Underperformance

Australia - An Under-performing Knowledge Nation

While Australia in some ways on the path to becoming a Knowledge Nation already, it is an under-performing one.

In all the key areas of investment we are falling behind our major competitors.

We are in danger of becoming a nation of followers, not creators.

This section outlines the extent of the problem in the vital areas of investment in education and skill formation, public and private sector R&D, and commercialisation. It finishes with an appraisal of Australia’s performance in selected knowledge - intensive industry sectors. The section that follows outlines what needs to be done to reverse this decline and make Australia an effective Knowledge Nation.

The Knowledge Investment Crisis

Considine, Marginson, Sheehan and Kumnick have constructed for the Taskforce an index of Australia’s investment in knowledge between 1985 and 1998 (see Table 5). (19) The index is based on the latest OECD data and compares Australia to 11 other OECD countries. It measures spending on both the creation and application of knowledge, including public spending on R&D and software, and the development of knowledge capabilities of individuals, including spending on education and training.

This measure shows that as well as being at the lower end of the range of OECD countries in 1995, investment in knowledge in Australia has fallen further since then relative to international trends (see Figure 4). While investment in knowledge in the selected countries increased from 7.46 per cent of GDP in 1985 to 8.22 per cent in 1998, investment in knowledge in Australia fell from 6.47 per cent of GDP to 6.15 per cent. And while it increased from 7.90 per cent to 8.22 per cent in the selected countries between 1995 and 1998, in Australia, spending took an upward swing in 1996, after which it collapsed. In the United States, investment in knowledge increased from 8.39 per cent of GDP to 8.73 per cent over the same period. In 1998, Australia was about 25 per cent lower in terms of investment in knowledge than the weighted average of the 12 countries, and nearly 30 per cent lower than the United States. Given the role of the United States as a pacesetter in economic change, this comparison is particularly important, and the widening gap particularly disturbing. On this measure, the share of the United States GDP devoted to investment in knowledge rose by just on 15 per cent between 1985 and 1998, and by 4 per cent between 1996 and 1998. By contrast, Australian investment fell by 5 per cent between 1985 and 1998, with about half that fall after 1996.

Furthermore, the ratio between investment in knowledge and investment in fixed capital assets is trending downwards (see Table 6). This confirms that the economic period after 1996 was associated with a massive diversion of national investment into buildings, rather than knowledge. To this extent, it represents a wasted opportunity that must be addressed in the first decade of the new century.

These data show that Australia is facing what amounts to a crisis in Knowledge Nation investment. The Taskforce also believes that when data for the past three years become available, they will show that this gap in knowledge investment between Australia and other nations will have widened further. While other nations are moving ahead with public and private investment in R&D and education, Australia is still pursuing cost cutting and privatisation policies.

Figure 5, which is drawn from Table 5, illustrates the seriousness of this problem. Australia is falling behind other nations in investment in knowledge creation. Unless this is rectified, we are in danger of losing touch forever with the world’s leading nations.

TABLE 5: Investment in knowledge, selected countries, 1985–1998 (% of GDP)

		1985	1992	1993	1994	1995	1996	1997	1998
1	Sweden	8.72	9.97	10.00	10.00	10.15	10.39	10.59	10.83
2	France	7.05	7.95	8.17	8.18	8.41	8.40	8.32	8.38
3	Denmark	7.47	7.92	8.58	8.39	8.46	8.73	8.84	9.06
4	Finland	7.29	9.93	9.57	9.00	9.11	9.41	9.26	9.62
5	Norway	6.64	8.86	8.82	8.92	8.90	7.97	8.67	8.80
6	Canada	7.52	8.55	8.10	7.94	7.58	7.41	7.25	7.38
7	UK	7.18	7.16	7.08	7.05	7.11	7.03	6.81	6.79
8	USA	7.60	8.26	8.16	7.86	8.17	8.39	8.63	8.73
9	Netherlands	8.31	7.02	7.09	7.00	6.92	6.88	6.78	6.95
10	Austria	6.87	7.32	7.07	7.12	7.10	6.96	7.88	8.03
11	Germany	7.26	7.19	7.09	6.97	7.07	7.13	7.11	7.27
12	Australia	6.47	6.14	6.42	6.22	6.11	6.30	6.24	6.15
Weighted average		7.46	7.96	7.90	7.71	7.90	8.00	8.12	8.22

Source: Considine et al. (2001)

(19) M Considine, S Marginson, P Sheehan and M Kumnick (2001) The Comparative Performance of Australia as a Knowledge Nation, Chifley Research Centre

