4 More efective innovation and

entrepreneurship will boost

productivity
4.1 Productivity growth is underpinned by
innovation
Innovation is the process of generating new value by creating
and adopting new or signifcantly improved ways of doing
things. Innovation can be undertaken by individuals, frms,
governments, non-government organisations, research
institutions, and even decentralised virtual communities.
In broad terms, innovation can be defned as the application
of knowledge to create additional value and wealth.
Innovation is much more important than invention,
specifcally it requires that knowledge is used in a way that
provides benefts through additional value-add. Through the
application of knowledge and technology to create new
products and services and improve production processes,
innovation allows us to increase our competitiveness, create
high-quality jobs and achieve greater value for what we
make and eport. It also enables us to respond more
e!ectively to unavoidable economic and social challenges "
#$%& '((), p. '*
+efned in this way, innovation encompasses a wide range of
activities including research and development #,-+*,
organisational change, product development and testing, and
changes to marketing and design #./%+ and /urostat '((0,
p. 1*. Innovation can include gradual and incremental
changes to products, services or processes, as well as more
radical change.
.ngoing productivity gains come from innovation that results
in the smarter use and combination of labour, capital and
other inputs. This requires improved skills and greater know-
how. Investment in these intangible assets is rising, and in
some countries, recent estimates of those assets 2eplain a
signifcant portion of multi-factor productivity growth3 #./%+
'(11b, p. 4*. The +epartment of Innovation, Industry, 5cience
and ,esearch #+II5,* recently cited evidence showing that6
" investment in intangible capital #innovation-related
activities such as skills development, design and
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 51
organisational improvements* and multifactor productivity
#spill-over impacts of these intangible investments* together
accounted for )'7 of &ustralia3s productivity growth
between 1884-80 and '((4-(0. #+II5, '(11, p. 1*
This is similar to some estimates for the 9nited :ingdom
#&%I; Tasman '(11, p. 1))*. &t the enterprise-level, fndings
from a recent study by the <roductivity %ommission #<%* and
the &ustralian $ureau of 5tatistics #&$5* based on the &$53s
$usiness ;ongitudinal +atabase also suggest that innovation
by businesses is associated with better business productivity
outcomes. The study indicated6
" a positive and statistically signifcant association between
the four types of innovation #goods and services,
organisational process, operational process, and marketing*
and higher productivity reported by the frm. #5oames et al.
'(11, p. '*
&ustralia is considered by the =orld /conomic >orum #=/>*
to be a country in the 2innovation-driven3 phase of economic
development #=/> '(11, p. 11*.
1
5imilarly, some other
commentators refer to ?elbourne as being a 2post-industrial
knowledge intensive economy3 #5@5 /conomics - <lanning,
sub. 0), p. 1*. Innovation is, therefore, particularly important
to future living standards in Aictoria because of the structure
of the economy, especially when compared with other states
and territories6 25ervices and knowledge industries now play
an increasingly vital role in our growth3 #Aictorian
@overnment '((B, p. 0*.
4.1.1 The role of government in supporting
innovation
?ost innovation is driven by businesses and individuals
operating and interacting in competitive markets. The <%
and &$5 study found that 2stronger competition is associated
with a higher propensity for frms to innovate3. They found
2statistically signifcant associationCsD"between certain
1
2Innovation-driven3 economies are those that have moved beyond 2factor-driven3
and 2e!iciency-driven3 development phases and their focus on 2basic requirements3
#institutions, infrastructure, health, primary education* and 2e!iciency enhancers3
#higher education, goods and labour market e!iciency, developed fnancial
markets, technological readiness*. Innovation-driven economies are characterised
by ,-+, knowledge intensity, and epanding services sectors #@/? '(1(, pp. 14E
10*. =hile 2basic requirements3 and 2e!iciency enhancers3 continue to underpin
prosperity, the growth and competitiveness of 2innovation-driven economies3
depend on 2entrepreneurship conditions3 #business sophistication and innovation*
#@/? '(1(, pp. 14E10F =/> '(11, p. 8*.
52 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
competition-related variables and the presence of a larger
number of di!erent types of innovation being completed and
a higher degree of novelty of those innovations3 #5oames et
al. '(11, pp. 1E'*. The Aictorian @overnment can contribute
to improving the innovation performance of Aictoria3s
economy in essentially three respects6 supporting innovative
practices in the public sectorF supporting the appropriate
2framework conditions3 to encourage innovation and
entrepreneurshipF and addressing market failures and system
failures in the national innovation system.
'

=ell-established market failures in innovation include the
problems of non-ecludability and non-rivalry in the
production of ideas. .ther potential sources of market and
system failures for innovation include6 barriers to market
entryF capital market failuresF institutional failures in areas
such as universities, research institutes or the patent systemF
network failuresF framework failures #such as regulation*,
intellectual property rights, and other background conditions
#?elbourne Institute and I<,I&. '(11, pp. ')E'G*.
The ?elbourne Institute and I<,I& identifed several
categories of policies to address market or system failures
that can lead to underinvestment in innovation by the private
sector #table 4.1*. ?any Aictorian and %ommonwealth
government policies fall into and across these categories
#+II5, '(11, pp. 41, )8, 81*.
The %ommonwealth and Aictorian governments have
di!erent instruments to support innovation. >or eample, the
%ommonwealth @overnment can enable or stimulate
innovation through taation, ,-+ grants, and legal
infrastructure #intellectual property rights system, and
competition law*. The 5tate @overnment can a!ect incentives
to innovate through the way it manages the state economy.
Innovation is also a!ected by state industry and innovation
programs, regulation, collaboration facilitation, skills and
education, city planning and #co*funding of innovation
infrastructure. In addition, the 5tate @overnment can
inHuence innovation as a direct service provider #for
'
The <% describes the innovation system as consisting of6 relevant institutions that
pursue innovationF embedded economic and social incentives that encourage or
discourage innovationF the capacity for di!usion of knowledge and innovationF a
skilled and capable workforce, entrepreneurship and high-quality training and
educationF the stability of the fnancial systemF and multiple feedbacks in the
system that can enhance or frustrate the prospects for learning, di!usion and
innovation #<% '((G, pp. 10E1G*.
