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Australian Innovation System Report 2017

The Australian Innovation System Report 2017 provides updates on Australia’s innovation performance, and aims to fill the current information gap on the high-growth firm (HGF) phenomenon in Australia.

Australian HGFs make a disproportionate economic contribution; between 2004-05 and 2011-12, firms with high growth in employment (Employment HGFs) represented only 9 per cent of all firms but contributed around 46 per cent of net positive employment growth. Firms with high growth in turnover (Turnover HGFs) represented just 15 per cent of firms, and contributed about 66 per cent of the net positive sales growth and 69 per cent of the net positive value added growth, in the same period.

HGFs can be found in all industries. Between 2002 and 2013, on average they were younger than other firms, their median capital expenditure was 65 per cent higher and they showed larger increases in annual labour productivity growth compared to non-HGFs. However, most Australian HGFs will conclude their high growth episode within four years.

In general, HGFs do not appear to be a type of firm, but rather a phase that some firms go through during their life cycle. As such the HGF landscape is constantly changing.

Overall, the proportions of HGFs in the Australian economy declined between 2005 and 2014; Employment HGFs declined from 18.6 per cent to 12.5 per cent, and Turnover HGFs declined from 17.6 per cent to 14.0 per cent.

The average turnover growth rates recorded by Turnover HGFs have declined, though these firms have generally become larger in terms of their annual sales revenue. In 2014, the median turnover growth rate of firms with high growth in turnover was 38 per cent and the median firm in this cohort recorded almost $184 million in sales revenue that year.

New evidence confirms that innovation is positive for firm growth. Across all firms, product innovation is estimated to lift turnover growth by 3.3 percentage points, and marketing innovation lifts turnover growth by around 4.0 percentage points. There is evidence that turnover growth is better for businesses that use innovation as a key performance indicator.

R&D expenditure has an overall positive influence on growth in turnover, labour productivity and wages across all industries, but may have a negative effect on employment growth. Three industries account for 75 per cent of research and development (R&D) HGFs, but their composition has changed since 2004-05 when Manufacturing contributed over half the R&D HGFs. The effects of R&D expenditure on firm performance have generally increased over time, however they are subject to substantial variation across firms.

Given the disproportionate economic contribution of HGFs, there has been considerable policy focus on their potential to support job creation and income growth. To date, however, there is scant evidence to show that targeting HGFs has had a significant impact on economic performance. Policies that address general framework conditions can lay the foundations for HGFs to emerge.

Increasing the skills available to businesses could strengthen Australia’s ability to make the workforce more capable of capitalising on future opportunities. Regulatory reform could reduce barriers to labour mobility, business entry and exit, and improving intellectual property arrangements. Evidence also suggests that access to finance to support innovation is constrained. Addressing such issues and maintaining macroeconomic stability will help support business innovation and growth.

This chapter provides estimates of Australia's overall business innovation performance, indicators of business collaboration, business dynamism and entrepreneurship.

In 2015-16, an estimated 48.7 per cent of all employing firms were innovation-active. These firms are distributed broadly across industries, with the highest proportion found in Manufacturing.

Australian innovation-active firms overwhelmingly specialise in modifying innovations introduced by other Australian firms but are not particularly strong at introducing new-to-market innovations.

Business collaboration on innovation is generally low in Australia. Across a range of collaboration metrics, Australia typically sits in the bottom half of the OECD.

This chapter defines and explores the phenomenon of high-growth firms; their key attributes and performance.

In Australia, Employment HGFs contributed about 46 per cent of net positive employment growth from 2004-05 to 2011-12, despite representing only 9 per cent of all firms with five or more employees.

Similarly, Turnover HGFs represented 15 per cent of all firms with five or more employees, and yet contributed about 66 per cent of the net positive sales growth and 63 per cent of the net positive value added growth from 2004-05 to 2011-12.

HGFs were found in all industries and the average size of these firms was similar to the general firm population. However, HGFs were younger on average than non-HGFs.

This chapter looks at how high-growth firms are changing over time, highlights their episodic nature, and compares Australia to the OECD.

Few firms can sustain outstanding rates of growth for long. The majority of HGFs end their high growth episode within four years.

The proportions of HGFs in Australia’s firm population have declined over time. Between 2005 and 2014, the proportion of Employment HGFs declined from 18.6 per cent to 12.5 per cent, while Turnover HGFs declined from 17.6 per cent to 14.0 per cent.

In addition to the declining proportions, the median growth rate of HGFs has slowed down. Between 2006 and 2013, the median three year compound rate of growth in turnover for Turnover HGFs has declined from 68 per cent to 38 per cent.

This chapter provides evidence of the benefits of innovation to firm performance, supported by new econometric analysis.

Innovation-active firms are more likely to report increases in sales, profitability, productivity, firm size, and other growth-related measures than firms that don’t innovate.

Innovation in goods and services increases firm growth by an average of 3.3 and marketing innovation increases growth by 4 percentage points.

For Turnover HGFs, goods and services innovation increases the turnover growth rate by 7.4 percentage points.

There is also a positive relationship between the focus on innovation performance and firm growth — turnover growth rates are boosted by an average of 4.0 percentage points for all firms and 9.7 percentage points specifically for Turnover HGFs.

This chapter examines the role of business research and development (R&D) activity and firm growth.

Australian businesses spent $16.7 billion on R&D in 2015-16 compared to $18.9 billion in 2013-14, a decrease of 12 per cent.

R&D HGFs accounted for a disproportionate share of growth in BERD in the 2000s. R&D expenditure by R&D HGFs expanded from $2.1 billion in 2003-04 to $4.1 billion in 2006-07 before the GFC set this growth back.

Three industries account for 75 per cent of R&D HGFs by number, but their composition has changed since 2004-05 when Manufacturing contributed over half the HGFs.

R&D expenditure has a positive effect across all industries on growth in turnover, labour productivity and wages, but a negative effect on employment growth.

This chapter explores some of the policy considerations and framework conditions relevant to the pursuit of innovation-led growth.

Policymakers may find HGFs to be an attractive target due to their potential to create job and income growth. However, the effectiveness of international policies directed at HGFs remains to be seen.

Irrespective of any policy specific to HGFs, underlying policy should continue to focus on creating a macroeconomic environment conducive to innovation and growth by improving framework conditions.

Increasing the depth, breadth and relevance of skills available, particularly in small firms, could strengthen Australia’s ability to capitalise on future challenges through innovation.

Australia’s successful adoption of digital technology is likely to be fundamental in boosting productivity growth and maintaining global competitiveness.