Australian Industry Report 2016

Foreword

While I write this foreword, I am watching the Australian cricket team reassert its competitiveness in test matches against Pakistan. Having been ranked as the number one men’s Test nation in the world, Australia slipped to third on the back of successive series losses to Sri Lanka and South Africa.

People argue about the veracity of these rankings in the same way as they argue about global economy rankings in exercises like the Global Competitiveness Index produced by the World Economic Forum.

That is because competitiveness, once you scratch and burrow into it, proves to be surprisingly slippery to define and measure. First, it is a relative concept. You might improve but your opponents might improve more. Second, factors beyond your own control matter. On a cricket field it might be the pitch, for an economy it might be the exchange rate. Third, the playing environment—the rules of the game—affects incentives and behaviour. Test and one-day games require different tactics to succeed. Poor rules can hinder and hold back an economy by favouring incumbents over start-ups. Fourth, a cricket team is made up of individuals of varying capabilities, some stars, some newly emerging talents and some whose best days are behind them. Similarly, an economy is made up of industries of varying strengths which are themselves made up of businesses that differ tremendously in their attributes, in their risk appetite and in their performance.

In this report we scratch and burrow into the competitiveness of Australian industries, looking at it from a range of angles, covering the impact of rising energy costs, whether exporters out-perform other businesses and how far along the path Australian business is towards digital maturity.

We argue that competitiveness can’t be condensed down to a single number—although productivity growth is the best performance indicator to measure improvement—but rather is an attribute that we observe. Competitive economies are ones that are open to the world, attracting investment and people. They have high levels of innovation and business start-ups, and a diverse industry base and export profile and workforce.

Competitiveness can wither and atrophy, and there is some evidence that this has been the case in Australia in recent years, notwithstanding 25 years of economic growth. Should that be sustained over the longer run it will be detrimental to living standards. It requires constant vigilance on the part of all players—industry, government, education providers, and the science and research community—to renew themselves and strive to lift their game.

Mark Cully
Chief Economist
Department of Industry, Innovation and Science

Executive summary

Australia has just recorded its 25th consecutive year of continuous economic growth — a remarkable achievement. But what should be done to ensure we remain competitive on the world stage? Australia’s competitiveness has once again come under scrutiny. Our ranking on international measures of competitiveness has slipped, real GDP per capita trends show signs of weakening, and keeping up with both technological advances and ongoing globalisation pose constant challenges.

The Australian Industry Report 2016 sheds lights on competitiveness — a multifaceted and elusive concept that can be measured in different ways. The report supports decision making through nine short chapters on important topics related to the competitiveness of Australian industries and the economy in general.

The first chapter examines how competitiveness can be measured, and compares Australia’s relative performance to other countries. It points to competitiveness challenges such as falling productivity growth, falling business investment, and low collaboration between businesses and research institutions. These issues are substantiated by an overview of the economy in Chapter 2, which reveals that despite Australia’s remarkable growth achievement over the past 25 years, there are risks to future growth.

Chapter 3 takes a closer look at cost competitiveness. Modelling shows that while reducing each of six key business costs can generate overall economic benefits, the outcomes of these cost reductions vary widely by industry. The impact of energy costs on the competitiveness of Australia’s industries are further scrutinised in Chapter 4. Results show that rising energy costs have a negative impact on the international competitiveness of Manufacturing industries, but there is no discernible impact on less energy intensive sectors.

Chapter 5 looks at exporting as an indicator of international competitiveness. New Australian firm-level results point to the characteristics of exporters and the consistent outperformance of continuous exporters vs. non-exporters. Chapter 6 reveals another important factor of business performance, namely digital maturity. It argues that Australia is not fully tapping into its potential to drive competition, innovation and productivity.

There are challenges for some of Australia’s regions. Using new experimental estimates of Gross Regional Product per capita, Chapter 7 shows that the benefits of growth across Australia have been uneven, benefiting some regions more than others. Agglomeration (population density) and mineral resources are identified as two key determinants of regional performance.

Chapter 8 discusses common issues affecting further growth in industry growth sectors, and acknowledges the work being undertaken by the Growth Centres to overcome these issues. Ultimately, success depends on getting sectors working smarter and more collaboratively with each other. The final chapter showcases a feature article by Martin Baily from the US Brookings Institution that examines the role of industry policy in managing the process of creative destruction. The key finding of each chapter is summarised on the next page.

