The Australian Innovation System Report 2015 (Report) compares Australia’s performance in a number of key innovation areas against other OECD countries and unearths critical issues for consideration if Australia is to embrace the ‘ideas boom’ and foster a culture that supports and grows entrepreneurship and innovation in Australia.
mdp Director and Patent and Trade Mark Attorney Gavin Doherty reviews the key findings, which include:
- Australia has a relatively high (but declining) proportion of young businesses.
- Startups contribute significantly to the economy.
- The greatest barrier to innovation for startups and young SMEs is access to additional funds.
- Fear of failure does not breed a culture of innovative entrepreneurship.
With the Federal Government’s recent release of their Innovation Statement, much attention is currently being focussed on how the Government intends to fund Australia’s ideas boom and encourage innovation. The Innovation Statement represents a welcome change from previous government announcements seeking to remove many of the incentives for Australia’s startups and entrepreneurs.
However, in order to determine the necessary changes for the future, it is important to review what has succeeded and failed in the past. It is timely, then, that on 26 November 2015 the Department of Industry, Innovation and Science released the Report, which provides that necessary in-depth analysis of the innovation culture in Australia over recent years.
The Report is the sixth in a series of yearly reports that review and analyse the innovation system in Australia. The 2015 report focuses specifically on innovation through the eyes of entrepreneurship, and analyses how startups and new businesses are affected by support for innovation and how these businesses contribute to the Australian economy.
The report reveals important issues that require consideration if Australia is to embrace its ideas boom. Some of these issues include:
Australia has a relatively high (but declining) proportion of young businesses
Large businesses represent around 0.3% of all Australian firms, but account for around 40% of the country’s employment. These figures are similar in the USA, Canada, UK and France.
When compared to the OECD countries, Australia has the second highest (behind Brazil) proportion of small businesses that are either startups or young (up to five years old), for the period 2001-2011. However, the startup rates for new businesses have been declining since 2004-2006 as shown in the graph below:
Startups contribute significantly to the economy
It is well established that startups can disrupt competitive markets but it has also been found that startups and business entrepreneurship can nurture economic growth. The Report supports this and shows that startups are more likely to report increases in employment, sales, profitability, productivity and product range and product innovation.
Over the period 2006 – 2011, 1.04 million full-time equivalent (FTE) jobs were added to the Australian economy through startups and young businesses. During the Global Financial Crisis (GFC) year of 2009, it was the mature businesses aged over 5 years that shed most of the net jobs and startups actually made a net positive contribution to employment during this period.
The greatest barrier to innovation for startups and young SMEs is access to additional funds
While Australian entrepreneurs rely upon a variety of funding sources to support their new business ventures, most do not seek external finance as their major source of funding. Rather, most young SMEs draw upon their savings, credit cards and other personal credit facilities to fund their activities. One source indicated that 19% of Australian startups are funded by family and friends, and a further 15% by public grants. More importantly, it was reported that half of Australian startups receive $100,000 or less in total funding.
Whilst it is well understood that national innovation systems throughout the world rely upon the availability of venture capital (VC), Australian VC investment has not bounced back to levels reached before the GFC. This is in contrast to many other countries, especially the USA and Israel.
In 2014, VC investment was at 40% of its 2007 levels. It was also reported that much of this investment is narrowly focussed on information technology and the life science sectors and, instead of being available to startup enterprises, it is being channelled into follow-on investments in existing companies. Compared with other OECD countries, Australia has the lowest proportion of VC invested in high risk, early stage venture capital.
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Fear of failure does not breed a culture of innovative entrepreneurship
Though Australia’s entrepreneurial rates are among the highest amongst OECD countries, much work is still required to build a culture that nurtures and supports entrepreneurship. In this regard, it was found that Australia ranks at around, or slightly below, the OECD average on many measurements. For example, one study showed that 53.4% of Australians aged 18-64 years considered ‘entrepreneurship’ to be a good career choice when asked such a question. This was significantly below the USA (64.7%), UK (60.3%) and the Netherlands (79.1%).
In addition to this, 39.2% of Australians aged 18-64 years were fearful of business failure, as compared to the average for the OECD countries (37.8%). Such a fear of failure was significantly higher than the rate in the USA (29.7%).
A culture of innovation is fostered from the early years in a child’s education and should provide an incentive for people to take risks, preventing widespread fear of the consequences of failure.
It is clear from the issues raised, that the Report lays the groundwork for the federal government’s recent Innovation Statement. Clearly, entrepreneurship remains alive and well in Australia, and as reported recently by the World Bank, Australia is still considered a favourable country in which to do business and to start a business. Further, the benefits to the economy through fostering a culture that supports entrepreneurship and innovation are well established. However, more needs to be done to free up access to funding and for making early stage investments more attractive to the investment community.
Clearly, the government’s proposed changes to the bankruptcy laws as well as introducing ICT programs into schools will go some way to addressing the cultural issues identified in the Report. Similarly, the introduction of the tax offset model should assist in making investments in startups more attractive.
However, as with all statements and good intentions, it is the manner in which they are implemented and what concessions are necessary for them to become policy that dictates their effectiveness. Clearly, based on the Report, there is scope for improvement for the Australian innovation system and it is heartening that the Federal Government have taken positive steps to address the issues raised in the Report.
As an IP firm directly involved in the innovation sector, mdp know the hard work and energy required to develop a new product or business. We share the successes and failures with our clients and support any initiatives that can foster and promote the entrepreneurial spirit that we see amongst our clients on a regular basis.