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 53
eample, in health*, through publicly-funded research and
public administration more broadly.
Tabl 1!1 Policy interventions for innovation market
failures
Market failure characteristic
Policy type Non-
excludabilit
y (private
incentives
too low)
Non-
rivalry
(difusio
n too
narrow)
Coordin
ation
(broken
linkaes
)
!isk
(need to
risk
share)
R&D support schemes
for industry
5ervice provision
schemes

/ntitlement schemes
%ompetitive schemes
Public research
Collaboration
9niversityEindustry
linkages

,-+ consortia - inter-
frm networks

Industry ,-+
corporations

Public procurement
Financial support
schemes

Cluster formation &
networks

N"#: T$ %&"'()*%+ a& *"# (&,)+ a*- .a*/ %"0&*.*# (&"%&a.+ ,'# a,&"++ +0&al
b"'*-a&)+!
Source: Mlb"'&* I*+#)#'# a*- IPRIA! 21112 (! 35!
The role of government in fostering innovation can also
etend to factors such as liveability, 2critical mass of creative
people3 and the design of cities #Iennings '(11*. The
%ommission3s recommendations in other areas #such as
education, infrastructure, ta and regulation*, and the role of
the 5tate @overnment in these areas, are therefore also
relevant to Aictoria3s innovation performance.
53 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
4.2 hile the state has strengths in
innovation there is a need to improve
performance
Aictoria has strengths in key sources of innovation including
the tertiary education sector which, according to the ./%+,
presents an important opportunity for Aictoria3s productivity
and innovation agenda6
The 5tate of Aictoria stands out among many other regions
in the ./%+ area thanks to its e!orts to make innovation
and knowledge-based development a pillar of its future
development. Aictoria and its tertiary education sector have
also made considerable strides in widening access to
education, strengthening university-industry collaboration
and improving the overall relevance of educational provision.
#./%+ '((8c, p. J*
Aictoria3s tertiary education sector 2accounts for over 0 per
cent of Aictoria3s @+< and educational services are Aictoria3s
strongest eport, worth more than K0.4 billion, surpassing
CtheD tourism and automotive sectors3 #./%+ '((8c, p. J*. In
'(1(, 2education-related travel3 services accounted for K0.0
billion, 4J.4 per cent of Aictoria3s services eports or 1G.4 per
cent of all eports #+>&T '(11*.
,?IT 9niversity argued that education 2is a key enabler of
the innovation agenda and the 5tate of Aictoria has a major
strength in higher education, with nine Aictorian universities,
each with particular capabilities3 #sub. G1, p. 1*. &%I; Tasman
similarly suggested that Aictoria3s universities and research
institutions are an important source of innovation capability
for the state6
Aictoria, and &ustralia more generally, possesses formidable
research capabilities " &ustralia was ranked 1(
th
globally in
the 2quality of scientifc research organiLation3 indicator of
the =/> @lobal %ompetitiveness ,eport '(1(-11 "
Aictoria3s research strengths are underpinned by the
capabilities and global reputation of its research-oriented
universities, particularly the 9niversity of ?elbourne and
?onash 9niversity. The breadth of ?elbourne 9niversity3s
research capabilities across the various scientifc felds,
compared with its peer institutions in other &ustralian
jurisdictions, is particularly noteworthy. #&%I; Tasman '(11,
pp. 1G1E1G'*
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 55
The %5I,. also has globally signifcant research capabilities
located in Aictoria.
The =/>3s "orld Co#petitiveness !eport $%&&-&$ saw
&ustralia3s competitiveness ranking fall from 1)th position
#out of 1J8 countries in '(1(E11* to '(th #out of 14'
countries in '(11E1'*. Innovation #which fell slightly to ''nd
from '1st* and business sophistication #unchanged at '8th*
were identifed as 2two critical drivers of competitiveness for
advanced economies3 contributing to &ustralia3s lagging
performance #&i@ '(11aF =/> '(11, p. 'B*. Motably,
&ustralia3s ranking fell somewhat in si of seven sub-
indicators making up the overall ranking on 2innovation3
#table 4.'*. The biggest falls were in 2government
procurement of advanced technology products3 and
2availability of scientists and engineers3.
&ustralia also ranks low on the =/>3s business sophistication
indicators of 2state of cluster development3 and 2value chain
breadth3 #ranked JGth and G0
th
respectively* #=/> '(11, p.
1(J*. This implies a low level of interconnectedness among
businesses and between private and public sectors of the
economy. This is consistent with the low levels of
collaboration on innovation by &ustralian frms with other
frms, universities and government relative to other ./%+
countries #./%+ '((8f*. .nly a small percentage of
&ustralian frms that innovate tend to source their ideas or
information from, or collaborate with universities or higher
education institutions #'.) per cent and '.4 per cent
respectively* #&$5 '(1(a*.
.ther benchmarking studies show &ustralia generally ranks
between 1B
th
and 'J
rd
in the world in its innovative
environment and performance.
J

Tabl 1!1 !ustralia"s ranking on innovation
competitiveness indicators# $% &lobal
'ompetitiveness (nde)
'ndicator "() $%&%*&& "() $%&&*&$
1 %apacity for innovation 'J 'G
J
These include the @lobal Innovation Inde ,eport '((8-'(1(F @lobal
%ompetitiveness ,eport '(11-'(1' EInnovationF Innovation6 Transforming the way
business creates, The /conomist Intelligence 9nit #?ay '((G*F The innovative
imperative in manufacturing #?arch '((8*F The &tlantic %entury $enchmarking
/9 and 95 Innovation and %ompetitiveness #>ebruary '((8* #A%/% adaptation of
IM5/&+ '(1(, p. 1(*.
