IBM Melbourne Institute Innovation Index of Australian Industry 2010

Transcription

1 IBM Melbourne Institute Innovation Index of Australian Industry 2010

2 Fourth Edition Contents Foreword...1 Executive Summary...2 Innovative Activity in Australia Remains Flat...3 Components of the Index...4 Innovation Index: Breakdown by Industry...5 Mining Industry Innovation...6 Manufacturing Industry Innovation...7 Utilities Industry Innovation...8 Construction Industry Innovation...9 Wholesale Trade Industry Innovation Retail Trade Industry Innovation Transport and Storage Industry Innovation Communication Services Industry Innovation Finance and Insurance Industry Innovation Property and Business Services Industry Innovation Health and Community Services Industry Innovation Cultural and Recreational Services Industry Innovation Personal and Other Services Industry Innovation Appendix 1: Construction of the IBM Melbourne Institute Innovation Index of Australian Industry Appendix 2: Industrial Classifications and Definitions...23 Melbourne Institute Economic and Social Indicators

3 Foreword Welcome to the fourth IBM Melbourne Institute Innovation Index of Australian Industry a comprehensive study of business innovation in Australia. When the last Innovation Index was released, IBM had just begun to share its concept of a Smarter Planet. This vision is our way of addressing the challenges the world faces today via the new possibilities and responsibilities that come with a digital world and the reality of globalisation. Since we launched Smarter Planet, the world continues to become more interconnected, intelligent and what we term instrumented the vast array of sensors and instruments that are embedded in our lives and in our infrastructure. The data that comes from these ubiquitous technologies is already driving the next wave of innovation in Australia, through techniques such as analytics that deliver deeper insight and better decision-making. Glen Boreham CEO and Managing Director IBM Australia, New Zealand As the latest Innovation Index shows, there are areas where Australia has great strengths, most particularly its technical and engineering sectors. The depth of expertise in these fields played a key role in IBM s decision in October to locate a new research and development laboratory in Australia. This unique facility will be tasked with tackling a range of research challenges in the areas of natural resource management, natural disaster management, and computational life sciences, and will make the most of Australia s robust and collaborative culture of innovation. The IBM Melbourne Institute Innovation Index of Australian Industry offers a revealing window into that culture of innovation, examining its intensity across 13 industries using a range of indicators. It aims to provide policy makers, business leaders, investors and analysts with a unique insight into a key driver of growth and success. Only with that insight can we guide Australia s progress towards a more sustainable, resilient and competitive economy. 1

4 Executive Summary The IBM Melbourne Institute Innovation Index of Australian Industry is a comprehensive, inter-industry, multi-indicator approach to measuring the rate of innovative activity in Australia. It embraces six different dimensions of innovation which have all been adjusted for the level of economic activity. Accordingly, the Innovation Index is a measure of the proportion of total activity that is taken up with innovative endeavours. The main conclusions from the IBM Melbourne Institute Innovation Index of Australian Industry 2010 are: Innovative activity in Australia as measured by the Innovation Index rose by 6.1 per cent between 2007 and This compares with an average rate of increase in the period since 1990 of 3.2 per cent per annum. Most of the growth in the Innovation Index in 2008 was due to an increase in patent, design and R&D intensity, as well as the increase in the organisational/managerial component. Trademark intensity actually declined in While the overall All-Industry Innovation Index for Australia rose by 6.1 per cent in 2008, innovation by all but one market sector industry reported rose much more significantly. Thus we can conclude that the rate of innovation in the nonmarket sector as a whole must have fallen during Cultural and Recreational Services, and Personal and Other Services recorded the strongest increases in innovation during Economic growth in Australia slowed to 2.4 per cent in calendar year 2008 from 4.7 per cent the previous year as the effects of the so called global financial crisis started to be felt. Whilst R&D is typically not cyclical, patenting and trade marking are typically pro-cyclical, hence during 2008 there was a decline in the rate of trademark applications and intensity, but not in patent intensity, as shown in Table 1. Economic research indicates that attempts to commercialise inventions are also pro-cyclical, thus we could expect that the global financial crisis will have a lagged effect on innovative activity. Having said this, Australia s ongoing economic growth of 1.3 per cent in 2009 (and rebound in 2010) in the face of global recession may put a floor under any downturn in innovation. * Notes: The terms market and non-market are defined on page 29. ** Note: The term pro-cyclical refers to two data series moving together: when one goes up (or down), the other goes up (or down). In relation to the statement that trademarks and patents are pro-cyclical, we mean that they both move in tandem with the business cycle (i.e. when there is a recession, both patent and trade mark applications fall). In contrast, if two phenomena are counter-cyclical, one goes up when the other goes down. 2

