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Productivity, Competitiveness and the Missing Link

By Terry Cutler

The debate about Australia’s flagging productivity and competitiveness has overlooked one vital factor – and some local role models.

Productivity is finally back in the headlines, if only because action on the nation’s productivity has been missing just when it is most needed.

Competitiveness is back on the agenda, too, but only as the flipside of a worrying resurgence of talk about protectionist bail-outs for underperforming industries now hit with adverse exchange rates and increased trade exposure.

In neither case, however, have the crucial linkages between productivity growth, competitiveness and innovation been highlighted. Competitiveness, productivity and innovation together form the tripod supporting a prosperous economy and community. Remove one of these legs and things fall apart.

A few recent newspaper headlines highlight the need for us to roll up our sleeves. First there was a report of Reserve Bank warnings over the adverse impact of our dismal productivity performance on interest rates.

Next I read about the reaction of Australian fruit growers to a World Trade Organisation ruling that Australia’s use of quarantine restrictions to ban the importing of New Zealand apples and pears is an unjustified abuse of free trade rules. Fruit growers and some politicians responded by arguing that the WTO ruling should be ignored – in other words, sidestep competition and productivity challenges by regulating them out of existence.

Another recent example of innovation failure is the response of Australia’s retail sector to a sales downturn. For years Australian retailers have been protected by Australia being a small, remote market in the global retail trade. In the digital era, however, consumers going online have been finding out that they are being ripped off by local retailers, and that there is greater choice in offshore markets.

But instead of saying to themselves, “We are not innovating enough; we are not reinventing our business models; we are not providing adequate customer service,” the knee-jerk response of the retail sector has been to say, “Let’s introduce unproductive and costly tax barriers to deter people from buying from more competitive and productive and innovative retailers”. In this they have been following the same self-destructive pattern of behaviour that the music industry pioneered.

Why do we make such hard work of the innovation challenge in Australia? Part of the problem is that it is easy and tempting for governments to retreat to a narrow supply-side focus around innovation revolving around traditional science and technology policy.

The reality is that innovation, in essence, is about people seizing opportunities arising in the real world to do things differently, and searching for the tools, inventions and ideas that help them to make things happen.

We need to marshal our ingenuity to identify and test possible solutions to the wicked problems that confront us – population, health, climate adaptation, food security or resource depletion. We need to focus more on a market-pull model of innovation, which is not the same thing as invention.

An innovator is essentially a change agent who challenges the status quo with the uncomfortable notion that we can do things better. For the innovator trying to make things happen on the ground with customers or endeavouring to reshape market structures, this requires tenacity, drive and passion. Incumbents will always fight hard to protect their turf, and we have abandoned any active focus on competition policy.

We also have a cultural problem. Too many of our business owners or managers are under-ambitious and have a “lifestyle” approach to business; many of our “success stories” look like under-performers when benchmarked globally. Cultural change needs to start in our schools and business faculties.

We also need firms that focus on rewarding workplace innovation and creative problem-solving. I keep asking people to nominate exemplar firms, and it is depressing to watch people struggle to come up with local role models.

There are several smaller and resource-based economies that are doing a much better job of meeting the innovation challenge than we are. Countries as diverse as Norway and Chile are using returns on natural resource exports to create national funds to invest in diversifying and future-proofing their economic base.

I will feel much more optimistic about Australia’s prospects when I no longer have to refer to overseas role models and success stories.

Dr Terry Cutler ftse chaired the Government’s 2008 review of the national innovation system. The Academy of Technological Sciences and Engineering (ATSE) will host a seminar Productivity, Innovation and Prosperity – The Great Australian Challenge on Friday 11 November 2011 at the Melbourne Convention and Exhibition Centre. Details and registration (03) 0864 0900 or