With our backs still warm from the self-congratulations of Innovation Festival 2007, it’s worth noting that IBM Australia and the Melbourne Institute of Applied Economic and Social Research recently released the most comprehensive and nuanced index yet of innovative activity in Australian industry. It is, in effect, a report card on the state of innovation in Australia over the past 15 years. The index reflects multiple indices, including, for the first time, more subjective measures of innovation (such as organisational and managerial change), as well as productivity and more traditional intellectual property activity. Paul Ryan discussed the innovation index with the Melbourne Institute’s Dr Paul Jensen and IBM Australia’s director of Strategy, Megan Dalla-Camina.
Paul D. Ryan: We’ve seen lots of innovation indexes in the past. What makes this one different?
Megan dalla-Camina (IBM): The innovation index is an industry first. We are looking at the innovation intensity, and the rate of change, across a wide range of industries. Another objective of IBM was to really lift the debate in the Australian marketplace beyond the discussion of R&D to focus on multiple indices and multiple facets of innovation. We wanted to have a firm index that business leaders and policy-makers could use.
Dr Paul Jensen (Melbourne Institute): Anyone with a business is included here in our IP data. Many of our other products, like the R&D Scoreboard, only consider public companies. But this index measures industry across the board in Australia. It’s a relative measure rather than an absolute measure. The 1.6 percent p.a. increase that we observed over the 15-year period of the index is net of the overall growth in the economy that we experienced over the same period. That’s a very important point. People say, of course were doing more patenting, trade marking and R&D – it’s just a function of economic growth. But this is 1.6 percent per annum over and above that.
PDR: Innovation is a fairly nebulous and slippery concept that everyone covets but it’s difficult to define and even more difficult to judge. It seems that every event I go to someone tries to define innovation. It almost seems a bit moot. Coming up with some kind of tangible gauge of innovation is a lot more important. Everyone is talking about innovation being the engine room of the economy. Does that actually bear out?
PJ: Innovation is one of those concepts that is bandied about. It doesn’t matter whether it’s economists or business strategists or futurists or policy-makers, everyone has an understanding of what innovation is, and they use it very glibly. As soon as you start to poke around on the edges of their definitions, you realise how slippery this is. One of the things we’re trying to do here is say we don’t like this blanket acceptance that innovation is good. We think that is quite naive. Perhaps it is very good, but we need to understand the relationship between investment in innovation and outcomes. We used a multi-indicator approach incorporating the easy things to measure, such as patents, trade marks and R&D. But we also incorporated softer measures, such as market and organisational innovation, as well as labour productivity, which we think is a sponge that will pick up any of those other unobserved changes that go on within the company. The idea that you can take R&D expenditure in any given year and get an idea of the state of innovation is absurd.
PDR: The index revealed that innovative activity in Australia’s manufacturing sector has risen quite sharply in recent times. Would you be prepared to say that this is a consequence of developing world competition and outsourcing, where local companies are needing to be more innovative to compete?
PJ: I am reluctant to start talking about determinants of these sort of things. It’s quite possible that the issues that you raise are important but you would need a more integrated global view to make those claims by industry. For instance, would need to look at investment decisions in other countries, flows of intellectual property and all those other issues relating to outsourcing. We really don’t have a model that is able to address those sorts of issues. But you can speculate.
PDR: Could one speculate that the decrease in patents and general R&D expenditure in the mining industry since 2001, despite record profits, is due to complacency in good times? Are our big commodities companies doing the hard yards for the future?
PJ: I’m not an expert on the mining industry, but it is easier to speculate on that position. Innovation is a very uncertain process. When times are good and money is flush, people are more likely to invest in risky activities. Looking beyond the mining sector to the aggregate level, we observe a fall of 2.6 percent from 2004 to 2005. Our interpretation is that the economy has been softening over the last few years and, consequently, firms have been less likely to invest locally in innovation. We don’t know what the optimal rate of innovation is, but if the innovation rating continues to soften over 2006-07, it should really be on the policy agenda.
PDR: Megan, from a large corporate perspective, is innovation the battle against complacency and inertia? Having to reinvent yourself constantly is a difficult thing to do in larger organisations. Can you draw lessons from that?
MDC: For a very large organisation, and for any size organisation really, innovation has to be a core part of your culture if you are to continually evolve in the right direction. We’ve done it in our IBM innovation jams in the past. We had an online web-jam that went for 72 hours across every country, with 250,000 employees joining in a discussion on what our corporate values should be.
In IBM’s 2006 CEOs study, the CEOs were saying that collaboration is one of the most effective ways to facilitate innovation. No longer can you just innovate within the walls of your organisation. You have to collaborate outside those walls. In a country the size of Australia, that’s where your best innovation efforts can come from.
PDR: One of the terms in the report that jumped out at me was ‘unsuccessful innovation’. It is not commonly acknowledged in any of these types of reports or indexes. We know that more startups fail than succeed, and I suppose innovation is a similar beast – if you are not going to try, you are not going to succeed, so you need to be prepared to fail. Is there a way of gauging ‘unsuccessful innovation’? Or is that a whole other index?
PJ: The reality is that the whole process of innovation is uncertain. Perhaps only half of your R&D projects will come to fruition and produce a marketable product. And perhaps only one-in-five of those products will succeed in the marketplace. People often find a positive correlation between successful innovation (say, a new product launch) and performance, and then say: ‘See, innovation is a good thing!’ This is so misguided. We tried to capture some measures of unsuccessful innovation in this index. For example, instead of using patents, we used patent applications. The R&D data we used also incorporates unsuccessful innovation. But I don’t think anyone wants to see an ‘unsuccessful innovation’ index.
PDR: This index is obviously evolving as a study and a resource. What would you like to see further explored in the future?
MDC: The aim is for this to be an annual index. We’re having discussions about taking it further down into smaller businesses next year. The Australian economy is dominated by SMEs, so it’s important that companies start to look at these different models of innovation to compete on the global stage. Companies need to realise that it’s okay to fail. Having indexes that reflect the mixed success of innovative efforts is an important step forward in that process.
PJ: We would also like to add an international element to this index in the future. A powerful way to gauge the success of Australian innovation is to compare it to innovation in other countries. It will give us a much better benchmark.