The Innovation Economy — implications and imperatives for states and regions

By NEVILLE STEVENS | 20 August 2018

Earlier this year the NSW Innovation and Productivity Council commissioned a report on the ‘innovation economy’ by The Business of Cities advisory group – to provide a contemporary picture of the innovation economy, to understand the current trends, learn from leading innovation regions and guide the Council’s forward work program.

The innovation economy describes what happens when new generations of technologies and business models emerge at unprecedented speeds and scales to disrupt existing sectors, create new products and processes, and foster advanced and high-growth industries.

In the innovation economy, improved access to venture capital and expanded investment pools, along with the recent rise of global crowdfunding, is making it easier to market ideas and obtain finance. Another feature of the innovation economy is the agglomeration of businesses in specific geographic areas, attracted by knowledge intensive institutions, talent and skills, and opportunities to collaborate and share insights.

These trends are supported by improvements to the business climate for entrepreneurship and small dynamic firms, and better legal protections for intellectual property. Many high income countries are finding that innovation and global competition have disrupted the job intensity of the established commodities and manufacturing economies.

Many jobs have either become unnecessary or have moved off-shore. They now seek to grow the innovation economy as one of the means to diversify their activities, provide a new base of jobs, boost wages, profits, and tax revenues, to be more competitive, and provide greater resilience to global economic shifts and shocks.

Our report examines three examples of world’s leading innovation regions: Ontario, Massachusetts and Bavaria.

Ontario is a well-known, world-leading innovation sector that includes the successful MaRS Discovery District. Ontario benefits from an established history of very strong public-sector investments in healthcare planning and environmental technologies, as well as a strong network of universities led by the world-renowned University of Toronto. Key areas of focus include:

.  a long term commitment by government to improve commercialisation and reduce regulatory burden.

.  a focus on four key areas of strength: bio-economy and clean technologies; advance health technologies; pharmaceutical research and manufacturing; digital median and ICTs.

.  providing access to seed capital for promising early stage companies to scale up in specific sectors through public voucher programs investment.

Massachusetts has a long history of innovation, from consistent state-level support and a high performing university, Massachusetts Institute of Technology which is recognised as an innovation powerhouse. State-level intervention include:

the Massachusetts Technology Collaborative – the state’s development agency for the innovation economy which brings together academia, industry and government to encourage technology adoption, and disseminate leading research

the Massachusetts Innovation Bridge – a partnership that allows government agencies to create new relationships with innovative academic institutions, established companies, and companies that previously did not work with government. Massachusetts has also invested a significant amount of state funds to provide new digital infrastructure to the region.

Bavaria has emerged as an international leader in technology R&D and innovation – including in biotechnology, medical, automotive, and energy. Initiatives include:

.  programs that enabled universities to expand, policies to support all phases in the innovation process – such as the establishment of 50 technologies centres and business incubators with a dedicated funding stream to encourage growth

.  significant investment in a new generation of digital infrastructure rolled out across the region.

Typically, leading innovation regions target a smaller number of strategic sectors and locations – sometimes as few as three sectors and three locations.

This is matched by a shared recognition from all levels of government that key innovation locations require bespoke and complementary interventions.

Most fundamentally, the world’s leading regions demonstrate a long term and deep commitment to driving innovation as the key source of future prosperity, fostering a more resilient and diversified economy, with the ability to adapt to shocks and future advancements.

For many of the leading regions this is already a commitment spanning more than 50 years.

NSW Innovation and Productivity Scorecard

We developed the Scorecard to understand how NSW performs on innovation and productivity metrics compared to other states, and world-leading economies that are known for their innovation and productivity outcomes, such as Germany and the US.

It is the first time that we have been able to benchmark NSW innovation and productivity performance against comparable state and international jurisdictions. While there are various measures of innovation and productivity at the national level, very few currently exist at the Australian state level.

To benchmark performance at the state level, the Scorecard uses available data across a range of conventional data sources (such as ABS) and unconventional metrics that have only been made possible through recent advances in data science technology. These use contemporary web analytics created in collaboration with CSIRO’s Data61 to provide complementary measures of innovation and will continue to be refined over time.

It starts to paint a picture of NSW performance against a range of innovation and productivity metrics, over a five year period to show improvements, where data was available.

The Scorecard provides a starting point for meaningful comparison to other jurisdictions and a way to track NSW performance over time.

The Scorecard compares NSW performance to Canada, Germany, New Zealand, Singapore, the US and the UK. Where data is available, individual metrics also include comparisons with the US states of Georgia and California and the OECD average.

Within Australia, NSW is compared against Victoria, Queensland, and the Australian average. There are 33 metrics altogether.

It was important to select jurisdictions that represented stretch or aspirational targets yet were also meaningful comparators – i.e. comparing like with like as much possible.

