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Economics References Committee
27/07/2015
Australia's innovation system

ROY, Mr Craig, Deputy Chief Executive, Commonwealth Scientific and Industrial Research Organisation

STEELE, Dr Jack, General Manager, Science Excellence, Commonwealth Scientific and Industrial Research Organisation

Subcommittee met at 09:05

CHAIR ( Senator Kim Carr ): I declare open this hearing of the Senate Economics References Committee inquiry into Australia's innovation system. The Senate referred this inquiry to the committee on 18 March 2014 for report by the first sitting day of July 2015. On 15 June 2015, the Senate granted an extension to the committee to report by 15 October 2015. The closing date for submissions is 31 July 2014. The committee has received 179 submissions, which are available on the committee's website.

These are public proceedings, although the committee may determine, or agree to a request, to have evidence heard in camera. I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee. Such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee.

If a witness objects to answering a question, the witness should state the grounds upon which the objection is taken, and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may also be made at any other time.

Finally, I would like to take the opportunity to thank the witnesses who have taken the time to appear before the committee today. I now welcome Mr Craig Roy and Dr Jack Steele from CSIRO. I invite you to make a brief opening statement should you desire to do so.

Mr Roy : Thank you for the opportunity to attend this inquiry today. We do have a brief opening statement, a copy of which we have provided the secretariat. I thank Dr Steele for his attendance here today. It was he and his team who drew together much of the analysis that supported CSIRO's submission. CSIRO commends the topic of the inquiry in highlighting the importance of the innovation system and its critical role in driving national productivity and competitiveness. Reflecting this, CSIRO has made boosting national competitiveness through catalysing change in the innovation system and delivering value to customers a central plank in our 2020 Strategy. This strategy was launched earlier this month, and we provided a copy as supplementary input to this committee, so you should have access to that through the secretariat.

I would like to highlight a couple of conclusions from our submissions and directions underlying that strategy. CSIRO approaches issues regarding the innovation system from the experience and perspective of being an applied R&D organisation that works with 2,600 clients or thereabouts each year, about 1,150 of those being Australian SMEs. We understand that some of the discussions at previous sessions have spoken about a linear model of R&D. Put simply, that is research that is conducted and thereafter the outcomes are handed over for commercial use. What we are affirming is that applied research does not universally work that way and that delivering commercial outcomes from given R&D investment is often constrained under such a linear model.

A key factor in delivering outcomes from R&D is to focus upon the intended impact, or value creation, of research outputs. In the most sophisticated application, understanding the impact is not an after-the-event review, although it might be separately valuable. It involves making the delivery of impact central to the research activity. This is required to ensure applied public sector research delivers the optimum economic, social and environmental outcomes from the government's investment in such research. We argue that a certain proportion of your portfolio investments in applied research should focus on the intended impacts—what you are trying to achieve—from the research at the beginning.

As I am sure you are aware, compared to other OECD countries Australia ranks relatively poorly in business collaboration and research institutions on innovation as well as business-to-business collaboration. Many Australian SMEs do not have the capacity—financial management and STEM—to engage with public sector research and effectively connect them to the firm's operations. There are, of course, some very great exceptions to that. Around 30 per cent of Australia's researchers are based in business, one of the lowest proportions in the OECD, and there are low levels of mobility between business and public sector R&D. This highlights the significant national challenge—or, put the other way, opportunity—of achieving deep engagement of the end users in the R&D process. This is particularly important now that the Australian economy is in transition. In our strategy we have called it a dilemma, but it is also an opportunity for significant improvement albeit not an issue that can be readily solved in the short course.

Our submission points to the importance for the overall innovation system of mechanisms to achieve the engagement of Australian end users with R&D practitioners. This involvement is both at the level of management of research business interface and during the conduct of R&D itself. Connecting Australian end users—in particular, industry—to the public R&D sector is important at the industry sector level in the form of technology road maps and also at the level of building STEM capability in firms through mechanisms such as the placement of researchers in the firms for specific projects. Although we have used the term 'dilemma', we recognise in our submission that there are successes and that these provide lessons for how we can go forward. In the agriculture and mining sectors there are relatively effective mechanisms that provide industry road maps and requirements that through the consolidation of multiple but mid-size players overcome the limitations of firm size and permit strong signalling engagement with R&D.

Australia has many of the ingredients required for a world-leading innovation system. We have relatively great R&D facilities, we have very smart people, we have a good global reputation, we have businesses with a global perspective and global reach, we have relatively stable governments and we are close to the largest growth markets in the world. While we have a number of terrific examples of Australian innovations changing the world and bringing value to Australia, we should continue to pursue changes that will create a future where Australia becomes an innovation powerhouse.

