Saul Eslake is one of Australia’s most respected bank economists. In his tenure as the Chief Economist at the ANZ bank, Eslake’s analysis and forecasts were usually on the mark. He also enjoys a reputation for having a razor-sharp intellect and a balanced attitude to life. We both share a connection to the University of Tasmania, but Eslake grew up in the remote Tasmanian town of Smithton, which probably goes some way to accounting for his grounded approach to life and work.

Fortunately, when he resigned from the ANZ he took a position as a commentator and analyst with a policy think-tank called the Grattan Institute. He has continued to provide inisghts into the challenges of increasing productivity in a mature economy. Crudely speaking, productivity measures the conversion of economic inputs to outputs. Productivity growth is the main driver of sustainable national wealth.

In a recent report, Eslake and Walsh have signalled that Australian productivity is falling. While high prices for coal and iron ore are driving growth in the economy, this is masking some concerning trends in productivity. This matters because a disruption to Chinese commodity consumption, perhaps caused by unforseen political turmoil, would have dire consequences for Australia.

He correctly points out that innovation is a very important driver of productvity. Arresting the decline in productivity means improving national innovation performance. The report also cites education and economic reform as being vital for increasing prodcutivity, but its possible to argue that some of these factors work through innovation. Management skills, in particular, are an important factor in making firms more innovative.

Innovation – the introduction of new goods and services, new ways of producing or distributing existing goods and services, or new ways of managing existing processes for producing or distributing goods and services – has long been recognized as a critically important source of productivity growth.

However, the focus of the report for improving innovation performance is a long way off track.

It is widely recognized that the weakest link in Australia’s innovation chain is the commercialization stage.

One of the dominant innovation myths is that innovation results from the commercialization of an invention – usually a scientific breakthrough. This linear model of innovaiton goes back to the 1950s and despite the mountain of evidence against it, we still see this myth alive and well in public debates and government policy. It’s a problem because it leads to several wrong assumptions about innovation. We’ve written many posts on this blog that I have linked into the following criticisms of these assumptions.

1. Innovation results from the commercialization of R&D. FACT– OECD reports show many organizations innovate without any formal R&D.
2. Economies will suffer if they don’t have a high-tech cluster like silicon valley where commercialization can flourish. FACT – High-tech sectors of developed economies directly contribute very little to growth and employment. The international obsession with trying to recreate successful industry clusters is irrational.
4. Commercialization of science will enable the replacement of old industries that don’t grow very much. FACT – Many studies show that ‘old’ industries are very innovative and grow rapidly as a consequence.
3. Universities should be compelled to commercialize their research, like US universities. FACT – Every survey of firms in the US, Australia and Europe shows buyers and suppliers as the most important source of innovation. Universities are always a long way down the list. Studies of North-American university commercialization offices show that these are mostly loss-making excercises.

The interesting thing about Eslake and Walsh’s discussion of innovation is that it acknowledges a paper written by some of the best innovation academics from the UK and Australia. This report also criticizes the view of innovation as a linear process where ‘market failure’ results in inventions not being commercialized. Instead, Dodgson et al. talk about the need to create innovation systems. New connections are the source of innovation, not the commercialization of ideas.

In concluding their productivity report, Eslake and Walsh foreshdow a deeper investigation of the innovation dilemma in Australia. A closer reading of Dodgson et al. would be a good start. Forget innovation chains, let’s talk about networks and systems.