Towards an Australian Innovation Led Industrial Strategy: A Public Administration Perspective

John H Howard, 26 August 2025

Australia’s search for an industrial policy confronts the limits of centralised models designed for small, unitary states. The nation’s vast geography, diverse regional economies, and federal governance make a single, cohesive policy difficult to achieve. International experience shows that large federations succeed when national governments set clear missions, fund enabling platforms, invest in strategic physical and digital infrastructure, and use procurement to create markets, while States and regions drive delivery through place-based strategies in cities and regions. For Australia, success lies in aligning Commonwealth missions with differentiated regional specialisations. Industrial transformation will depend on turning federalism into an asset, building adaptability, competitiveness, and resilience through multilevel collaboration and mission-oriented investments.

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For nearly 30 years Australian innovation policy advisers and analysts have been calling for a comprehensive "industrial policy" to transform the nation's economic foundation. There is now an even greater imperative that Australia must transition from its traditional reliance on resource extraction and rural commodity production towards the knowledge-intensive industries of the future—advanced manufacturing, clean technology, biotechnology, artificial intelligence, and digital services.

This transformation is essential for long-term competitiveness and resilience in an era of technological disruption and geopolitical uncertainty. Proponents point to successful industrial strategies in Europe and Asia as evidence that targeted government interventions can steer an economy towards a more competitive and innovative path with higher-value industries and emerging technologies.

The aspiration for such a transformation in Australia, however, confronts a fundamental challenge often underestimated or overlooked. The issue is not the absence of ambition or even the lack of compelling international models to emulate. The difficulty lies in the deep mismatch between the concept of a unified industrial policy, typically conceived for unitary states, and the political, administrative, and economic reality of Australia as a vast continental federation comprising six independent sovereign States, each with distinct economic specialisations, institutional structures, and political cultures.

This challenge is far more complex than it initially appears. Australia is not Denmark, Finland, Sweden, or Singapore, the small, cohesive economies that often serve as exemplars of successful industrial coordination. Australia is a large continent with a population comparable to a medium-sized European country, but spread across vast distances with varying economic specialisations and governance structures among its States and regions.

This reality complicates the pursuit of a coherent national industrial strategy, though it does not render it impossible. The task is to acknowledge this structural complexity and develop an approach to industrial transformation that aligns with Australia's size, diversity, and federal system of governance rather than working against it.

The Appeal and Limits of Industrial Policy for Australia

Industrial policy is attractive because it offers a sense of unity and consistency. It connects investments, skills, research, and infrastructure to speed up significant changes. The well-known cases of Japan's Ministry of International Trade and Industry (MITI) in the years after World War II and South Korea's organised approach to industrial change show that governments in unitary governance systems can influence market results and direct resources towards emerging industries. China, as a command economy, has also embarked on implementing a top-down industrial strategy.

In Western economies, the intellectual foundation of industrial policy draws on “national innovation systems” (NIS) thinking developed in the late twentieth century. These frameworks assume that innovation is integrated within institutions and that national governments play a key role in coordinating collaboration among businesses, universities, and public agencies. They are based on the experiences of small, closely knit European economies, where national governments could operate similarly to regional development authorities.

The Australian industry policy challenge lies in these assumptions not aligning with the realities of large, decentralised, and geographically varied nations. A national industrial policy relies on the notion of a unified economy that can be steered through a single set of priorities. Australia’s economic landscape is shaped by diverse State and regional systems, each influenced by distinct conditions of geography, climate, natural resource endowments, historical legacies, and political cultures.

Some people have claimed that the answer would be to “Abolish the States”, but in truth, this is merely a political and constitutional illusion. Federalism incorporates mechanisms of checks and balances that help prevent the concentration of power, which can be a characteristic of unitary and centrally governed countries.

Australia’s Continental and Federal Reality

Spatial scale. In Denmark, the road trip from Copenhagen to Aarhus takes under three hours. In Finland, Helsinki to Tampere is a two-hour drive. The flight from Sydney to Perth takes five hours and covers a distance of 3,300 kilometres, which is more comparable to international collaboration between Europe or North America than to exchanges within a single country. The challenge of distance continues to be a significant aspect of Australia's economic situation.

Economic diversity. Western Australia’s economy, which relies heavily on mining, differs greatly from Victoria’s blend of manufacturing and services, as well as Queensland’s focus on agriculture and resources. Sydney has emerged as a centre for finance and technology, whereas Adelaide is establishing itself in the fields of defence and space. Hobart and Darwin encounter unique industrial challenges influenced by their geographic locations, size, and historical backgrounds.

To combine these into one “national” framework risks favouring certain industries while neglecting others or creating an overly extensive list that loses its significance.

Federalism. Section 51 of the Australian Constitution provides the Commonwealth Government with many levers relevant to industrial strategy. Powers over trade and commerce (s 51(i)), taxation (s 51(ii)), corporations (s 51(xx)), defence (s 51(vi)), and external affairs (s 51(xxix)), along with powers over patents and intellectual property, communications, statistics, and bounties. Additional provisions, such as s 90 (customs and excise), s 92 (free interstate trade), and s 96 (conditional grants to States), all extend Commonwealth influence.