5 Innovative Activity in Australia Edges Higher The Australian Innovation Index rose by 6.1 per cent in 2008 following a fairly flat performance the previous three years, which in turn followed steady growth during the period from 1990 to The overall rise in the Innovation Index from 1990 to 2008 was 74 per cent (see chart). Table 1 below presents a breakdown of the Australian Innovation Index according to its six innovation components. In the year 2008 the strongest growth was in patent intensity (up by 25.8 per cent), followed by design intensity (up 11.9 per cent), R&D intensity (up 4.5 per cent) and organisational/managerial innovation (up 3.2 per cent). The productivity component also rose in 2008 by 1.6 per cent. Meanwhile trademark intensity fell by 5.9 per cent in Growth in patent intensity outstripped that of all the other components during the period 1990 to Trademark intensity has shown the second strongest trend increase overall since 1990, closely followed by R&D intensity. All of these indicators are normalised for growth in employment or value added. The Index suggests that Australia as a whole is putting more resources into innovative activity vis-à-vis direct production activity. Across industries (see Table 2), the strongest increases in innovation during the period from 1990 to 2008 were in Personal and Other Services; Wholesale Trade; Communication Services; Retail Trade; and Finance and Insurance. While the overall Australian Innovation Index rose moderately by 6.1 per cent in the year 2008, some of the individual industry indexes recorded much stronger gains, in particular Cultural and Recreational Services (up by 70.9 per cent); Personal and Other Services (up by 63.9 per cent); and Retail Trade (up by 59.4 per cent). Given that the results for some industries are typically volatile, large year-to-year swings should be treated with caution. IBM Melbourne Institute Innovation Index of Australian Industry Table 1. Innovation Index of Australian Industry and its components (five year intervals) Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity Notes: Component weights and some ABS data have been revised since last year s report. See Appendix 1 for details. 3

6 Components of the Index R&D Intensity R&D intensity rose for the ninth consecutive year in R&D intensity, which is an average of R&D expenditure and R&D employment normalised for the overall level of economic activity, appears to move in line with the business cycle. During the 18-year period shown in the chart, R&D intensity declined in four years only (1992 and ), corresponding with economic recession and the 1997 Asian economic crisis respectively. Patent, Trademark & Design Intensity Patent applications per person employed TM applications per person employed Design applications per person employed Growth in patent intensity has significantly outpaced that of the other innovation components since 1990, more than quadrupling during the period under review. The intensity of trademark activity declined for the fourth consecutive year in 2008, albeit from a relatively high level. While design intensity has trended higher since 2002, it has generally underperformed the other two innovation components. Organisational/Managerial Innovation = The organisational/managerial innovation component of the Innovation Index for Australian industry overall has been fairly flat throughout the period since 1990, recording a fall overall of 2.0 per cent by Having said this there was a 3.2 per cent rise in the year Caution should be used when interpreting these data because the time series is too short to discern a significant trend Productivity Value added per person employed 1 Submission to the Inquiry into Raising the Level of Productivity Growth in the Australian Economy, September Ministerial Report on the OECD Innovation Strategy, May According to the OECD innovation accounts for the bulk [around 70 per cent] of labour productivity growth in OECD countries. Thus productivity is a key overall indicator of past successful innovation since it captures the effects of both product and process innovation in the operations of a business. Measured in terms of value added per person this indicator rose by 1.6 per cent in 2008, following more modest gains in the previous two years. In 2008 the productivity index was 30 per cent above the 1990 benchmark level. Since productivity growth in Australia has slowed markedly. The Productivity Commission 1 estimates that 70.0 per cent of the decline in multi-factor productivity growth between and was due to declines in just three industry sectors: Mining, Utilities and Agriculture, with the declines in the last two due largely to drought. 4

