Friday, 10 January 2020

Innovation - the follow-up

My recent thoughts on innovation were well received, which is gratifying, and elicited a couple of comments; there was also some comment in today’s The Australian that caught my eye. I thought I’d offer some follow-up comment of my own.

Firstly, Heinz Zimmermann pointed out that a successful nation has innovation in all walks of life and on all levels, such as consumer, health, energy, space, communication, automotive (especially hydrogen technology), and so on. He’s absolutely right, and that’s the reason I singled out the National Innovation and Science Agenda (NISA) for comment.

NISA may be associated with Malcolm Turnbull, but that doesn’t make it bad policy – in fact, it’s extremely good policy and something that a nation that wants to be called ‘the clever country’ should be implementing and pursuing, rather than criticising. But I guess that’s the Australian way. Changing the culture will take a while, which is why policy and budgetary consistency and persistence are so important.

Peter Freed pointed out that a willingness to allow the transition of innovations into operational use is also a necessity, adding that the so-called ‘valley of death’ isn’t confined solely to the shipbuilding sector.

This goes to what Heinz was saying: we need an innovation culture in this country – in defence and also right across the economy – in which market pull is given its rightful status as a key stimulant of innovation in Australia. This isn’t to argue for an industry-led defence policy but rather for an acknowledgement that if we seek a strategic operational advantage based on in-country innovation and industry excellence, the monopsony customer in our supposedly market-led defence economy needs to play a critical role. And he starts by acknowledging both the existence and the importance of that role. Many in Canberra and the ADF get that; many more simply don’t, and look on the equipping of our defence force as simply a transactional arrangement with a bunch of overseas supplier, with brute haggling (when you get down to brass tacks) determining the price paid and ignoring the value received.

Which brings me to this morning’s edition of The Australian. On page 13, under the headline “Dividends ‘a drain on performance’”, there’s an interview with a woman named Sarah Williamson, who is CEO of an American not-for-profit called FCLT Global. That stands for ‘Focussing Capital on the Long Term’ and part of the thrust of what she said related to the short-termism of many investors. They seek a short-term share price or dividend gain and ignore longer-term investments such as corporate R&D. 

The company recently published a report titled ‘Predicting Long Term Success’, which says that spending on corporate R&D can boost returns. Says Ms Williamson, ‘[The report] looks at not just the total amount of money [spent on R&D] but the productivity of the research… Companies that do well over the long term are investing in R&D. A lot of large corporates innovated very well but it is hard to see it. And investors may not give them credit for it – for example, if you are a dividend-seeking investor, you may not care about a cool piece of innovation.”

This insight isn’t new – IBISWorld and the University of Melbourne used to publish an annual R&D and Intellectual Property Scoreboard, benchmarking innovation in Australian enterprises, which pointed out exactly the same thing. My own research independently validated this also. The IBISWorld figures show a direct correlation between the amount a company invests in self-funded R&D and its overall performance and growth; my own research showed this applied also to defence innovation project success.

All this presupposes a reasonably efficient market, of course. In non-defence AI, fintech, manufacturing, bio-tech, aerospace, automotive, etc, markets are pretty efficient – companies that invest in R&D and innovation to give themselves an advantage tend to do significantly better than companies that don’t. 

But the Australian defence market is a monopsony that exists at the pleasure of the Department of Defence and ADF who are still grappling with the cultural changes necessary to be an efficient customer. It’s early days yet, in public service terms, but one of the early lessons the public service needs to internalise and act upon is that, as far as innovation in concerned, the world thinks, decides and acts much faster than it does. As I said before, many in Canberra get this, but too many don’t.

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