and Exits, Table 1. Cat. No 8165.0, last accessed 24
November 2023.
8 Data drawn from Organisation for Economic Co-operation and Development (OECD) Enterprises by business size, OECD
website, accessed 24 November 2023.
9 Organisation for Economic Co-operation and Development (OECD) Enterprises by business size, OECD website, accessed
24 November 2023.


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#### Key findings and recommendations

The following recommendations are based on our findings of the practical challenges to
collaboration and commercialisation, and the barriers within the innovation process in the context
of the Australian industry structure, market dynamics and policy landscape.

Our overarching recommendations reflect what we consider is required to build industry capability
and capacity to collaborate and commercialise, grounded in an understanding of Australia’s
economic, research and industry context. We recommend the Government develop policy and
interventions across these four critical areas to shift the dial in capability and capacity, which will
benefit Australia’s economic complexity and resilience.

#### Demand-side barriers

Many government programs and interventions assume businesses’ motivation for innovation, risk
appetite, capability and capacity, which is underdeveloped or may not exist – and the
competitiveness of businesses and sectors continues to decline.

##### Few businesses have the need or risk appetite to innovate.
 Australia’s economy is dominated by primary industry with high reliance on its unique natural

resources advantage. Operations in these sectors are exposed to high levels of risk in terms of
safety and regulatory compliance, capital intensity, weather dependency and workforce
variability. Risk saturation and a regulatory environment that imposes high penalties for noncompliance constrain the appetite for innovation.

 Not all businesses have the need or risk appetite to innovate to achieve their objectives.

Research shows that only 5% to 15% of business leaders of small and medium enterprises (SMEs)
have the desire to grow to be multinational businesses; the majority are lifestyle businesses.[10]

 The scale of the obtainable market for innovative enterprises is perceived to be small. The

domestic market represents subscale reward relative to the risk profile. Businesses seeking to
service global markets from Australia face barriers such as accessibility and cost competitiveness
that render these markets unobtainable, particularly on tangible product-only value
propositions.3

 Businesses servicing domestic markets with adequate current demand may not need to engage

in new-to-market or new-to-world innovation or undertake high-risk, high-reward
collaborations.

10 Professor Goran Roos, interview conducted by IISA 18 August 2023. In addition, see:
ICS Ltd. (2010) Review of the Innovation Readiness of SMEs. A Short Study Undertaken for the Danish Agency for Science,
_Technology and Innovation, Copenhagen, Denmark._
Brnjas Z, Vulićević V and Čanaićević, D (2015) ‘Importance and role of fast-growing companies–Gazelles in modern
economies’, Economic analysis, 48(3-4):44-61.
Ferrantino MJ, Mukim M, Pearson A and Snow ND (2012) ‘Gazelles and Gazillas in China and India’, Office of Economics
Working Paper/US International Trade Commission, available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2167303.


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##### Australia’s industry structure has implications for the capacity and capability to adopt and scale innovation.

 Australia's industry structure is dominated by small businesses (93% of Australian businesses)

with low levels of free cash flow and human resourcing. These characteristics limit the capacity
to invest in adopting and scaling innovation. The “missing middle” (low number of medium-sized
businesses) means that the scaling of innovation and realisation of commercial benefits either
fails or is taken offshore.

 Management experience necessary to steward risky and innovative enterprises is developed

through operating businesses in dynamic and highly competitive markets. In recent decades,
domestic industry conditions have led to an atrophy in this skill set.

 Small and medium-sized businesses have reduced absorptive capacity. The nature of Australia’s

industrial base also leads to a reduction in demand for innovation.

#### Recommendation: Demand-side drivers and the need to innovate

###### 1. Effectively identify businesses with the need to innovate and focus
 interventions on the barriers specific to that sector. 

 Actions could include:
1.1 Selectively support businesses with the need and risk appetite to innovate to deliver novel

products and/or services for growing domestic and international markets.

1.2 Design incentive programs that target businesses and industries critical to Australia’s

industry policy objectives and align business and funding risk-taking in both direction and
magnitude. For example, design funds and guidelines to filter applications based on business
motivation and ambition, and provide advice, connections and resources specific to their
needs to de-risk their opportunity.

1.3 Focus government interventions on businesses seeking to service growing export market

opportunities and transitioning internal markets with innovative new-to-market products or
services that over time will contribute to improving Australia’s economic complexity.

1.4 Effectively aggregate demand for innovation through coordination of whole-of-government

policies, such as the transition to a net-zero economy, and the development of sovereign
advanced manufacturing capabilities required to meet domestic and global needs. This will
create competitive, dynamic markets for innovation in priority areas.


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#### Supply-side barriers

Australia has a shrinking middle band of businesses in its industry structure. We have a scale-up
problem, not a start-up problem. This is impacting the absorptive capacity and capability of our
industrial base.

##### Australia’s industry structure has implications for the capacity and capability to create and develop innovation.

 The dominant Australian innovation policy discourse is that universities and research institutions

are the source and supply of innovation. This is not the case. Small and medium enterprises
(SMEs) are the engine room of innovation in most economies. Unlike publicly funded
institutions, SMEs participate in the commercial environment in which innovation outcomes are
incentivised.

 Australia's industry structure is dominated by small businesses (93% of Australian businesses)

with low levels of free cash flow and human resourcing. These characteristics limit the capacity
to invest in creating and developing innovation.

##### Limited competition and misalignment of incentives

 Incentives of tertiary education and research institutions are not aligned with commercialisation

outcomes. Funding mechanisms do not produce the conditions that manifest the need to
collaborate with industry to produce innovation. Despite this fact, universities and research
institutions have a near-monopolistic supply of government-supported innovation initiatives.

 Activities of universities, including knowledge discovery, dissemination, and education, occur on

a different cadence and paradigm to commercial endeavours:

 Businesses engage in rapid (weekly or monthly), low-cost, iterative testing of relevant

assumptions on market scale, product performance and business model viability.

 By contrast, tertiary institutions engage in activities that are conducted over years and have

few cycles, if any, focused on customer validation for value or relevance.

 Initiatives designed to support industry-research collaboration presuppose the requirement to

work with universities. Outcomes and commercialisation performance have been unsatisfactory.


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#### Recommendation: Build absorptive capacity and capability for industry transformation.

###### 2. Create the policy environment to attract and grow medium enterprises in
 targeted industries.

 Actions could include:
2.1 Restricted tax reform or similar levers that change risk–reward evaluations of businesses

currently based in Australia and attract and build businesses with the management
experience, capacity, and capability for innovation, and increase competition and business
dynamism.

2.2 Recalibrate government interventions to focus on building capabilities to de-risk market

adoption and develop innovative business models. Programs currently focus primarily on
technical readiness or product feasibility risk, while neglecting crucial elements of building
competitive businesses.


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#### Efficiencies of innovation process 

Similarly, research push initiatives and interventions assume businesses’ motivation for innovation,
risk appetite, capability and capacity which may not exist – and their outcomes and indeed our
research commercialisation performance has been unsatisfactory. To be effective, interventions
aimed at boosting collaboration and commercialisation will need to explicitly address businesses’
motivation for innovation, risk appetite, capability and capacity barriers, as well as the resulting
misalignment and market inefficiencies in the marketplace for industry-research collaboration.

##### Maximising funding impacts

 A lack of cohesion and coordination between innovation incentive programs both across and

within state and federal government levels results in dilution of resources, reduction in
competition, delay in paths to market and an overall reduction in the likelihood of commercial
success. Further consideration of effective national strategy development, design and resourcing
is required to achieve transformative outcomes.

 Government policy directs most resources to physical sciences and tangible product innovation.

Limited support is available for de-risking innovation in services, business model or market
adoption and growth. Programs and incentives are focused on addressing the technical risk of
tangible products. There is an absence of interventions addressing the development of
competitive business strategies.

 The marketplace for the supply and demand for innovation in Australia is opaque. There is

under-serviced market-making between those supplying and demanding innovation. The
pathways for forming relationships necessary for successful industry-research collaboration are
limited and inefficient. The business models for the engagement of facilitators and market
makers have not been optimised to maximise markets.

 Industrial transformation is a decadal endeavour. Strategies must be well framed and target

clear outcomes over specified timeframes. Programs must be adequately resourced, frequently
evaluated and responsive to industry changes to achieve national outcomes through electoral
cycles.


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#### Recommendation: Improve efficiencies of innovation processes. 

###### 3. Increase competition on the supply side of innovation and harness
 alignment of incentives found in SMEs. 

 Actions could include:
3.1 De-coupling the requirement for industry to engage publicly funded research organisations

to be eligible for government innovation support programs will open the market and
increase competition for funds available to achieve commercialisation outcomes. This will
not exclude universities and research institutions but will effectively filter those aligned to
address relevant questions for industry to advance innovation and commercialisation
outcomes.

3.2 Review models for engaging providers of advisory services in existing and emerging funding

programs to assure successful outcomes.

3.3 Review and update supply-side funding guidelines to support researchers interested in

working within industry and developing commercial acumen and entrepreneurial mindsets.

3.4 Investigate market-making brokerage services to improve opportunities for successful

industry-research engagement. Brokerage services unaligned to specific institutions could
lower friction costs between industry and academia.

3.5 Examine other jurisdictions for models of efficient research-industry IP and patenting

arrangements, such as Singapore or universities in the USA where there are very low or no
licencing fees, in preference for equity to entrepreneurial researchers and students spinning
out IP in partnership with industry. This could increase the alignment of incentives for the
research supply side and better alignment of both parties focusing on commercial outcomes
in the market.


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#### Measuring what matters

Metrics on the outcomes of investments in innovation are not sufficiently standardised across the
government’s investments in science, research and innovation. Inputs to science, research and
innovation are more robustly defined, collected and benchmarked than the outputs and outcomes
(including commercialisation, business growth, revenue and profit metrics).

 Reporting and measurement of public investments in science, research and innovation do not

adequately align to business competitiveness outcomes.

 There is insufficient transparency and detail on the outputs and outcomes from innovation and

collaboration to enable a meaningful evaluation of the performance of policy and investment.

#### Recommendation: Measure the things that matter to drive economic complexity, resilience and societal outcomes.

###### 4. Design and implement the measurement of commercialisation outcomes
 and industry impacts over the appropriate timeframes. 
 Actions could include:
4.1 Measure growth in revenue, productivity and resilience. Ensure public investments in

research translation activities visibly realise industrial transformation, business
competitiveness and growth, sovereign capability, productivity and higher value jobs in
industry, alongside equally important improved health, environmental and social outcomes
for Australians.

4.2 Supplement existing self-reported survey instruments with hard data to measure

commercialisation and industry transformation outcomes.


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## Section 1: Market dynamics and innovation

Economic diversification is a process of transforming a country's economic structure toward the
production and export of more complex and value-added products. Currently, Australia’s economic
complexity and export profile is comparable to that of developing countries.