54 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
'ndicator "() $%&%*&& "() $%&&*&$
' Nuality of scientifc research
institutions
1( 1J
J %ompany spending on ,-+ 'J 'G
4 9niversity-industry collaboration
in ,-+
1J 14
0 @overnment procurement of
advanced technology products
JG 0(
) &vailability of scientists and
engineers
40 )(
G 9tility patents grantedOmillion
population
1G 1)
N"#: WEF 2111511 )*,l'-+ 136 ,"'*#&)+2 WEF 2111512 )*,l'-+ 132 ,"'*#&)+!
Sources: WEF 21112 (! 758 WEF 21112 (! 113!
The recently released +ustralian 'nnovation ,yste# !eport
$%&& #+II5, '(11* provides the latest in-depth assessment of
the performance of the national innovation system relative to
other ./%+ countries. The key fndings from the report were
as follows6
&ustralian innovation input data such as resource
mobilisation, research and skills capacity, and business
conditions rate relatively highly compared with other
./%+ countries6 2=ith the eception of collaboration, the
data shows &ustralia3s framework conditions rate
relatively highly compared to other ./%+ countries,
demonstrating a high capacity of the innovation system to
produce and di!use innovation3 #+II5, '(11, p. 1*.
Innovation output indicators suggest &ustralia rates
relatively highly on entrepreneurship, knowledge
di!usion, industrial design, trademark registrations and
knowledge generation, but relatively poorly on
new-to-market innovation and patenting #+II5, '(11, pp.
1E'*.
&nalysis of how &ustralian frms innovate shows the most
common approach is modifcation of innovations that have
already been introduced to &ustralia. &ccording to +II5,,
2large &ustralian frms are more than twice as likely to
modify and introduce to &ustralia innovations already
developed internationally. This suggests the important
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 59
role of large frms as conduits for overseas innovations
reaching the domestic market3 #+II5, '(11, p. 1*.
&ustralia also has a high research capacity, but relatively
low rates of patenting and collaboration between industry
and research compared with the ./%+ as a whole. This
suggests there is 2a problem with researchEindustry
partnering, or a lack of complementary markets in
&ustralia for our research output3 #+II5, '(11, p. '*.
<revious approaches to innovation policy in Aictoria have
tended to emphasise supply push #rather than market pull*,
and underemphasise innovation in the services and public
sectors. There are several issues that reduce the
e!ectiveness of the innovation system and innovation policy
#table 4.J*.
Tabl 1!2 *bservations on previous approaches to
innovation policy and the +ictorian
innovation system
'ssue -etails
5upply-
push focus
<revious innovation policies have tended to focus on
2supply-side3 factors based on a 2technology-push3
approach. =hile there have been recent e!orts to shift
to a more 2problem-based3 approach, there appears to
be more to be done to shift the focus of innovation
policy.
Meglecting
innovation
in services
Innovation thinking and policy has, thus far, paid little
attention to innovation in the services and public
sectors. <olicies elevating ,-+ spending contribute
little to service sectors that undertake little ,-+ but
enact important organisational and workplace
innovations #,oyal 5ociety '((8F +odgson et al. '(1(, p.
JB*.
>ragmenta
tion of the
innovation
system
The ./%+ places &ustralia in the lowest ranks among
its members on rates of collaboration in innovation6
among frmsF between frms and higher educationF and
between frms and government. This inquiry heard that
linkages between business and universities in Aictoria
were weaker than those overseas, and there is a need
for strategies to build the long-term, trust-based
relationships between business and universities that are
essential for innovation.
57 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
'ssue -etails
%apability
gaps
Inquiry participants and the %ommission3s research
highlighted shortcomings in skills closely related to
Aictoria3s innovation capacity. @reater emphasis on the
development of innovation, entrepreneurship, policy
evaluation, commercialisation and collaboration skills is
needed. & key issue is in understanding barriers to
collaboration and how these can best be overcome.
=eak
evidence
base
& shortage of data and evaluation of past policies
impedes assessment of Aictoria3s overall innovation
performance. This constrains the analysis of 5tate-based
and frm-level innovation and a!ects the capacity to
develop future policies.
9nclear
role of
governme
nt
There is scope for the Aictorian @overnment to provide
clearer guidance on its role in innovation, based on a
synthesis of current thinking on market failure and
system failure. This includes a stronger focus on global
and local linkages. This could then feed into the
development of clearer objectives and processes for the
development and evaluation of innovation policies.
Source: VCEC!
=hile the challenges in measuring innovation are signifcant,
drawing on the available data, the %ommission makes the
following conclusions6
Aictoria has some important strengths in its innovation
system, in particular, the strong research capabilities in
its universities and other research establishments.
Powever, there are also some signifcant and persistent
weaknesses that may be limiting Aictoria3s innovative
performance. These include, in particular, collaboration
among the researchOuniversity and industry sectors,
coordination issues, certain skills and capability gaps, and
a weak evidence base for innovation policy. %ertain
sectors of the economy, such as the service and public
sectors, also require more attention in innovation.
&s a result, the 5tate, more broadly, may not be
maimising the potential 2innovation dividend3 from its
key assets. This has implications for both Aictoria3s
productivity and competitiveness as a knowledge-
intensive, innovation-driven economy.
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 56
4., *pportunities for improvement
The %ommission considers that the Aictorian @overnment
should set innovation policy as a key part of a 5tate-based
reform agenda. The @overnment can inHuence innovation in
three ways6
#1* by encouraging a more enabling environment for
innovation
#'* by addressing market and system failures that impede
innovation
#J* by developing a more innovative public sector.
,ecommendations relating to these three areas are
presented below. @iven the uncertainties that permeate
innovation policy, there is limited evidence available to
determine conclusively the forms of government intervention
that would successfully stimulate innovation without
displacing private activity. Mevertheless, there are benefts in
the @overnment trialling and evaluating policy approachesQ
based on current evidence on the types of activities that
stimulate innovationQto address the identifed shortcomings
in the innovation system in Aictoria #and &ustralia*. The
contet in which government intervenes to promote
innovation means that innovation policy6
" should be seen itself as an evolutionary process in which
policy eperimentation and the analysis of its impacts in
specifc contets is used to further refne the range of
innovation policy instruments #?ytelka and 5mith, '(('*.
