On first sight, one could be despondent about Australia’s commitment to intellectual property and how to build it via innovation in the form of R&D, patents, trademarks and design applications. Indeed, a glance at R&D expenditure across the OECD nations shows how far down the pecking order we are.
Australia currently allocates around 3% of its GDP to R&D compared with around 4.3% of GDP by the OECD.
Our higher education R&D (HERD) was above the OECD average of 0.4% of GDP in 2002, while government expenditure on R&D (GERD) was around 1.6% of GDP was just 70% of the OECD average. It is business expenditure on R&D (BERD) that is the most recalcitrant: in 2002, our 0.79% of GDP was half the OECD average.
Yet there are four trends that are encouraging. The first of these is the rising level of BERD as a percentage of GDP.
The level of spending has risen from 0.25% of GDP in the early eighties to over 0.8% in the mid noughties of this new Century.
While it could take 15-20 years to match the current OECD average of 1.6% of GDP – with Australia’s level in 2005 of around half that level – we are on the rise; and hopefully we will close the gap much sooner.
The second trend is the increasing gap (premium) between the book value and the market value of shares in companies. Once 1.2 times book value decades ago, share are now around 2.4 times. On the Australian stock market, this suggests unrecorded intangibles (including intellectual property) of around 600 billion or more, which is far greater than the R&D spent by such listed companies over the past several decades. So, just maybe, we are underestimating just how much market-valued innovation is taking place.
The third phase that is encouraging is the globalization of Australia’s business. Overseas investment has risen from a lowly 5% of capital accumulation in the early 1980s to a trend level of around 25% in 2005, heading for a trend level of 35% in ten years time. World best practice is a condition of survival for such enterprising Australian firms, and they (and Australia at large) will garner a lot of intellectual property in the process.
And, fourthly, this year’s R&D and Intellectual Property Scoreboard report has some encouraging news. The average BERD across Australia was 0.37% of the nation’s $1.96 trillion private sector revenue in F2004. However, the level of the Top 50 BERD spending was 0.95%; nearly three times the national average.
One year of R&D of course should never be correlated to the profitability of a company. But 5 years can. Thirty of the Top 50 R&D spenders had such a time series. On a weighted basis, their spending on R&D over the five years was 1.19% of revenue or more than four times the national BERD average over the same 5 years of 0.26%. The weighted average return on shareholders funds after tax over the five years for these 30 companies was 17.1% compared with 7.7% for the nation’s Top 1000 enterprises; more than double.
All other things being equal, innovation pays.
Once again, this year’s Scoreboard provides fascinating statistics on innovation and its components. I commend it to the reader.