It is well known that the increased prominence of resource-oriented activities in the last fifty years
has brought benefits to Australia’s economy. This was accompanied by a decline in the
manufacturing industry’s contribution to Australia’s Gross Domestic Product and an increase in the
level of import penetration in the manufacturing sector. The erosion of Australia’s industrial
capabilities (as shown in Chart 2) has consequences for the productive knowledge and the knowhow business leaders need to enable improvements and innovation in the manufacturing industry.[11]

Australian manufacturing in priority areas of the economy is strongly focused on cost efficiency and
adaption of products and processes to the small and fragmented domestic market.[12] This can affect
the willingness of business leaders to undertake the innovations necessary to scale up and compete
in international markets. The decline in management skills has also limited the innovation
capabilities in manufacturing businesses.

The development of economic complexity is slow for countries with productive structures geared
toward low-productivity and low-wage activities, producing mostly low-value-add commodities or
agricultural products.[13] Conversely, development is fast in countries with productive structures
geared toward high-productivity and high-wage activities.

The ambition to accelerate and diversify the economy requires targeted actions to generate the
conditions that support greater complexity and industry innovation. The Australian Government is
supporting conditions to de-risk innovation and commercialisation through supply-side initiatives
that provide concessional finance, patient capital, business advice and grants. The government also
provides support to encourage businesses to undertake research and development activities
through the R&D Tax Incentive.[14] Although this contributes to creating an environment conducive to
industrial transformation, equally important is creating the conditions for boosting demand for
desired innovations.

11 United Nations Industrial Development Organisation (UNIDO) (2022) Building socio-economic resilience through
industrial capabilities, UNIDO website, last accessed 24 November 2023.
12 Organisation for Economic Cooperation and Development (OECD) (2015) Australian manufacturing in the global
_economy [PDF 4.7MB], study for the Australian Government Department of Industry, Innovation, Science, Research and_
Tertiary Education, OECD website, last accessed 23 November 2023.
13 Felipe J, Kumar U, Abdon A and Bacate M (2012) ‘Product complexity and economic development’, Structural change and
_economic dynamics, 23(1):36–68._
14 See Appendix 5 for detail on the distribution of the R&D refundable tax offset by manufacturing activities related to the
National Reconstruction Fund priority areas.


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The productive structures required to drive transformation and diversification involve two key
processes: (i) how countries develop new products through novel combinations of the capabilities
they already have, and (ii) how countries accumulate new capabilities and combine them – through
collaboration – with the existing capabilities to develop new products and/or services.[15]

Our analysis highlights that, to be effective, interventions must address capability and capacity
shortfalls across Australia’s industrial base. A significant challenge will be shifting industries that may
not currently have the capability, capacity, risk appetite or “burning platform” to undertake
transformative innovation and collaboration. This is due to the nature of our industry structure and
market dynamics that impact business and management strategy.

_Despite the need to innovate (commercialise and collaborate) to address low_

_competitiveness, representative elements of the Australian economy we studied do_

_not demonstrate the required levels of innovation, commercialisation or_

_collaboration activity to transform._

15 Hidalgo CA and Hausmann R (2009) ‘The building blocks of economic complexity’, Proceedings of the National Academy
_of Sciences, 106(26):10570–10575._


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Figures 1 and 2 below (and Appendix 3) illustrate the contrasting profiles of economies with low and
high complexity.

**Figure 1: Australia’s export complexity in 2023 (ECI Ranking = 93rd of 133)**

**Figure 2 Germany’s export complexity in 2023 (ECI Ranking = 4th of 133)**


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#### Impact of market dynamics on business strategy, risk appetite and pursuit of new-to-market innovation

Our Revealed Comparative Advantage analysis indicates that many subsectors or products that fall
within priority areas of the economy have low international competitiveness. Many face high import
penetration and others focus on servicing Australia’s small domestic market.

Businesses that Australia needs to innovate the most, thereby driving industrial transformation, may
lack the need or incentive to actively pursue and execute new-to-market or disruptive innovations.

Revealed Comparative Advantage (RCA) is an index calculated using exports. It is widely used to
measure the competitiveness of industries. It provides a measure of the relative specialisation of a
country’s export activities in an industry. RCA is the proportion of a country’s exports in that industry
divided by the proportion of world exports in that industry. If the RCA is greater than one, a
**_comparative advantage is “revealed.” If the RCA is less than one, the country has a comparative_**
**_disadvantage in that industry._**

Our analysis, illustrated in Chart 4, overlays import penetration data to highlight market dynamics in
each of the four identified quadrants. The discussion of findings that follows illustrates the different
market conditions and the likely type of innovation required to achieve industry transformation and
diversification for industries in each of the corresponding quadrants.


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_Industrial transformation_

_requires priority areas_

_moving to QI & QII_


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**Chart 4 illustrates the different market conditions and the likely corresponding innovation required**
to achieve industry transformation and diversification. It is our view that stable transformation
arises by making a strategic choice for economic development based on high value rather than low
cost. High-value strategies create and extend markets while low-cost approaches invite
commoditisation and insecurity. Relevant policy may include nudging businesses to move toward a
focus on high-value products in niche and growing markets (Quadrant II).

 **Quadrant I – includes businesses operating in industries that are already competitive.**

 At a minimum, these businesses would need to continuously pursue and adopt incremental

new-to-business innovations to maintain their competitiveness.

-  Examples of these are food processing manufacturing and wool scouring (both part of
the value-add in agriculture priority area) and primary metal manufacturing such as
copper refining which is critical input for renewable technologies (part of the value-add
in resources priority area).

-  In food processing, for instance, incremental innovations such as line extensions,
packaging changes, new flavours and other operational improvements could simplify
supply chains, enhance sustainability and reduce costs. In contrast, new-to-market
innovation would involve investment in disruptive innovations to address social issues
such as hunger and accommodate emerging markets, such as plant-based meats, insect
protein bars, synthetic fat replacers and precision fermented milk proteins.

 **Quadrant II – includes businesses that are highly competitive, specialised in niche markets and**

**facing intense competition.**

 At a minimum, these businesses would need to pursue and adopt incremental innovations

to remain competitive in their niche markets; for example, differentiating through product
quality and technological advancements.

-  Iron and steel casting is the only subsector that falls within this category. This subsector
manufactures cast iron and steel components based on a technique that allows
manufacturers to produce components with complex geometries, tailored to customer
requirements and specific markets. Cast iron and steel components are used in wind
turbine systems, aircraft engine parts and defence equipment, among other uses and
markets.

 **Quadrant III – includes businesses operating in low competitiveness industries that face no to**

**moderate import competition and are focused on the domestic market.**

 These businesses would require disruptive innovations to scale up and compete in

international markets. Examples of these are transport equipment manufacturing (vehicle
body and trailer manufacturing), boat building and pharmaceutical products. For example,
the domestic manufacturing of vehicle body and trailer manufacturing is mainly oriented
toward the production of caravans and trailers for domestic household consumption.

-  Pharmaceuticals also fall within this quadrant. This is because imports satisfy around
50% of Australian domestic market, and Australian exports represent 0.7% and 0.4% of
total Australian and global exports, respectively.[16] The COVID-19 pandemic highlighted

16 Export shares sourced from unpublished Department of Industry, Science and Resources data. Export shares refer to
2021 year. Import penetration based on Australian Bureau of Statistics (ABS) (2023) (reference period 2020-21 financial
year) Australian National Accounts: Input-Output Tables [data set], ABS website, accessed 24 November 2023.


-----

Australia’s dependence on global pharmaceutical supply chains. Despite this, exports of
medicinal and pharmaceutical products have increased at a faster pace than overall
Australian exports in the last two decades. Over the period 2000 to 2022, the annual
average growth rate of pharmaceutical exports was 9.1%, while Australian total exports’
annual average growth rate was 8.4%.[17] This is consistent with patent activity, which
shows that applications for pharmaceuticals patents have been on a growth trajectory
since 2014, growing from 1,834 patent filings in 2014 to 4,465 in 2022.[18] Australia has a
comparative advantage in certain pharmaceutical products, including medicaments,
vitamins and alkaloids.

 **Quadrant IV – includes businesses that operate in industries that are not internationally**

**competitive and face significant import competition.**

 These businesses would require disruptive innovations to support capability building to

compete on value rather than cost or price. Sectors in this quadrant include medical
equipment manufacturing (for example personal protective equipment, hospital bed
manufacturing and other manufactured consumables). In 2021, the medical equipment
industry shares of total Australian and global exports were 0.3% and 0.6% respectively.[19] IISA
interviews with businesses highlighted the difficulty businesses face in commercialising
medical devices in international markets due to lack of product testing in Australia’s small
domestic market. The medical equipment industry is largely fragmented, based on
specialised manufacturers that require a highly skilled workforce and ongoing investment in
R&D to be competitive.[20] Australia has a comparative advantage in certain medical devices
such as therapeutic respiration apparatus, breathing appliances and gas masks.

#### Risk-taking in pioneering enterprises for global markets

Australia’s industrial transformation relies on businesses improving their performance in priority
areas of the economy (Quadrants III and IV). We recommend that policy address market dynamics
and business strategy to invigorate collaborative innovation.

Businesses operating in domestic-market-focused sectors with no significant import competitive
pressures (Quadrant III) can meet domestic demand without innovation, disincentivising external
collaboration to pursue radical innovations.[21] A similar case is evident in those low-competitive
domestic-market-focused sectors that face significant import competition (Quadrant IV). Import
competition may create dilemmas for businesses in low-competitive sectors to choose between
short-term low-cost strategies or high-risk innovation strategies. Our observation is that businesses
will respond to importation pressures by reducing research and development efforts.[22] Additional
evidence reinforces the observation that management responds to import competition by
competing on cost and price.

17 Australian Bureau of Statistics (Reference period: 2000 to 2022) ‘Table 12a. Australia’, International Trade in Goods and
_Services, Australian Bureau of Statistics, accessed 23 November 2023._
18 IP Australia (2023) Australian Intellectual Property Report 2023: Patents, IP Australia, last accessed 24 November 2023.
19 Unpublished data, Department of Industry, Science and Resources
20 IBISWorld (2023) C2412 – Medical and Surgical Equipment Manufacturing in Australia, IBISWorld, last accessed 24
November 2023.
21 Cuervo-Cazurra A and Rui H (2017) ‘Barriers to absorptive capacity in emerging market firms’, Journal of World Business,
52(6):727–742.
22 Nobuaki and Isamu (2017), ‘Innovation responses of Japanese firms to Chinese import competition’, The World Economy,
43(1):60–80.


-----

This interpretation is supported by Australian Bureau of Statistics data on business attitudes toward
risk, innovation strategy and market competition. Data shows that only approximately 30% of
businesses in priority areas took a proactive approach to market competition, and 8% engaged in
high-risk projects (Chart 5). A low-innovation approach appears to be a rational business strategy if
the businesses are predominantly servicing domestic markets with low import competition.