This requires signifcant policy evaluation and assessment
competence, and recognition that the challenge of innovation
policy is continual and changing6 there is no absolute
2solution3. #+odgson et al. '(1(, p. JB*
>uture innovation policy should be embedded as an
evolutionary process in Aictoria. The %ommission3s
recommendations should be implemented, where
appropriate, as pilot initiatives or on a trial basis, and always
in the spirit of 2aggressive learning3 within a robust
evaluation framework. 5uch trials would test what works and
inform future government policy and activities of others
interested in innovation.
The %ommission does not recommend an increase in funding
for innovation policy or for industry assistance more broadly.
Instead, the %ommission3s recommendations would be
41 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
implemented by re-ordering priorities. Innovation policy
should aim to increase returns from government spending on
,-+, innovation and the innovation system. The policy focus
in this regard should be on innovation, not providing
subsidies to businesses.
4.,.1 !n enabling environment for innovation
/nterprises are the key innovators in the marketplace.
Powever, as Mational /ndowment for 5cience Technology
and the &rts #M/5T&* suggested, while many factors a!ect
the opportunities to innovate, there are 2=ider >ramework
%onditions3 that are 2outside the boundaries of the frms as
key innovators in the marketplace3 but 2shape the contet in
which frms innovate and inHuence their innovation
performance and subsequent market success3 #M/5T& '(11,
p. J*. M/5T& identifed the si framework condition
categories as6
the public research base and its propensity to work with
innovating frms
demand conditions and the degree of competition in
relevant markets
availability of fnance and high-quality human resources
infrastructure and services that facilitate Hows of
knowledge and people
the degree of entrepreneurship that a!ects the
capabilities of frms to innovate
the wider business environment and competition for
innovation #M/5T& '(11, pp. J, J0*.
Importantly, these conditions 2characterise the competing
environments that countries o!er to innovating frms3
#M/5T& '(11, p. J*. 5everal of these conditions are outside
the 5tate @overnment3s control but they may be inHuenced
by government policy.
There is increasing recognition among governments,
especially in 2innovation-driven3 economies, that linkages,
interactions and Hows of skills, technology and knowledge
among actors in the innovation system are crucial to an
enabling environment for innovation. International and
&ustralian research has also highlighted collaboration as an
important feature of e!ective innovation systems in that it
creates opportunities to combine ideas and capabilities, and
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 41
to e!iciently engage in innovative activities. <roductive
collaboration can occur among businesses and between
researchers and businesses, and is strongly associated with
higher rates of innovation6
./%+ empirical research has shown that innovating
enterprises are invariably collaborating enterprises, that
collaboration persists over long periods, and that the
publicly-supported infrastructure #such as universities and
research institutes* are important collaboration partners.
This is strong empirical confrmation of the idea that
innovation should be seen as a collective phenomenon.
#5mith and =est '((G, p. 10*
+espite ongoing e!orts by universities and governments to
build and enhance linkages to industry, the evidence appears
to indicate that &ustralia3s innovation system still
underperforms relative to other countries in business,
research and government collaboration. ,esearch by the
./%+, and input from a number of participants in this and
the %ommission3s manufacturing inquiries, suggested that
increasing collaboration should be a high priority for
Aictoria3s innovation reform agenda. /nhancing industryE
research linkages is particularly important for Aictoria given
its strengths and investments in research. =eak or ine!ective
linkages reduce the 2spillovers3 or the 2innovation dividend3
Aictoria receives from its assets.
<articipants argued that any innovation agenda should focus
on fnding e!ective ways to increase collaboration, skills and
knowledge Hows between researchers and businesses, and
on shifting from the traditional focus on technology
commercialisation or 2supply-push3 towards problem-sourcing
or 2demand-pull3 approaches. ,?IT 9niversity, for eample,
argued for a 2coordinated e!ort to build a stronger culture of
collaboration between institutions, enterprises and the public
sector, to reap the benefts of Rcritical massS3 #sub. G1, p. G*.
?onash 9niversity also noted that6
,egional and sector aligned innovation strategies are
stronger, more clearly articulated and more integrated
between research providers and industry in many overseas
regions than in Aictoria, with some regions positioning their
universities as major research and workforce-skills providers
in the supply-chains of their local companies. #sub. 04, p. 0*
42 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
The ./%+ similarly recommended enhancing the
contribution of tertiary education institutions to innovation in
Aictoria #bo 4.1*.
There are, however, many impediments to stronger linkages.
<articipants highlighted6 mismatches in epectations, risk
tolerances and time-horiLonsF insu!icient inter-sector
mobilityF misaligned incentives and cultural barriers
#9niversity of ?elbourne, sub. GG, p. B*. They also pointed to
issues of fragmentation, lack of coordination and
understanding of Aictoria3s research capabilities, and skills
gaps in businesses for engaging the research sector #?onash
9niversity, sub. 04F ,?IT 9niversity, sub. G1, p. B*. .ther
impediments cited included lack of risk capital and
infrastructure to support spin-o!s #$iosciences Aictoria
%ollaborative, sub. 0JF 5winburne 9niversity of Technology,
sub. GJ*.
5ubmissions from several Aictorian universities highlighted
new models being implemented to improve collaboration
2across and beyond the 9niversity3 including development of
partnerships, interdisciplinary institutes, precincts and
networks, and research support organisations #9niversity of
?elbourne, sub. GGF ?onash 9niversity, sub. 04*.
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 43
B": 1!1 *$'- recommendations for enhancing
tertiary institutions" contribution to
innovation in +ictoria
In the period '((8E11, 14 regions in 11 countries participated in
the ./%+ !eviews of .iher (ducation in !eional
-evelop#ent #part of its <rogramme on Institutional
?anagement in Pigher /ducation*. The ,eviews involve joint
regional self-evaluation by higher education institutions and
stakeholders followed by an ./%+-led epert review resulting in
a ,eview ,eport. The following recommendations were made in
the ./%+3s !eview of .iher (ducation in !eional and City
-evelop#ent/ ,tate of 0ictoria1 +ustralia #'(1(*6
That the Aictorian @overnment6
E commission a comprehensive review of the innovation
system to better understand the levers and demands
within the private sector that can be better met by new
university initiatives
E continue to encourage greater collaboration among
universities
E ensure that research on clusters and the demands of
industry etend into the services sector and include
clusters such as tourism. %lusters also should be
conceptualised as cutting across the manufacturingE
service divide.