FIGURE 4: Investment in knowledge: Australia’s comparative performance

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FIGURE 5: Investment in knowledge: selected countries (% of GDP)

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TABLE 6: Investment in knowledge and private investment on buildings and structures, Australia 1992–1999 (% of GDP)

	91–2	92–3	93–4	94–5	95–6	96–7	97–8	98–9
Private investment in buildings and structures	7.4	7.4	7.9	8.1	7.8	8.2	9.1	9.4
Investment in knowledge	6.14	6.42	6.22	6.11	6.30	6.24	6.15	n.a.
Ratio of investment in knowledge to investment in buildings and structures	83.0	86.8	78.8	75.4	80.8	76.0	67.6	n.a.

Source: Considine et al. (2001) Source: Considine et al. (2001)

An Under-performing Education System

Comparative performance

Australia’s performance in education is falling behind compared to our main competitor nations. Our history is one of significant achievement up to the 1990s, followed by decline, especially after 1995. (20)

	Between 1996 and 1998, preschool participation in Australia declined from 24.1 per cent to 22.4 per cent, compared to the OECD country average of 39.6 per cent, and much higher levels of participation in Western Europe.
	While Year 12 completion rates in Australian schools increased from 36.3 per cent in 1982 to 77.1 per cent in 1992, this increase has not been sustained and has been stagnating for a number of years. In 2000, the apparent retention rate for full-time secondary students from Year 7/8 to Year 12 was only 72.3 per cent. The decline in participation was sharper for boys than for girls, for children from State schools, and for those from lower socio-economic backgrounds.
	While there was growth in the numbers of Australians going to university in the 1990s, this was at a slower rate than the expansion of university places in most OECD countries. Between 1990 and 1995, domestic student load (i.e. the number of effective full-time students) in Australian universities rose by 19.2 per cent, but in the next four years to 1999, the rate of increase was slower, at just 10.2 per cent. In the year 2000, the number of domestic students in Australian higher education system actually fell, from 603,156 in 1999 to 599,905 in 2000 (a decline of 0.5 per cent). This is a very worrying trend.
	Of the Australian population aged 25–64 years, 18 per cent have a tertiary education. While this is above the OECD average, it is well behind the United States at 27 per cent.

Education funding levels

Since 1996, education policy in Australia has been dominated by the drive to reduce fiscal costs. This has been at the expense of national capacity. Once an above average investor in education, Australia is now below the OECD average (with 5.46 per cent of GDP devoted to education of all forms, compared to an OECD country average mean of 5.66 per cent in 1998). In terms of public expenditure on education at all levels, Australia’s 4.34 per cent in 1998 was well below the OECD average of 5.00 per cent and ranked 21st out of 29 OECD countries. The United States (4.82 per cent), Canada (5.48 per cent) and the United Kingdom (4.65 per cent) were all higher.

	Preschool funding is lamentable by international standards. In 1998, Australia spent only 0.1 per cent of GDP on pre-primary education, compared to an OECD overall mean of 0.4 per cent, the same as the United States.
	Total public spending on schools in Australia by the Commonwealth and the States (3.8 per cent in 1998) was only just above that of the OECD average (3.71 per cent), but well below that of high investors such as Korea and France. Commonwealth policy evidences a lop-sided preference for private schooling, increasingly at the expense of the public sector although it educates more than two-thirds of all students. This has been responsible for the non-government sector pulling ahead in terms of Year 12 retention and results.
	While university income from private sources (Higher Education Contribution Scheme [HECS], international student fees, domestic student fees, donations and endowments, investments and fee-for-service research) has increased markedly as a proportion of total university funding since 1996, this has been needed to replace significant falls in Commonwealth funding. In 1998, Commonwealth funding constituted only 51.85 per cent of total university funding, down from 58.08 per cent in 1996. Overall, total university income has stagnated at a time Australia needs it to expand. Worryingly, the evidence suggests that in terms of the teaching and research functions of universities, the increased private income per student has not necessarily substituted for the public income per student that has been lost, but has been ploughed back into the corporate functions of universities (such as off-shore marketing, public relations, ICT and asset management). Overall, funding per student is falling (now $29,194) and is now well below the OECD average ($35,087).
	Cutbacks in Commonwealth funding of vocational education and training (VET) have been even more severe than for universities. This has been compounded by the lesser ability of VET institutions to raise private income compared to universities. Between 1990–91 and 1997–98, government expenditure per course hour in VET declined by 17.3 per cent in real terms. The National Centre for Vocational Education Research calculates that this fell by a further 11.0 per cent in the two years between 1997 and 1999.