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Chapter 1
Australia's competitiveness

Examining the importance of competitiveness, alternative ways of measuring it, and analysing how Australia is performing

Competitiveness is a broad concept that can be applied at the business, sector and national level. Understanding what competitiveness means and how Australia is performing is vital to addressing the nation’s economic challenges. Australia’s performance on international competitiveness rankings has fallen in recent years. Without understanding what is contributing to this drop in performance, policy development may neglect to focus on strategies to leverage Australia’s advantages at home and abroad.

This chapter examines options for measuring competitiveness, assessing a range of possible indicators and approaches from an outcomes-focused perspective. The chapter nominates a select number of indicators that can be used to track Australia’s competitive performance relative to other countries. These indicators are then grouped into a set of identified characteristics that a competitive economy would be expected to display.

Having defined these indicators, the chapter then analyse how Australia is currently performing and, where possible, how it is performing against international comparators. Together, these indicators can be used to improve our understanding of Australia’s current competitiveness.

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Chapter 2
Economic conditions

Assessing Australian industry’s economic performance over the past financial year, focusing on international, domestic and industry-specific developments.

In 2015–16, Australia celebrated 25 years of consecutive economic growth, second only to the Netherlands. Given the recent challenging international conditions, this is a remarkable achievement.

Other advanced economies have struggled to return to pre-Global Financial Crisis levels of growth, with lower growth in China and growing unease about the benefits of globalisation.

In contrast, Australia saw strong domestic economic growth in 2015–16, along with a lower unemployment rate indicating a successful transition away from the mining investment boom.

However, underneath these headline indicators lie risks to our economy, such as continuing poor business investment, slow wages growth, and mixed labour market conditions. The chapter examines the data behind these trends.

This chapter also presents performance data across industry sectors, showing areas that are in decline, and others that continue to grow. For example, the highest and lowest growth rates in output in 2015–16 were in Mining and Manufacturing, respectively. The chapter also presents highlights that have occurred in Australian industries over the past year.

In totality, the chapter paints a picture of where Australia stood economically in 2015–16, and our economic trajectory for the near future.

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Chapter 3
Reducing business costs

Examining how reducing business operating costs yields net benefits for the economy, and how different types of cost reductions produce distinct advantages and disadvantages for different industries.

Cost competitiveness measures a business’ ability to produce goods or services more cheaply than its competitors. Cost competitiveness improves when production costs fall and resource use becomes more efficient.

This chapter models reductions in six key business costs (rent and facility charges, labour costs, interest and debt charges, transportation, energy, taxes) to show how reducing particular costs serves different industries.

The modelling examines changes in industry value-added and employment, and shows that while all kinds of cost reductions produce net benefits for the economy, each reduction produces distinct advantages and disadvantages at an industry level. Reductions in transport costs produce the highest benefit among the six business costs.

Modelling indicates that benefits tend to be uneven, with some industries growing while others miss out. The results suggest that policymaking in this area should account for side-effects, and ensure that the cost reduction agenda is linked to broader economic goals.

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Chapter 4
The energy–competitiveness relationship

Uncovering energy costs’ impact on the competitiveness of Australia’s industries.

Rising energy costs affect individual businesses as well as broader economic activity and competitiveness.

This chapter empirically estimates the magnitude of energy costs’ impact across Australian industries. It also includes a feature article on the impact of the Clean Technology Investment programme on business dynamism and emissions reductions.

The chapter first determines the extent to which rising energy prices drive improvements in industrial energy efficiency.

In the short term, the average impact of an energy price rise across all Australian industries is a small improvement in energy intensity. Energy efficiency improvements are not large enough to offset the price rise, which means that energy costs rise.

Over longer time periods, and for higher energy intensive sub-industries, it is expected that energy price rises lead to a greater improvement in energy efficiency. The improvement is able to offset the impact of the energy price rise to a greater extent.

The chapter concludes by testing whether energy costs have an impact on competitiveness, as measured by revealed comparative advantage (RCA). The principle finding is that rising energy costs have a small detrimental impact on the competitiveness of Australian Manufacturing industries. However, the competitiveness effect is not discernible for less energy intensive sectors.

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Chapter 5
Export behaviour and business performance

A statistical overview of exporters and an empirical analysis of the performance of exporters relative to non-exporters.

Exporting is an indicator of international competitiveness. Evidence also suggests that exporting and innovation are interrelated. Since exports are a driver of economic growth, policymakers are keen to see more businesses exporting more of their output.

Understanding the dynamic relationship between exporting and business performance is a prerequisite for designing policies seeking to promote growth through exporting.

The analysis underlying this chapter is an initial attempt using Australian microdata based on the Business Longitudinal Analysis Data Environment (BLADE) to examine these important policy-relevant issues.