CHAIR: Thank you very much, Mr Roy. I appreciate your comments and I really do appreciate the fact that you have distributed your statement in advance because it gives us a chance to ask questions about it. I have got a couple of questions. Undoubtedly, as you would know, I can talk the leg off a chair on all of this. But I want to limit what I say now. It would be fair to say that the CSIRO is very highly regarded across the Australian parliament. With that in mind, and given that you have just released your strategic plan, what is the attitude of your organisation on the way we collect statistical data about science and innovation? You are familiar with the science research and innovation tables, I take it.

Mr Roy : Yes.

CHAIR: The majority of the Commonwealth's investments in those fields is directed through those tables, but it seems to be geared towards, for example, plant and animal production and mining and energy. There is very little highlighted in those tables about the level of engagement in manufacturing, ICT and other emerging areas of science. Does the Commonwealth have a role in setting priorities for investment in science research and innovation?

Mr Roy : That is a great question. I will lead off and then I will ask Jack if he wants to pick up on that because he knows some of those tables and the numbers intimately. My sense is that, as a country, we have to have a balance. Where does the government wish to invest its precious R&D dollars in quite specific areas, be they industry sectors or underlying capability? You specifically mentioned ICT, which is fundamental in shifting the needle on our national performance. We note that the current underlying research priorities do not include ICT, or big data. We would argue that you need data and big data infused through the priority sectors such as food, agriculture and mining. So we take a sectoral lens approach to it. That is the approach we have taken—it is still not finally signed off—in bringing together NICTA and CSIRO's Digital Productivity Flagship. They will work with those flagships and say: 'How do you really get precision agriculture to shift to the next wave of innovation and productivity in the agriculture sector?'

Coming back to your question around priorities, I think it is important that we have priorities but at the same time they should not stymie blue sky or pure research. The key question we think about is: what is the right balance across the two? CSIRO is a small part of Australia's innovation system but an important part. We have said that about 15 per cent of our budget going directly into blue sky research is about the right proportion for us, but the remainder should be very industry focused through the nine flagship programs we have plus the national facilities that we operate plus the centres that support SMEs quite directly. So we have taken that sort of an approach through the thing. Is there capacity for researchers across the country to have their eyes more towards what the impact will be, how we will shift national competitiveness for the country? Yes, we believe there is greater capacity to do that. But this is not an on/off switch; you need to be able to do both, and nimbly so. I hope I have come close to addressing your question. Jack, do you want to add something?

Dr Steele : You have asked a question about different sectoral analyses basically—the amount that is in ICT, manufacturing and the more primary industries. Our submission goes slightly orthogonal to that as well. We are saying think about the amount which is specifically purposed towards applied research versus the amount which is purposed towards the more blue-sky approach, which inevitably ends up being a more linear approach. We are saying think about that mix in all of the sectors, in effect. That is the first comment I would make.

The second comment I would make is that the level of analysis, which results in the tables, is a fairly important thing. The ABS has just started to do analysis of the level of business activity in the industry sectors that are now articulated in the names of the industry growth sectors, for example. So we are getting a much more distributed knowledge of what the actual system is and the areas in which different firms are located and active. Basically, through a number of things, we are pulling together a tier of things that give you a better idea of how the system works—the extent to which it is in different sectoral outcomes from industry, the extent to which there is prioritisation of the research in different areas of science that feed into those. I think we are now getting to understand that the system is more than a simple model where we put money into grant schemes called this and that and there is a further lineage of finance which is in the publicly funded research organisations—end of story. It is becoming a much more networked and understood mechanism.

CHAIR: Have had a chance to look at submission No. 115, which is from the Australian Research Centre of Excellence for Creative Industries and Innovation?

Dr Steele : I have had a brief glance at it.

CHAIR: Where in the tables do I find any analysis of the creative industries as part of our innovation system? It is asserted in that submission that the ABS is relying on statistics from the ARC centre of excellence to claim that quite substantial contributions are made by the creative industries, but I cannot see it in the SRI tables. Would that be a fair comment and how do we measure contributions like that of the creative industries?

Dr Steele : You have picked up a fair question in terms of the juxtaposition of the sciences with the arts. Indeed, the design fits absolutely on that fracture line as you know. That is very important as well in terms of the manufacturing industry in a large sense because there are a number of different tiers of design that fit into that. Your question articulates the following problem: it is artificial to call science and art—and, of course, the social sciences fit across the boundary—completely separate activities in terms of the application of the knowledge that comes out of those. I think it is a good question for you to ask the ABS as to how they see it—

CHAIR: Thank you!