**Chart 5. Business inclination regarding high risk-reward projects in government priority areas**


Took a pro-active approach to market competition

Continually sought out new partners to collaborate

with

Had an innovation strategy as part of its business plan

Had the capacity to acquire and exploit

information/knowledge external to the business

Were usually the first in the market to innovate

Initiated change upon which its competitors reacted

Often got involved in high risk/reward projects


28.5

22.6

16.3

15.1

10.5

9.6

7.7


0.0 5.0 10.0 15.0 20.0 25.0 30.0


Source: IISA customised data request (unpublished) from the ABS Business Characteristics Survey collaboration and
commercialisation, Characteristics of Australian Business, 2020-21.

Few Australian businesses are accustomed to the type of high-risk, high-reward innovation that is
required to transform and diversify the economy. Only 1% to 2% of Australian businesses innovate in
ways that are new to the world.[23]

Australian industry shows a greater propensity with new-to-business innovation. This includes
adopting already proven technology or adopting and implementing new business processes, rather
than new-to-world or new-to-market innovation.

Australia performs relatively well among the OECD (8[th] out of 27 countries) in overall introduction of
innovation. More than 80% of these innovations are new to the business, in other words, adoptions
or adaptations from other businesses’ innovations (Chart 6).

23 Productivity Commission (2023) 5-year Productivity Inquiry report, Volume 5: Innovation for the 98%, Productivity
Commission, page iv, accessed 24 November 2023.


-----

**Chart 6: Percentage of businesses introducing innovation – Australia ranks 8[th] out of 27 OECD**
**countries.**

90.0

80.0

70.0

60.0

50.0

**%**

40.0

30.0

20.0

10.0


0.0


Source: Organisation for Economic Cooperation and Development (OECD) (2021) Business
_innovation statistics and indicators, OECD website, last accessed 24 November 2023._

Australian businesses lag on commercialisation of new-to-market innovations (26[th] out of 34 OECD
countries). Only 11% of Australian businesses undertake this type of innovation (Chart 7).


**Chart 7: Percentage of businesses introducing new-to-market goods and services innovation –**
**Australia ranks 26[th] out of 34 OECD countries.**

30.0


25.0

20.0


15.0

10.0


5.0

0.0


Source: Organisation for Economic Cooperation and Development (OECD) (2021) Business innovation
_statistics and indicators, OECD website, last accessed 24 November 2023._


-----

Australian businesses that pioneer new-to-market products often do so by combining growth
ambition with strategic collaboration and the acquisition of capability to execute high-risk, highreward innovation.

**Case study: Redarc’s high-risk, high-reward innovation approach drives global growth.**

REDARC has grown from a small vehicle ignition manufacturer in South Australia, to a world-class,
advanced electronics manufacturer. It now employs over 350 people across Australia, New Zealand,
North America and Europe.

REDARC today is a group of technology-based companies with a focus on innovation, designing and
manufacturing advanced, integrated on-board vehicular power solutions for defence, transport and
logistics, marine, medical, mining and industrial applications. Success is evidenced by REDARC
growing more than 20% per annum over two decades servicing both domestic and international
markets.

REDARC 's business model is centred around a commitment to innovation driven by in-house
research and development capabilities along with strategic partnerships. Partnerships with
international product developers and customers enables REDARC to undertake calculated risks,
employing a fast-fail and stage-gated approach to introduce new-to-market or disruptive
innovations.

**_REDARC has transitioned from lower-risk, single-customer, single-problem products to innovations_**
**_that proactively anticipate mass market demands, informed by horizon scanning._**

This approach necessitates both technical and business model innovation. While the risk associated
with achieving product-market fit may be higher, the rewards for successful projects are significantly
greater, as they have the potential to scale into adjacent markets and regions.

REDARC 's collaboration with universities is mutually beneficial, with the company gaining valuable
capabilities while also contributing insights and guidance through its participation in advisory
councils that inform teaching curricula. Furthermore, REDARC demonstrates its commitment to
innovation through a skunkworks program, which explores technologies and markets unrelated to its
core competence.

**_REDARC stands as an exemplary outlier, highlighting the importance of calculated risk-taking and_**
**_strategic execution required to compete in high-value global markets._**
The company's unique ability to scale has empowered it to establish internal systems, capabilities,
and resources that enable the exploration and exploitation of high-value opportunities.

Further exploration of the significance of firm and absorptive capacity will be detailed in the
subsequent section.


-----

#### Recommendations and policy considerations

 Demand-side drivers and the need to innovate

###### 1. Effectively identify businesses with the need to innovate and focus interventions
 on the barriers specific to that sector. 

 Actions could include:
1.1 Selectively support businesses with the need and risk appetite to innovate to deliver novel

products and/or services for growing domestic and international markets.

1.2 Design incentive programs that target businesses and industries critical to Australia’s industry

policy objectives and align business and funding risk-taking in both direction and magnitude. For
example, design funds and guidelines to filter applications based on business motivation and
ambition, and provide advice, connections and resources specific to their needs to de-risk their
opportunity.

1.3 Focus government interventions on businesses seeking to service growing export market

opportunities and transitioning internal markets with innovative new-to-market products or
services that over time will contribute to improving Australia’s economic complexity.

1.4 Effectively aggregate demand for innovation through coordination of whole-of-government

policies, such as the transition to a net-zero economy, and the development of sovereign
advanced manufacturing capabilities required to meet domestic and global needs. This will
create competitive, dynamic markets for innovation in priority areas.


-----

## Section 2: Business composition, absorptive capacity and capability

The composition of businesses, in terms of size, is related to the capability and capacity of industries
to innovate, collaborate, and commercialise new products, technologies and services. We undertook
an analysis of business size composition to understand barriers to collaboration and
commercialisation.

The proportion of different business sizes in an industry can affect its ability to transform through
acquiring and assimilating new external knowledge. For example, evidence suggests that SMEs – the
most common type of business in the manufacturing industry – have insufficient time and resources
to focus on innovation and business strategies. Generally, SMEs have limited management
capabilities (in terms of volume and experience in larger businesses), which impedes their ability to
engage in new-to-market innovations and fully realise the benefits of collaboration.[24] SMEs are less
likely to have the information, skills and financial resources to identify and to undertake an optimal
program of innovation, and are also less likely to have the ability to diversify risks.[25]

The structure of Australian industry is a barrier to higher levels of innovation in at least some cases.
We analysed business-size composition in priority areas of the economy as a reflective microcosm of
business-size distribution. Most businesses in priority areas of the economy are small businesses –
93% of total businesses in priority areas have 1 to 19 employees (Chart 8).

The high participation of small businesses across the Australian economy, and their limited capacity
to innovate and establish innovative collaboration networks, has implications for the wider
economy. Evidence suggests that the diversity of collaborating partners is positively related to
innovation performance. The presence of diverse types of organisations in collaborative networks
can provide complementary resources, competencies and information flows, which accelerate the
innovation process.

Collaboration provides large businesses with agility and SMEs with expanded reach. For smaller
businesses, entering the value chains of larger businesses allows them to be exposed to larger
markets, including international markets. This provides them opportunities to de-risk scaling up to
meet established market demand. Collaboration with multinational businesses can diffuse foreign
knowledge and global connections. Larger businesses can also benefit from integrating small
businesses into their supply chains; for example, they can gain economies of scope by working with a
range of highly specialized small businesses.[26]

24 Productivity Commission (2023) 5-year Productivity Inquiry report, Volume 5: Innovation for the 98%, Productivity
Commission, page 33–34, accessed 24 November 2023.
25 Professor Goran Roos, interview conducted by IISA 18 August 2023.
26 In an economy of scope, a business diversifies its product offerings. See Etemad H, Wright RW and Dana LP (2001)
‘Symbiotic International Business Networks: Collaboration Between Small and Large Firms’, Thunderbird International
_Business Review 43(4):481–499._


-----

**Chart 8. Composition of business size, value add and employment across government priority areas.**

L: 0.4% **VA Agriculture,**
M: 6.9% **forestry and**

**fisheries**

S: 92.7%

L: 0.4%

**Enabling**

M: 4.9%

**Capabilities**

S: 94.7%

L: 1.2% **VA in**
M: 7.7% **Resources** L: 1.5%

M: 17.6%

S: 91.1%

S: 80.9%

L: 1.4%

**Transport** M: 13.3%

**RLET**

S: 85.3%

L: 0.9%
M: 8.0%
S: 91.1%

**Medical Science**


100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000


80,000

70,000


60,000

50,000


40,000

30,000


20,000

10,000


**Employment**

Source: ABS, Australian Industry
L = Large; M = Medium; S = Small; RLET = Renewables and Low Emission Technologies


-----

#### Australia’s industry base has a shrinking band of medium-sized businesses.

During the last 14 years, Australia’s manufacturing industry experienced a dramatic contraction in
the number of medium and large businesses (a decline of 37% and 29% respectively), while the
number of small businesses remained relatively stable (an increase of 1%).[27] The declining mix of
business sizes across priority areas poses challenges to the success of collaborative networks and
constrains small businesses’ ability to acquire complementary capabilities to innovate and scale up.
Improving our capacity to be resilient, to thrive, and to grow the Australian economy requires an
industry structure with greater numbers of commercially sustainable medium-sized businesses.

Medium-sized businesses were 15 times more likely to shrink or stagnate than grow in FY2017–18
(increasing to 26 times during COVID FY 2020–21). Pre-COVID, in the FY2017–18, the ratio of
medium-sized businesses (20 to 199 employees) that shrank to those that grew was 15:1. The same
ratio for a small business (5 to 19 employees) was 3:1.[28]

**Table 1: Change in the number of Australian businesses, 2008 to 2022.**

|Industry % Small Medium Large Agriculture, Forestry and Fishing -14.3 -54.6 -64.6|Col2|Col3|Col4|
|---|---|---|---|
|Mining 11.8 -16.7 58.7||||
|Manufacturing 0.8 -37.4 -28.9||||
|Electricity, Gas, Water and Waste Services 50.3 26.4 42.6||||
|Construction 28.3 -16.9 -38.7||||
|Wholesale Trade 9.9 -28.1 -5.2||||
|Retail Trade 14.6 -44.4 -32.5||||
|Accommodation and Food Services 56.5 -30.1 -32.3||||
|Transport, Postal and Warehousing 60.1 -29.5 -6.4||||
|Information Media and Telecommunications 44.0 -27.6 -41.6||||
|Financial and Insurance Services -18.7 -29.4 -54.1||||
|Rental, Hiring and Real Estate Services 30.5 -47.3 -40.9||||
|Professional, Scientific and Technical Services 43.2 -2.1 -20.6||||
|Administrative and Support Services 63.9 -16.0 -34.5||||
|Public Administration and Safety -4.6 -36.6 -21.1||||
|Education and Training 71.1 33.7 32.0||||
|Health Care and Social Assistance 93.9 19.1 21.2||||
|Arts and Recreation Services 35.3 -29.8 -2.0||||
|Other Services 48.1 -40.0 -44.8||||
|Average|32.9|-21.4|-16.5|



Source: ABS Counts of Australian Businesses, including Entries and Exits, June 2008 and June 2020

27 Calculations based on Australian Bureau of Statistics data collection Counts of Australian Businesses, including
Entries and Exits (various years), Cat. No 8165.0, last accessed 24 November 2023.
28 Calculations based on Australian Bureau of Statistics data collection Counts of Australian Businesses, including Entries
_and Exits_ (various years), Data cube 1, Table 14a, Cat. No 8165.0, last accessed 24 November 2023.