The results indicate that exporters are generally larger than non-exporters in terms of employment, value-added and capital expenditure. On average, exporters are also more productive and pay higher wages. Exporters demonstrate superior performance even before they begin to export.

However, the pre-export performance advantage diminishes within a few years after foreign market entry. This is mainly due to entry into and exit from the export market. Taking this into account, it is found that continuous exporters consistently outperform non-exporters.

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Chapter 6
Australian business and digital maturity

Examining the role of digital maturity in driving higher business productivity and economic growth, and demonstrating the benefits of better measurement for both business and government.

Digital maturity is the extent that a business uses digital technologies to improve its performance and competitive advantage. Digitally mature businesses tend to be more productive and competitive than less digitally mature firms. This capability can be a significant source of growth at a time of slowing productivity in the Australian economy.

Current models of measuring digital maturity are not keeping up to date with economic developments or the rapid evolution of digital technologies. We need new ways to measure both how firms adopt and use digital technologies, and the impact digital technologies have on both firm performance and the economy in general.

The department is developing stronger evidence on digital maturity in Australia. This evidence will help the government develop policies that facilitate business take-up of digital technologies. It will also help policy makers and businesses accurately measure the impact of digital technologies on the economy.

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Chapter 7
The geographic distribution of economic activity

Explores the relationship between new experimental estimates of Gross Regional Product per capita and factors known to influence regional performance.

The benefits of Australia’s economic growth have been unevenly distributed across Australia. Regional areas are not performing as well as capital cities, which has implications for the sustainability of remote and regional areas.

This chapter first sets out to develop experimental estimates of Gross Regional Product per capita. These estimates indicate how economic activity is distributed across Australia’s regions. For example, more than 68 per cent of Australia’s economic activity is generated within less than one per cent of Australia’s land area—Australia’s capital cities.

The chapter then considers the relationship between these experimental estimates and factors that existing research has already shown to influence regional performance. The results indicate that population density, mineral endowments, infrastructure, structural change and knowledge intensity are all positively related to regional performance.

These results are a useful way of explaining why some regions perform better than others, and what governments can do to support economic growth across regions.

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Chapter 8
Industry Growth Centres: challenges and opportunities

Demonstrating how Industry Growth Centres are working to address challenges to further growth at the sector level by improving competitiveness, productivity and innovative capacity.

Industry Growth Centres are not-for-profit, independent companies created under an Australian Government initiative to advance six sectors of competitive strength:

  • Advanced Manufacturing
  • Cyber Security
  • Food and Agribusiness
  • Medical Technologies and Pharmaceuticals
  • Mining Equipment, Technology and Services
  • Oil, Gas and Energy Resources.

This chapter draws on consultations with five of the Growth Centres (excluding Cyber Security as it is still in its early days), including their plans to increase competitiveness in their sector.

The chapter also draws on data from the Business Characteristics Survey for 2013–14, which was commissioned by the Department of Industry, Innovation and Science and conducted in partnership with the Australian Bureau of Statistics (ABS).

Research reveals that the Industry Growth Centres are well positioned to take advantage of emerging opportunities, and show strong potential for further growth. There are also opportunities for further growth, including increasing collaboration and commercialisation, enhancing management capability and workforce skills, improving access to global supply chains and international opportunities and optimising the regulatory environment. The chapter showcases steps that the Growth Centres are taking to address these challenges.

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Chapter 9
Enhancing Australia’s competitiveness

A look at "creative destruction" — the symbiotic nature of growth and displacement — and the role that industry policy plays in managing this process.

The term "creative destruction" describes how innovation and competition result in economic growth. The term captures both the opportunities and the displacement generated by the process.

This chapter looks at how innovation drives productivity and economic growth in the long run. It also examines how some sectors will inevitably decline in its wake.

Entrepreneurs for example, succeed by taking market share away from incumbents. Technology lowers the cost of production by taking the place of workers. Investors that choose to invest in one sector, choose not invest in another.

Economy-wide, markets generally ensure that resources flow to their most productive uses. And on balance this process is net positive. But it does not mean the process is costless. Where resources are ’sticky’, the economy can be slow to adjust, resulting in prolonged unemployment. And in some towns a single employer can be responsible for the economic viability of the whole community.

In this chapter Martin Baily from the Brookings Institution, writes about the role industry policy plays in managing this process. Effective industry policy helps maximise the benefits of creative destruction, while minimising social and economic costs.

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Chart data

Chart data from the Australian Industry Report 2016 is publically available as part of our ongoing commitment to open data. Through open data we aim to deliver value and benefits for our readers, allowing them to build upon our findings in new and innovative ways. Analysis in the report helps bring this data to life and enhances discoverability.

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