Dr Steele : but I have got a bit of sympathy for the logic that you have got in your question.

CHAIR: What is the role of creativity in innovation if we are looking at these types of questions? How do we possibly measure that?

Mr Roy : I think the measuring part is complex but its role is fundamental. Something that comes out in our strategy is that we really talk about a small number of numbers here on how Australia is performing. You will have heard these numbers before but your comments go straight to the numbers. I will quote from the International Innovation Index, which is done by the World Intellectual Property Organization with INSEAD and some other players as well. On inputs—the strength of systems, government and R&D—Australia ranks 10th of the approximately 130 countries, so it is very strong on that side. On the outputs side, Australia is rated 22nd, but is well and truly below our total value as a country. They assess that on the basis of two key headlines. The first is knowledge and technology outputs and the second is creative outputs. Where it becomes not good reading for Australia is that, if you do the efficiency rating of inputs to outputs, we are rated 81st as a country. So we are very strong on the inputs but we have got ground to make up, or some pretty big opportunities to improve, on the translation of those inputs into value to the country. And if you do the ratio we are particularly poor.

Senator CANAVAN: I want to focus on some of the comparisons you have outlined in your submission. You mention in your submission that, relative to other countries, we have a low number of STEM workers employed by industry. Why do we always look at it that way? Are there other countries saying Australia has a high number of STEM workers employed in their public sector? Are we show for that? What is the goal here? Why is having researchers working in industry necessarily better than having them working in the public sector or at a university or in a research space?

Mr Roy : I do not think it is a magic number within itself. What we do know is that we have great strength in the inputs. Those countries that tend to have strength in also being very entrepreneurial and accepting R&D as value creation and not necessarily as a cost—and I am not saying this is a universal for Australia—have people with R&D expertise fused across the whole system. They have them infused in industry and they have them infused in government. If you compare Australia to the US, Japan or Germany you will see a very different profile. So some of us are looking for the rationale as to why we might not have taken that opportunity—and that is an observation that we see from one side to the other. But if there are other levers for our translation from R&D inputs to value creation for the country, we would not care two hoots how many are in industry and how many are not. It is just one of the things we think could help shift the needle nationally.

 

 

 

Senator CANAVAN: I suppose I am particularly interested in any analysis about why we are where we are before we try and change what has developed organically in this country—or at least as organically as possible, given government policy settings. Why do other countries have so much higher ratios of these inputs and outputs?

Mr Roy : Again, it is a great question. I do not have the answers for you. We have not looked into it deeply enough. But I suggest there is a large cultural and inherited resource that we have. If you compare us to some of those other countries, they have had to be nimble and create value out of things that are not agricultural, that are not mining and resources. It is almost their circumstances that have driven them down that pathway. But that is not based on CSIRO research; that is just based on my observation, going and talking to others around the case. Sometimes your own context drives what you need to do as a response.

Senator CANAVAN: In the agriculture space, as you point out, we have performed very well in terms of innovation traditionally, although, as you do point out, in the last decade productivity growth has slowed there. Areas like agriculture and mining are exposed to world prices, so they have to be innovative. They cannot afford to be uncompetitive. You mention, in the agriculture space, the RDCs and how they are beneficial. Has anyone ever looked at expanding that model to other industries? Why is it just thought of as something we do for agriculture research? In my view, that matched funding model, which requires industry to put in money as well and have some skin in the game, seems somewhat attractive. Does that work anywhere else that you know of in our economy?

Mr Roy : Again, I suggest it is history that has got us there, but I will ask Dr Steele to provide a bit more.

Dr Steele : It is largely a matter of history that has got us there, so some industries have basically coalesced and formed bodies in which they have been able to, as a consequence, develop plans for the industries, formally or informally, and so you have ended up with technology road maps and requirements for knowledge—

CHAIR: It is a bit more than that. There was a deliberate policy behind the R&D corporations.

Dr Steele : Correct.

CHAIR: The technology road maps in many sectors arose directly from the RDCs.

Senator CANAVAN: Chair, you are correct. I suppose that goes to the point of my question. A policy decision to establish these in agriculture has been made by the agriculture department, or the agriculture ministry, so they are focused on that sector. But have there been any thoughts given to expanding them into other industries? Are there any other examples like that right now that I might have missed with the matched funding—not exactly like the RDCs but with government and industry matching funding?