-----

#### Australia has a scale-up problem. 

Medium-sized businesses in Australia lag OECD averages for the contribution to employment and
value added. Large changes in Australia’s productivity and wages could be leveraged by incremental
improvements in the number and performance of medium-sized businesses.


**Chart 9: Contribution of the SME sector and large businesses in Australia and OECD average[29]**

50.00


40.00

30.00


20.00

10.00


0.00


**Employment** **Value added** **OECD**


Source: Organisation for Economic Cooperation and Development (OECD) (2021) SME and
_Entrepreneurship Outlook: Country Profiles [PDF 3.3MB], OECD, last accessed 24 November 2023._

Medium-sized businesses are trying to innovate but are not growing. Medium-sized businesses have
the highest rate of innovation-active businesses (at 71%) among Australian businesses of all sizes –
even higher than large businesses. Growing medium-sized businesses will be critical to the
transformation of the industrial base. Growing medium-sized businesses will have a transformative
impact in several ways. For example:


 Medium-sized businesses are more likely to have in place structures and systems for the

accumulation of resources and capabilities, and the absorptive capacity to support collaboration
to exploit existing or new market opportunities.


 Small businesses may have the need, but not the capability and capacity, to innovate. More

medium-sized businesses will provide adjacent small businesses with a greater source of
capabilities to draw upon as they scale.



Medium-sized and large businesses are more likely to operate in bigger domestic and

international markets. Therefore, small businesses can benefit from collaborating with mediumand large-sized partners with business networks and a larger customer base. This could enable
smaller businesses to scale up more rapidly, rather than scaling up independently.

The larger the business, the more likely it is to innovate and export, be digitally active and have
higher productivity levels than smaller businesses. Larger businesses also employ more high-skilled

_Profiles [PDF 3.3MB], OECD, last accessed 24 November 2023._


_SME and Entrepreneurship Outlook: Country_
, OECD, last accessed 24 November 2023.


-----

workers and capable managers and pay higher wages. We note that there are few instances of
start-ups becoming large businesses. This implies a strategic risk for policy that assumes economic
transformation based on the success of start-ups.

Academic literature suggests that there is strong correlation between business size and capacity to
implement innovation. This is mainly attributed to the availability of resources to fund, manage and
execute R&D projects.[30]

While the number of medium-sized businesses compared to population is slightly higher than the
OECD average,[31] the Australian data on medium-sized businesses illustrates considerable
opportunity for scaled growth that has not been realised.

Medium-sized businesses in Australia face difficulties growing into large businesses. This is captured
by Mark Cully, former chief economist of DISR, in his paper Stuck in the Middle analysing pre-COVID
data.[32] Since then, growth has become even more difficult for medium-sized businesses. Based on
ABS data, of the 56,252 medium-sized businesses operating at the start of FY2020-21:

 79.0% (44,439 businesses) stayed as medium-sized businesses;

 0.6% (375 businesses) grew to a large business; and

 17.5% (9,877 businesses) shrank to smaller-sized businesses.

In other words, the ratio of shrinkers to growers in the FY2020–21 was roughly 26:1 compared to
20:1 in FY2016–17 and 15:1 in FY2017–18.[33]

Some of the characteristics of medium-sized business are illustrated below:

 Medium-sized businesses have the highest rate of innovation-active businesses (at 71%) among

Australian businesses of all sizes – even higher than large businesses. However, this is not the
case in manufacturing. For example, the rate of goods and services innovation in large
manufacturing businesses is almost double that of medium-sized manufacturing businesses: 60%
and 32%, respectively.

 80% undertake new-to-business innovation (adoptions of innovations from other businesses).

 One in six indicated that they had the capacity to acquire and exploit information or knowledge

external to the business.

 8% often got involved in high-risk, high-reward projects, compared to 7% for large businesses.

 6% target overseas markets for the most significant innovation of the business.

 43% consider that collaboration is not important at all for innovation, compared to 17% in large

businesses.

25(1):25–32.


See for example Shefer D and Frenkel A (2005) ‘R&D, Firm Size and Innovation: An Empirical Analysis’, Technovation,

‘Stuck in the middle? Mid-sized enterprises in Australia,’ Speech at the Global Access
Partners 8th Annual Economic Summit on Midsize Business, Global Access Partners, last accessed 24 November 2023.

‘Stuck in the middle? Mid-sized enterprises in Australia,’ Speech at the Global Access


Partners 8th Annual Economic Summit on Midsize Business, Global Access Partners, last accessed 24 November 2023.
_Counts of Australian Businesses, including Entries_
Data cube 1, Table 14a, Cat. No 8165.0, last accessed 24 November 2023.


-----

The evidence suggests that there is a significant gap between medium-sized and large businesses not
only in the scale of operations but in the capabilities needed to grow and diversify. Another factor
the data highlights is the lack of awareness or resources to understand the competitive
environment, including opportunities to grow and build capabilities.

Commercialisation is of little to no relevance to innovation, according to 72% of medium-sized
businesses. This sentiment reveals business preferences to adopt innovation from other businesses
rather than engage in high-risk, self-driven innovation projects that introduce new-to-world, new-toindustry or new-to-Australia goods, services, processes or a combination of these. Similarly, about
55% of medium-sized businesses regard technological advancements as not important at all or of
small importance for innovation. Given the crucial importance of new technological developments,
such as artificial intelligence, to industry, this may suggest that medium-sized businesses have
limited appetite to embrace technical change that could shape opportunities for growth. This is
confirmed by the Australian Bureau of Statistics survey on the use of information technologies (IT)
that shows that most small and medium-sized businesses are limited users of the most advanced
IT.[34]

##### Collaboration for building capabilities and supply chains

Typically, innovation is the outcome of interaction between individuals, businesses, and different
types of organisations.[35] Australian businesses in the most internationally competitive sectors are
significant collaborators with publicly funded research organisations. We note that leading
businesses in the mining and agriculture sectors have developed systems to identify, engage and
establish productive collaborations with research organisations.[36]

These systems vary across organisations and sectors. In agriculture, the unique model of Rural
Research and Development Corporations (RDCs) uses partnerships to decide research prioritisation,
and a levy system of shared funding contributions. The RDC model has increased the productivity of
Australian agriculture by supporting the introduction and diffusion of incremental innovation.
However, we have less confidence that this model is the most appropriate to realise more
transformative innovations because it may prevent greater multidisciplinary research and
collaboration to address more complex environmental and social objectives, such as food security.[37]

Effective systems for developing capabilities through collaboration are rooted in joint problem
solving both at short- and long-term horizons, backed by joint risk. Innovation literature[38]
emphasises the importance of ensuring that capabilities are incorporated into the business’s
routines, so they are transformed into “learned competences” that the business uses to advance its
competitive position. For most trade-exposed Australian businesses, leveraging and embedding
themselves in supply chains provides the appropriate structure in which problems and opportunities
can shape productive collaborative opportunities. Supply chains (or value chains) are powerful
mechanisms for industry to upgrade and scale up. This is driven by the need to collaborate to
achieve a common objective of providing value to final customers.

Press, online, http://www.jstor.org/stable/j.ctt1gxp7cs.

patenting and co-patenting data provided by IP Australia.

, ABS website, last accessed 24 November 2023.

_National Systems of Innovation: Toward a Theory of Innovation and Interactive Learning, Anthem_
.
_ABS Business Characteristics Survey data collection and customised analysis of unpublished_

ABARES support for innovation policy 140922’, Rohan Nelson, YouTube, last

accessed 24 November 2023.

_organisations, social systems and governance, Oxford University Press, Oxford._


Winter SG (2008) ‘Dynamic Capability as a Source of Change’, in Beck N and Ebner A (eds) The institutions of the market:
, Oxford University Press, Oxford.


-----

##### Policy focussed on medium-sized businesses – international comparisons

Medium-sized businesses have attracted policy interest as a group of economic importance that
supports supply chains in export-oriented industries and the economy in general. This is the case for
Germany’s medium-sized businesses (referred to as the Mittelstand). The Mittelstand is the
backbone of Germany’s economy, accounting for almost 60% of the country’s employment and 34%
of national revenues. Of note, the Mittelstand displays a significantly higher diversity of businesses
compared with similar-sized businesses in Australia.[39]

Germany’s model for manufacturing has relied on world-class, internationally competitive
businesses in a range of manufacturing sub-areas, underpinned by a strong, highly productive
network of medium-sized businesses that operate in niche areas to maintain a strong market
position. This, along with encouraging collaboration, has allowed Germany to be a world-leading
exporter of high-value manufacturing goods, which account for approximately 18% of GDP and GVA
(as of 2021).

The Mittelstand includes over 99% of all businesses in Germany.[40] The approach of the Mittelstand
model is to encourage large numbers of diverse SMEs that can produce high-quality goods in niche
areas, thereby maintaining their manufacturing capabilities and capturing a strong market share in
those specialised areas.

Germany has also minimised barriers to scale by making the necessary investments to retain their
role as a differentiated manufacturing destination. High investment in innovation (for example,
process innovation, technology and digitisation) has allowed SMEs to remain competitive.
Businesses typically link their production networks with their R&D. This close proximity and
investment has created productivity gains and closer collaboration between businesses and
innovation activity. German SMEs also have strong engagement with larger businesses and customer
relationships to build their supply chains and implement innovation and complex products and
services. This is due to their status as a market leader.

|Table 2. Measures to support SMEs in Germany|Col2|Col3|
|---|---|---|
|Competence Centres Provide training for SMEs, facilitate collaboration between SMEs, primes and research organisations (i.e., Fraunhofers). Inter-company vocational training centres targeted at apprentices. “Mittelstand 4.0” provides knowledge and examples of best practice in adoption of digital technology.|Fraunhofer-Gesellschaft Network of institutes that perform contract research for industry, especially SMEs, to bridge the gap between applied research and industry- specific product or process improvements. Each institute specialises in a sector e.g., manufacturing, battery technology (see case study below).|ZIM: “Central Innovation Programme” Funding programme that aims to foster the innovative capacity of SMEs. It launches several thousand new projects every year, making it the country’s largest innovation programme for SMEs. ZIM funds innovative companies in Germany to develop new or significantly improve existing products, processes or technical services. It has a budget of EUR 2.2 billion (USD 2.6 billion).41|



that employ between 50 and 249 persons, as opposed to 20 to 199 in Australia.