(20) The following analysis is drawn from ABS 4221.0; OECD Education at a Glance 2001; The Comparative performance of Australia as a Knowledge Nation

The consequences for quality

What have been the implications of this lack of adequate Commonwealth funding of education?

	In the VET sector, the dramatic funding shortfalls are unsustainable in the medium term. Government policy is making it harder for VET institutions to fulfil their roles in building a knowledge economy, such as the diffusion of new technologies, techniques and modes of work organisation, and industry retraining. Anecdotal evidence suggests that some institutions are struggling to remain open.
	There have been large increases in university student:staff ratios (i.e. effective full-time staff to full time students in teaching-related positions) from 1:15.31 in 1996 to 1:18.84 in 2000. Increases have been across the board, affecting all disciplines.
	The proportion of university teaching staff employed as casuals rose from 17.49 per cent in 1990 to 19.35 per cent in 1998.
	The proportion of university staff employed in teaching fell from 42.79 per cent in 1990 to 37.68 per cent in 1998.
	The major growth in university enrolments has been in business, economics and administration. It has been driven largely by the need for cash-strapped universities to seek full-fee paying overseas students. Growth in other important disciplines has been disappointing.
	What are in effect big increases in HECS payments through rate rises and falls in the repayment threshold have acted as a disincentive for many people, particularly mature-aged people, from entering university. Evidence suggests that inadequate levels of income support are affecting the participation rate of young people from working class backgrounds in higher education. (21)
	The remuneration of Australian teachers and university lecturers compared to their overseas counterparts is low. While Australian teachers generally have high starting salaries, they can expect to earn substantially less than their counterparts in most comparable nations as their career continues. Similarly, Australian university teaching salaries at all levels are approximately only 65 per cent of their counterparts in the United States.

The implications of this are worrying. The decline in job security and expected income and the increase in student load per lecturer are acting as disincentives for young people considering a research career in Australia. The impact is severe in areas closely associated with high technology enhancement and research. The dramatic increase in student: staff ratios must inevitably affect teaching quality, particularly the small group and one-on-one teaching that is the hallmark of good university experience.

Furthermore, while the substantial increase in the number of international students has been positive for the Australian economy and universities, the increasingly lopsided nature of enrolments in course work masters degrees and business studies has potentially negative implications. Such growth has been at the expense of disciplines that have a greater capacity to contribute directly to the growth of a Knowledge Nation, such as science, mathematics, engineering, education, humanities and the social sciences. Fiscal pressures should not be allowed to distort the growth of Australia’s higher education sector in this way. The Taskforce believes that there is a need for greater Commonwealth involvement in optimising the benefits to Australia of the growing numbers of overseas students in our universities.

Critical gaps in Australia’s educational capacity are now opening up.

	There is a crisis throughout the mathematical sciences, including a 25 per cent fall in the number of university mathematics staff since 1995, a decline in the number of Year 12 students studying advanced mathematical courses, and shortages of well-qualified maths teachers. It has been estimated that about 40 per cent of junior secondary students are taught mathematics by a teacher who has little or no background in the discipline. Some schools, especially those in regional and rural areas, simply cannot find qualified maths and science teachers. (22)
	Although improving, Australia is only in the middle rank of performance in international comparisons of literacy and numeracy. We need to be at the top.
	There is a looming teacher shortage that must be addressed, particularly in rural areas. (23)
	Australia faces a serious shortage of skilled ICT workers over the coming years. (24)
	Options for lifelong learning and retraining are being cut off for many people.

(21) B Birrell, A Calderton, IR Dobson and TF Smith. ‘Equity and access to higher education revisited’, People and Place, Vol. 8, No. 1, 2000
(22) J Thomas, ‘Mathematical Sciences in Australia: Looking for a Future’, FASTS Occasional Papers Series, Number 3, October 2000
(23) B Preston (2000) Teacher supply and demand to 2005: projections and context, Australian Council of Deans of Education, Canberra
(24) IT&T Skills Taskforce (1999) Future Demand for IT&T Skills in Australia 1999–2004. Available at http://www.aiia.com.au/activities/index.html

The Crisis in Australia’s R&D Performance

The establishment of ‘emerging’ industries and enabling industries holds great promise for creating new highly-paid jobs, increasing national wealth and its distribution, improving health standards through medical and public health research and ensuring environmental sustainability.

As the Chief Scientist stated recently, the next few years represent a window of opportunity for Australia to maximise the benefits of investment in the creation of emerging industries, after which rates of return and benefits will be diminished. (25) Creating emerging industries will require a sense of urgency and purpose that is currently lacking.