Dr Steele : It is at least one of the objectives of the industry growth centres that each industry growth centre would be developing basically a technology road map for that industry sector. As you know, those industry growth centres are just getting underway as we speak. Certainly it would be CSIRO's hope that that will be one of the outcomes of that policy at this stage. Agriculture versus manufacturing is an interesting comparison, in the sense that, in both of those industries, you have got a very large number of firms which are relatively small in size. As I am sure the chair is thinking, manufacturing covers a broad range of things, whereas agriculture covers a defined range of individual product outcomes, and so it is a little bit different at that level, but the basic question that you ask is: what do we need to do to make an intervention to cause it to be easier for there to be innovation, uplift, inside industry? Given the structure of the Australian industry, with a very large proportion of companies which by the global terms are micro and a very small proportion of firms which are multinational size, at the other end of the spectrum, we have got a unique issue, which is geography and industry structure, which plays into the uplift of knowledge out of the Australian or out of the global knowledge chains. That is actually the reason why it is crucial that you have people who have STEM capability inside industry, because this stuff walks on two legs—it walks on having familiarity and knowledge with all of that during industry decision-making processes, firm decision-making processes. The more we can have an outcome where we have the STEM capability built into the firms, or at least strongly visiting the firms, the higher the probability of uplift.

Senator CANAVAN: Why aren't firms doing that now? If they need to have those two legs to innovate and to produce high-quality commercial products, why aren't they doing it?

Dr Steele : I think the honest answer to that question is that, if you look at the analysis—and, by the way, I draw your attention to the Australian innovation system report that the Department of Industry and Science put out, which is actually a ripsnorting read—there are a number of issues. One is the industry structure and the other is the extent to which there is an appetite among the smaller firms. There are a lot of relatively small so-called lifestyle type firms—I do not mean to be pejorative about it, but that is the term that people use sometimes. The report also identified access to capital as an issue. Basically, a very large portion of the sales of those smaller firms are highly domestic—usually just national, often in the same state. A relatively small portion of those firms are exporting firms, exposed to the world market. Clearly we are seeing a change in the economy where that is going to be a factor for us going forward.

Mr Roy : If I may add to that, we would not like to leave you with the impression that nobody is doing this. There are some terrific examples. You mentioned data before. The next revolution, which the mining companies are already onto now, is in how they get the very most out of the data, the knowledge and the equipment they use and how they automate those systems. They are doing that now as the next wave of productivity.

It was only recently that I heard about what sounds like a terrific company out of Geelong, Carbon Revolution. Senator Carr, you may well know Carbon Revolution. If you look at the ingredients of success in the automotive sector—and they have just won a contract to provide all the wheels for Ford Mustangs—that happens because some people were willing to back them financially. They are on site at Waurn Ponds, just outside of Geelong, with some universities—Deakin, RMIT. They work with the CSIRO and there has been government support as well. It is one of the key partners.

CHAIR: Quite big.

Mr Roy : Yes, exactly.

CHAIR: But part of that collaboration also involves moving the CSIRO textile labs.

Mr Roy : From Geelong out to—

CHAIR: So there is a whole lot of collaboration. This is a very important example of real progress.

Senator McALLISTER: I would like to follow on from that chain of conversation, because I too am quite interested in what 'good' looks like when your organisation is collaborating at the firm level. We have talked a little bit about the skills that are needed inside the firm to make that work. What sorts of skills do you see as being necessary inside your organisation to be able to work effectively with business?

Mr Roy : That is a great question. I must admit we could almost spend this whole session just on that topic, and that is the heart of our next strategy. If we are talking about firms, I have made the assumption that we are talking about the smaller end of the spectrum, not the big companies that have big legal back offices and all sorts of things.

Senator McALLISTER: I am quite interested in them as well, but let's start with the small ones.

Mr Roy : They want us to be more nimble and to be able to respond more quickly so that, when you agree to something and get a term sheet to agree to something, you do not then have to go through a long legal process. Mobility is not too bad. We can have mechanisms to make us mobile between the two, but CSIRO is also looking at incentives for its staff to go and put themselves inside these firms, to support the firms. So those are two points. The third point is cultural, and we have learnt this from experience: we have as much to learn from the firm as they have to learn from us. So we cannot just plonk a PhD inside a firm and expect that will create magic. We need to understand the business and how they create value in their business as well.

The other area where we often will fall over a cliff a little is with some seed capital for a company that usually does not have a lot of capital to support, to take something that is a great idea and start to de-risk it and turn it up so you can go over what our chief executive is talking about—that dilemma; the issue in our system where you take it from a small idea through to something that can be of significant scale and get into global supply chains.

