March 25th 2000

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Articles from this issue:

EDITORIAL: Telstra - is there another way forward?

COVER STORY: Aged Care: where to from here?

BOOKS: 'The High Price of Heaven', by David Marr

TAIWAN: Taiwan election presents new challenge for Beijing

ECONOMICS: World economy: the rhetoric, the reality

PAKISTAN: Feudalism: root cause of Pakistan’s malaise

BUSINESS: Innovation, technology and the forces of change

Letter: Free trade and predatory policies


AGRICULTURE: How government kick-started land settlement

LAW: No Native Title on mining leases: Federal Court

POLITICS: SA swings away from major parties

FAMILY: Mr Howard’s "forgotten people": Australia’s families

JUSTICE: The facts behind the furore on mandatory sentencing

COMMENT: The war against drugs is not lost it was never started

CANBERRA OBSERVED: Immigration policy: whose view will prevail?

Letter: Federal control of resource development

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Innovation, technology and the forces of change

by Chris Dawson

News Weekly, March 25, 2000
Our current lifestyle is obviously the cumulative result of all the past improvements and developments across scientific, technological, social and cultural 'advances', with a recognition that knowledge itself holds value (hence the importance placed on the "knowledge-based economy").

The forces that power and underpin this 'innovation engine' is seen by governments (and in particular OECD governments) as fundamental for our future prosperity.

Viewing economic growth through the lens of innovation and entrepreneurship provides for a more dynamic and realistic understanding of the forces of change than many traditional economic models provide. Alan Greenspan, the US Federal Reserve Chairman, recently stated:

"... the evidence for technology driven acceleration is compelling ... the newest innovations which we label information technologies, have begun to alter the manner in which we do business and create value, often in ways not readily foreseeable even five years ago ... technology investments by US businesses are a key contributor to the economy's robust nine year expansion."

Most players at the OECD table now see innovation performance as the key factor in long term economic growth and health. Implicit in assumptions about national innovation success are the notions of trade barrier reduction (two way), open capital flows, private property rights (especially intellectual property) and the need for governments to provide environments at the national level conducive to innovation processes and entrepreneurial activity. This has led to the identification and definition of a National Innovation System (NIS).

Although innovation is more than just technological in nature, it has proven difficult to measure all of the intangible components of innovation.

For example, how do you measure 'knowledge' in the knowledge-based economy? Do you simply measure those 'inputs' or 'outputs' that are readily measured? The Bureau of Statistics is attempting - with some considerable difficulty - to develop such capacity.

Although the word 'system' is perhaps a little too generous in Australia, it is currently fashionable to see it as the institutions, their incentive structures and their competencies acting at the National level.

"The innovation process is significantly enhanced where the national culture and institutions support, encourage and reward innovation and enterprise. A successful national innovation system is one in which players each perform their respective roles well and maintain good connections with others in the system." (Jones, 1999)

When examining these relationships within the NIS in an "institutional approach" the national institutions, corporate research activities and government policies are assessed in terms of their influence on the propensity for innovation (Nelson, 1993).

Similarly the use of the word 'system' in the NIS implies connected order, methodology and a plan. The Strategy should perhaps see R & D as an investment in the future of the nation and be a part of an investment strategy approach to the allocation of R & D expenditure and organisational reform.

Unfortunately, the bulk of funding allocation is limited to R & D and derived from a submission basis leading to the selection of projects based on the 'best submission' rather than those with the most strategic fit with any coherent national strategy or synergies with existing programs. R & D Policy is seen to lie within the National Innovation Policy Framework which is seen as being a part of what is now known as the National Innovation System.

The Federal Government's spending on R & D in particular and innovation in general is seen as critical to the nation's future:

"... the average level of Commonwealth funding for a detailed research field is $5.5 million. There are relatively few detailed research fields that receive more than $15 million in Commonwealth R & D funding. For the socio-economic objectives of the R & D, the average level of Commonwealth funding is $5.3 million." (Matthews & Howard, 2000)

As a result of historical circumstances and of various entrenched myopic agendas, Australia finds itself without a clearly defined R & D expenditure policy and without a coherent National Innovation Strategy.

Existing R & D funds are spread too thinly across too many research fields. There is too little money available to pursue any promising developments through the experimental development and later stages prior to external investment. This leaves insufficient 'critical mass' to carry enough ideas through to the marketplace.

Similarly, any understanding of entrepreneurial behaviour is incomplete and therefore takes no account of the necessary early stage incentives required to 'get things done'.

"... that technology transfer and commercialisation of research is about people rather than procedures or university practice ... which may lead to the successful commercialisation of research. The study recognises that entrepreneurship in Australia is minimal and encourages its development for the future." (Cripps, Yencken, et al., 1999)

As innovation appears to be vital for our future wellbeing, it stands to reason that the innovation process itself should be studied very closely indeed. The Innovation Process should be subject to intense innovation forces both incremental and radical. For example there will be different optimal strategies for different industries and markets.