That Aictorian universities look to develop and enhance the
9nigateway project to provide a more hands-on engagement
with business and a more collaborative way of referring
enquiries. The 5tate andOor %ommonwealth government
should encourage greater involvement by 5?/s.
The %ommonwealth @overnment should consider the
establishment of core funding for university engagement to
promote knowledge transfer and the interests of industry. It
should also consider reviewing the impact of the
%ommonwealth @overnment3s research policies on business
engagement, especially the /cellence in ,esearch for
&ustralia research assessment process, and making more
accessible the &ustralian ,esearch %ouncil3s linkage
program, with a 2continuously open call and lightweight
review for smaller projects3.
Aictorian universities should look to match global levels of
ecellence in supporting entrepreneurship in the curriculum,
and build comprehensive support programs encompassing
entrepreneurship training, practical eperience of creating
new businesses for groups of students, and 2incubation and
hatchery3 facilities together with seed funds for new
graduate ventures.
Aictorian T&>/ institutes should provide sectorally and
locally focused comprehensive support for 5?/s, connecting
43 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
The %ommission notes the recently announced strategic
relationship between %ochlear ;td and ?acquarie 9niversity
to establish %ochlear3s new global headquarters and
principal manufacturing facilities in ?acquarie3s Morth ,yde
campus and new research collaboration initiatives with the
university #?acquarie 9niversity '((G*. 5imilar partnerships
with world-class innovators in Aictoria could provide a
variety of benefts to the 5tate. &s suggested by the
9niversity of ?elbourne6 2=e are investing signifcant time
and resources in building relationships with strategic
industry partners, including as an eample I$?, who in turn
are investing in people and knowledge-based economic
activity based in Aictoria3 #sub. GG, p. 8*.
4

;inkages within the business community are also important
for innovation. The &ustralian data suggest that this too is a
problem area. The %ommission heard in its manufacturing
and tourism inquiries #A%/% '(11i, '(11h* that innovation in
Aictoria could be enhanced by more collaboration among
businesses.
%onsultations and research conducted in the course of the
manufacturing inquiry suggested that, while a number of
collaboration and networking groups are relevant to
manufacturing, there is scope to improve the e!ectiveness of
these groups to facilitate more productive relationships. In
particular, the %ommission considered in its draft report that
there may be scope to address 2the challenges of small and
medium enterprises #5?/s* who may not have access to the
resources and capacity for networking, information gathering
and skill development needed to innovate e!ectively3 #A%/%
'(11c, p. 10J*. It is unclear, however, to what etent the
problems highlighted are applicable across all industries in
the 5tate. The %ommission welcomes more information on
the similarities in innovation issues in manufacturing
compared with other sectors.
&s part of the shift away from technology-push innovation,
there may be a case for redirecting funds towards seeding
new or eisting networks to undertake initiatives to develop
more productive collaborations within groups and between
4
I$? recently established a @lobal ,esearch and +evelopment laboratory at the
9niversity of ?elbourne. This is I$?3s frst lab that combines research and
development in a single organisation. The lab3s focus will be on 2smarter natural
resource management3 and 2smarter natural disaster management3. This
partnership builds on eisting collaborations between I$? and the university in
computational life sciences #I$? '(1(*.
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 45
groups. The funding might etend to providing network
facilitators or essential administrative support. &s noted
above, there is little evidence on the best design for
government programs that successfully stimulate networks
and generate broader economic spillovers by building
innovation capacity, embedding an innovation culture and
spreading innovative ideas. To build the evidence and
information base it would be necessary to test and evaluate
potential approaches. The %ommission considers, therefore,
that a process of trial and evaluation is needed. The use of a
specialised Institute to support and disseminate such
research is discussed in the following section.
In addition, the %ommission considers that the Aictorian
@overnment should support a review of how impediments to
greater collaboration between universities and business in
Aictoria could be addressed. To ensure impediments #and
solutions* to all sides of the collaboration relationship are
captured, this review could be facilitated by the Institute for
innovation and entrepreneurship #proposed below*, drawing
on industry and research views and eperience. &ny
information available from Aictorian universities and
research organisations on impediments to greater
engagement with businesses on research, development and
commercialisation should also be fed into this process. To
encourage collaboration, the @overnment could also provide
one-o! seed funding #for eample, for a maimum of two
years* to encourage epansion or creation of self-sustaining
networks and business-driven communities of practice that
focus on innovation.
Draft recommendation 10
That the Victorian o!ernment enhance the links
between industry and the research sector" and within
industry" by#
re!iewin$ and remo!in$ impediments to
en$a$ement and collaboration
pro!idin$ seed fundin$ to encoura$e inno!ation%
focussed" business dri!en communities of practice&
44 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
4.,.2 !ddressing market and system failures in
innovation
The Aictorian @overnment has invested signifcant resources
in supporting innovation in the 5tate, especially in science
and technology and infrastructure. Powever, there are some
capabilities underpinning innovation that, at present, seem to
be undersupplied or are inadequate for a forward-looking,
evidence-based and economy-wide innovation agenda. This
includes capabilities in researching innovation itself,
innovation policy evaluation, innovation management and
entrepreneurship.
Aictoria also needs to improve the attraction and retention of
talent, particularly world-class researchers. This is driven by
a number of trends, including6 the increasingly international
nature of innovative activity, the global competition for
talent, the lack of 2critical mass3 and demographic changes in
&ustralia3s academia. Input to the inquiry suggested there
may be opportunities for Aictoria to strengthen its innovation
capabilities through a combination of measures to build the
skills of the eisting workforce and to attract especially
talented workers and researchers to Aictoria.
$uilding innovation capability is di!icult and there is no
2silver bullet3. Mevertheless, the %ommission3s consultations
identifed two proposals, based on perceived current and
impending gaps in Aictoria3s innovation capability, that merit
further serious attention6
#1* a world-class centre to promote innovation and
entrepreneurship
#'* attracting and retaining early career researchers.