7 Innovation Index: Breakdown by Industry Table 2 presents the Australian Innovation Index and its disaggregation by major industries (Appendices 1 and 2 give details of the overall Index coverage and exclusions). As can be seen, increases were recorded in the innnovation indices of all but one industry in 2008, many of which were very significant: in particular, the Cultural and Recreational Services index rose by 70.9 per cent and Personal and Other Services innovation grew by 63.9 per cent in At the other end of the scale, Mining innovation was unchanged in Meanwhile, five industries recorded growth in innovation of between 24.5 and 59.4 per cent in 2008 (Retail Trade, Communication Services, Wholesale Trade, Utilities and Manufacturing), and the remaining industries recorded innovation growth of between roughly 12 and 20 per cent in Looking at index movements over the period since 1990, the innovation index of one of the 13 industries increased six-fold (Personal and Other Services); the indices of another three more than quadrupled (Wholesale Tade, Communication Services and Retail Trade); one increased by around 3½ times (Finance,); another three industries indices more than doubled (Manufacturing, Utilities and Cultural and Recreational Services); while the rest increased by between 56 and 80 per cent during the period 1990 to The results for 2008 came on the back of across-the-board increases in innovation in all of the industries in Compared with the previous two years, this result is very positive; innovative activity fell in 11 and seven industries respectively in 2006 and The pick-up in the rate of innovation across industries in 2007 and 2008 occurred against a backdrop of growing unease in world financial markets from around mid-2007, with this unease reflected in a sharp slowdown in global economic growth in 2008, escalating into a global recession in 2009 as world GDP fell by 0.6 per cent (characterised by a 3.2 per cent fall in GDP in advanced economies which was only partially offset by growth of 2.4 per cent in developing economies) 3. In contrast to the situation in other advanced economies Australia avoided recession completely, with GDP growth slowing from a buoyant 4.7 per cent in 2007 to a more modest 2.4 in 2008 and 1.3 per cent in It is true that the global credit crunch has had an impact on Australian companies ability to borrow and invest, arguably retarding investment in innovation as well. But given the relatively positive economic background in Australia, the broad-based growth in innovation across industries in 2008 is not so surprising. Table 2. Innovation Index by Industry (five year intervals) Mining Manufacturing Utilities Construction Wholesale Trade Retail Trade Transport and Storage Communication Services Finance and Insurance Property and Business Services Health and Community Services Cultural and Recreational Services Personal and Other Services All Industry Innovation Index IMF World Economic Outlook, April

8 Mining Industry Innovation A sharp increase in resources demand from emerging markets, in particular China and India, has benefitted the Mining industry and Australia s terms of trade enormously since The RBA non-rural US$ commodity price index more than doubled between 2003 and December 2007, rising a further 56 per cent to its peak in September 2008, before falling 18 percent by December that year with the escalation of the global economic crisis; despite the fall in late 2008, the commodity price index remained around three times the average of its level in In line with this buoyancy in resources demand and prices the industry s share of GDP has edged higher, and the Mining Innovation Index grew quite strongly in the three years to 2007 before steadying in 2008, as shown in the chart below. This unchanged 2008 result was the outcome of a doubling in trademark intensity and an almost eight-fold increase in design intensity (a notoriously volatile series), which more than offset falls in the other components of the Mining Innovation Index, as shown in the table below. Mining productivity meanwhile has fallen significantly since 2001, from a level 63 per cent above the all-industry average to a level 15 per cent below the all-industry level in This decline is consistent with the boom in resources demand and prices, given that this boom has led to: strong growth in labour and capital investment (to meet demand) that has yet to be fully reflected in increased in output volumes; the mining of more marginal deposits; and bottlenecks in infrastructure and labour supplies. Given an average lag of three years in the feed-through of investment to increased production, the output benefit of this higher investment should add to multifactor productivity in the coming years, all else being equal. While the mining of more marginal deposits may act as a dampener on productivity growth going forward, analysts believe that discoveries and improvements in technology and production practices (i.e. innovation) will largely offset the effects on productivity of resources depletion. 4 2 Mining Innovation Index All-Industry Innovation Index Mining Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity For a full discussion see Productivity Commission (2008), Productivity in the Mining Industry. 6

9 Manufacturing Industry Innovation The relatively buoyant performance of Manufacturing innovation in the past decade can be partially attributed to the earlier opening up of the industry to increased competition from abroad through successive cuts in government assistance and general microeconomic reform, which in turn contributed to the production of more highly value-added goods over time. The Productivity Commission highlights the link between such reform and innovation, stating that the resulting market competition is imperative in encouraging cost reductions and product and process improvement, including through higher rates of innovation and diffusion 5. While the share of manufacturing value added in GDP continued to trend lower in recent years (the result of increased exposure to competition as well as a range of other complex factors) it nevertheless accounted for a relatively high 9.3 per cent in In 2008 the Manufacturing Innovation Index recorded its strongest gain ever during the period under review, with a rise of 24.5 per cent. Four of the five innovation component indexes rose in 2008, with the volatile design intensity index showing the biggest increase of 84.5 per cent. Strong growth was also recorded in trademark intensity (up by 45.7 per cent) and patent intensity (up by 40.2 per cent) in 2008, while R&D intensity grew much more modestly (by 1.6 per cent). The organisational/ managerial innovation component index fell by 2.1 per cent in Manufacturing productivity grew by 2.2 per cent in 2008, having out-performed that of many other industries during much of the period under review. There has been a slowdown in productivity growth in manufacturing, and more generally in Australia, in recent years, partly due to the exhaustion of the scope for such gains from earlier microeconomic reforms and the lack of further such reform. The overall increase in the value of the Australian dollar since the early 2000s, largely the result of the sharp rise in the terms of trade, has applied added pressure on investment in this and other trade-exposed industries. 2 Manufacturing Innovation Index All-Industry Innovation Index Manufacturing Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity Submission to the Inquiry into Raising the Level of Productivity Growth in the Australian Economy, September