While the Commonwealth powers are significant, the States retain substantial residual authority in areas central to industrial policy, including land use planning, development control, infrastructure, education and training, natural resources, and industry development. These responsibilities give States substantial influence over the location and growth of industries, regional specialisation, and workforce capability. States also design their own industrial and innovation strategies reflecting their own priorities and perceived opportunities.

The result is a shared, uneven and highly complex policy space where State-level initiatives play a decisive role in shaping industrial outcomes within their jurisdictions, sometimes complementing federal priorities as well as competing with other States, but where the real competition is international.

In practice, the Commonwealth’s principal policy lever is its control over money, which allows it to create broad guidelines and develop funding programs, built around grants of financial assistance subject to stringent conditions and controls. These programs have not always been well-designed or coordinated among Ministers. This issue is currently being addressed by the Strategic Examination of R&D (SERD).

The States also leverage Commonwealth research, development and innovation (RD&I) programs, such as the Cooperative Research Centres program. Even so, the actual implementation and delivery of industrial policy is largely a shared Commonwealth-State responsibility. Efforts to implement centralised strategies usually face strong resistance from State, Territory and Local Governments–unless they are mainly about money.

Financial relationships between the Commonwealth and the States are seldom marked by smooth coordination; instead, they are influenced by negotiation, competition, and varying levels of capability. However, as COVID showed in the realm of public health, both federal and state governments can collaborate to achieve national objectives.

A Constitutional and Administrative Challenge that Cannot be Ignored

These structural characteristics indicate that achieving a cohesive national industrial policy is particularly difficult. Several points illustrate why.

Fragmented institutions. Universities are funded federally but embedded regionally. Vocational education is supported by both Commonwealth and state funding. Some industry programs function on a national scale, but infrastructure delivery and planning are managed at the State-level, with significant authority delegated to 537 democratically elected Local Governments, each with substantial statutory planning and infrastructure responsibilities.

Conflicting priorities. Industrial policy requires a clear and achievable set of national goals. However, the complexities of federalism and regional identity create challenges in reaching a consensus. A Commonwealth Government that favours defence industries in South Australia, for example may distance itself from Queensland and Western Australia. Efforts to elevate one region’s specialisation as a “national priority” invite pushback from others.

Cycles of dependency. Federal fiscal dominance leads states to seek financial support from Canberra. Instead of collaboratively developing strategies, States actively and competitively seek money from “funding programs”. The outcome is a lack of integrated capability, competitive bidding processes, and duplication, instead of a unified transformation of industrial capability.

The Political economy of short cycles. Industrial policy requires long horizons. Australia's federal political landscape is influenced by brief electoral cycles, regular alterations in the Administrative Arrangements Order, and a competitive parliamentary Opposition. Strategies labelled as “industrial” may also be pejoratively labelled by the Press as “picking winners” in specific sectors or regions, which weakens their legitimacy.

Thus, the concept of “one national industrial policy” is difficult to grasp. The more Canberra attempts to centralise, the more the reality of interstate diversity and the administrative and political economy of federalism undermine the effort.

International Comparisons

Other large, federal economies illustrate the points made above.

The United States does not have a national industrial policy in the European sense. Instead, it has a mix of federal programs: defence procurement, research Foundations and Institutes, energy funding, and the CHIPS and Science Act provide platforms and missions, while States drive execution. Silicon Valley, the life sciences hub in Boston, and the technology sector in Austin result from local and State environments rather than national industry plans. The federal role has, however, been catalytic: funding research, underwriting infrastructure, and creating markets through procurement, principally through large and continuous government contracting, particularly in defence and aerospace.

In Germany, also a federal republic, industrial policy is coordinated but decentralised. Berlin defines priorities, funds research notably through the Max Planck and Fraunhofer Institutes, and builds platforms, while states (Länder) and cities, and districts and precincts within them, initiate and adapt ecosystem strategies to their strengths. In this way, Germany combines national frameworks with strong regional execution. The federal government sets missions in energy transition, digitalisation, and advanced manufacturing, such as Industrie 4.0, and leads on education, skills, and industry support. Institutions such as the Fraunhofer Society provide applied research capacity across regions.

Canada balances federal ambition with strong provincial control. Ottawa establishes wide-ranging guidelines by implementing initiatives such as the Global Innovation Clusters and the Strategic Innovation Fund, collaborating in fields like digital technologies, protein industries, and ocean economies. Ontario focuses on automotive and artificial intelligence, British Columbia emphasises clean technology, and Quebec specialises in aerospace. Federal funding creates missions and platforms, while Provinces adapt and deliver. Industrial policy is thus collaborative and place-based, anchored in regional ecosystems but supported by national coordination and EU-style cluster initiatives.