Germany’s definition of “Mittelstand” (SMEs) differs compared to Australia’s. Medium-sized firms in Germany are those

_Shares of small and medium-sized enterprises in selected variables, 2021,_

Destatis website, last accessed 24 November 2023.

Alert, last accessed 24 November 2023.


_Germany: modification of Central Innovation Programme (ZIM) for SMEs, Global Trade_


-----

##### Support for medium-sized business through national innovation systems

The Fraunhofer-Gesellschaft (Fraunhofer) is one of the world’s leading applied research
organisations. Founded in 1949, it currently operates 76 institutes and research units throughout
Germany. Fraunhofer is a particularly important supplier of innovative know-how for small and
medium-sized enterprises. At an organisation-wide level, Fraunhofer identifies trending technologies
with major market potential and advances them through in-house research programs. Each
individual Fraunhofer institute develops its own business units and core areas of expertise based on
its immediate market environment, and they operate as separate profit centres.

**_Fraunhofer Research Institution for Battery Cell Production FFB[42]_**

To ensure that production in Germany can provide new battery technologies more efficiently
and of the highest quality in the future, the German federal government and the state of North
Rhine-Westphalia have funded the establishment of a Fraunhofer institute to develop a factory
for battery production. The 680-million-euro commitment provides the infrastructure with
which companies can test, implement, and optimise the near-series production of new
batteries. Small, medium-sized and large companies can access the infrastructure. This
Fraunhofer aims to become the centre for developing scalable battery cell production for
Germany and Europe.

Fraunhofer has a research budget of approximately €3.0 billion. Of this, €2.6 billion is derived from
contract research with industry and other external sources.[43] The German federal government
contributes around a third of base funding. More than 25% of Fraunhofer revenue is from direct
industry contracts. Half of contract research comes from large businesses, while the other half is
from SMEs. Fraunhofer’s criteria for success is the share of funding coming from external project
revenue as a barometer of continued relevance and impact within industry.

Another distinguishing feature of the Fraunhofer model is researcher mobility and the movement of
researchers into industry after a set period. This has been implemented through a policy that
ensures 60 percent of researchers work for contracts of 3 to 5 years. Subsequently they seek or are
placed into jobs in industry. Many Fraunhofer alumni keep contact with Fraunhofer, leading to
collaboration with the businesses the researchers now work for.[44]

The CSIRO, like Fraunhofer, is an internationally regarded science and technology research
organisation. An opportunity exists to further develop CSIRO’s linkages with industry, drawing upon
relevant features of other national innovation systems. For instance, encouraging CSIRO researcher
mobility and placements within industry, and incentivising revenue generation from industry as part
of annual budget targets, could be important levers to enable the creation of new industries and

direct result of private sector contracts.[45]

Battery Cell Production FFB, last accessed 24 November 2023.

strengthening of existing ones. In contrast to Fraunhofer, CSIRO’s revenue model is skewed toward
government funding (over 60% of CSIRO’s budget is from government funding), while only 5.5% is a

[45]

_About Us, Fraunhofer Research Institution for_

_Annual Report 2022, Fraunhofer-Gesellschaft, last accessed 24 November 2023._

45 CSIRO (2022) Annual report 2021–22, CSIRO, last accessed 24 November 2023.


Intarakumnerd P and Goto A (2018) ‘Role of public research institutes in national innovation systems in industrialized
_Research Policy 47(7):1309–1320._
, CSIRO, last accessed 24 November 2023.


-----

Research competitiveness is not a function solely of investment on the supply side, but also of
sharpening the demand side.[46] Innovative businesses are more likely to grow and transition to a
larger size. However, as indicated above, adoptions or imitations of other businesses’ innovations do
not appear to be an effective source of growth for most medium-sized businesses. Another issue is
the selection sorting effect. This refers to fact that the best and more qualified employees, including
managers, select the best-run businesses, which not only pay more but may be more interesting
workplaces. This usually happens in larger businesses.

Medium-sized businesses are a potential source of growth and a pathway to diversify the economy.
Most medium-sized businesses are not lifestyle businesses – they aspire to grow. However, as the
data indicates, they struggle to sustain momentum. Policy can support medium-sized businesses in
several ways:

 Building capabilities in identifying technological and market opportunities

 Improving technological awareness

 Attracting talent

 Renewing focus on novel forms of innovation (beyond adoption of other businesses’

innovations) including commercialisation of new products and services

 Undertaking collaboration – both business-to-business and business-to-research – as a pathway

to build capabilities

 Reducing the barriers to accessing and commercialising research both in the private and

education sectors.

#### Recommendations and policy considerations

 Build absorptive capacity and capability for industry transformation.

###### 2. Create the policy environment to attract and grow medium enterprises in
 targeted industries.

 Actions could include:
2.1 Restricted tax reform or similar levers that change risk–reward evaluations of businesses

currently based in Australia and attract and build businesses with the management experience,
capacity, and capability for innovation, and increase competition and business dynamism.

competitive businesses.

Recalibrate government interventions to focus on building capabilities to de-risk market

adoption and develop innovative business models. Programs currently focus primarily on
technical readiness or product feasibility risk, while neglecting crucial elements of building


perspectives and options’, Flinders University, last accessed 24 November 2023.


Australian sovereign capability and supply chain resilience:
’, Flinders University, last accessed 24 November 2023.


-----

## Section 3: Efficiencies of innovation process 

The existing market for industry-research collaboration compounds barriers created by market
dynamics and industry structure. This market is inefficient and ineffective and does not align with
the needs of industry, particularly small to medium-sized businesses. Industry engagement has
identified significant issues impacting the effective operation of collaboration and commercialisation
supported by publicly funded research entities.

#### Intellectual property

Intellectual property (IP) arrangements present a significant barrier to commercialisation. Research
entities are inclined to control IP and often have outcomes misaligned with those of industry.
Friction over IP control hinders the ability of business to efficiently exploit IP, such as by forming
additional business partnerships to penetrate new markets. Friction over IP control also acts as a
barrier for capital growth, inhibiting business finance from private markets. Private markets are
disinclined to fund businesses that do not wholly own or control their IP. Businesses need certainty
of IP ownership, its secure long-term use or exclusivity of IP rights, to reduce risk of return on
investment in commercialising that IP.

Businesses interviewed as part of our analysis report that the terms being offered to them by
universities continue to deteriorate (see Appendix 1 for list of industry interviews). The following
sentiment was expressed by businesses:

 _Universities dictate the terms of program partner agreements, determined to take maximum_

_grant funding and IP._

 _Universities demand ownership of IP in partner agreements, which if agreed to by the business_

_partner, would adversely impact the business’s book value and ability to raise capital._

 _No one wants to invest in a spin-out [or start-up] that only has a licence to IP._

 _Shift incentives of owning IP from the research sector to the industry sector. Research sector_

_retains rights to use (publish) but not own IP from publicly funded research. By research_
_organisations owning the IP, the opportunity for business to access venture capital is lost._

 _If universities relinquished control of IP, Australia would achieve better results._

Industry submissions responding to the Department of Education, Skills and Employment
consultation paper on the Higher Education Research Commercialisation Intellectual Property (IP)
_Framework (2021) also suggested that university IP is usually in a very early stage of development._
Further, the submission suggested that commercialisation pathways should better recognise the
significant investment and risk that an industry partner will take to successfully translate university
IP to a commercial product, service or process.[47]

47 See for example: Business Council of Australia (2021) Submission made to the HERC IP Framework first consultation

[Submission responding to the Department of Education, Skills and Employment consultation paper on the Higher
_Education Research Commercialisation Intellectual Property Framework], Australian Government Department of Education_
website, last accessed 24 November 2023; and Rio Tinto (2021) Submission made to the HERC IP Framework first
_consultation [Submission responding to the Department of Education, Skills and Employment consultation paper on the_
_Higher Education Research Commercialisation Intellectual Property Framework], Australian Government Department of_
Education website, last accessed 24 November 2023.


-----

Despite the introduction of a voluntary research commercialisation IP framework, IP arrangements
persist as a significant barrier to commercialisation. Trends in co-patent data also suggested a
structural and business model shift that appears to have further entrenched barriers emanating
from the research supply side. Co-patenting data (Chart 10) reveals a significant downward trend,
suggesting businesses are moving away from research entities as a source of co-invention.
Conversely, the trend may also signal the changing business model of research entities, focussed on
revenue generation through licencing. The downward trend may reflect research organisations’
technology transfer offices’ close-hold management approach of IP.

**Chart 10. Australian businesses patent co-filing applications with the research sector as**
**percentage of all Australian business filings**


3.0

2.5


2.0

1.5


1.0

0.5


0.0


Co-filed with all research entities

Co-filed with Australian research entities

Co-filed with non-Australian research entities


Source: IISA customised data request IP Australia, unpublished.

Australia should examine other jurisdictions for models of more efficient research-industry IP and
patenting arrangements, such as Singapore or universities such as Stanford in the USA. In these
cases, there are very low or no licencing fees in preference for equity to entrepreneurial researchers
and students spinning out IP in partnership with industry. This increases the alignment of incentives
for the research supply side and the alignment of both parties focusing on commercial outcomes in
the market.


#### Work practices 

The cadence of work at tertiary institutions does not align with that of commercial enterprises. This


is especially evident for small to medium-sized businesses where cash flows are particularly
constrained. The speed at which industry and research entities operate is misaligned. There is a
fundamental mismatch between the research/academic mindset and delivering outcomes for
business partners. This often makes collaboration with universities difficult. Although the quality of
the research may be good, the trade-off in terms of timeliness and relevance is too great. The
perceived difficulty is a strong disincentive to businesses considering research collaboration.


-----

In 2021, CSIRO and RMIT reported barries to SME–research collaboration in Australia.[48] The report’s
literature review identified similar barriers related to work practices:

 SMEs perceive that university traditions and working environments are premised on more long
term approaches with flexible timelines to delivery. Conversely, academics regard SMEs as
being too rigid on timelines and too focused on quick results that may be unattainable.

 SMEs view academics as in pursuit of research outcomes of less interest to them, while

academics are concerned that collaborations with SMEs do not yield important academic
outputs.

 Limited institutional support and uncertainty about the role of collaboration in career paths

matters when competencies are evaluated through documented research or teaching
experience, and, to a limited extent, SME collaboration.

 SMEs have a lack of confidence in the ability of university and research institutes to understand

the day-to-day problems that businesses face or how to solve them.