10 Utilities Industry Innovation During the first half of the period under review the Utilities industry in Australia was affected by the widespread economic reforms undertaken during the 1980s and 1990s, and specifically by the privatisation of formerly state-owned businesses operating in this sector. In the past decade or so the beneficial impact on productivity of these reforms has waned. At the same time population growth and associated increases in energy demand, as well as the decade-long drought in much of Australia (up until 2009) which encouraged conservation and demand management measures, have driven up costs in the sector. Despite (or perhaps because of) this, innovation in businesses operating in electricity, gas and water in Australia increased significantly in 2007 and As shown below, the Utilities Innovation Index rose strongly by 26.7 per cent in 2008, following an increase of 8.0 per cent in In particular, patent and trademark intensity rebounded strongly by and 94.9 per cent respectively, while the organisational/managerial measure of innovation rose more modestly by 19.8 per cent. By contrast, R&D intensity declined by 34.5 per cent in 2008, meanwhile the small counts of design innovation make this measure very lumpy in nature. The impact of the reforms of the 1980s and 1990s is evident in the relatively strong productivity performance of the Utilities sector up until around 2000; output grew strongly while excess capacity in terms of labour and capital was worked off. Thereafter productivity (both multi-factor and labour) declined as capital spending and labour inputs grew in response to increasing energy demand and the drought-induced pressures mentioned above. In 2008 labour productivity in the Utilities sector fell by 13.8 per cent following a modest rise of 2.1 per cent in Utilities Innovation Index All-Industry Innovation Index Utilities Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity

11 Construction Industry Innovation Developments in the Construction industry are dominated by the strength of the business investment cycle and economic growth in general. Strong growth in engineering construction and non-residential building associated with the resources boom and a pick-up in public sector construction supported strong value added growth in this sector up until With the more recent deceleration in the business investment cycle and the credit crunch associated with the global financial crisis, activity in the sector has slowed somewhat. Despite this, ongoing strong demand from mining-related sectors and public sector infrastructure spending should provide a floor under activity in the construction sector in the coming years. Following a strong increase in the Construction Innovation Index during the period , the Index fell by 24.8 per cent in 2006 before rebounding in 2007 and The main contributors to the recorded rise in 2008 were a sharp recovery in R&D and design intensity, up by 51.7 and 45.1 per cent respectively; trademark intensity also recorded solid growth of 17.6 per cent. Patent intensity and the organisational/managerial component of the index declined by 5.4 and 1.1 per cent respectively in As with innovation, average productivity growth in the Construction industry has generally underperformed vis-à-vis the allindustry measure during the entire period under review from Productivity rose modestly by 1.7 per cent in This poor relative performance over time likely reflects in part the intrinsic nature of the Construction industry, being relatively less exposed to foreign competition and with perhaps less gains to be achieved from the application of new information and communication technologies (ICT) and R&D than other industries. 2 Construction Innovation Index All-Industry Innovation Index Construction Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity

12 Wholesale Trade Industry Innovation Businesses in the Wholesale Trade industry typically deal with other businesses rather than consumers, but there has been a blurring in the boundaries in recent years as some retailers and others deal directly with manufacturers, some consumers deal directly with wholesalers, and some wholesalers act as import agents and stock liquidators. This trend has been facilitated by the spread of modern communications technologies (particularly the internet) in the past 15 years and globalised markets. The implicit increase in competition for wholesalers has been the catalyst for industry rationalisation and innovation, as evidenced by the buoyant performance of the Wholesale Innovation Index in the past decade. In addition, the widespread adoption of productivity-enhancing technologies has moved the sector from a storage-based system to a fast-flow distribution network. As an intermediate industry this sector is important to the broader economy and activity remains highly dependent on demand from industries such as Manufacturing and Retail Trade. Hence the slowdown in growth in the Wholesale Trade industry in recent years has been greater than that of overall GDP, which has been underpinned by the widespread beneficial effects of the resources boom. The Wholesale Trade Innovation Index grew strongly by 32.0 per cent in 2008, following growth of 14.4 per cent in This rebound in innovative activity in 2008 is largely attributable to big increases in design intensity (89.5 per cent), patent intensity (up by 48.2 per cent) and trademark intensity (43.1 per cent). Meanwhile, R&D intensity fell by 2.1 per cent and the organisational/managerial measure of innovation rose modestly by 1.1 per cent. The fall of 0.5 per cent in productivity growth in the Wholesale Trade sector in 2008 followed a rise of 3.3 per cent in Productivity in this sector has strongly outperformed overall productivity growth in Australia during the period under review. Productivity-enhancing technologies such as barcoding, paperless pick systems and automatic re-ordering processes have been critical to this growth Wholesale Trade Innovation Index All-Industry Innovation Index 2 Wholesale Trade Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity

