Innovation, Productivity, and Competitiveness: Five Questions for Australia’s Economic Future

John Howard, 20 June 2025

The Albanese Government has recognised that Australia’s longstanding productivity slowdown has become too urgent to ignore and has tasked the Productivity Commission to produce a report to address this reality.

It is common knowledge that despite consistently ranking among the world’s most liveable countries, Australia is steadily losing ground on a metric fundamental to national prosperity: how efficiently the economy turns resources into value.

This Insight frames the productivity challenge around five questions, each inviting deeper scrutiny of our assumptions about innovation and its relationship to productivity performance.

1. Why Does Productivity Matter—and Why Is It Slowing?

Productivity is not an abstract economic concept. It is the foundation of real income growth, national competitiveness, and fiscal sustainability. When productivity rises, more value is produced per unit of labour and capital, allowing economies to grow without necessarily increasing resource consumption.

In Australia, productivity growth has stagnated. Labour productivity averaged just 1.1% in the last decade—barely half the rate of the 1990s (Productivity Commission, 2023). Multifactor productivity—considered a core indicator of innovation performance—has also weakened, especially in service-intensive sectors.

This slowdown is not merely cyclical. It reflects deep structural headwinds:

• Sectoral shift: Over 80% of economic output is now in services, many of which are traditionally low-productivity and resistant to scale economies (ABS, 2019).

• Demographic drag: An ageing population and a shrinking ratio of working-age citizens challenge both labour supply and aggregate demand.

• Technology diffusion lag: While cutting-edge technologies are available, adoption rates—particularly among small and mid-sized enterprises—remain low.

• Policy fragmentation: Innovation and industry policies are too often disjointed from education, digital infrastructure, and workforce development efforts.

International peers, including Germany and South Korea, face similar challenges but are more actively reshaping their institutional settings to align innovation with productivity-enhancing goals.

2. What Do We Really Mean by "Innovation" in This Context?

The term “innovation” is frequently invoked, but rarely defined with sufficient rigour in productivity debates. It is often conflated with invention or with high-growth start-ups. In truth, innovation is more comprehensive and systemic.

It includes:

• Technological innovation: such as artificial intelligence, robotics, and digital platforms.

• Organisational innovation: new work arrangements, process re-engineering, and supply chain integration.

• Policy and social innovation: redesigning public services or co-producing value with citizens.

• Collaborative innovation: partnerships that cross boundaries between research, business, and government.

What distinguishes “productive innovation” is its uptake: it must be absorbed into organisational practice, drive measurable efficiency gains, or create new value streams. As economist Bart van Ark (2016) has argued, innovation contributes to productivity only when it scales across firms and sectors. This means diffusion—not invention—is the real engine of growth.

3. Why Are We Becoming Interested in Innovation Ecosystems?

Isolated innovation efforts struggle to achieve scale. Increasingly, policymakers and business leaders are turning to the concept of innovation ecosystems—geographically and institutionally embedded networks that bring together talent, infrastructure, knowledge, and finance.

Effective ecosystems connect:

• Anchor institutions such as universities and research agencies.

• Start-ups, SMEs, and larger corporations.

• Intermediaries, incubators, investors, and government actors.

Their value lies in creating shared physical infrastructure, dense knowledge flows, and trust-based coordination mechanisms. Innovation ecosystems facilitate what Schumpeter called "new combinations"—they are relational systems that accelerate problem-solving and reduce the transaction costs of collaboration.

Australia has promising early examples—Sydney’s Tech Central, Lot Fourteen in Adelaide, and Melbourne Connect—but their maturity varies. Sustaining these ecosystems requires long-term vision, patient capital, and governance structures capable of stewarding complexity over decades.

4. Why Is Australia Struggling to Translate Innovation into Productivity Gains?

Australia performs relatively well on innovation inputs—R&D spending, publications, start-up formation—but poorly on outputs, such as commercial success, diffusion, and productivity enhancement. According to the Global Innovation Index (2024), Australia ranks higher on innovation infrastructure than on innovation outcomes.

Key bottlenecks include:

• Weak diffusion: SMEs struggle to adopt proven technologies due to cost, risk aversion, and limited access to advice.

