How to fix Australia’s dire state of economic complexity

A staggered investment of an additional $4.4 billion each year from across the economy, increasing as GDP grows, could see Australia reach the 3 per cent of GDP target by 2035.

A succession of global financial disruptions – the pandemic, followed by the wars in Ukraine and Gaza, and spiralling inflation – have clearly demonstrated that Australia needs to build a more resilient and diversified economy, one able to withstand shocks and pivot quickly in response to crisis.

Australia’s economic complexity ranks at just 93rd in the world, between Uganda and Pakistan, rather than alongside those we normally see as our peers – Japan (1), Germany (4), the UK (8) and the US (14). What do these countries do differently that helps them have such strong and stable economies?

They all invest substantially in research and development ­(R&D).

Each of these countries invests around 3 per cent or more of their GDP each year into R&D. This includes government funding, business investment and research from universities and not-for-profit organisations.

By comparison, Australia’s R&D investment fell to 1.68 per cent of GDP in 2023, with government investment reaching a 30-year low of 0.49 per cent of GDP.

It’s no wonder our economic complexity ranking has dropped 27 places since 2007.

We need a plan to move the nation’s R&D investment towards a level comparable with our peers. This is not a radical idea. Given each dollar spent on R&D is estimated to generate an additional $3.50 for the economy, it would be radical not to do it.

A staggered investment of an additional $4.4 billion each year from across the economy, increasing as GDP grows, could see Australia reach the 3 per cent of GDP target by 2035. This would result in an additional $133 billion injected into the economy each year.

The soon-to-be-released national science and research priorities will help focus R&D on the areas most important to the nation. That research will help Australia meet changing conditions, safeguard the economy and meet the nation’s challenges. However, it will not be possible without long-term investment planning.

Falling behind

A staggered increase in R&D funding over the next 10 years would allow the returns on investment to start flowing back into the economy, helping to reach and maintain 3 per cent of GDP.

It would also allow Australia’s R&D sector time to ramp up its capacity. Thousands of highly trained researchers have abandoned Australia as funding dried up over the last decade and a half. The sector will need time to attract these people back and train new researchers to fill the gaps.

Government would not pay for this increase alone. While 53 per cent of R&D funding in Australia comes from business investment, it is well below our international competitors like the US, where industry funds around 70 per cent of all R&D. Investment incentives and long-term planning would encourage industry to also invest with surety and is vital to meeting this goal.

A strategic approach that covers the entire research commercialisation pipeline from concept to commercial product or service is necessary. This will need to bring together the entire research landscape – government, higher education, industry and not-for-profit.

Australian research is losing capacity. Every day, researchers we’ve spent years training are leaving for better prospects in other countries. Every day, we lose new commercial opportunities.

We know the government is aware of these issues, with ministers repeatedly lauding Australian innovation during the pandemic and lamenting the brain drain, but the sector needs more than words.

The government needs to put its own policy platform into practice.

The ALP’s 2023 national platform states: “Labor will work with business, industry, universities and research institutes to boost Australia’s investment in research and development as a percentage of GDP, getting it closer to 3 per cent of GDP achieved in comparable countries”.

The scale of this may seem daunting, but this investment doesn’t need to come all at once, or all from the government. But it does need to start now, and the government needs to take the lead.

We can’t afford to delay. To step up to Australia’s science priorities and solve our most complex problems, the government must invest in Australian R&D now.

In doing so, we can make our economy more resilient and prosperous, sustain a strong national STEM workforce ready to face future challenges and promote Australian innovation globally. Failing to raise our R&D investment levels will see Australia fall further and further behind.

This article was originally published in print in the Australian Financial Review on Feb 5, 2024. The original article is available online.