13 Retail Trade Industry Innovation The Retail Trade sector benefitted in recent years from strong consumer demand and rationalisation in response to increased competition, and the widespread adoption of labour-saving technologies. Changes in legislation relating to trading hours and industrial relations reform which increased the focus on enterprisebased work conditions (under the pre-november 2007 Coalition government) also helped improve productivity in this labour-intensive industry up until This was reflected in strong real growth in the sector in excess of 5.0 per cent in each of the two years to , well ahead of overall GDP growth 6. The Retail Trade Innovation Index rose sharply by 59.4 per cent in 2008, following growth of 19.8 per cent in While innovation in the retail sector appears to have broken trend with overall innovation around 1996, it rebounded particularly sharply after Four of the six component indexes rose in 2008, in particular patent intensity (up per cent), design intensity (106.7 per cent) and trademark intensity (52.8 per cent) grew strongly. The 10.7 per cent fall in R&D intensity followed a sharp increase of 31.7 per cent in Organisational/managerial innovation also fell slightly in 2008 by 3.2 percent. While productivity growth in the Retail Sector only slightly outperformed that of the overall economy up until 2003, from 2003 to 2008 it rose by 15.8 per cent versus growth of just 4.8 per cent in the economy overall during the same period. These productivity gains (due to the sorts of factors mentioned in the first paragraph above) are consistent with the increase in the Retail Trade Innovation Index in recent years Retail Trade Innovation Index All-Industry Innovation Index Retail Trade Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity ABS Cat Australian National Accounts, Table 33 Industry Gross Value Added. 11

14 Transport and Storage Industry Innovation Most of the Transport and Storage sector s activity involves dealing with businesses (i.e. carrying freight) rather than passenger services. The major sources of demand in the industry come from physical production sectors such as Agriculture, Mining, Manufacturing and Construction, as well as Wholesale and Retail Trade. Thus given the strength of activity in many of these areas in the years to 2008, the Transport and Storage sector also recorded strong growth in recent years. The chart and table below show that the Transport Innovation Index grew quite strongly by 20.4 per cent in 2008, following a 14.8 per cent rise the previous year. There were increases in four of the component indexes of innovation in 2008: design intensity rose by 54.1 per cent; trademark intensity was up by 33.9 per cent; organisational/managerial innovation rose by 27.0 per cent; patent intensity rose by 20.0 per cent; and R&D intensity rose by 6.1 per cent. As shown in the chart below, during the period since 1990 the Transport Innovation Index has tended at times to move significantly higher than overall industry innovation before reverting back to the overall trend. Productivity growth in the Transport and Storage sector has moved broadly in line with Australian productivity growth overall since 1990 and was unchanged in This result is consistent with the Transport innovation performance overall, which has also broadly tracked the average of all industries over the period under review, as noted above. 2 Transport and Storage Innovation Index All-Industry Innovation Index Transport and Storage Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity

15 Communication Services Industry Innovation The Communication Services industry provides services to both businesses and households and its fortunes are largely determined by developments in the telecommunications area, including new technology in phones, internet devices and related areas. Perhaps unsurprisingly, then, the sector recorded strong growth in excess of 6 per cent per annum in the most recent two years of the period under review. As a result of this strong performance the industry has almost doubled its share of GDP in the period under review 7, while its share of total employment has fallen over time reflecting rapid innovation and adoption of new technologies. The Communication Services industry typically experiences growth spurts following the introduction of major new technologies and services. The Communication Services Innovation Index grew by 49.6 per cent in 2008, following growth of 30.2 per cent the previous year. Overall, innovation in the Communication Services index has grown at a much faster rate than that of Australian industry overall. Rises were recorded in all but one of the component indexes in 2008, with trademark intensity recording the biggest increase of 94.0 per cent, followed by patent intensity which rose by 62.2 per cent; design intensity (an inherently volatile series) and the organisational/management components recorded more modest gains of 26.6 and 0.9 per cent respectively. R&D intensity fell in by 2.8 per cent in 2008 following a rise of 17.2 per cent in Productivity in the Communication Services industry increased sharply by 15.5 per cent in 2008: it has grown consistently more strongly than the all-industry average in the period under review, in line with the major advances in telephony and the internet during this time Communication Services Innovation Index All-Industry Innovation Index 2 Communication Services Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity ABS Cat Australian National Accounts, Table 33 Industry Gross Value Added. 13

