Governments should focus on improving "framework conditions" that support innovation given doubts over the effectiveness of specific policies targeting high-growth firms.
In the annual report on Australia's innovation system, the federal government's Office of the Chief Economist has focussed on high-growth firms, defined as delivering annual growth in turnover, or employment growth, of more than 20 per cent per year over three consecutive years.
The report says Australian high-growth firms contributed about 46 per cent of net positive employment growth from 2004–05 to 2011–12. Yet they represented just 9 per cent of all firms with five or more employees.
It finds the proportion of high-growth firms in the Australian economy has actually declined. Between 2005 and 2014, the proportion of firms with high-growth in employment declined from 18.6 per cent to 12.5 per cent, while the proportion of firms with high-growth in turnover declined from 17.6 per cent to 14 per cent.
At the same time, R&D investment by Australian business as a share of GDP has declined sharply since late last decade, after strong growth in the previous decade. It says this could be driven by recent large declines in R&D expenditures in mining and manufacturing but points to gaps in the economy and the importance of transitioning to innovation-based industries.
The outcome is confirmed in a separate report from the European Commission, the EU Industrial R&D Investment Scoreboard, which found Australia had only 14 companies in the global top 2,500 investors in R&D.
While 27 per cent of the world's biggest corporate investors in R&D in 2016 were pharmaceutical and biotechnology companies, just three of the 14 Australian companies in the top 2,500 were focussed on life sciences.
The leading Australian investor in R&D was Telstra, which was ranked 186th globally, followed by two banks, ANZ (237) and the National Australia Bank (246), and then CSL (276). The two other Australian life sciences companies in the list were Cochlear (892) and Mesoblast (1,796).
Nine of the top 30 global investors in R&D were life science companies, led by Novartis, followed by Roche, J&J, Pfizer, MSD, BMS, Sanofi, AZ and GSK.
The Australian companies also included other banks and financial companies, a paper manufacturer, a maker of agricultural chemicals, and even one maker of gambling machines.
The report's recommendations focus on strategic policy settings to promote the growth of high-growth firms, rather than specific settings, including the workforce and skills, such as STEM, the creation of a regulatory environment conducive to competition and therefore innovation, and improving access to finance.
It says, while policy makers may find high-growth firms (HGF) an "attractive target" given their potential to create jobs and income growth, "the effectiveness of international policies directed at HGFs remains to be seen."