The first problem to overcome is Australia’s woeful R&D performance. Between 1996–97 and 1998–99, R&D as a share of GDP declined from 1.65 per cent to 1.49 per cent — a fall of 10 per cent of the nation’s income devoted to R&D. Both the private and public sectors were responsible for this fall. Business expenditure on research and development fell from 0.80 to 0.67 per cent of GDP, and government expenditure on research and development fell from 0.39 per cent of GDP to 0.35 per cent (not including university R&D) (see Figure 6).

In comparative terms, Australia’s R&D performance improved significantly between 1984 and 1996 but began to tail off significantly thereafter. Since 1995, Australian R&D has fallen by 15.4 per cent as a share of GDP, whereas that of the OECD and the United States has increased by 4.2 per cent and 5.0 per cent respectively (see Table 7). The share of GDP devoted to R&D in Australia has fallen from 81.6 per cent of the OECD share in 1995 to 66.6 per cent in 1998.

The Taskforce believes that Australia must become a world leader in the percentage of GDP devoted to R&D. It notes, however, that even at a much higher level of R&D to GDP, the small size of the Australian economy means that the overall quantum of R&D will be comparatively low in world terms, necessitating greater targeting of our R&D effort.

(25) The Chance to Change: Discussion Paper by the Chief Scientist, August 2000, p19

FIGURE 6: Australian R&D spending (as a share of GDP), as a proportion of total OECD spending levels

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TABLE 7: Investment in R&D, Australia and selected OECD countries, 1992–98, (share of GDP)

	84	91	92	93	94	95	96	97	98	84–95	95–98
change (%)
OECD	2.20	2.28	2.24	2.19	2.14	2.16	2.18	2.21	2.25	–1.8	4.2
Australia	1.11	1.46	1.59	1.59	1.62	1.76	1.70	1.60	1.49	59.0	–15.4
USA	2.73	2.81	2.74	2.62	2.52	2.61	2.66	2.71	2.74	–4.4	5.0

Source: OECD Main Science and Technology Indicators (2000) and estimates by Considine et al.

Venture Capital and Commercialisation

One of the major impediments to the growth of new Australian firms in the knowledge area is the relative lack of venture capital funds and other forms of support for start-up companies, such as incubator and other clustering arrangements, compared to other competitor nations.

The stories of the great Australian inventions that had to go overseas to be brought to market are depressingly familiar to all Australians. A recent MIT study listed the world’s 150 leading companies across eight key high-tech sectors according to the number of a firm’s patents and other indicators that combine to measure their capacity for innovation. The key sectors are aerospace, automotive, biotechnology/pharmaceuticals, chemicals, computers, electrical/electronics, semiconductors and telecommunications. Worryingly, there are no Australian companies in the list, but there are many from countries with populations that are similar to or smaller than Australia’s, such as Canada, Denmark, Finland, France, the Netherlands, Singapore and Sweden. (26) This suggests powerfully that we need to increase the rate of commercialisation of Australia’s research efforts.

It is true that in many cases, Australia’s small domestic market leaves entrepreneurs with little choice but to commercialise their ideas overseas. However, if Australia is to become a Knowledge Nation, it will be incumbent upon future Australian governments to ensure that there are no excuses for Australia to miss out on the jobs and profits that flow from the successful commercialisation of brilliant Australian ideas.

A number of policy innovations in recent years (such as Pooled Development Funds and capital gains tax incentives) have made progress towards improving Australia’s commercialisation environment. Nevertheless, more work remains to be done. For example, the recent Chief Scientist’s report concluded that:

It appears that after a number of false dawns, Australia does seem to be solving the long-standing venture capital problem ... however the emerging issue has become the inadequacy of pre-seed capital and the “deal” flow — that is, where do marketable ideas come from? (27)

Details of recent initiatives and recommendations have been set out in the reports of the Chief Scientist and the Innovation Summit Implementation Group. (28) The Taskforce supports these recommendations. Australia also needs to address the tax and other impediments that are limiting our ability to commercialise research and development and attract large companies here. This report lists several recommendations to improve Australia’s venture capital and commercialisation performance (see Recommendations 4–7 in particular).