There are a number of things we are focused on and our strategy picks up eight elements, but I will pull out a small number that are relevant to this. The customer is at the heart of what we do, so the first element of our strategy is customer first. Collaboration talks to us about how we want to operate and effectively become a point of entry—a point of entry, not the only point of entry—for innovative companies to come and draw on Australian R&D. If you were an Australian SME and you wanted to know a particular capability in a field, you would have to go and hunt it out. There is no help desk where you can go to ask, 'Where are the best polymer scientists? Where are the best material scientists?' or whatever the case happens to be. Another element is entrepreneurism. We need to become a bit better as an organisation at skilling up our own people in entrepreneurism, taking risks and having some of our own capital to invest in those great ideas. Throw a whole bunch out that are not going to work as you go through and test them, but scale up to large scale those ones that will work. So there are a number of things where we are trying to reposition and educate ourselves better for that market.

Senator McALLISTER: Your submission speaks about the significance of large, globally connected firms in driving R&D activity at present. One of the things you would observe is that many of our firms are being bought up into much larger global conglomerates, and so head offices for the large firms operating in Australia are not always in Australia now. How are you going in ensuring that the R&D expertise that we have is being accessed by firms where their head office is not necessarily here but in New York or Toronto?

Mr Roy : If we look at it through their eyes, what those firms look for is people who are best in class, best in the world, to add value to their businesses. That is why organisations like CSIRO need to stay not only at the forefront of the science but at the forefront of where their businesses are so they can translate it. For example—and you may have heard this example before—we have had someone embedded in Seattle with Boeing for about two decades. We won the R&D supplier of the year about three years ago for Boeing across in the order of 10,000 other suppliers that they have. This is without doubt a global game and, if we were not globally competitive and global players, that would not be good for the Australian innovation system—because we also seek to draw others from the Australian industry system into global supply chains, and you can assist in doing that if you have the big partnerships with those companies.

Senator KETTER: I recently visited Israel and I was extremely impressed that a country of eight million people was able, over the course of some decades, to get to the situation where 50 per cent of its exports are in the high-tech area. There has been a fairly significant transformation and the government there played, I think, a fairly instrumental part. I note you do not have a specific reference to Israel as a case study here, but I wondered: have you considered what has happened there and the lessons for Australia? Is there anything we can take out of that?

Mr Roy : There is. Indeed, our chair, Simon McKeon, recently led an Australia Israel Chamber of Commerce delegation to Israel—that would have been about four to five months ago—as a way for us to observe and learn. Again, going to the senator's question previously around context, clearly there is a very different context in Israel as well, which drives part of that innovation. Just part of the DNA of their system is around innovation and how you create new technologies and new values. We do look globally and Israel is one of those countries that we have looked at.

CHAIR: Their spend is about double ours, is it not, as a percentage of GDP? That would be about right, wouldn't it, Dr Steele?

Dr Steele : I believe it is significantly higher than it is in Australia and it has a very active venture capital structure to it, but keep in mind that it has a whole requirement from the point of view of defence high-technology procurement as well, which is part of the story.

Senator KETTER: There is a government led focus in Israel. I was told that they invest something like $3.4 billion per annum, whereas Australia invests around $200 million. In fact, the Office of the Chief Scientist in Israel invests in projects where the risk is so great that the private sector will not touch it. There is certainly an appetite for innovation.

Dr Steele : I think that latter sentence would not particularly differentiate between Australia and Israel, in terms of the risk profile and when it is that industry are prepared to come in, but certainly I believe that there are differences in the relative proportion. But you need to look at a system-wide approach when you do the analysis. The Australian system is a bit different from the Canadian, from the US et cetera. So the real question is about the fundamentals. What is the purpose of the investment? Where are the outcomes going to go? What is the design to try and make sure the knowledge is going to be uplifted and implemented, and how early are the end users of the research going to be engaged in the research investment? That does not necessarily involve their own money but the decision around the investment, to ensure that it is designed to be fit for purpose fairly early on in the process.

CHAIR: Thank you very much. Our time has run out. I appreciate your attendance today. I have a few questions with regard to food and the agribusiness sector, which you have placed some emphasis on in your submission. Would you mind taking a few on notice?

Mr Roy : We are very comfortable with that.

CHAIR: It may be the view of the committee that we will have you back, because there is so much interest in what you are doing.

Mr Roy : Thank you.

CHAIR: That is something to think about. We will try to get the questions on notice to you today, and would like them back by 10 August, if that suits everyone. Thank you.