Spain also implements its industrial policy within a decentralised framework, where the national government establishes overarching strategies, such as energy transition, digitalisation, and green industry, that are frequently aligned with European Union missions and funding. Autonomous Regions play a significant role in service delivery by customising support to local specialisations in sectors such as automotive (Catalonia), aerospace (Andalusia), and renewable energy (Navarre, Basque Country). National frameworks, European Union cohesion funds, and recovery plans provide guidance and resources and implementation takes place at the regional level. The outcome is a multilevel industrial strategy influenced by both Brussels and Madrid, grounded in local territorial ecosystems.

Chile does not have a unified national industrial policy either. Instead, its strategy integrates national programs with robust sectoral and regional initiatives. Santiago has prioritised digital and financial services, whereas regions such as Antofagasta concentrate on mining technologies and renewable energy. National agencies like CORFO (Corporación de Fomento de la Producción) offer funding, incentives, and cluster programs, frequently in partnership with international co-financiers. The approach focuses on mission-oriented sectors such as green hydrogen, lithium value chains, and agtech; however, execution is tailored to regional and ecosystem-based contexts, reflecting the diverse geography and resource endowments of Chile.

Brazil implements its industrial policy through national missions, which are executed in a decentralised manner across its states. The federal government supports financing, procurement, and research initiatives in sectors such as aerospace, agribusiness, energy, and digital technologies through agencies like BNDES and EMBRAPII. States such as São Paulo, Minas Gerais, and Paraná support specialised clusters in automotive, biotechnology, and agtech sectors, while regional development banks and industrial parks enhance federal programs. The outcome is a hybrid system in which Brasília determines priorities and allocates funding for platforms, while states and metropolitan regions tailor strategies to align with their economic strengths and institutional capabilities.

In China, which has a unitary governance system, delivery of industrial policy is highly decentralised. Provinces and municipalities tailor central directives to fit their unique contexts, frequently competing to draw in investment and talent. Special Economic Zones like Shenzhen demonstrate how local experimentation, backed by central incentives, facilitates transformation.

These examples demonstrate that large, federated, and diverse countries do not function under a unified industrial strategy. They operate within a governance system comprising multiple levels, where national governments establish goals, provide incentives, and create frameworks, while regional authorities develop and execute strategies that align with their resources and organisations.

Policy Implications for Australia

For Australia, these cases indicate that striving for a comprehensive and cohesive nationally directed and controlled industrial policy may be impractical.

What is needed instead is a method that recognises Australia as a federation comprised of diverse State and regional economies, each with its own unique assets, industries, institutions, and political and administrative cultures.

A national industrial strategy should direct efforts by setting long-term goals, funding research and development, building regional information and AI data platforms at innovation district and precinct levels, creating demand through procurement, and making strategic investments to strengthen national capabilities. The approach should allow States and metropolitan areas to comprehend and execute these missions in a manner that aligns with their national economic frameworks, capabilities, and sociopolitical contexts.

This approach would embrace Australia’s federalism instead of opposing it. This would result in New South Wales, Victoria, Queensland, Western Australia, South Australia, Tasmania, and the two Territories adopting tailored strategies that leverage their strengths, ranging from advanced manufacturing and defence to energy, artificial intelligence, mining technologies, and agribusiness.

The Commonwealth's role will remain pivotal by defining missions such as net zero, health resilience, and digital security; investing in platforms such as research infrastructure, data and digital networks, and skills and migration; and ensuring that procurement and regulation stimulate markets for innovation. States and regions would facilitate delivery by developing innovation ecosystems and regional specialisations that integrate into national and global value chains.

The takeaway from international comparisons is that industrial policy in a large federation is effective when it operates at multiple levels, is adaptable, and grounded in local context. For Australia, this means moving past the concept of a singular national plan and embracing a cohesive strategy for industrial transformation. This approach harnesses the advantages of federation to enhance the economy's long-term resilience and competitiveness.

Conclusion: From Aspiration to Adaptation

Australia's quest for an industrial policy should transcend the call for centralised control and instead align with the realities of its federal structure. The country's diversity is not a challenge to be eliminated, but a fundamental strength to be embraced.

A practical framework will regard industrial transformation as a collaborative endeavour: the Commonwealth outlines missions, sets up platforms, and supports market growth through procurement and regulation, while States and regions tailor their approaches to align with their economic resources and institutional capabilities.

This approach is consistent with international practices in large federations, where policy coherence arises from collaboration across multiple levels rather than from central mandates.

What is important is having a clear national purpose and the flexibility to execute plans at the local level. Investments in research, skills, and physical and digital infrastructure should be aimed at enhancing distinct specialisations rather than weakening them. Federal support should promote evidence-based strategies, encourage collaboration across jurisdictions, and consider distributional effects to ensure that industrial transformation enhances inclusivity and legitimacy.

By anchoring industrial policy in missions that extend beyond electoral cycles and zooming in on place-based strategies that enhance resilience and competitiveness, Australia can transform federalism from a limitation into an asset. The alternative of adhering to a unitary model that is ill suited to Australia’s scale will only exacerbate fragmentation and result in missed opportunities.

This Innovation Insight is a chapter in the forthcoming book Innovation ecosystems: placemaking, economics, business, governance to be published by the Acton Institute for Policy Research and Innovation at the end of September.