Similarly, the different stages of development in technological innovation, especially the development of complex systems involving significant lead times can be modeled in ways that do not involve the cost of building numerous prototypes or pilot plants. Without question, an understanding of the necessary level of resources to achieve 'critical mass' in any given field is also an essential ingredient in the development of a genuine National Innovation Strategy.

In addition, the organisational and financial structures necessary for successful innovation in Australia's unique National Innovation 'System' do not yet exist in any meaningful fashion. This lack of knowledge (in a knowledge-based economy) and 'strategies' necessitates some serious research and radical thinking about how to provide a suitable (incentives and benefits) and acceptable (socially and culturally desirable) framework in which genuine entrepreneurship and innovation can flourish.

Joseph Schumpeter in defining the entrepreneur and the entrepreneurial function also postulated and developed the theory of "Creative Destruction". Innovation is a two-edged sword. Whilst 'new jobs and industries' employing bright young highly trained graduates emerge from the knowledge-based economy's 'creative' process of innovation, the concurrent 'destruction' of many 'old jobs and industries' ensues. This 'destruction' is a direct by-product of these changes and can at best cause regional strains to an economy, and at worst can throw the whole economy out of balance.

For example, the casino of derivatives trading and the split second flow of international capital (being the result of significant incremental and radical innovations of both a technological and organisational type) driven by the herd instinct, could not be seen by any sane person as a stable and balanced way for electronically encoded capital to slosh around the world. It is clear that the genie of innovation, if let loose as a zeitgeist of unfettered capitalism, will take no account of or interest in the repercussions of Schumpeter's other sword edge - 'destruction'. Our national government is the only power we as Australian citizens have to tame and successfully manage this genie.

I would like to think that our leaders will now seriously attempt to do the following:

* Develop a fundamental and scientific understanding of innovation and entrepreneurship through rigorous research and development and training

* Develop a National Innovation Strategy in accordance with 2020 vision after having done a cost benefit analysis (in terms of economic, social, political and environmental outputs and so on) on various options

* Generate a 2020 vision of what we as a nation want from technology and from change by say, 2020, (do we wish to maintain the accelerating nature of change and ever increasing consumption ad infinitum? Or do we want quality consumption and qualitative change in an environmentally sustainable and viable local, regional and national economy? Will we be happy voting with our dollar as consumers in an open unfettered international marketplace or do we wish to retain a national vaguely democratic government providing a legislative and policy framework agreed to by our fellow citizens? Do we wish to live in a culture governed purely by consumerism, individualism, corporate greed and power, or do we wish to have a society bound by moral, ethical and social standards within a clear legalislative framework?). If you don't know where you are going, you'll end up somewhere else.

* Understand the forces they are attempting to unleash and in particular have a series of strategies in place to enhance the positive 'creative' benefits, whilst properly addressing and catering for the negative 'destruction' of careers, businesses, industries and communities.

* Overcome the urge to wash their hands of the destruction by pretending that the invisible hand of the market will eventually solve all the problems. Insecure, scared and capital poor people do not provide suitable nor optimal human resources for innovation in a knowledge-based economy.

Capitalism is a fantastic engine for economic growth and community well-being, as long as it is tethered by strong democratic government and fed by an environment and culture conducive to and accepting of innovation and entepreneurship.


Cripps, D., Yencken, J., Coghlan, J., Anderson, D. and Spiller, M. (1999) University Research: Technology Transfer and Commercialisation Practices, Canberra: Australian Research Council.

Jones, Dr.A. J., (Ed.) Shaping Australia's Future: Innovation - Framework Paper. Canberra: Industry, Science & Resources (ISR). (1999)

Matthews, M. and Howard, J. (2000) A Study of Government R & D Expenditure by Sector and Technology, ISR.

Nelson, R. (1993) National Innovation Systems, New York: Oxford University Press.

OECD (1994) Accessing and Expanding the Science and Technology Base

Patel, P. and Pavitt, K. (1994) National Innovation Systems: Why They Are Important, and How They Might be Measured and Compared. Economics of Innovation and New Technology 1, 77-95.

Schumpeter, J.A. (1948) Capitalism, Socialism and Democracy, George Allen & Unwin.


Entrepreneurs: what do they do?

"We have seen that the function of entrepreneurs is to reform or revolutionise the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganising an industry and so on ...

... Railroad construction in its earlier stages, electrical power production before the First World War, steam and steel, the motor-car, colonial ventures afford spectacular instances of a large genus which comprises innumerable humbler ones - down to such things as making a success of a particular kind of sausage or toothbrush.

This kind of activity is primarily responsible for the recurrent 'prosperities' that revolutionise the economic organism and the recurrent 'recessions' that are due to the disequilibrating impact of the new product or methods ...

... first, because they lie outside the routine tasks which everybody understands and, secondly, because the environment resists in many ways that vary, according to social conditions, from simple refusal to either finance or to buy a new thing, to physical attack on the man who tries to produce it.

... To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that define the entrepreneurial type as well as the entrepreneurial function ...

...This function does not essentially consist in either inventing anything or otherwise creating the conditions which the enterprise exploits ...

...It consists in getting things done."

- Joseph Schumpeter,Capitalism, Socialism and Democracy ,1948

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