! world.class centre to promote innovation and
entrepreneurship
%urrently, Aictoria3s approach to innovation su!ers from a
weak evidence base and limited understanding of how
&ustralian frms innovate and 2what works3, including the
e!iciency and e!ectiveness of government interventions. The
chances of success of future government, research and
business sector initiatives would beneft greatly from a better
understanding of 2downstream3 innovation, at the enterprise
level, and capabilities that bridge the divide between
research and industryQincluding entrepreneurship,
collaboration, and the impact of government interventions
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 49
#as suggested by the ./%+, bo 4.1*. There is currently no
focal point forQor 2critical mass3 amongQthe industry,
government and research sectors to come together to
research innovation to improve innovation performance in
Aictoria3s public and private sectors.
&n option for the Aictorian @overnment is to establishQ
leveraging its strengths in higher education and research Q
a world-class, inter-disciplinary centre #the Institute* focused
on how to unlock Aictoria3s potential for innovation and
entrepreneurship. The Institute could act as a focal point for
industry, research and government sectors to connect on
innovation issues and progress community understanding
and awareness of innovation in Aictoria and more widely.
The requirements of good innovation policy can be
2technically demanding3 #$anks '((B, p. '(*. %reating the
Institute could also provide a transparent way for rigorously
evaluating and researching which types of innovation
initiatives are e!ective, with benefts that outweigh their
costs. @iven the shortage of information and data on what
works, the Institute could make a valuable contribution.
The Institute could have three core functions6
#1* research #compile data, analyse and research innovation
issues, and review policies and programs*
#'* education #develop training materials, measurement tools,
case studies, and provide training*
#J* a forum for cross-sector interaction and collaboration
around innovation issues.
The Institute could be tasked, at least initially, to address
shortcomings identifed by the %ommission such as
collaboration between research and industry, public sector
innovation, analysis of innovation performance and
innovation policy, and innovation in the service sectors.
/!orts to improve the current understanding of innovation in
&ustralia #and hence the capacity to design more e!ective
and e!icient innovation policies* are currently fragmented.
=hile epertise eists, it is dispersed across institutions.
9nderstanding the comple causes and e!ects of innovation
also requires a multi-disciplinary approach #Iensen and
=ebster, sub. 0(, p. 4*.
The 9nited :ingdom3s Innovation ,esearch %entre #9:TI,%*
initiative provides a possible model for Aictoria, given the
47 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
identifed shortcomings, including the weak evidence base
for innovation policy and the weak understanding of
&ustralian enterprise-level innovation. The 9:TI,% is a
collaborative initiative focused on how innovation can make
businesses more competitive and improve public services
delivery. It is a joint venture between the %entre for $usiness
,esearch at the 9niversity of %ambridge and Imperial
%ollege $usiness 5chool, and involves a large-scale, multi-
year research programme and a knowledge hub to engage
policy-makers and practitioners about innovation research. It
is a focal point for policy-relevant innovation research, and
unites leading scholars to6
ensure that new research on innovation in the public and
private sectors has the greatest e!ect on policy and
practice
eplore the relationship between innovation and business
performance and how this a!ects the national economy
and the individual organisation
actively disseminating its work through a 2:nowledge
/change Pub3, which will include activities ranging from
seminars to innovation podcasts #Imperial %ollege ;ondon
'(11F 9:TI,% '(11*.
&n Institute in Aictoria, linked with other groups
internationally, could also help to strengthen inter-
disciplinary #for eample, science and technology, social
sciences* and cross-boundary #for eample, public sector,
private sector, research sector* interaction, research, and
knowledge di!usion. This approach to multi-disciplinary,
problem-driven research and industry engagement would be
in the same vein as the 2inter-disciplinary institutes3 and
2virtual institutes3 that have been established in Aictoria3s
universities,
0
and the strategic re-orientation of the %5I,.
around multi-disciplinary solutions and 2mission-directed3
research.
)

& number of sources suggest that &ustralia needs to focus
more on entrepreneurship and improving the management
0
>or eample, the ?elbourne 5ustainable 5ociety Institute and ?elbourne /nergy
Institute straddle engineering, land and resources, computing science and other
felds #?elbourne 5ustainable 5ociety Institute '(11*.
)
%5I,.3s '(11E'(10 strategic plan focuses on its 2Mational >lagships3 and
organisational development to help it 2deliver integrated solutions to comple
problems at the intersection of natural and human systems #such as energy, water,
climate and land use*3 #%5I,. '(11*.
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 46
and leadership skills necessary for innovation #+odson '(11,
p. BF ?onash 9niversity, sub. 04, p. '0F Pargraves Institute,
manufacturing inquiry sub. 48, p. '*. $etter entrepreneurship
and management skills can have a large positive impact on
productivity and innovation #9T5 et al. '((8, pp. 0E)*. &
study of the links between productivity and management
capabilities in &ustralian workplaces found that6 2& factor
that is often overlooked or underemphasised is the role and
quality of leadership, culture and management practices in
encouraging and enabling workplace innovation3 and that
2&ustralian state level initiatives directed at lifting innovation
through improved leadership, culture and management
practices are sporadic and where they eist, fragmented and
lacking strategic coordination3 #5ociety for :nowledge
/conomics '((8, pp. BE8*. The Institute, in collaboration with
other training institutions, could also provide training to
address gaps in innovation management and entrepreneurial
skills.
5uch an institute could also play a valuable role in developing
the understanding of the etent to which government can
inHuence private sector innovation and which types of
government programs are cost e!ective. It could
independently evaluate innovation initiatives and disseminate
the results of those evaluations. This type of information is
essential to improving innovation policy.
!ttracting and retaining talent
&nother way to increase innovation capability is to attract to
Aictoria and retain early career scientists, engineers,
?asters and +octoral students, and post-doctoral
researchers. The 9niversity of ?elbourne3s submission
argued that attracting and developing talent, is 2arguably the
most important pre-requisite for a healthy innovation system3
#sub. GG, p. 8*.
