Industry policy in an open economy

Eugenia Karanikolas, Economics

Key issue
Australia is one of the world’s most open economies. Like other advanced economies, Australia has been moving away from lower skilled and highly labour-intensive industries towards more knowledge-intensive and internationally-focused industries, especially in services and advanced manufacturing. As a result, Australia’s industry policy has been gradually shifting its attention towards supporting businesses to become internationally competitive by adopting new technologies and undertaking more knowledge intensive activities.

Background

The structure of the Australian economy has changed significantly in the last 35 years. A strong supporter of the multilateral trade system, Australia has been reducing its trade barriers in goods, services and investment. Economic integration, the widespread adoption of new communication technologies and the rise of cheap labour-intensive manufacturing elsewhere mean that some industries that used to focus predominantly on the domestic market can no longer compete.

On the other side of the equation, industries that have taken advantage of Australia’s strengths, such as its educated workforce, competitive environment and sound physical and communications infrastructure, have shifted focus to compete successfully in international markets. This is not only true for two of Australia’s largest export industries, mining and education, but also for high value-added industries like wine and manufacturing of medical equipment.

In addition, new types of industries have recently developed that focus increasingly on the online market for consumer, property and business services. These industries now account for a third of the top 50 growth industries identified by IBIS, the industry research group. For instance, IBIS predicts that revenue in the smartphone app development sector will increase by 37.0% to almost $300 million in 2013–14. In addition, industry revenue from online shopping will increase by 11.3% to $12.3 billion, whilst revenue in the online education sector will increase by 9.6% to around $5.3 billion.

The service sector now accounts for 80.0% of the economy and 17.0% of exports. Niche exports, including legal, media and business advisory services, are on the rise and are now worth around $8 billion a year. Growth in exports of sophisticated manufacturing products is also strong, especially exports of mining technology and equipment which are currently worth around $27 billion a year. Other high-value added exports are also increasing their share of Australia’s total exports: the pharmaceuticals and medical technology sector now comprises the largest share of manufacturing exports to China, Australia’s largest trading partner.

Consistent with this performance, Australia’s trade and industry policy has increasingly been formulated to build on those strengths. Specifically, Australia’s efforts are currently concentrated on advancing multilateral and bilateral agreements that facilitate trade in services, including financial, legal and transport services. On the domestic front, current efforts are concentrated on improving business competitiveness in services by investing in the country’s communications infrastructure. Efforts are also being made to encourage a stronger culture of innovation and entrepreneurship.

Current industry programs

Many of Australia’s industry programs focus on improving the competitiveness of small businesses, providing the incentive for business to invest in innovation and commercialisation of new products and providing export support. Some of the main programs are:

  • The R&D tax offset: this is by far the largest program. It provided $800 million in tax concessions to business in 2012–13.
  • Enterprise Connect: this program specifically targets small and medium enterprises (SMEs) and receives funding of approximately $24 million a year. The program is designed to bridge the information gap faced by SMEs in accessing reliable information and support them to improve their competitiveness. For instance, SMEs receive help to identify opportunities in major projects that may exist in Australia and overseas and receive advice on how to best position their business to take advantage of them. SMEs can also get advice on new technologies and how to go about adopting them in their business.
  • Cooperative Research Centres (CRC): this long-standing program aims to establish links between universities and industries. CRCs respond to well-defined challenges faced by industries which have a wider economic, social and environmental impact. The Cochlear hearing implant, one of the great successes of recent years, was produced as part of a CRC. In terms of the funding it receives, this program is one of the largest, with a current budget of around $145 million.
  • Commercialisation Australia: this program focuses on supporting businesses to commercialise their product, process or service by providing funding of up to $2 million for each participant to help to cover costs. In 2013–14, this program’s budgetary funding amounted to $75 million.
  • Industry Innovation Precincts and Industry Innovation Network: these are new programs which in essence aim to encourage collaboration between businesses and between research organisations and industries that have export potential. Around $500 million has been committed to build ten industry hubs and to establish a portal that will connect businesses to each other and help them to share information.
  • Venture Australia: this program aims to increase the pool of funding for Australia’s innovative and knowledge-intensive start-ups including those in the technology, life sciences, bio-medical and medical devices sectors. Funding for this program is currently close to $380 million.
  • Export Market Development Grants (EMDG): this is a long-standing program which aims to support SMEs to break into export markets by reimbursing up to 50% of their expenses relating to export promotion. Recent changes to the program increased the number of grants available to exporters targeting Asian markets whilst the number of grants targeting established markets like the United States and the European Union were reduced. This program has a current funding budget of around $125 million.

Notwithstanding the move towards programs that aim to create a business culture of innovation and encourage and support entrepreneurship, a significant amount of budgetary funding in Australia is still targeted towards ‘old’ industries. For instance, funding for vehicle assembly through programs like the Automotive Transformation Scheme and direct assistance to General Motors Holden, which some commentators argue might be better targeted towards niche sectors within the industry that are better able to adapt, innovate and compete internationally.

As Australia’s economy moves towards a trade-exposed economy based on knowledge-intensive sectors, industry policy will have to focus more on broad-based programs that encourage innovation, commercialisation and internationalisation in services industries as well as manufacturing.

Further reading

M Dodgson, A Hughes, J Foster and S Metcalfe, ‘Systems thinking, market failure, and the development of innovation policy: the case of Australia’, Research Policy, 40(9), 2011.

M Mazzucato, The entrepreneurial state, Demos, London, 2011.

Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education, Australian innovation system report, Canberra, 2012.

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