16 Finance and Insurance Industry Innovation The Finance and Insurance Industry Innovation Index continues to grow at a faster rate than the average innovation index for all Australian industries. This record on innovation probably reflects a range of factors, in particular the significant deregulation of the financial sector during the 1980s and the diffusion of substantial innovations in ICT within this industry from the 1990s into the 2000s. Productivity growth in the sector has also been enhanced by these developments, and has similarly outperformed Australian average productivity growth. The Finance and Insurance Innovation Index has more than tripled since 1990 and grew by 13.0 per cent in 2008, following growth of 8.1 per cent the previous year. While the volatile design series recorded the biggest increase of per cent in 2008, R&D and trademark intensity also grew sharply by 36.6 and 17.0 per cent respectively. Patent intensity and the organisational/managerial component fell, by 2.4 and 3.3 per cent respectively. The productivity component of the innovation index grew by 5.7 per cent in Productivity growth in the finance sector has performed strongly in recent years, second only to growth in the communications industry. This sector has been a major investor in ICT over recent years, which has contributed to the acceleration of financial intermediation and boosted productivity. Strong growth in R&D expenditure has played an important role in this process Finance and Insurance Innovation Index All-Industry Innovation Index Finance and Insurance Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity

17 Property and Business Services Industry Innovation The Property and Business Services sector covers a wide range of services that are provided mainly to other businesses, although some businesses in the sector provide services to private individuals. This sector has grown strongly in recent decades and is currently Australia s largest industry grouping, accounting for around 12 per cent GDP. By its very nature this sector is a large employer, second only to the Retail Trade industry, thus providing less scope for productivity gains due to the application of ICTs and other technologies reflecting major innovation. Having underperformed relative to the All-Industry Innovation Index since 1990, the Property and Business Services Innovation Index rose strongly by 15.4 per cent in 2007 and further by 17.3 per cent in 2008 to a level just above that of the all-industry average, as shown in the chart below. Patent, trademark and design and intensity recorded the biggest gains in 2008, up by 49.2, 31.5 and 22.8 per cent respectively. A more modest increase of 5.1 per cent was recorded in the organisational/managerial component. In contrast, R&D intensity fell by 3.2 per cent. Productivity growth in this industry has been more or less consistent with growth in the innovation index during the period under review, but was unchanged in 2008 compared with strong growth in innovation in that year; arguably the latter will be reflected in future measures of productivity. Productivity in this sector has also underperformed vis-à-vis economy-wide productivity growth since According to the Productivity Commission information about productivity in this sector is relatively difficult to amass 8. 2 Property and Business Services Innovation Index All-Industry Innovation Index Property and Business Services Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity Submission to the Inquiry into Raising the Level of Productivity Growth in the Australian Economy, September

18 Health and Community Services Industry Innovation The health sector is third biggest employer in Australia and the Australian Institute of Health and Welfare (AIHW) estimates that expenditure in the sector will increase from around 9 per cent of GDP currently to more than 12 per cent by 2030; population growth, the aging population and technological innovation in medicine is driving this increase. The Health and Community Services Innovation Index has moved broadly in line with the All-Industry Index since 1990, but has increased in volatility in the last four years. In 2008 the Innovation Index rose by 12.5 per cent, following 15.2 per cent growth in The 2008 result reflects increases in design, trademark and R&D intensity of 147.8, 34.9 and 25.4 per cent respectively, while the organisational/ managerial component also rose by 15.1 per cent. Patent intensity fell by 26.4 per cent in The spike in innovation in 2005 was due primarily to a three-fold increase in trademark intensity in that year, as well as a slightly smaller increase in the more volatile design intensity series. Productivity in the Health and Community Services sector has slightly underperformed relative to the national average since In some senses the health sector fits the pattern of other service industries where the individual human input cannot easily be replicated or automated (e.g. for employees such as nurses, doctors and social workers). Having said this, innovation also plays an important role in this sector (for example in terms of the application of ICT in certain areas, high tech automation and the development of new drugs) so there will also be scope for further productivity growth. 2 Health and Community Services Innovation Index All-Industry Innovation Index Health & Community Services Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity

19 Cultural and Recreational Services Industry Innovation Cultural and Recreational Services (which includes film, TV, radio, museums, galleries, theatres, sport, gambling and other recreational activities) account for just 1.0 per cent of GDP. This sector grew strongly by 6.5 per cent in before slowing to 2.3 per cent in as households and individuals wound back discretionary spending as the financial crisis unfolded; spending in this area is relatively high but non-essential so it tends to suffer in times of economic downturn, although the sector as a whole rarely records negative growth 9. Having barely kept pace with innovation in Australian industry overall for much of the period under review, innovation in the Cultural and Recreational Services Industry rebounded in 2008 by 70.9 per cent. Significant gains were recorded in patent and R&D intensity, which rose by and per cent respectively. Meanwhile trademark and design intensity rose by 53.6 and 93.3 per cent respectively and the organisational/managerial component rose by13.0 percent. Average productivity growth in the Arts and Recreational Services industry has lagged growth in overall productivity during the period since As with some other service industries, such as Property Services, the relatively limited scope for this industry to benefit from some of the key drivers of productivity growth elsewhere in the past 15 years probably accounts for this relatively poor performance. Specifically, a number of services are not easily automated or significantly amenable technological improvement. 2 Cultural and Recreational Services Innovation Index All-Industry Index Cultural and Recreational Services Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity ABS Cat Australian National Accounts, Table 33 Industry Gross Value Added. 17

20 Personal and Other Services Industry Innovation The Personal and Other Services industry encompasses a diverse range of occupations and businesses, but with two fairly distinct streams: services to individuals and businesses, and government-funded essential services. Whereas spending on the former is discretionary and fluctuates with the economic cycle (e.g. domestic cleaners and hairdressers), spending on essential services (e.g. policing and waste disposal) is more stable. The Personal and Other Services Innovation Index has significantly outperformed that of the All-Industry Innovation Index in recent years (note the large left-axis scale in the chart). It rose strongly by 63.9 per cent in 2008, reflecting strong growth particularly in patent and trademark intensity (up by and 43.4 per cent respectively). R&D intensity and the organisational/managerial component rose by 22.2 and 37.3 per cent respectively, while design intensity fell by 4.3 percent. Productivity in this sector has underperformed somewhat compared with the national average since As with some other service industries, the Personal and Other Services industry is highly labour-intensive and thus less amenable to automation and the application of labour-substituting technologies. As a result there is less scope for increases in productivity due to ICT-related and other capital-deepening and efficiency gains Personal and Other Services Innovation Index All-Industry Innovation Index 380 Personal and Other Services Innovation Index R&D intensity Patent intensity Trademark intensity Design intensity Organisational/managerial innovation Productivity

21 Appendix 1: Construction of the IBM Melbourne Institute Innovation Index of Australian Industry Innovation which is typically defined as the introduction of something new and useful is widely regarded as the wellspring of economic prosperity, since the introduction of new processes, techniques and products drive productivity growth. However, innovation is much more than the introduction of new processes, techniques and products, since it also relates to a wide range of activities such as how people organise themselves, how businesses are structured and how products are packaged. Despite the fact that innovation is relatively easy to conceptualise, several variants of its meaning exist and identifying what is new is not unambiguous. For example, should something that is simply an imitation of practices used by other companies be called an innovation? While such new-to-the-firm innovations are clearly important, since they foster productivity growth within the firm, many people would not regard this as innovation. Rather, they would think of innovation in a narrower (and grander) sense that is, as involving something which is new to the world, such as the creation of penicillin or the launch of the personal computer. In trying to measure the extent of innovative activity, we also need to consider whether we should include the many new products which are abandoned because they do not find a niche market or the organisation that created them goes out of business. Should such innovations be counted in an exercise which is designed to identify the level of innovative activity? Or are we really only interested in those innovations which are successful, however this is measured? For the purposes of this report we adopt a broad definition of innovation. We include innovations which are both new to the world (such as patents) and those which may be simply new to the firm (such as trademarks). We also seek to include all innovative activities, not just the few that achieve success, which we do by including data on R&D expenditure and employment since these data embody elements of both successful and unsuccessful innovation (not all R&D projects end up in marketable products or new processes). And while relying heavily on activities which create a paper trail, such as patent and trademark applications, we supplement this with survey information on the R&D activities and organisational reforms of businesses. This provides us with the broadest possible conception of all those activities which constitute innovation in Australian industry. Even with a clear definition of innovation, a further problem lies in its measurement, since many innovative activities are trade secrets or improvements in production processes which are not reported outside the innovating organisation. As consumers we may see the effects of such innovations (in terms of better products or lower prices), but it is less clear how to include the innovations in an index of innovative activity since they are essentially unobservable. Here we measure these types of innovations indirectly, through the inclusion of industry-by-industry productivity, since any internal process innovations should ultimately be reflected through productivity improvements. In terms of coverage, all one-digit Australian New Zealand Standard Industrial Classification (ANZSIC93) industries are included in the Index with the exception of non-market sector activities such as government and defence, education and the not-for-profit health services, as well as agriculture, forestry and fishing. Government trading enterprises, on the other hand, are included (see Appendix 2 for details). We provide discrete indexes for: Mining; Manufacturing; Construction; Utilities; Wholesale Trade; Retail Trade; Transport and Storage; Communication Services; Finance and Insurance; Property and Business Services; the for-profit part of Health and Community Services; Cultural and Recreational Services; and Personal and Other Services. The Index therefore covers the vast majority of active businesses, industries and organisations in Australia. The Innovation Index tracks patterns in the rate of innovative activity across a wide range of Australian businesses. Note that the Index covers changes in the rate (rather than the level) of innovative activity from 1990 to the present. It covers innovations relating to goods and services, business processes, and organisational and managerial functions. These dimensions are measured by six industry data series comprising: 19