5winburne 9niversity of Technology strongly supported
improving Aictoria3s innovation performance by developing
programs to attract and retain early career researchers,
arguing that 2the increasing mobility of workers, and ageing
nature of the academic workforce in &ustralia is a cause of
concern3 #sub. )1, p. J*. &s noted above, &ustralia3s ranking
in the 2availability of scientists and engineers3 indicator fell
from 40th to )(th between the '(1(E11 and '(11E1' @lobal
%ompetitiveness Inde #=/> '(1(, p. B0F =/> '(11, p. 1(J*.
91 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
The 9niversity of ?elbourne #sub. GG*, &us$iotech #sub. G0*,
$io?elbourne Metwork #sub. )'* and $io5ciences Aictoria
%ollaborative #sub. 0J* also supported schemes to attract and
retain talented researchers, as well as schemes that attract
eperienced epatriate innovators back to Aictoria and build
businessEresearch and international linkages.
The %ommission considers that talent attraction and
retention schemes could provide a number of benefts, such
as6
strengthening Aictoria3s eisting comparative advantages
in research
improving national and international linkages and
delivering other networking benefts
enhancing 2knowledge spillovers3 #especially if combined
with collaborative scholarships with industry*
providing a source of business start-ups #especially if
combined with training in entrepreneurship and
innovation management to bridge the 2lab to market3
divide*
helping to achieve critical mass in key industries and
research felds.
%are would need to be taken in designing a talent attraction
program to ensure it achieved additionality Q that it does not
simply displace or replace the eisting e!orts of companies
and universities to attract early-career scientists, engineers
and post graduates. %are would also be needed to ensure
quality Q that the participants in the scheme were genuinely
high calibre and possessed sought-after capabilities. 5uch a
program should build on other models and precedents,
including6
&ustralia3s skilled migration program, or the
complementary /arly %areer ,esearchers Talent
&ttraction scheme suggested by &%I; Tasman, targeting
highly-talented and high-achieving foreign early career
research professionals #&%I; Tasman '(11, pp. 1B1E1B'*
the Aictorian /ndowment for 5cience, :nowledge and
Innovation #A/5:I* #9niversity of ?elbourne, sub. GG, p.
8F $io5ciences Aictoria %ollaborative, sub. 0J, p. '*
%ommonwealth schemes such as Pigher /ducation
%ontribution 5cheme eemption scholarships, &ustralian
<ostgraduate &wards, Mational Pealth and ?edical
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 91
,esearch %ouncil and &ustralian ,esearch %ouncil
;inkage schemes
&%I; Tasman3s proposed 2Mew /conomy3 <ostgraduate
5cholarship scheme, which &%I; Tasman suggested
should include tuition fee waivers, stipends to cover living
epenses, and o!ers of permanent residence upon
completion of courses #&%I; Tasman '(11, pp. 1B(E1B1*
?odels adopted in other ./%+ countries #./%+ '(1(b,
pp. 1'BE1J)*, and the /uropean Industrial +octorate,
recently announced by the /uropean %ommission
#9niversity of ?elbourne, sub. GG, p. 8*.
G

&s an ongoing concern for talent attraction and retention, the
9niversity of ?elbourne also noted that the Aictorian
@overnment has a role in 2maintaining ?elbourne3s position
as one of the most RliveableS cities in the world #and in turn
maintaining the liveability of Aictoria as a whole*3 #sub. GG, p.
8*.
Aictorian @overnment support for these schemes should be
through the reordering of funding priorities and advocacy at
the %ommonwealth level.
Draft recommendation 11
That the Victorian o!ernment address information
$aps and enhance the 'tate(s capacity for inno!ation
by#
establishin$ a world%class )nstitute for inno!ation
and entrepreneurship
attractin$ and retainin$ leadin$ early career
researchers" de!elopment en$ineers and scientists&
4.,., -eveloping a more innovative public sector
The public sector in total is a signifcant part of the economy.
In Aictoria, it accounts for around '1 per cent of @5<Q
Aictorian and local government and public corporations #14
per cent* and national government and public corporations #G
per cent* #&$5 '(1(d*.
B
The Aictorian <ublic 5ervice and
G
This is a /9,'( million pilot scheme, based on one that has operated in +enmark
for 4( years #?yklebust '(11*.
B
/stimate based on 5tate and local general government fnal consumption
ependiture, and gross fed capital formation, and public corporations gross fed
capital formation, as a share of @5< in '((8-1(, chain volume measures #&$5
'(1(d*.
92 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
Aictorian <ublic /ntities employ around ')( ((( people or 8
per cent of the Aictorian labour force #55& '((8b, p. 10*. The
siLe and economic contribution of the government sector
provides a 2compelling reason to ensure that its performance
is maimised through innovation3 #+II5, '(11, p. 1(J*.
The public sector may face a number of barriers and
challenges to innovation, including6 policy 2silos3, risk-
aversion and cultural barriers. &lso, the nature and diversity
of public sector policy-making and service delivery makes
measuring the etent and e!ects of innovation more di!icult
#9: +epartment of $usiness, Innovation - 5kills '(1(, p.
J)*.
&lthough public sector innovation has largely been isolated
from Aictoria3s economy-wide innovation policy agenda, the
Aictorian @overnment has undertaken a number of initiatives
in this area in recent years. The +epartment of <remier and
%abinet is driving innovation in government through the
Aictorian <ublic 5ector Innovation &ction <lan
8
and the
@overnment '.( &ction <lan.
1(
/ndorsed by departmental
secretaries, both plans are being implemented across the
Aictorian <ublic 5ervice and are underpinned by principles of
collaboration, openness and engagement.
11
The Aictorian @overnment could consider building on these
e!orts and commit to creating a more innovative public
sector by6
systematically identifying and addressing barriers to
innovation in di!erent parts of the public sector, in areas
such as managing risk, I%T and collaboration
infrastructure, and promoting an innovative culture
improving measurement of public sector innovation
capacity and performance
8
The plan focuses on four action areas6 creating connections between people,
ideas and opportunitiesF building innovation capabilityF generating ideas and
rewarding good practiceF and sharing information and data #+<% '((8*.