National jurisdictions used in the comparison were selected primarily because of their comparable economic frameworks, and to measure against the national average.

For example NSW and Western Australia don’t make a good comparison because of the fundamental differences in their economies, with mining being a dominant influence in Western Australia against NSW which has a more diverse economy.

The results of the NSW Innovation and Productivity Scorecard were synthesised under three themes: growth and productivity, skills and enterprise and research and collaboration.

The Scorecard reveals strengths of the NSW economy and areas that can be improved.

NSW performs strongly for growth and productivity with NSW ranked third for labour productivity, performing above both the Australian and OECD average over the five years to 2017.

When we look at the multi-factor productivity, which is the volume of output relative to the volume of the combined input of capital and labour, the NSW multi-factor productivity for the market sector grew 4.7 percent in NSW (between 2007–08 and 2015–16), while the Australian multi-factor productivity fell by 2.1 percent. Demonstrating strong, sustained productivity growth in NSW.

Multi-factor productivity growth represents the change in output that cannot be directly credited to changes in observed capital and labour. Research has shown that innovation, and an organisation’s ability to absorb and utilise new knowledge, is a key driver of economy-wide multi-factor productivity growth.

NSW is third for the number of firms that have grown their employee headcount by more than 10 percent per annum in the last two years.

And within Australia, NSW also had the greatest increase in net business creation over three years, with more businesses starting up than exiting the market.

Together these charts demonstrate that ratios of venture capital firms in an economy and the share of venture capital investment in an economy’s GDP are not necessarily related. After all, venture capital firms will invest outside their home markets.

NSW outperforms the benchmark Australian states on both venture capital investment and the number of venture capital firms on social media, with 100 local firms listed on LinkedIn in 2017, but lags behind leading international jurisdictions on local venture capital firms and investment.

Nonetheless, NSW businesses are increasingly attracting venture capital from overseas companies. In the last decade more than 50 NSW businesses have attracted investment from the world’s top technology venture capital funds. NSW attracts the bulk of venture capital and private equity investments made in Australia.

The national outlook for investment in the near future is also positive, with high stocks of ‘dry powder’ (liquid asset reserves to cover future obligations and acquisitions) among venture capital investors.

NSW is home to the largest proportion of Australian startup founders and start-ups that grew out of research institutions and universities.

NSW workforce is highly educated with 47 percent of the NSW workforce holding a tertiary qualification in 2016 – fourth behind Canada, Singapore, and Victoria.

Germany’s tertiary education ranking is low, as it is known to have high rates of vocational training qualifications, which aren’t reflected in this metric. Qualifications are also being utilised effectively in NSW and the employment rate of NSW tertiary-employed workers is on par with most international benchmarks.

Consistent with Australia’s performance in the Global Innovation Index, NSW has high levels of annual business investment in R&D at $6.4b. This includes business R&D funding that may have been received from government. Three-quarters of this R&D investment is spent by the manufacturing, science and technical, IT and finance sectors.

NSW outperforms the international average for higher education investment in R&D at $3.2 billion. This amount also captures government funding to universities. At 7.7 percent, NSW higher education R&D has one of the highest rates of annualised growth in the last decade.

In NSW, 13 percent of researchers are among the top 10 globally in at least one specialised topic, as ranked by the League of Scholars, which rates scholars on citations, industry collaboration and public engagement.

NSW performance is on par with most jurisdictions, with the exception of the United States, which continues to lead the table on this metric.

NSW has 11 public universities, with three of these ranked in the top 200 in the QS World University Rankings 2018, which rates the quality of universities by academic and employer reputation, citations and faculty to student ratios.

NSW universities are ranked number one for research in over 50 diverse topics, including photovoltaics, water filtration, and cryptography and network security.

NSW has a lower proportion of researchers in the workforce than most of the benchmark jurisdictions, but a strong rate of highly-cited papers, producing 3,115 top one percent cited papers over the last 10 years.

University/industry collaboration is measured internationally by The Netherlands’ Leiden University at their Centre for Science and Technology Studies by looking at the rate of university publications co-authored with private sector for-profit enterprises.

Co-publication is strongly associated with the number of patents issued, licences executed and spin-offs formed.

By this metric, NSW and Australia lag against international benchmarks. Australia’s collaboration performance in the 2017 Global Innovation Index confirms that active university-industry collaboration remains a challenge across the nation.

IPC have commenced a project looking at NSW University and SME Collaboration to better understand the broader relationships of this collaboration to articulate the learnings from successful mechanisms that led to commercial outcomes, and provide examples of successful programs or initiatives.

(Neville Stevens AO is chair of the NSW Innovation and Productivity Council. He is a former secretary of the Department of Communications, Information Technology and the Arts. This article is based on an address at the launch of the IPC report, The Innovation Economy.)