Investment, Innovation and Competitiveness

Keynote Address to CEDA Conference

Shangri La Hotel, Sydney

Speech, check against delivery

6 July 2012

The eminent Harvard economist Ted Levitt once remarked: "Just as energy is the basis of life itself, and ideas the source of innovation, so is innovation the vital spark of all human change, improvement and progress.”

At a time when the global economy is undergoing arguably its greatest seismic shift since the Industrial Revolution, only countries that embrace change instead of resisting it will thrive and prosper into the future.

When I spoke at a CEDA event earlier this year I talked about the link between microeconomic reform, trade and competitiveness.

Today’s topic, ‘Investment, Innovation and Competitiveness’ builds on that theme.

A large part of my role is to help ensure that Australian businesses can benefit from Asia’s re-emergence as a powerhouse in the global economy.

To grow and succeed in this, the Asian Century, Australian companies will need to innovate.

The rapidly-expanding Asian middle class represents tens of millions of new consumers wanting the high-quality goods and services Australia can produce.

But we will need to work hard to plug into these new markets if we want to realise the benefits.

Important to achieving this is helping to connect business, government and the research sector, and building an international understanding of Australia’s strengths.

If Australia can gain access to just 1 per cent of the growing Asian middle class over the next 20 years, it will be the equivalent of tapping into a new market the size of Australia.

But we can do much better than that.

Tapping into global value supply chains will generate the greatest payoffs, particularly for sophisticated manufacturing and service-related industries.

The benefits of becoming a link in global value chains are that we can focus on those areas of production where we have a comparative advantage.

To be frank, Australia’s participation in global value chains has been minimal.

When it comes to the imported content of Australian exports, we have one of the lowest in the OECD at around 11 per cent, only marginally better than the United States and Japan.

On the broader measure, which takes account of how exports are used as inputs by other countries, Australia’s participation is higher, at around 47 per cent, but still well below that of many other economies.

The message here is that with the business model of producing all the parts of a final product in one country now out-dated, Australia has a lot of catching up to do.

Why is it important to further integrate into global - or more particularly, regional - supply chains?

Because these systems ensure that a specific component of production takes place where it has the lowest marginal cost.

And companies are beginning to realise this.

I recently came across an example of a small company that sells leather shoes in Australia.

While the shoes are designed in Australia — supported by Australia’s highly-skilled creative talent pool — their physical production takes place in other, low-wage economies.

Another example is the iPhone.

iPhones are typically assembled in factories in mainland China, where this is more cost effective.

But while iPhones retail for around US$550, China captures only around $10 of the value of the product.

Apple, which controls the design and marketing of the iPhone, retains around 58 per cent of the value of the final product.

The vast majority of value captured by companies and countries around the world is captured by those engaged in design, technological innovation and marketing.

And it is here where Australia’s manufacturing and related service industry future lies.

If Australian businesses can better participate in global value chains, particularly those in our region, it would provide a big boost to our sophisticated manufacturing and service-related industries.

This idea was reaffirmed by the Prime Minister at her recent National Economic Forum.

She has committed our Government to supporting the integration of our manufacturing and services industries more fully into the opportunities emerging in our region.

This we will do by deploying the expertise and resources of Austrade and the Export Finance Insurance Corporation to encourage the participation of Australian manufacturing and service businesses.

We will also ensure that the Export Market Development Grants Scheme is helping to capture these new opportunities for Australian export businesses.

Global value chains have spread rapidly in East Asia, with strong network trade involving China as a final point for assembling manufactured goods and with intermediate goods often supplied by countries such as Japan and Korea.

The expansion of global value chains has been driven by technological advances in communications, large international cost differences, and improved international logistics.

It follows, then, the pursuit of further trade liberalisation can only spur further integration of production processes across global and regional markets.

Eliminating trade barriers imposed by other countries remains an enduring Australian Government policy priority.

We currently have seven completed Free Trade Agreements, each of which gives us improved access to overseas markets for our producers, and cheaper goods and services for Australian consumers.

These seven agreements — with ASEAN, New Zealand, Singapore, Thailand, the United States, Chile and Malaysia — account for 27 per cent of our total trade.

Five more bilateral FTAs are under negotiation. These are with China, Japan, Korea, India and Indonesia.

And we’re involved in negotiations for the Trans-Pacific Partnership.

These deals — if they can be completed — will cover a further 42 per cent of Australian trade, and enmesh us ever closer with Asia.

But equally important is the global struggle to resist turning back the clock on trade liberalisation.

G20 and APEC pledges and WTO rules have constrained protectionist responses since the global financial crisis.

However, with the downturn in the global economy over the past year and a half, protectionism has been on the rise across many countries.

It is important that we continue to do what we can to resist protectionist responses.

Resorting to protectionist ways now would throw away decades of progress and would only exacerbate the current global difficulties.