1(
The plan provides the Aictorian <ublic 5ervice with the foundations for the use of
=eb '.( applications #based on access to public sector information and new
Internet-based technologies* to engage with citiLens, develop policy and deliver
services #+<% '(1(*.
11
The Independent ,eview of 5tate >inances #I,5>* terms of reference direct that
inquiry to consider improved governance of Aictoria3s public sector departments
and public bodies, through reforms or improvements to e!iciency, e!ectiveness,
fnancial, operational and other performance accountabilities. These issues are
also relevant to public sector innovation.
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 93
developing skills in designing and implementing 2pilots3,
including the use of market-based approaches to address
policy issues
providing incentives and recognition for innovation
improving engagement with the private sector, research
sector and the communityOnot-for-proft sector
eposing public sector leaders to the latest innovations in
public service delivery and administration in &ustralia and
elsewhere
using demand-side policies such as public procurement,
2open-government3 and @overnment '.( initiatives to
better engage the private sector and the wider community
in fnding innovative solutions to public sector problems
and needs.
<ublic procurement is one area in which public sector
innovation is emerging. Aictoria3s 5mart 5?/s ?arket
Aalidation <rogram #?A<* is an eample of the Aictorian
@overnment playing the role of 2leading edge customer3
#A%/% '(11i*. <ublic procurement and the ?A< may be
useful approaches to public sector innovation, and
opportunities to improve and adjust eisting programs should
be further eplored #including through an evaluation of the
current ?A< trial program*.
The Aictorian 5patial %ouncil3s submission to the present
inquiry noted that 2access to information can lead to
innovation and the development of new products and
services, and an increase in national wealth3 #sub. 0', p. )*.
>or eample, in '((8 the %ommonwealth @overnment3s
@overnment '.( Taskforce argued6
=hen information is released it creates new and powerful
dynamics which can drive innovative use and re-use,
allowing the commercial, research and community sectors to
add value to it. "&llowing unfettered use and re-use of
government data and information more generally can add to
&ustralia3s innovative capacity and economic prosperity.
#+>+ '((8, pp. 4, 04, cited in sub. 0', p. )*
The Aictorian 5patial %ouncil cited the %utler review of the
national innovation system, which argued that information is
crucial for market e!iciency and consumers3 ability to drive
innovation by providers. The review also argued that
governments can ensure that the 2information and other
content that they fund is widely and freely available to be
93 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
used by consumers, and to be re-used and transformed into
new value-added products by frms further down the
production chain3 #%utler '((B, p. B1*.
There have already been eamples of state governments
eperimenting with innovative ways to fulfl public sector
needs Q such as by combining competitions with releases of
government-held data on web-based 2crowd-sourcing3 and
collaborative open-innovation platforms. In >ebruary '(1(,
the Aictorian @overnment launched the 2&pp ?y 5tate3
competition to build mobile and web applications. This was
accompanied by the release of over 8( Aictorian @overnment
datasets to encourage new applications to be created #>lynn
'(11*. The competition produced G4 valid entries and various
useful applications for future use by Aictorians #e@overnment
,esource %entre '(1(*. Mew 5outh =ales held a similar
competition in '(1( with its 2&pps4M5=3 competition #>lynn
'(11*. &pproaches such as these may produce more
innovations and better solutions Q possibly at a lower cost
and in shorter timeframes Q than would have been possible
if the public sector worked in isolation or through traditional
procurement.
Draft recommendation 1*
That the Victorian o!ernment encoura$e public
sector inno!ation by#
identifyin$ and addressin$ barriers to inno!ation in
the Victorian public sector
buildin$ on e+istin$ initiati!es and e+ploitin$
emer$in$ opportunities to test and e!aluate
inno!ati!e methods of ,ndin$ solutions to public
sector problems&
4.,.4 ! new agenda for innovation
,eHecting the importance of innovation to future productivity
growth, the %ommission3s draft recommendation is that the
Aictorian @overnment develop and publish Q as part of its
5tate-based reform agenda Q a new, comprehensive and
integrated Aictorian Innovation 5tatement. The 5tatement
would set out the @overnment3s approach to promoting
innovation and addressing some of the systemic issues,
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 95
including shortcomings in the evidence base for state-based
innovation performance.
The %ommission considers that Aictoria3s innovation reform
agenda should seek to strengthen the constituent parts of the
innovation system, and, crucially, strengthen the links across
those parts. The reform agenda could include several goals
as reHected in the draft recommendations above6
sustaining and enhancing critical linkages in the
innovation system, which could include6
E increasing business engagement with Aictorian
universities and other research organisations #that is,
facilitating the improvement of business-research
linkages*
E encouraging the development of strong and etensive
business networks with an innovation focus #that is,
improving businessEbusiness linkages*.
strengthening the 5tate3s innovation capabilities, which
could include6
E creating a world-class centre to promote innovation
and entrepreneurship
E attracting and retaining early career researchers,
development engineers and scientists
promoting innovation in and through the public sector,
which could include6
E identifying and addressing barriers to public-sector
innovation
E using procurement, open-innovation and new media
technologies to fnd innovative solutions to public
sector problems and needs.
&longside these policies to improve innovation in Aictoria,
the 5tate @overnment should focus on maintaining and
enhancing ?elbourne3s liveability and the way the city
operates #chapter G* and education and training that support
innovation.
Draft recommendation 1-
That" drawin$ on the proposals in draft
recommendations 10" 11 and 1*" the Victorian
o!ernment set out an inno!ation a$enda that
outlines#
94 SECURING VICTORIAS FUTURE PROSPERITY: A REFORM AGENDA
key strate$ies for enhancin$ inno!ation" with
speci,c measurable ob.ecti!es
principles to $uide the de!elopment"
implementation and e!aluation of pro$rams
a data collection" monitorin$ and e!aluation
framework for all inno!ation pro$rams&
MORE EFFECTIVE INNOVATION AND ENTREPRENEURSHIP WILL BOOST PRODUCTIVITY 99