Research Note Index

Research Note no. 24 2004–05

Investing in the economy’s knowledge base

Guy Woods
Statistics Section
29 November 2004

Introduction

Expenditure on plant and machinery has traditionally been seen as an indicator of future economic growth and productivity. However, in the age of high technology, investment in an economy’s knowledge base could be as important.The Organisation for Economic Cooperation and Development (OECD) has defined investment in knowledge as expenditure aimed at the enhancement, acquisition and diffusion of knowledge. Key areas include investment in research and development (R&D), in software and in human capital (measured by expenditure on higher education).¹

This Research Note presents data on these three indicators and a composite indicator, created by the OECD, which brings them together in to one indicator of investment in knowledge.

Investment in R&D

Since the early 1980s expenditure on R&D in Australia tripled in real terms.² As a result the ratio of R&D to gross domestic product (GDP) increased from 0.94 to 1.62 per cent between 1981–82 and 2002–03. This ratio peaked at 1.66 per cent in 1996–97. The current ratio is a result of lower growth rates for R&D expenditure in the late 1990s (see Table 1).

Table 1:Australia Expenditure on R&D

Investment in software

Table 2 shows that investment in software has increased from 0.2 per cent of GDP in 1979–80 to 1.7 per cent of GDP in 2002–03. Between 1997–98 and 2002–03 investment in software grew, in real terms, from $5.7 billion to $13.2 billion: an average annual growth rate of 18 per cent. This compares with a real annual average growth rate for investment in other machinery and equipment of 9 per cent over the same period.³

Table 2: Australia Investment in Software

Investment in higher education

Between 1995 and 2000 expenditure on higher education grew at an annual average rate of 2.3 per cent in real terms. However, because this was less than the 4.3 per cent recorded for GDP over the same period, the ratio of higher education expenditure to GDP fell from 1.7 per cent in 1995 to 1.5 per cent in 2000.⁴

The OECD’s indicator

By themselves the OECD’s three key indicators provide only a partial picture of the levels of investment in knowledge. To obtain a more inclusive picture of the level of investment in knowledge the OECD has combined the three into a single indicator of investment in knowledge (see Table 3).⁵

Table 3: Investment in Knowledge (2000)

Source: OECD, National Accounts, Economic Outlook, MSTI and Education databases ; International Data Corporation, June 2003.

Using the OECD’s indicator, Australian investment in knowledge was equal to 4.0 per cent of GDP in 2000. This was almost half that of Sweden and the United States, which invested 7.2 and 6.8 per cent respectively. It was also less than the OECD average of 4.8 per cent, but equal to the Economic Union average.

Over the period 1992 to 2000, Australia’s investment in knowledge grew at an average annual rate of 4.5 per cent. Although equal to the average for the OECD, it was significantly less than the 9.7 per cent and 6.1 per cent recorded by Sweden and the United States.

For Australia the emphasis on investment in knowledge is on R&D, followed by software and then higher education. This was similar to the pattern observed in most other OECD countries.

In relation to other high income countries Australian investment in R&D was on the low side.

Expenditure on software places Australia around the average for the OECD.

In relation to expenditure on higher education only the United States, Korea, Canada and Ireland exceeded Australia’s rate of 1.1 per cent to GDP.  It should be noted, however, that the United States and Canada include post secondary non-tertiary education in this indicator.

Summary

In the last twenty years Australia has significantly increased the amount it invests in its knowledge base.

However, compared with other high income industrialised countries, the amount Australia invests in its knowledge base is on the low side.

1. OECD, STI Review: Special Issue on New Science and Technology Indicators, No. 27, 2001.
2. $2.3 billion in 1981–82 to $7.1 billion in 2000–01 (international dollars 1995 prices) OECD, Main Science and Technology Indicators 2003–2.
3. Chain volume measure reference year is 2001–02.
4. OECD, .Education at a Glance, OECD indicators, 2003. National Income, Expenditure and Product, ABS (5206.0).
5. OECD Science, Technology and Industry Scoreboard, 2003.

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