Investment in Information and Communication Technology

Information industries are both key drivers of the global knowledge economy and central sources of growth in modern economies. The Australian Treasury has recently argued that Australia’s failure to develop an indigenous ICT manufacturing sector is of no consequence; that the only benefit of ICT is its diffusion throughout the whole economy and the increase in labour productivity it brings. (29) The Taskforce disagrees. We believe that the impact of ICT occurs through two main channels — the rapid adoption and use of information technology goods and services across all industries, and the rapid growth in output and employment in the information industries themselves. While we acknowledge the need to encourage the embedding of new processes such as ICT (and also biotechnology and sustainability, among others) in all relevant industries, we believe that Australia must reject the mentality that sees us content to send our best ideas and minds overseas to be developed and commercialised.

(26) http//www.technologyreview.com/magazine/may01/scorecard.asp
(27) The Chance to Change Final Report, p82
(28) The Chance to Change: Final Report, pp. 81–98; Innovation Unlocking the Future: Final Report of the Innovation Summit Implementation Group, 2000, pp. 22–3
(29) Budget Paper No. 1, 2001– 02, statement 4

Consigning Australia’s economic future to that of just being a good diffuser of technology merely reflects a poor understanding of the nature of technological change. It is increasingly becoming accepted that the productivity jumps associated with the new economy have been most visible in those sectors that heavily use new technology and also those sectors engaged in the production of new technology. The economic and knowledge spillovers from use and production overwhelm those associated with just being a good diffuser.

It is important to recognise that the production and use of new technology are not mutually exclusive but, rather, are mutually re-enforcing. It is one of the great economic fallacies that being a good adopter of technology is both costless and easy. The economics literature on growth suggests otherwise. The essential economic requirement in the new economy — for being a good adopter, a good user, and a good producer — is for economies to be lifted close to their knowledge frontier. Critical to that objective is the need to build a culture based on education, skills, training, research and development and innovation. This is not derived through some exogenous means, but must be generated endogenously in the economy and our society.

In an increasingly globalised and competitive market, it is clear than economies that position themselves close to the frontier of knowledge are best able to exploit the discoveries of others and, at times, lead other economies in the reaping the economic rents of leading innovation. While it is often argued that to always be a leader can be associated with large costs, to never be a leader can also generate opportunity costs.

Developing a production sector in ICT is fundamentally about value-adding to our existing industries, developing new products and processes, and, importantly, developing our content generation and services sector.

In Australia, it has generally been accepted that, in spite of having failed to develop a major role in the creation and production of ICT goods and services, the nation is relatively well advanced in other information industries and in the application of ICT goods and services in businesses generally. Thus the information industries should provide a strong impetus to growth in Australia also. Drawing on the work of Houghton, (30) research by Considine, et al. on behalf of the Taskforce (31) shows that, over the past few years, this seems not to have been the case:

	Australia’s position in the communication and information equipment area, which had been relatively small but growing, has declined significantly in recent years.
	In spite of the importance of the information industries, and their strong growth globally, employment in Australia in these industries has barely increased at all since 1995–96, and employment in ICT specialist businesses has fallen.
	While the number of firms engaged in these industries has continued to grow, that growth has been slower since 1995–96 than was the case for the previous three years, and has largely comprised an increase in the number of very small firms.
	In terms of spending on the ICT industries, Australia rates relatively highly among OECD countries, although in part this is due to the impact of distance on spending on telecommunications infrastructure.
	The overall market for the products and services of the information industries continued to grow strongly in Australia, with the total market estimated at about $75 billion in 2000. But the share of domestic production in total income from those sales declined sharply between 1995–96 and 1998–99.
	More generally, in terms of the contribution of the information industries to the national economy, Australia ranks last of the 18 OECD countries for which information is available.

One of the most striking of these findings is in terms of employment in the information industries, data on which are provided in Table 8. After growing by 42.5 per cent between 1992–93 and 1995–96, employment in these industries increased by only 0.3 per cent in the three years to 1998–99. This cessation of growth reflects two main factors: a big decline (18.8 per cent) in employment in the communications services industries, as service providers cut back sharply on staff levels, and a smaller decline in the manufacturing and wholesale area (3.9 per cent). While the information services and content areas continued to grow by 35.2 per cent and 12.1 per cent respectively, this growth barely offset the declines in the other two areas. Specialist ICT businesses make up about 80 per cent of total employment in the information industries, and in these businesses employment actually fell by about 2,500 persons between 1995–96 and 1998–99.

This weakness in employment in the information industries after 1995–96 is in turn related to trends in the number of businesses active in these industries. The overall number of businesses operating in the information industries continued to rise after 1995–96, increasing by 30.4 per cent between 1995–96 and 1998–99. However, the overwhelming share of the additional jobs was in the information services sector, and jobs in the manufacturing and wholesale sector fell by 20.7 per cent.

