Australia was once a world leader in innovation. A new report shows the system is now ‘broken’

Australia’s research and innovation system is “broken” and needs “bold reform”, according to a major new independent report released on Tuesday.

Titled “Ambitious Australia”, it’s the culmination of a strategic examination of research and development in Australia, commissioned by the federal government in December 2024. It was led by Tesla chairwoman Robyn Denholm.

Ambitious Australia joins a long line of reports stretching back to the Hawke-Keating era in the 1980s and ‘90s, when public spending on science, research and innovation gained a substantial boost.

By the end of the 1990s, the fastest-growing component of Australia’s export mix was high-value, complex, finished products. Correspondingly, Australia’s rate of productivity growth was running well above the OECD average.

We are now in a very different world. As this new report shows, Australia has fallen behind its peers on many fronts.

Diagnosing the problem

If the report did nothing other than highlight how fragile Australia’s hard-won prosperity is, it would still have performed a valuable service. And on this point, it does not hold back.

The report notes Australia’s manufacturing as a share of gross domestic product (GDP) is the lowest among developed economies in the OECD.

Australia also has among the lowest share of spending on research and development in the OECD at 1.69% in 2023–24. This is from a peak of 2.24% of GDP in 2008-09.

And between 2010 and 2020, Australia’s productivity growth was the weakest it had been in six decades.

Of course, correlation is not causation. But in most countries, manufacturing is where businesses make the biggest commitment to research and development. It is hardly surprising that as manufacturing has declined, so, too, has spending on innovation.

Rethinking our reliance on resources

The economic concept of “comparative advantage” suggests a country should specialise in producing the things it can with a lower opportunity cost than its trading partners.

The problem is that in pursuit of comparative advantage, successive federal governments have allowed Australia’s resources exports – such as iron ore and coal – to crowd out high-value manufacturing.

The task of this review was twofold.

First, it had to think through the reconstruction of our entire research and innovation system. This includes neglected “blue sky” research, which doesn’t have immediate practical use, but which has led to world-changing inventions.

For instance, work on black hole mathematics played a key part in the invention of WiFi at CSIRO.

Second, it had to ensure the system was “fit for purpose” as part of broader industrial policy to build new areas of competitive advantage in global markets and value chains.

The report’s recommendations

After a lengthy consultation process, the report proposes a comprehensive “plan for action”, with 20 recommendations, including:

• better support for foundational research
• consolidation of fragmented research and innovation programs
• changes in the incentive structure for business research and development
• improved startup and early-stage financing
• embedding research and development in public procurement.

Echoing previous reviews, Ambitious Australia also called on the federal government to establish a new national innovation council. This body would set priorities and coordinate efforts to meet goals across six national innovation “pillars” in:

• health and medical
• agriculture and food
• defence
• environment and energy
• resources
• technology.

Overall, the idea is to promote more efficient teamwork across these pillars between government, business, investors and researchers on “high-risk, high-impact” challenges.

What could work better

The problem with this approach is that while the motivation is sound, the bureaucratic complexity of the new structure may prove a drawback. This is especially the case when it comes to getting industry involved.

As a number of submissions, including one from the Business Council of Australia, suggested, Australia should be following the lead of countries like Germany, the UK and US, which have built a network of collaborative research and innovation hubs in specific locations.

For instance, the UK Catapult centres bring together some of the UK’s top businesses, scientists, technical specialists and engineers to work side by side. In doing so, they bridge the gap between research and industry.

This is not a new idea. About 30 years ago, then-Prime Minister Paul Keating’s “Innovate Australia” policy statement favoured a similar model, with the CSIRO and universities as an engine for industrial transformation.

However, as with so many policy statements and reports, it became a casualty of a change of government. The Rudd-Gillard government’s Venturous Australia report suffered a similar fate.

Gaps to be filled

The recommendations in the report are mostly compelling. But there are still some significant gaps.

For example, the report offered no view on whether the current research and development tax incentive represented better value for taxpayer money than direct targeted funding.

Nor did it address the crucial role of management in improving productivity by engaging with workforces and building their capacity to adopt and adapt to new technology, such as embodied artificial intelligence in manufacturing.

And then there’s Australia’s regions. These can play a vital part in the research and innovation system because they address the related challenges of energy transition and economic diversification.

A separate report on the government’s Energy Industry Jobs Plan goes some way to filling this gap.

What’s next

Ambitious Australia outlines many recommendations whose time has surely come – especially given the federal government’s vision for a “Future Made in Australia”.

The challenge now is to work through the report in the lead-up to the 2027 federal budget and beyond. We must also ensure strategic intent is matched by transformative actions.