But aside from further trade liberalisation, we have to look at other ways of increasing our competitiveness.

Innovation is an important part of the productivity and competitiveness story.

The evidence of the link between innovation and productivity is strong.

Innovation-related activities such as training, research and development - and the spillover from this - have contributed up to half the increase in living standards in Australia over the past four decades.

Innovation at the company level drives productivity and profitability.

Australian Bureau of Statistics data shows that Australian businesses that innovate are twice as likely to report increased productivity as those which stick with old practices.

And companies that innovate are 40 per cent more likely to report higher profits.

In my talks with CEOs and other leading business people, I hear many good news stories.

Companies such as General Electric and Boeing, for example, are partnering with the CSIRO to develop innovative products and processes, including in the area of aerospace components.

IBM, one of the largest global innovators, opened its first ever research and development laboratory in Australia in Melbourne last year.

It is not due to luck that these companies are coming to Australia.

Australia was chosen by them because of its world-class research institutions, strong pipeline of talented and motivated professionals and stable and transparent regulatory environment.

We did not get here by accident — decades of economic reform have made Australia an open, stable, innovative economy with the geographic fortune to be able to tap into the exciting opportunities in our region.

Yet for about three-quarters of the 20th Century, Australia clung to a security blanket of over-regulation and protection against foreign competition, which our young nation thought it needed.

It didn’t work and it cost us immensely, even if for many years our politicians told us it was the right way to go.

But in the 1980s, the Hawke Government — followed by the Keating Government in the 1990s — brought their market-opening ideas to bear upon the protectionist mindset that had prevailed in Australian economic thinking.

Through floating the dollar and bringing down tariff walls, the Hawke and Keating Governments backed Australian competitiveness and ingenuity.

Those reforms were hard, particularly for those who had been insulated from foreign and domestic competition.

These companies were obliged to innovate and adapt.

But no one can argue about the results: 20-plus years of recession-free growth, a 61 per cent increase in real incomes, low and stable inflation and generally low unemployment.

However, our recent success forged on the back of the mining boom has masked a disturbing slowdown in productivity growth.

This is because the mining boom has helped maintain growth in incomes despite the slowdown in the rate at which we have found better ways of producing goods and services.

As the Reserve Bank of Australia recently noted, with the terms of trade likely to ease over the coming years, real income growth will slow unless there is a pick-up in productivity growth.

And we obviously can’t lift productivity through the same reforms that were implemented during the 1980s and 1990s.

Continued innovation, supported by investment in human capital, is crucial if we are to build on the productivity-enhancing reforms of the past.

The Gillard Government recognises the importance of investing in human capital and this is demonstrated by our recent achievements.

Total expenditure on higher education under this Government has roughly doubled since it came to power.

An additional 150,000 students are now attending university than under the previous government.

For the first time, the Government is funding undergraduate places at public universities based on student demand.

These young people are the lifeblood of future innovation and entrepreneurship.

We should not be engaged in a race to the bottom against low-wage economies.

Instead of moving down the income chain, we need to move up the value chain.

To this end, the Federal Government has raised investment in R&D to almost $9 billion, an overall increase of 35 per cent since 2007.

The Government’s new R&D Tax Incentive, which passed through the Parliament last year - opposed strongly by the Coalition - greatly strengthens R&D support for businesses, large and small.

And record funding is being provided to CSIRO, our pre-eminent science and research institution.

These investments will help Australian scientists and researchers create new knowledge and lift national productivity in an increasingly competitive global economy.

My colleague Greg Combet will also soon release an Industry and Innovation Policy Statement setting out the Government’s commitments and priorities for driving business growth.

The Statement will provide a platform for Government to continue working with business, unions and research communities.

And the National Broadband Network will be a game-changer in giving life to Australian innovation, allowing our brightest to compete and push out their ideas on a global scale.

And of course we’re working on the broad long-term strategy.

The Asian Century White Paper has progressed since I last addressed CEDA in March.

We’ve finished the formal consultation phase, although we’re still listening to business views.

It is still too early to talk about the paper in much detail, but some of the themes are becoming clear.

We need to enhance Australia’s ability to engage with Asia, building language and cultural literacy skills.

We need to make sure our economic policy settings boost our competitiveness, particularly by looking at the tax and regulatory systems, and infrastructure gaps.

We need to continue to invest in our research capabilities in order to remain at the higher end of the value chain.

We need to strengthen linkages between industry and universities so we can better tap Australia’s intellectual capital to generate jobs and growth.

And we need to focus on the opportunities arising from Asia’s economic growth, particularly through global value chains.

We also need to be able to attract foreign investment, which will continue to be vital to building our comparative advantage.

Increasingly, Asia will be a source of that capital.

All in all, we need to be more productive, competitive, and innovative if we are to thrive as our regional and global environment changes.

Thank you.

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