There is an opportunity to improve the framework within the university system to better incentivise
and reward research-industry collaboration based on the commercial outcomes achieved, including
via promotion and recognition pathways.

Funding guidelines may further support researchers interested in being deployed into an industrial
setting and encouraging others to adopt customer-focused and agile work practices and business
acumen to align with the needs of industry.

#### Lack of competition in the brokerage and delivery of effective industry-research partnerships beyond research collaboration

Improving innovation outcomes will require expansion, creating multiple pathways toward forming
relationships necessary for successful research collaboration. This could be facilitated by an
enhancement of market-making brokerages to improve opportunities for successful industryresearch engagement. Brokerage services unaligned to specific institutions could substantially lower
friction costs between industry and academia.

Our analysis has concluded that monopolistic research supply conditions have led to market barriers.
These barriers may be addressed by an increase in competition for funds available to researchindustry collaboration. Support for partnerships should extend beyond publicly funded research
entities and be opened to private research organisations to increase competitiveness to address
current default settings in programs.

Insights from a business sentiment survey (responses of 453 businesses) conducted by the Office of

research sector for the purpose of innovation (Chart 12).


Industry Innovation and Science Australia for this report found that only a third of surveyed
businesses agreed or strongly agreed they have a robust method to calculate the cost-to-benefit
**Chart 11). Further, most businesses agreed or**
strongly agreed they required a third-party advisor to identify and facilitate collaboration with the
**Chart 12).**


_SME Barriers and Enablers to Collaboration, CSIRO website, accessed 1 June 2023._


-----

**Chart 11: Many businesses lack a robust method to calculate the cost benefit of collaboration.**

40.0


35.0

30.0


25.0

20.0


15.0

10.0


5.0

0.0


Strongly disagree Disagree Neutral Agree Strongly agree

Source: OIISA business survey data, August 2023, unpublished.


**Chart 12: Need for a third-party advisor to identify and facilitate collaboration with research**
**sector.**

35.0


30.0

25.0


20.0

15.0


10.0

5.0


0.0


Source: OIISA business survey data, August 2023, unpublished.


Disagree Neutral Agree Strongly agree


-----

#### Measuring the things that matter 

The framework for measuring commercialisation outcomes is flawed and is not measuring the things
that matter to achieve the outcomes of commercialisation. The definition of commercialisation
appears to have been stretched and distorted, and various definitions are applied according to the
party involved in the process.

Commercialisation outcomes appear differently for the actors in the innovation ecosystem –
research, industry and government. For example, licencing intellectual property is considered
commercialisation by the research sector, whilst business would define commercialisation as taking
a new or improved product, service or process based on that intellectual property to market.
Governments also measure, value and drive different yet complementary commercialisation
outcomes, serving the complexity and diversity of actors in the innovation ecosystem and wider
community expectations of government, research and businesses to innovate. The introduction of a
Universities Accord, the National Reconstruction Fund and the Industry Growth Program present an
opportunity to reset national commercialisation outcome metrics and methodology through the lens
of industrial transformation and growth of sovereign capabilities.

Better coordination of the measurement of commercialisation outcomes is required. The starting
point should be measuring the growth in industry revenue. Commercialisation outcomes do not end
at the licence, option, assignment, start-up or spin-out of intellectual property (existing approach to
reporting outcomes). Public investments in research must more visibly realise industrial
transformation, business competitiveness and growth, sovereign capability, productivity and higher
value jobs in industry, alongside equally important improved health, environmental and social
outcomes for Australians.

The commercialisation policy narrative over recent decades has focussed on improving our
performance on international benchmarking indices such as the World Intellectual Property
Organization Global Innovation Index.[49] It is our view that this is a flawed approach. Australian policy
may better serve and benefit more Australians by refocussing on outcomes particular to
transforming and lifting the competitiveness of our industries and businesses, instead of chasing
international benchmarking metrics.

While there is an agreed OECD definition of “collaboration,” there is no agreed international
definition of “commercialisation” to collect and benchmark Australia’s performance. Benchmarking
data for Australia is also outdated or missing/not available. Inputs to innovation, including
collaboration, are more robustly defined, collected and benchmarked than the outputs and
outcomes of innovation (including commercialisation). Further, in standardising data to make
countries comparable, Australian data undergoes considerable change, distorting Australian industry
structure and making comparisons less relevant.


WIPO Global Innovation Index benchmarks 132 countries across 14 metrics under the “knowledge and technology
outputs” indicator, including but not limited to: Patents by origin, Scientific and technical articles, Citable documents H-
index, new businesses/thousand pop, Intellectual property receipts, % total trade.


-----

Our consultation and observation of submissions to the Universities Accord indicate a desire to
supplement or replace existing self-reported survey instruments (the ABS Business Characteristics
Survey, innovation module; the Australian Research Council, Engagement and Impact Assessment
and the Survey of Commercial Outcomes from Public Research administered by Knowledge
Commercialisation Australasia). It is an opportune time for Government to drive and embrace the
uptake of open access to research data, big data and digital adoption to automate data collection
and reporting, including gleaning “hard data” from related national data collections (labour mobility,
trade and taxation data, for example).

A precondition for developing successful policy that supports innovation is that we measure
innovation well and report on it regularly as part of an ongoing national conversation.[50] If the
Australian Government does not focus on the right metrics for Australia, there is a significant risk
that these metrics, that we rely on to inform policy, will result in suboptimal outcomes.

#### Recommendations and policy considerations

 Improve efficiencies of innovation processes 

###### 3. Increase competition on the supply side of innovation and harness alignment of
 incentives found in SMEs. 

 Actions could include:
3.1 De-coupling the requirement for industry to engage publicly funded research organisations to be

eligible for government innovation support programs will open the market and increase
competition for funds available to achieve commercialisation outcomes. This will not exclude
universities and research institutions but will effectively filter those aligned to address relevant
questions for industry to advance innovation and commercialisation outcomes.

3.2 Review models for engaging providers of advisory services in existing and emerging funding

programs to assure successful outcomes.

3.3 Review and update supply-side funding guidelines to support researchers interested in working

within industry and developing commercial acumen and entrepreneurial mindsets.

3.4 Investigate market-making brokerage services to improve opportunities for successful industry
research engagement. Brokerage services unaligned to specific institutions could lower friction
costs between industry and academia.

3.5 Examine other jurisdictions for models of efficient research-industry IP and patenting

market.

arrangements, such as Singapore or universities in the USA where there are very low or no
licencing fees, in preference for equity to entrepreneurial researchers and students spinning out
IP in partnership with industry. This could increase the alignment of incentives for the research
supply side and better alignment of both parties focusing on commercial outcomes in the

“What you measure, you optimise.” Department of Industry, Science and Resources (DISR) (2022), Final report:


_improving innovation indicators, DISR, page 6, accessed 24 November 2023._


, DISR, page 6, accessed 24 November 2023.


-----

#### Measure the things that matter to drive economic complexity and industry outcomes.

###### 4. Design and implement the measurement of commercialisation outcomes and
 industry impacts over the appropriate timeframes. 

 Actions could include:
4.1 Measure growth in revenue, productivity and resilience. Ensure public investments in research

translation activities visibly realise industrial transformation, business competitiveness and
growth, sovereign capability, productivity and higher value jobs in industry, alongside equally
important improved health, environmental and social outcomes for Australians.

4.2 Supplement existing self-reported survey instruments with hard data to measure

commercialisation and industry transformation outcomes.


-----

## Appendix

#### Appendix 1: Methodology

##### Revealed Comparative Advantage and import penetration
This report uses the Relative Comparative Advantage (RCA) index and the level of import
penetration to understand the competitive position of Australian manufacturing industries related
to priority areas. The RCA is sourced from calculations by Analysis and Insights Division in the
Department of Industry, Science and Resources based on UN Comtrade data and import penetration
sourced from the Australian Bureau of Statistics Input-Output (I-O) tables. The RCA is based on 2021
trade data and import penetration for the FY2020–21. The RCA data is calculated by ANSZIC 4-digit
code which facilitates correspondence with I-O Product Group classification.

##### Composition of business size across priority areas
This report used ABS – 8165.0 Counts of Australian Businesses, including Entries and Exits, June 2018
to June 2022 and ABS – 8155.0 Australian Industry to calculate the business size composition, value
added and employment across priority areas. The Priority Area Declaration was used as a reference
point. The definition of manufacturing is broader than that of the ABS, and includes developing
products, providing logistics, distributing products, selling products, after-market services and
maintaining products. There are particular areas, such as Enabling Capabilities and Renewables and
Low Emission Technologies, that add complexity to the correspondence with the ANZSIC framework
as there are no industry codes for these sectors. Bearing this in mind, we note that overestimation of
business population, employment and value add is likely in these sectors.

##### Commissioned ABS Business Characteristics data for priority areas
IISA commissioned the ABS to produce business characteristics data for priority areas with the
purpose of understanding and obtaining further insights on business attitudes and innovation
activity.

##### Industry and whole of government consultation: targeted interviews 
The Office of IISA and IISA interviewed leaders in Australian business and research, and senior
officials across whole of government. Please see Reference materials for a full list of businesses
interviewed.

##### Industry consultation: industry survey 
The Office of Industry Innovation and Science Australia conducted an online survey of businesses in
priority areas. We received 453 validated responses and 2 invalid responses. Responses provide data
on business size, competitiveness and innovation, collaboration, and research commercialisation to
help validate hypotheses using sentiment analysis.

|There was a strong response from medium-sized businesses (as compared to the proportion of medium-sized businesses in the Australian economy):|Col2|
|---|---|
|All survey responses received, by business size (FTE) Count||
|Small (1–19 FTE) 231||
|Medium (20–199 FTE) 211||
|Large (200+ FTE) 13||
|TOTAL|455|


**There was a strong response from medium-sized businesses (as compared to the proportion of**

**Count**

231

211

13


455


-----

|All responses by government priority (ANZSIC) and business size:|Col2|Col3|Col4|
|---|---|---|---|
|Priority Small Medium Large||||
|Resources 10 8 0||||
|Agriculture 25 36 2||||
|Transport 1 8 0||||
|Medical 21 13 0||||
|Renewable Energy 4 3 0||||
|Enabling Technologies 59 39 1||||
|Not aligned|111|104|10|


-----

#### Appendix 2: Glossary of terms

 **Absorptive Capacity the ability of a business to recognise the value of new, external**

information, assimilate it, and apply it to commercial ends.[51]

 **Building scale and “scale up” refer to business growth. Recognising that business growth is a**

process with varying phases (including steady growth, stagnation, high growth and declines),
increasing business scale encompasses “high-growth businesses” including transformation of
startups into larger enterprises, as well as growth in established medium and large
manufacturers.