(30) J Houghton (2001) Information Industries Update 2001, Centre for Strategic Economic Studies, Victoria University, Melbourne
(31) Considine et al. op. cit, pp. 35–9

More important, perhaps, is the change in the number of firms in the information industries by size. Between 1995–96 and 1998–99, the number of medium–sized firms (20–99 employees) actually fell, and there was only a small increase in large firms. Apart from this, all of the increase in the number of firms was in those with fewer than 20 employees. These increased by 4,530 firms or 35.4 per cent. Small firms operating in information services now account for a dominant share of the Australian information industries.

It is likely that an industry that consists primarily of small firms operating in the information services area will not be able to compete effectively with the large international companies that play such a decisive role globally. In fact, one of the most disturbing trends of the period since 1995–96 has been the falling share of the large Australian market that has been met by Australian providers. As shown in Figure 7, the share of domestic production in total income from Australian sales has fallen sharply for the packaged software and communications and ICT hardware markets.

TABLE 8: Employment in the information industries, 1992–93 to 1998–99

	1992–93 no.	1995–96 no.	1998–99 no.	Share 1998–99 (%)	Growth 1992–3 to 1998–9 (%)
Communication services	68,000	91,701	74,467	30.3	9.5
Information services	30,071	55,028	74,395	30.3	147.4
Manufacturing & wholesale	60,613	83,208	79,931	32.5	31.9
Information content	13,308	15,155	16,982	6.9	27.6
Total	171,992	245,092	245,775	100.0	42.9

Source: Houghton (2001), based on ABS sources.

FIGURE 7: Change in the share of domestic production in total income from sales by sector, 1995–96 to 1998–99 (%)

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Note: ICT Hardware is the sum of communication hardware, computer hardware and other hardware.

Source: CSES analysis.

As Houghton concludes: ‘it appears that Australia’s information industries are failing to hold their own against competition from overseas products’. (32) The communications and information services are still much less exposed to global competition than the product industries, although that competition is intensifying rapidly.

This weakening trend in Australia’s information industries belies the widely held belief that in this area, Australia is coping reasonably well with the emergence of the global knowledge economy. Indeed, comparative data on the share of value added of the ICT industries in total business sector value added (Figure 8) illustrate starkly the limitations of these industries in Australia. Of the 18 OECD countries for which data are available, Australia has the smallest share of ICT value added of any country. The information industries may be growing rapidly around the world, but Australia’s position within them is small and seems to be declining in relative terms.

The common factor in this is the impact of government policies, particularly the failed ICT outsourcing program. This has retarded the development of a promising Australian ICT industry and constrained the growth of large firms that could have developed an Australian ‘brand name’.

Investment in Environmental Management Technologies and Services

A key source of opportunity for Australia is the growing world market for environmental management technologies and services.

It has been estimated that in 2000, the world environment market was approximately $1 trillion, including water, waste, air quality, pollution control, recycling, impact assessment and conservation services. However, as virtually every business has an environmental responsibility, the real market for environmental products and services is the whole economy. Around the world, firms are responding to the lack of government leadership by adopting their own environmental standards, particularly ‘triple bottom line’ (financial, social and environmental) reporting. With the narrowly defined environmental market expected to grow much faster than the broader economy, the opportunities for Australia to benefit both environmentally and economically are enormous.

Unfortunately, while Australia has much expertise in environmental research and service provision, particularly in the areas of water and waste management, we are not taking full advantage of the available opportunities. Out of a national expenditure on the environment of $8.6 billion in 1996–97, $4 billion was in imports, mostly in technology. By contrast, we exported only $300 million in technologies and services. While there are lots of small Australian firms with good ideas and products, many are finding it hard to expand due to inadequate access to venture capital, commercialisation expertise and government regulation. A recent study listing the world’s 50 largest environmental management companies does not include one Australian company. (33)

Generally, Australian companies are regarded as dismal performers in their adoption of sustainable environmental practices.

There is currently no government plan to facilitate these new industries. Although the Department of Industry, Science and Resources (DISR) has made tentative first steps, more urgency is needed.