22 R&D intensity (measured by R&D expenditure as a per cent of total value added and R&D employment as a per cent of total employment); Patent intensity (measured by the number of patent applications per person employed); Trademark intensity (measured by the number of trademark applications per person employed); Design intensity (measured by the number of design applications per person employed); Organisational/managerial innovation (measured by responses to questions in the Melbourne Institute Management and Innovation Survey relating to such things as the extent of business resources devoted to organisational change, e.g. restructuring and changes in work practices; managerial change, e.g. new management techniques and enterprise bargaining; and the marketing of new products or processes); and Productivity (value added per person employed). There are three main sources of data used to construct the Innovation Index. The Australian Bureau of Statistics (ABS) supplied data on productivity, R&D employment, R&D expenditure, industry employment and industry value added. We also used ABS data to construct the weights used to reflect the relative importance of each component of overall business performance in the Innovation Index (using two recent ABS surveys of innovation in Australia which reported results on the proportion of sales income that resulted from the introduction of goods/services, processes and organisational/managerial innovations). In addition, IP Australia supplied the data on patent, trademark and design applications. These are matched to business listings from the business directories to produce industry series. The Melbourne Institute of Applied Economic and Social Research supplied the data on organisational/managerial innovation through its annual enterprise-level Management and Innovation Survey, which has been conducted every year since The IBM Melbourne Institute Innovation Index of Australian Industry is constructed using the following equation: (1) where λj denotes the intensity of the j-th measure of innovative activities R&D intensity which is a factor of R&D expenditure as a proportion of valued added, R&D employment as a proportion of total employment (RD); patent applications per person employed (Patents); trademark applications per person employed (Trademarks); design applications per person employed (Designs); the mean of three survey questions from the Melbourne Institute s Management and Innovation Survey on the extent of business resources devoted to organisational change (e.g. restructuring, changes in work practices), managerial change (e.g. new management techniques, enterprise bargaining) and the marketing of new products or processes (OrgMan); and value added per person employed (Productivity). Thus, there are six distinct components of the Innovation Index. Each data component is disaggregated by one-digit ANZSIC industry and year. By including numerous dimensions in our quantitative measure of innovation, we capture information about the extent of innovative activity within an industry at different stages of the innovation pathway. Each of these items captures different points in the innovation lifecycle. R&D data, for example, captures both the initial investment made in conducting research about a potential innovation and the subsequent expenditure made in conducting the trials necessary to ensure that the innovation actually works. Note that the R&D data relate to internal expenditure on research and development and do not include expenditure (or employment) contracted out to third parties. Intellectual property, such as patents, trademarks and designs, reflects the outputs of innovative activity these are typically observed after the R&D process has been completed and new products (or modifications of existing products) are launched onto the market. The effect of combining these dimensions into an innovation index is to provide us with a much more comprehensive picture of the breadth and depth of innovative activity across all stages of the innovation pathway. Note, however, that this implies that the components of the Innovation Index are not mutually exclusive some research expenditure no doubt results in patent applications while spending on development is probably also captured in the productivity component. 20