 **Business model and Business model innovation (BMI) refers to the logic underpinning how**

businesses create and deliver value for customers and how they generate revenue streams. BMI
refers to key changes in how a business creates and delivers value or generates revenue.

 **Collaboration is any arrangement where entities work together for mutual benefit and share**

some of the technical and commercial risks. For example, consultancies, research contracts, joint
research collaborations, licensing of intellectual property and staffing placements. It explicitly
excludes fee for service and franchise arrangements. Collaboration involves a degree of trust
and interdependence.

 **Commercialisation is the process through which ideas or research can be exploited by**

businesses and researchers themselves to generate economic and social value and industrial
development.[52] It involves a process of introducing an innovation into commerce – making a
new or improved product or service available in the market. Proxies for research
commercialisation are registered intellectual property rights, designs, trademarks and patents.

 **Competing on value refers to a business’s ability to compete on the higher value of their**

products, rather than simply on their cost. It involves a shift in focus to increasing sales of
high-quality outputs rather than reducing costs to achieve scale, particularly through pre- and
post-production activities.

 **Global value chain refers to** how the different functions of design, production, marketing and

services occur across different countries to produce a product.

 **Innovation is a new or improved product or process (or combination thereof) that differs**

significantly from the unit’s previous products or processes and that has been made available to
potential users (product) or brought into use by the unit (process).

 **Intangible assets are non-physical, non-monetary resources that can be expected to deliver a**

future economic benefit to a business. These include marketing, branding, business processes,
managerial capabilities, patents and trademarks.[53]

refers to higher-order capabilities that help a business expand, change

or improve its ordinary or operational capabilities to lift performance and competitiveness.[54]

Cohen WM and Levinthal DA (1990) ‘Absorptive capacity: a new perspective on learning and innovation’, Administrative
35(1):128—152. (Special Issue: Technology, Organizations, and Innovation (Mar. 1990))
_Commercialising Public Research: New Trends and Strategies, OECD Publishing, Paris, page 18._
‘Accounting Standards, 138’, AASB, accessed 24
_Capitalism without Capital: The rise of the intangible economy,_


Princeton University Press, Princeton.


Adapted from Kale P and Singh H (2007) ‘Building firm capabilities through learning: the role of the alliance learning
_Strategic Management Journal 28(10):981–1000._


-----

 **New to the world (business) innovation. It is the highest threshold for innovation in terms of**

novelty referring to a the first-time a new product or service has been introduced into the
market by a business or other organisation.

 **New to firm (business) innovation. It is the lowest threshold for innovation in terms of novelty**

referring to a first time use or implementation by a business. An example of a new to firm
innovation is when adopting existing products or business processes – as long as they differ
significantly from what the business offered or used previously – with little or no modification.[55]

 **Non-R&D Innovation: The type of (technological) innovation that is achieved without investing**

in research and development.[56]

 **Revealed Comparative Advantage (RCA) Revealed comparative advantage (RCA) is an index**

calculated using exports, providing a measure of relative specialisation of a country’s export
activities in an industry. It is widely used to measure the competitiveness of industries. The RCA
is calculated as the proportion of a country’s exports in that industry divided by the proportion
of world exports in that industry: If the RCA is greater than one, a comparative advantage is
“revealed.” If the RCA is less than one, the country has a comparative disadvantage in that
industry.

 **Skills generally encompass specialist knowledge and core competencies, sourced through on-**

the-job training and formal qualifications, associated with particular occupations.[57]

 **Talent encompasses a wider range of intangible attributes. Talent includes vision, leadership,**

commercial and strategic nous, creativity, entrepreneurship and experience.[58]

 **Tangible assets are physical, non-monetary resources that can be expected to deliver a future**

economic benefit to a business. These include plant, property and equipment.[59]

 **Value creation refers to the processes by which businesses efficiently combine diverse tangible**

and intangible assets, such as skills, knowledge, technology and physical capital, to turn inputs
into high quality outputs of goods and services that meet consumer demands.

 **Value differentiation refers to** sources of value creation for customers beyond product cost,

such as product leadership, reputation, reliability, flexibility and service offering.

NSC, last accessed 24 November 2023.

Based on Organisation for Economic Cooperation and Development (OECD) (2018) Oslo Manual 2018: Guidelines for
, OECD, last accessed 24 November 2023.
_The Role of Non-RD Expenditures in Promoting Innovation in Europe,_
available at SSRN: https://ssrn.com/abstract=4215981 or http://dx.doi.org/10.2139/ssrn.4215981.

The National Skills Commission has developed ‘Skill Clusters’ to show groups of similar specialist transferable skills to
describe day-to-day work within an occupation. See National Skills Commission (NSC) (n.d.), Australian Skills Classification,

_Cross-cutting challenges facing Australian manufacturing businesses:_

accessed 24 November 2023.


, report to IISA, unpublished.
‘Accounting Standards, 116’, AASB, last


-----

#### Appendix 3. Revealed Comparative Advantage – top 20 competitive subsectors, 2021.


Coal Mining (19.7) Gold Ore Mining (16.5)
(29.1)

Alumina Production (21.0) Other Grain

Sheep Farming (29.1) Wood Chipping (4.5)

Growing (4.3)

Beef Cattle
Farming (5.8)

Meat Processing

Silver-Lead-Zinc (4.2) Cotton Ginning (4.0)
Ore Mining (9.2) Other Basic Non-

Ferrous Metal

Other

Manufacturing (5.8)

Metal Ore

Copper Ore

Mining

Mining (3.8) Aluminium

(2.8)

Smelting
(3.2)

Nickel Ore Mineral Sand Oil and Gas

Iron Ore Mining (26.4) Bauxite Mining (20.9) Mining (6.7) Mining (5.1) Extraction (3.2) Other Non-Metallic Mineral

Mining and Quarrying


-----

#### Appendix 4: Industry collaboration with research and higher education institutes


Source: Organisation for Economic Cooperation and Development (OECD) (2021) Business innovation statistics and indicators, OECD website, last accessed 24 November 2023.


-----

#### Appendix 5: Composition of Government Expenditure on R&D by socio- economic objective and distribution of R&D refundable tax offset in priority areas

**Government Expenditure on R&D by socio-economic objective**

**1992-93** **2020-21**

Source: ABS Research and Experimental Development, Government and private Non-Profit organisations, Australia 2020-21 and


1992-93 Australian Bureau of Statistics (ABS) (1994) (reference year 1992-93) Research and experimental development: general
_government and private non-profit organisations Australia, ABS website,_ accessed 24 November 2023; and Australian Bureau of
Statistics (ABS) (reference year 2020-21) (2022) Research and Experimental Development, Government and Private Non-Profit
_Organisations, Australia, Data cube: Government expenditure on R&D, by Socio-Economic Objectives, 2020-21, Table 1, ABS_
website, last accessed 24 November 2023.

|R&D Refundable tax offset in some manufacturing sectors related to NRF priority areas.|Col2|Col3|Col4|Col5|
|---|---|---|---|---|
|R&D Share of Average Median Priority Refundable all ($) ($) tax offset ($) economy|||||
|Medical science 85,791,146 28,597,049 39,764,396 3.1%|||||
|Value-add in Agriculture, Food, Forestry 81,107,402 1,655,253 482,532 3.0%|||||
|Renewables & Low Emissions Technologies 66,043,323 11,007,221 7,697,958 2.4%|||||
|Transport 42,212,414 4,690,268 4,940,151 1.5%|||||
|Value-add in resources 37,035,238 1,543,135 679,703 1.4%|||||
|Enabling capabilities|24,842,252|8,280,751|6,684,187|0.9%|



Source: Australian Taxation Office (ATO) (reference year 2020-21 financial year) Company – Table 4, ATO website, accessed
24 November 2023.


-----

## Reference materials

##### Australian Government materials
Industry Innovation and Science Australia
(2021) Investment, innovation and success:
_how Australian businesses are creating value_
_(un-published), Department of Industry,_
Science and Resources, Australian
Government

Industry Innovation and Science Australia
(2021) Driving effective Government
_investment in innovation, science and_
_research,_ Department of Industry, Science and
Resources, Australian Government

Industry Innovation and Science Australia
(2020) Stimulating business investment in
_innovation, Department of Industry, Science_
and Resources, Australian Government

Industry Innovation and Science Australia
(2017) Australia 2030: prosperity through
_innovation, Department of Industry, Science_
and Resources, Australian Government

Office of the Chief Scientist (2018) Global
_Production Sharing and Australian_
_Manufacturing, Department of Industry,_
Science and Resources, Australian
Government

Office of the Chief Economist (2020)
_International entrepreneurship: evidence on_
_Australian-born global firms,_ Department of
Industry, Science and Resources, Australian
Government

Office of the Chief Economist (2020) Market
_power and entrepreneurship change: the_
_case for Australia, Department of Industry,_
Science and Resources, Australian
Government

Office of the Chief Economist (2020) Impact
_of Commercialisation Australia on business_
_performance, Department of Industry,_
Science and Resources, Australian
Government


Office of the Chief Economist (2020) Business
_performance of Enterprise Connect_
_participants_ Department of Industry, Science
and Resources, Australian Government

Office of the Chief Economist (2019) Updates
_on entrepreneurship dynamics in Australia,_
Department of Industry, Science and
Resources, Australian Government,

Office of the Chief Economist (2019) _Do_
_manufacturing entrepreneurs in Australia_
_have (or develop) a productivity_
_advantage?, Department of Industry, Science_
and Resources, Australian Government

Office of the Chief Economist (2019) _The_
_characteristics and performance of 457_
_migrant visa sponsoring businesses,_
Department of Industry, Science and
Resources, Australian Government,

Office of the Chief Economist (2019) Trends in
_Market Concentration of Australian Industries,_
Department of Industry, Science and
Resources, Australian Government

Office of the Chief Economist (2018) The
_impact of persistent innovation on business_
_growth, Department of Industry, Science and_
Resources, Australian Government

Office of the Chief Economist (2016)
_Australian geography of innovative_
_entrepreneurship, Department of Industry,_
Science and Resources, Australian
Government, accessed 25 August 2023
Department of Industry, Science and
Resources (2023) National Science and


_Research Priorities and National Science_
_Statement, Australian Government_

Department of Industry, Science and

_Impact_

Resources (2019) Business Research
_Collaboration User Centred Design Project,_
Australian Government


-----

Department of Industry, Science and
Resources and Department for Education
(2013) Discussion paper: Boosting the
_commercial returns from research, Australian_
Government

Department of Industry, Science and
Resources (2018) Partnering with Australia on
_Innovation, Science and Research profiles,_
Australian Government

Department of Industry, Science and
Resources (2015) Survey of Research Service
_Providers registered under the R&D Tax_
_Incentive Programme, Australian Government_

Department of Industry, Innovation, Science,
Research and Tertiary Education (2012)
_Australian Small Business Key Statistics and_
_Analysis, Australian Government_