FIGURE 8: Share of ICT industries value added in total business sector value added in OECD countries, circa 1998 (%)

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Source: OECD (2000) Measuring the ICT Sector, OECD, Paris 12 10

Investing in Biotechnology

In its December 2000 report entitled Global Trends 2015, the United States Central Intelligence Agency stated:

Fifteen years ago, few predicted the profound impact of the revolution in information technology. Looking ahead another fifteen years, the world will encounter more quantum leaps in IT and in other areas of science and technology. The continuing diffusion of IT and new applications of biotechnology will be at the crest of the wave. (34)

The report continues that by 2015, ‘the biotechnology revolution will be in full swing with major achievements in combating disease, increasing food production, reducing pollution and enhancing the quality of life’. The principal fields of this biotechnology revolution will include:

	genomic profiling (decoding the genetic basis of pathology, enabling medical researchers to move beyond the description of diseases to more effective mechanisms for diagnosis and treatment);
	proteomics (or functional genomics), which identifies the mechanism by which proteins control cell functioning in all forms of life;
	biomedical engineering (spurring the development of sensor and neural prosthetics such as retinal implants, cochlear implants;
	therapeutic and drug developments (curing enduring diseases and countering trends in antibiotic resistance);
	bioinformatics (the rapid processing, storage and manipulation of genomic and proteomic data in support of the above applications).

Already there are significant commercial applications of the biotechnology revolution. Forty-five per cent of all new pharmaceuticals in the year 2000 have been developed from genomics/molecular biology. Two of these products alone — human insulin and erythropoetin — have an annual market value greater than the entire Australian grains crop. Furthermore, the cloning of soil DNA has just identified the first new antibiotics in a generation. These innovations are relevant to the diagnosis and treatment of many longstanding diseases (genetic, cardiovascular, neurological, viral and auto immune diseases; cancer; HIV; multi-drug resistant TB). These types of applications are potentially of enormous social and economic value to humanity.

The Economic Significance of Biotechnology

The global market for biotechnology has also been projected to grow at 12–20 per cent per annum. World trade in biotechnology is considerably outstripping normal growth in general world trade. For example:

	The OECD estimated in a 1998 report that the world market for products and services generated through the modern health biotechnology sector alone (some 69 per cent of the whole) will reach $US100–305 billion by the year 2000–2005.
	International Business Asia in March 2001 estimated the current value of the world biotechnology industry at $US200 billion.
	Ernst and Young, in a 2000 report, estimate the current value of the United States’ private biotechnology sector alone at $47 billion — creating almost half a million direct and indirect jobs.
	Forbes Magazine estimates that by 2030, biotechnology will occupy 10 per cent of the US economy.

Those who generate and apply this knowledge will transform all of the biologically-based industries that represent half of the world economy and a central part of the Australian economy. These include medicine, pharmaceuticals, agriculture, natural products, waste treatment, and environmental management.

In the biotechnology revolution, it is the ownership of intellectual property that will dictate the winners and losers. While firms can always patent and copyright a better computer or program, there are only a finite number of genes, proteins, cell functions and processes to patent. Australia is falling well behind in the number of biotechnology patents it is generating relative to the United States and other competitor states. The potential economic consequences are staggering.

(32) Houghton (2001) p. 21
(33) Investing in Sustainability: a discussion paper to assist the development of an environmental industry action agenda, DISR, December 2000, pp. 9 & 28–9 http://www.isr.gov.au/industry/environ/EIAA_Discussion_6dec00.pdf
(34) Global Trends 2015: A Dialogue About the Future with Nongovernment Experts, United States National Foreign Intelligence Council. http://www.cia.gov/nic/pubs/2015_files/2015.htm

Performance of Competitor Countries

Competitor states, including most notably the United States, have recognised that public investment in the R&D base is the critical precondition for the development of biotechnology industries and other high-tech industries. This is an investment in creating new economies made by government on behalf of citizens. The budget of the United States National Institute of Health (equivalent to the NHMRC) is US$ 25 billion. This contrasts with the NHMRC’s budget of approximately $US125 million — i.e. one two-hundredth that of the United States, while our population is one sixteenth.

The Japanese government has committed US$ 18 billion over the next 5 years with the objective of developing over 500 new biotechnology companies with a projected annual turnover greater than Australia’s current GDP. At present, the number of biotechnology companies in Japan (140) is not much greater than the number operating in Australia (120). For the future, however, there is a radical difference in the level of commitment between the two countries’ governments.

Advancing economies in our region, such as Singapore, Taiwan and Korea, have made commitments in the order of $US1 billion per annum strategically targeted at developing their life science R&D and accelerating the growth of biotechnology industries. Their science base is weak compared to Australia’s, but they have a focus and a commitment that is currently lacking in Australia.

Australian Performance

Private R&D spending in Australia is much lower in the biotechnology industries sector than in most other competitor states, as Table 9 demonstrates.