• Low absorptive capacity: Many firms lack internal innovation management systems or skilled personnel to integrate new technologies.

• Fragmented intermediaries: There are too few institutions actively helping firms convert research into application.

• Policy imbalance: Australia leans heavily on tax incentives (such as the R&D Tax Incentive), which do little to address sectoral or systemic challenges.

The Productivity Commission (2023) put it succinctly: “Innovation is essential, but capability is the multiplier.” Without a stronger innovation capability architecture, we will continue to underperform.

5. What Must Change to Make Innovation a Driver of Productivity and Competitiveness?

At least five strategic shifts are needed to realign innovation policy with productivity objectives:

• From Discovery to Diffusion:
Funding should flow not just to new inventions but to mechanisms that support uptake—innovation intermediaries, standards development, and demonstration projects.

• From Individual Firms to Capability Systems:
Sector-wide platforms for skills, mentoring, and digital transformation are needed—especially for SMEs that cannot innovate in isolation.

• From Tax Incentives to Smart Co-Investment:
Governments should shift towards mission-oriented programs that de-risk innovation in priority areas, using procurement and co-investment tools strategically.

• From Centralised to Regional Ecosystems:
Locally anchored innovation districts can align research, training, and industry development—if supported with governance structures that bridge institutions.

• From Inputs to Outcomes:
Success should be measured by adoption, scale, and productivity gains—not just patents or expenditure. Innovation dashboards could track capabilities and results.

If innovation is to boost national productivity, we must track what actually changes as a result: how many firms adopt new technologies, how widely knowledge is disseminated, how effectively capabilities are enhanced, and how these impacts are translated into measurable economic outcomes.

Developing public, transparent, and trusted metrics—focused on diffusion, impact, and performance—is essential. Without them, governments cannot calibrate policy, institutions cannot coordinate effectively, and the public cannot see the value of innovation investment.

The Critical Role of Leadership—The Triple Helix of Government, Business, and Public Research

Innovation-led productivity is not the responsibility of one actor. It requires deliberate leadership across sectors:

• Government must move from fragmented programs to whole-of-government strategies. This includes using procurement, regulatory reform, and public service innovation to catalyse demand.

• Business must invest in internal capabilities—especially middle management, data systems, and long-term partnerships. This means rebalancing from short-term shareholder value to long-term competitiveness.

• Public research organisations must rethink engagement. Rather than focusing narrowly on IP commercialisation, they should co-create value with industry and communities, aligning capabilities to regional and sectoral needs.

Mission-oriented innovation strategies suggest that public leadership must set direction while enabling bottom-up experimentation. This does not mean picking winners, but rather shaping markets where Australia can compete on knowledge and capability. 

Conclusion: A Deliberate Innovation Economy

Australia’s economic future hinges on its ability to lift productivity through innovation. But this will not happen passively. It requires a deliberate shift from fragmented initiatives to coordinated, capability-building strategies. The five questions explored here provide a roadmap:

• Define innovation in systemic, not transactional, terms.

• Build ecosystems that enable diffusion and collaboration.

• Realign policy from tax benefits to strategic investment.

• Empower Innovation Districts and, more broadly, Regional Innovation Ecosystems, with governance and purpose.

• Hold all actors accountable for outcomes, not activity.

We cannot rely on legacy industries, resource exports, or real estate cycles to deliver the next wave of prosperity. Nor can we expect digital start-ups alone to compensate for structural productivity malaise. A more mature innovation system—anchored in productivity, competitiveness, and inclusivity—is both necessary and achievable.

References

Australian Bureau of Statistics. (2019). Australian Industry, 2017-18. ABS Cat. No. 8155.0.

Global Innovation Index. (2024). Global Innovation Index Rankings. World Intellectual Property Organization.

Mazzucato, M. (2018). The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Penguin.

Productivity Commission. (2023). Advancing Prosperity: Inquiry into Australia’s Productivity. Canberra: Commonwealth of Australia.

Van Ark, B. (2016). Innovation and Productivity: Making a Complex Relationship Simple. The Conference Board.