Department of Education (2022) University
_Research Commercialisation Action Plan,_
Australian Government

Department of Education (2021) University
_Research Commercialisation Consultation_
_Paper, Australian Government_

Department of Education (2023) Universities
_Accord Discussion paper, Australian_
Government, accessed 25 August 2023

Department of Education (2021) 2021 NRI
_Roadmap public consultation paper on_
_industry engagement, Australian Government_

Department of Education (2021) _2021 NRI_
_Roadmap industry engagement ideas jam_
_summary report, Australian Government_

Department of the Treasury (2022) Reaching
_for the stars: Australian businesses and the_
_global productivity frontier, Australian_
Government, accessed 25 August 2023

Department of the Treasury (2017) Australian
_productivity trends and the effect of structural_
_change, Australian Government_


Productivity Commission (2020) Can Australia
_be a productivity leader?, Department of the_
Treasury, Australian Government

Noble, David; Charles, Michael B.; Keast,
Robyn. Australian Economic Papers March
_2023:_ _Valuing intangible outcomes of_
_Cooperative Research Centres_ _Vol. 62 Issue 1,_
Department of the Treasury, Australian
Government

Australian Consumer Competition
Commission (24 April 2023) Submission to the
_Australian Parliament, House of_
_Representatives Inquiry into Promoting_
_Economic Dynamism, Competition and_
_Business formation, Department of the_
Treasury, Australian Government

Australian National Audit Office (2023)
_Potential Audit of the Administration of the_
_Government Business Enterprise (GBE)_
_governance and accountability framework,_
Australian Government
##### Reports for the Australian Government
Acil Allen (2023) Cooperative Research Centres
_Program impact evaluation,_ report to the
Australian Government, Department of
Industry, Science and Resources

Acil Allen (2021) Industry Growth Centres
_Initiative: initial impact evaluation, report to_
the Australian Government, Department of
Industry, Science and Resources

Allen + Clarke Consulting (2020) Medical
_Research Commercialisation Landscape,_
report to the Australian Government,
Department of Health


##### Federal Parliamentary enquiries and submissions 
Australian Senate (2022) Senate Economics
_References Committee: The Australian_

_Australian_ _manufacturing industry, Australian_

Government

Australian Senate (2022) Enquiry into the


_Australian manufacturing industry: submission_


-----

_from the Advanced Manufacturing Growth_
_Centre, Australian Government_
Australian Senate (2022) Enquiry into the
_Australian manufacturing industry: joint_
_submission Ai Group and Engineers Australia,_
Australian Government

Australian Senate (2022) Enquiry into the
_Australian manufacturing industry: submission_
_from the Productivity Commission, Australian_
Government

Australian Senate (2022) Enquiry into the
_Australian manufacturing industry: submission_
_from the Department of Industry, Science,_
_Energy and Resources, Australian Government_
##### International institutions and government reports
Dan Breznitz (2022) Innovation in real Places:
_Strategies for Prosperity in an Unforgiving_
_World, OECD accessed 25 August 2023_

OECD (2021) The missing entrepreneurs:
_policies for inclusive entrepreneurship and_
_self-employment_

OECD (2019) University-Industry Collaboration

_- New Evidence and Policy Options_

OECD (2013) Commercialising Public Research:
_New trends and strategies_

World Economic Forum (2015) Collaborative
_Innovation – Transforming Business, Driving_
_Growth_

World Intellectual Property Organisation
(2022) Global Innovation Index 2022: What is
_the future of innovation driven growth?_

Department for Business, Energy & Industrial
Strategy (2019) Business Basics Programme
_progress report, United Kingdom Government_

The Royal Academy of Engineering (2012)
_Bridging the valley of death: improving the_
_commercialisation of research: The Royal_
_Academy of Engineering, Institute of Chemical_
_Engineers, The Institute of Engineering and_

Nous Group, for the Queensland Department
of Tourism, Innovation and Sport (2022)
_Macro-level Evaluation 2 of Advance_
_Queensland, Final Report_

##### Association and institute reports

_Technology and Engineer UK response, United_
Kingdom


##### Reports by State and Territory governments
South Australian Productivity Commission
report (2023) Turning Research into Economic
_Competitiveness, South Australian_
Government

South Australian Productivity Commission
report (2023) Productivity Commission 5 Year
_Review: Advancing Prosperity_ _(Volume 3: A_
_competitive, dynamic and sustainable and_
_Volume 5: Innovation for the 98%), South_
Australian Government

Accelerating R&D in NSW Advisory Council
(2021) Turning ideas into jobs: Accelerating
_R&D in NSW Action Plan_ _, NSW Government_

NSW Chief Scientist & Engineer (2022) NSW
_20-year R&D Roadmap, NSW Government_

NSW Chief Scientist & Engineer (2023) NSW
_20-year R&D Roadmap Supplement, NSW_
Government

Investment NSW (2018-2022) _NSW Innovation_
_and Productivity Scorecards, NSW_
Government

Investment NSW (2022) _NSW Modern_
_Manufacturing Taskforce I Making it in NSW_
_Report, NSW Government_

NSW Innovation and Productivity Council
(2019) Business Size Report, NSW Government

Investment NSW (2018) The Innovation
_Economy: Implications and Imperatives for_
_States and Regions, NSW Government_

Nous Group, for the Queensland Department
of Tourism, Innovation and Sport (2022)
_Macro-level Evaluation 2 of Advance_
_Queensland, Final Report_

##### Association and institute reports


, United Australian Banking Association (2022) SME

_Lending Report_


-----

The Australia Industry Group (2016) The
_Australian Industry Group: Joining Forces –_
_Innovation Success Through Partnerships,_

Small Business Association of Australia (2023)
_Pre-Budget Submission_

Council of Small Business Organisations of
Australia (2023) National Reconstruction Fund
_Submission_

Business Council of Australia (2023)
_Australia’s investment drought and what to do_
_about it_

NSW Business Chamber (2014) NSW Business
_Chamber: Industry Research Collaboration_
_Discussion Paper_

COSBOA (2022) Beyond Survival: Small
_business development and growth in the post-_
_pandemic world. A snapshot of three policy_
_and program issues_

COSBOA (2022) Submission to the NSW Small
_Business Strategy 2022-2025_

CEDA (2023) Dynamic Capabilities: how
_Australian firms can survive and thrive in_
_uncertain times_

CEDA (2021) Submission to the University
_Research Commercialisation scoping work_

The Australia Institute (2022) A Fair Share for
_Australian Manufacturing: manufacturing_
_renewal for the post-COVID economy,_

The Grattan Institute (2022) The next
_industrial revolution: transforming Australia to_
_flourish in a net-zero world_

The Grattan Institute (2017), Stagnation
_Nation? Australian investment in a low-_
_growth world_

InnovationAus (2022) The Innovation Papers
##### Private sector reports

Australian National University (2022)

_Stagnation_ _Marramarra murra (creating pathways) First_

_Nations Wealth Forum and Economic_
_Development Symposium_

_The Innovation Papers_ Universities Australia (2019) Universities

_Australia: Clever collaborations – the strong_

PwC (2022) PWC Connecting Australian
_Research with the World_


Nous Group (2019) _Policy directions to_
_increase business investment in innovation_

Nous Group (2023) Summary of submissions
_on priorities for the Australian Universities_
_Accord_

AlphaBeta Advisors (2020) Australian business
_investment in innovation, levels, trends and_
_drivers_

McKinsey (2020) Digital collaboration for a
connected manufacturing workforce

Deloitte (2021) Deloitte The path forward for
_commercialising university research_

Deloitte Access Economics (2014) The
_Collaborative Economy_

The Boston Consulting Group (2013)
_Optimizing Collaboration’s Strategic Potential,_
accessed 25 August 2023
PwC (2008) _Managing the risks and rewards_
_of collaboration: Industry Views, technology_
_executive connections_

##### CSIRO and university reports
CSIRO and RMIT (2021) Enablers and barriers
_to industry-research collaboration, an SME_
_perspective_

CSIRO (2023) CSIRO Collaboration Readiness
_Levels (online tool and PDF report available on_
the webpage)

CSIRO and Business Council of Australia
(2021), _Unlocking the innovation potential of_
_Australian companies,_

Australian National University (2022)
_Marramarra murra (creating pathways) First_
_Nations Wealth Forum and Economic_
_Development Symposium_

Universities Australia (2019) Universities
_Australia: Clever collaborations – the strong_


_business case for partnering with universities,_


-----

##### Academic papers
Roos, G and Pike S (2011) The relationship
between university and firm innovation, The
_Institute of Chartered Accountants in Australia_
_& Centre for Accounting, Governance and_
_Sustainability, University of South Australia_

Roos, G (2010) Review of the Innovation
Readiness of SMEs, Danish Agency for Science,
_Technology and Innovation, Copenhagen,_
Denmark

Brnjas, Z., Vulićević, V., & Čanaićević, D.
(2015) Importance and role of fast-growing
companies–Gazelles in modern economies,
_Institute of Economic Sciences 48(3-4), 44-61_

Ferrantino, M. J., Mukim, M., Pearson, A., &
Snow, N. D. (2012) Gazelles and Gazillas in
China and India, Available at SSRN 2167303.
##### Newspaper articles
Voelker N (22 March 2023) Victoria drops the
ball on research _The Australian_

Gittins R (28 February 2018) Why outgoing
competition boss Rod Sims fears for the
future of the market economy _The Sydney_
_Morning Herald_

Smith P (7 June 2023) Start-ups face walking
dead scenario _Australian Financial Review,_
##### OIISA interviews 
Industry Innovation and Science Australia
interview with Fortescue Future Industries,
conducted on 1 August 2023

Industry Innovation and Science Australia
interview with Archer, conducted on
2 August 2023

Industry Innovation and Science Australia
interview with FLINTPro, conducted on
2 August 2023


Industry Innovation and Science Australia
interview with Tindo Solar, conducted on
3 August 2023

Industry Innovation and Science Australia
interview with Professor Ken-Tye Young
conducted on 4 August 2023

Industry Innovation and Science Australia
interview with Nexxis, conducted on
4 August 2023

Industry Innovation and Science Australia
interview with Redarc, conducted on 7 August
2023

Industry Innovation and Science Australia
interview with Aria Research, conducted on
8 August 2023

Industry Innovation and Science Australia
interview with Robotic Systems, conducted on
10 August 2023

Industry Innovation and Science Australia
interview with VitalTrace, conducted on
10 August 2023

Industry Innovation and Science Australia
interview with Uniquest, conducted on
17 August 2023

Industry Innovation and Science Australia
interview with Micro-X, conducted on
17 August 2023

Industry Innovation and Science Australia
interview with Boeing Australia, conducted on
18 August 2023

Industry Innovation and Science Australia


interview with Professor Goran Roos,
conducted on 18 August 2023


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