Public investment in biotechnology R&D is also modest by international standards. According to a 1999 Ernst and Young report, (35) this figure totalled only $257 million or 8 per cent of the total $3,157 million expended R&D. Table 10 illustrates the distribution of this funding across the sector.

The Australian biotechnology industry is demonstrably in the early stages of its development. The number of firms is small. R&D effort, both public and private, is modest, just as the current profitability of biotechnology firms is modest. It is estimated that Australian biotechnology firms currently trade at or near break-even.

Despite these deficiencies, Australia, with strategic leadership from the national government, has the capacity to become a recognised world leader in the life science industries.

	Australia is one of the world’s twelve most bio-diverse countries and the only mega-diverse country in the world that has a developed economy, advanced infrastructure and skilled economy.
	Australia has a rich scientific base with a strong, but now faltering, academic tradition in the biological sciences — stronger in fact than most other countries in the region. The challenge is to staunch the brain drain, retain the 10,000 life science researchers we have, and bring back home many of those researchers we have lost abroad.
	Australia already has committed State governments, particularly, but not exclusively, in Queensland and Victoria, dedicated to making their States major centres of biotechnology research, development and commercialisation. The challenge for the Commonwealth is to work in effective national partnership with them.
	Australia has well-established research institutes of national standing specialising in the various sub-fields of the life sciences. The challenge is to enhance these institutes and make them centres of genuine global standing in their field.
	Australia has a stable legal framework, a well developed regime for the protection of intellectual property, and mature financial markets. The challenge is to ensure that these and related elements of our overall legal and financial infrastructure are fully supportive of the needs of start-up companies in the life sciences sector.

These challenges demand strategic leadership from the national government if Australia is to maximise its participation in the global biotechnology revolution — and the economic and social dividend to be derived from that revolution. While Australia theoretically has some form of nationally coordinated approach to ICT through the National Office for the Information Economy, no systematic approach yet exists to promote biotechnology.

Our future success as a Knowledge Nation does not rest exclusively on the biotechnology sector. The biotechnology sector, however, will become a major driver of future economic growth. Policy innovation in this sector serves as an exemplar of what can be achieved in other technology sectors — both old and new.

The time for national policy leadership is now.

(35) Ernst & Young Australian Biotechnology Report 1999, http://www.ey.com/global/gcr.nsf/Australia/Australian_Biotechnology_Report_1999

TABLE 9: Private R&D spending in Australia, Canada, the U.S. and Europe 1998 and 1999

	Canada (1998)	Australia (1999)	USA (1999)	Europe (1999)
Number of core biotechnology companies	282	120	1283	1178
Number of listed public companies		20	327	68
Companies per million population	9.2	8.3	4.7	3.1
Relative to USA (Companies/capita)	1.9	1.3	1	0.7
Companies per GDP $US 10 b	5	3.3	1.7	1.5
Relative to USA (Companies GDP)	2.9	1.9	1	0.9
Revenue (US $billion)	0.85	0.66	18.6	4.4
Average revenue (US$ million)	3	5.5	14.5	3.7
R&D expenditure (US$ million)	436	159	9810	2754
Average R&D expenditure (US$ million)	1.5	1.3	7.7	2.3

Source: Fayle et al. (2000) Vol. 10, No.3, p37

TABLE 10: Public investment in biotechnology R&D in Australia 1999

	Biotechnology A$m2	Total A$m3	Share of total funding
CSIRO	40	741	5%
National Health and Medical Research Council	40	216	19%
Australian Research Council	35	436	8%
Cooperative Research Centres	25	140	18%
R&D Start	15	161	9%
Rural R&D Corporations	10	151	7%
Pharmaceutical Industry Investment Program	2	7	29%
Universities	90	1195	8%
Other	0	110
TOTAL	257	3157	8%

Source: Ernst & Young (1999) p. 15.

Conclusions

The application of knowledge to existing and emerging industries has enormous potential to increase Australia’s wealth producing capacity and help us improve seemingly intractable environmental, health and social problems. But Australia will only maximise the benefits if it acts decisively now. As this study has shown, Australia is not maximising the potential of value-added manufacturing, ICT, environmental management and biotechnology industries, among others. This is partly because for too long, we have settled for being average performers in investing in the factors that underpin successful knowledge nations, particularly education, training, research and commercialisation. And we have failed to build on our world-leading status in areas like medical research. We lack a coherent national strategy to make us a Knowledge Nation.

In each of these areas, Australia must aim to be among the world leaders, not among the middle of the OECD rankings. We need a national strategy to boost the value added performance of existing industries and the growth of emerging industries. The following section sets out such a strategy.