John H Howard, 3 March, 2025
Below is a summary of the Paper Australian Innovation and the Crossroads: The Slump in National R&D since 2008—causes, consequences, and Prospects, Acton Institute for Policy Research and Innovation, May 2024. It draws on several articles prepared for @AuManufacturing.com.au
Australia's R&D sector, once a cornerstone of its economic competitiveness, is now languishing. Since 2008, R&D expenditure as a percentage of GDP has plummeted from 2.25% to 1.68%, marking a two-decade low. While other OECD nations have surged ahead, increasing their average R&D investment from 2.3% to 2.7%, Australia has slipped behind, losing momentum in the race to innovate and prosper.
This is not just an academic issue; it’s an economic imperative. R&D drives productivity, fosters competitiveness, and lays the foundation for long-term growth. The question policymakers must grapple with is: Why is Australia failing, and what can be done to change course?
The Numbers Tell a Worrying Story
Business R&D: A Collapsing Pillar
Historically serving as the backbone of national research and development, Australia's business sector faces significant challenges. Business expenditure on R&D (BERD) has dropped from 1.38% of GDP during the mining boom to a meagre 0.93% today—its lowest point in 20 years.
The reasons are stark: once a significant R&D contributor, the mining sector has slashed its investment from $4.1 billion in 2011–12 to under $1 billion in 2021–22.
Without a robust private-sector commitment, national R&D cannot thrive.
Higher Education: Growth Without Impact
On the surface, higher education R&D (HERD) appears to be growing, reaching $13.99 billion in 2022. However, as a share of GDP, it dropped from 0.61% in 2020 to 0.55%, the steepest decline since records began.
Universities shoulder much of Australia’s basic and applied research burden, yet this diminishing share reflects deeper structural failings in funding and translation to industry outcomes.
Government: A Spectator, Not a Leader
Government R&D spending now sits at 0.51% of GDP—underscoring inaction rather than leadership.
This level of investment is far from adequate for a country aspiring to join the ranks of global innovation leaders.
Why Is Australia Stuck in Reverse?
Several intertwined factors have dragged Australia’s R&D performance into stagnation:
A Narrow Base of R&D Activity: Three industries—professional services, manufacturing, and finance—now account for 74% of all business R&D. When these sectors wobble, the national R&D effort crumbles.
Policy Volatility: Frequent changes to R&D tax incentives have created uncertainty for businesses. Investing in tomorrow’s innovations is hard when today’s policies are unpredictable.
A narrow range of policy levers: Business R&D support is concentrated in the RDTI, with few direct funding programs specifically supporting R&D, such as the United States SBIR model.
Multiple other program initiatives tend to be short-term, narrowly targeted, poorly coordinated across up to 14 ministerial portfolios, and lacking in scale.
Unlike many other countries, Australia has not effectively used the FDI policy lever to encourage overseas R&D investment.
Many reviews, including the recent Australia 2030 innovation plan, have recommended using public procurement as a policy lever, but this has not happened. Currently, there is a growing focus in this direction.
Global Financial Crisis (GFC) Hangover: The GFC stifled corporate profitability and heightened risk aversion. Many firms slashed R&D budgets to weather the storm and never recovered.
Barriers for SMEs: R&D is increasingly capital-intensive, driven by cutting-edge digital tools and high-cost infrastructure. Small and medium-sized enterprises, often seen as the lifeblood of innovation, are being priced out of the game.
The legacy of the GBE privatisations from the 1990s: These enterprises, which had historically contributed a substantial portion of Australia’s applied R&D, were corporatised or sold off to the private sector, leading to a dramatic shift in focus towards short-term profits rather than long-term innovation. This impact has been particularly noticeable in Telstra.
The Pull of Foreign Shores: Multinational corporations are relocating R&D operations to countries with friendlier policies, more generous incentives, opportunities for PPPs, and clearer commitments to innovation. ADI, taken over by Thales, has been impacted by this strategy.
Short-Termism in Business: A relentless focus on immediate shareholder returns by Boards and many institutional investors has deprioritised the long-term benefits of R&D investment in many ASX200 companies. With its share buy-backs, Qantas is possibly an exemplar of this effect.
The Consequences of Neglect
This retreat from R&D is costing Australia dearly. The fallout is significant and multifaceted:
Diminished Competitiveness: Fewer innovations mean fewer opportunities to lead in global markets. Australia risks becoming a follower rather than a pioneer.
Stalled Productivity Growth: Without the technological breakthroughs driven by R&D, productivity gains are harder to achieve, leaving the economy stuck in low gear.
Brain Drain and Talent Gaps: As opportunities dwindle, Australia’s best and brightest researchers are seeking opportunities elsewhere, further weakening the national innovation system.
Economic Vulnerability: Reliance on imported technologies leaves Australia exposed to global supply chain disruptions and geopolitical risks.
Lessons from Global Leaders
Countries like South Korea and Israel, with R&D intensities exceeding 4% of GDP, show what’s possible with sustained commitment.
These nations have built regional/local innovation ecosystems anchored in stable policies, generous incentives, and seamless collaboration between government, industry, and academia.
The gap between Australia and these leaders highlights the need to radically rethink its R&D strategy.
The Path to Recovery: What Needs to Change?
Australia’s R&D crisis isn’t insurmountable. The nation can reclaim its position as a global innovation player with bold action. Here’s how:
Restore Confidence in Business R&D: Revamp the Research and Development Tax Incentive (RDTI) to offer more targeted, stable, and accessible support
Introduce targeted grants for high-impact projects, especially in emerging technologies.
Elevate Government Leadership: Raise public R&D spending to at least 1% of GDP by 2030.
Focus on strategic sectors like green technologies, quantum computing, and biotechnology.
Reinvigorate Industry-Academia Collaboration: Expand funding for translational research programs that bridge the gap between university discoveries and commercial applications.
Foster innovation precincts where researchers and businesses can co-create solutions.
Use the FDI Policy Lever to attract Overseas corporate R&D: Offer targeted incentives, enhance IP protection, foster skilled workforce development, and establish collaborative innovation ecosystems for global partnerships.
Champion SMEs
Lower barriers to entry for small firms by offering subsidised access to R&D infrastructure.
Create dedicated programs to help SMEs participate in global innovation networks.
Review prudential requirements constraining the banking system in supporting medium-sized, high-growth technology-based firms.
Attract and Retain Talent: Offer competitive research fellowships and grants to entice top global talent.
Strengthen STEM education pipelines to ensure a skilled future workforce.
Signal Long-Term Commitment: Establish a National R&D Strategy with clear targets and timelines, such as reaching 2.5% R&D intensity by 2035.
Avoid policy flip-flops by committing to bipartisan-supported frameworks.
A Vision for the Future
Imagine an Australia where innovation flourishes: businesses lead the charge with bold R&D investments, universities and companies collaborate seamlessly to bring ideas to market, and the government acts as a steadfast partner, not a reluctant bystander.
This is not merely an aspiration; it's a decision. The policies we implement today will determine whether Australia thrives or stagnates in the decades to come.
The time for half-measures has passed. Addressing the slump in Australia’s R&D requires tackling the root causes, not just the symptoms.
With decisive action and unwavering commitment, Australia can rebuild its innovation ecosystem and secure its place in the global knowledge economy.
If you would like to learn more about these and related issues, please contact John Howard at john@actoninstitute.au.
Dr John Howard is Executive Director of the Acton Institute for Policy Research and Innovation. He is an expert in science, research, and innovation policy, advising government, universities, and industry to enhance R&D and innovation performance.
For inquiries, contact john@actoninstitute.au
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