10.2 Research and development
The Commonwealth Government makes a significant investment in research, including science. Total government support for research and innovation is around $9 billion per year (Australian Government, 2013).
Australia’s research system is highly productive and is generally performing well relative to most EU-15 countries. Australia has an above the OECD average number of researchers for every thousand people in our workforce and Australia’s research workforce is publishing at a rate and quality comparable to the top OECD countries. Australia also enjoys a positive reputation globally as a world-class research destination for researchers and research students in areas of research strength (Australian Government, 2011a).
Rationale for government funding of research and development
The Productivity Commission (2007) has identified two strong rationales for public funding support of science and innovation.
The first is that governments exercise many functions and need to fund research and development (R&D) to discharge those functions effectively. The R&D supports both evidence-based policy development and the evaluation of the effectiveness and impacts of government programmes. The absence of publicly funded support would mean a lack of knowledge and analysis to support, for example:
- defence technology (such as the Defence Science and Technology Organisation’s functions); and
- biosecurity problems (such as weed and pest control).
The second rationale provided by the Productivity Commission is that the spillovers that result from innovation cannot be captured by the innovator. This can create a market failure where research that would benefit society as a whole is not undertaken by business as each individual business would not receive sufficient return.
However, the Productivity Commission emphasised that the existence of spillovers was not sufficient to justify government intervention (Productivity Commission, 2011). A range of other conditions also need to be met:
- even in the presence of positive spillovers, public funding support will only be justified where the expected benefits for a producer/industry are insufficient to motivate investment in research that is of net benefit to the community as a whole (additionality principle);
- the expected benefit for the community for any funding for R&D must be sufficient to cover the administrative and efficiency costs of public revenue raising; and
- given the range of calls on government funds, the expected benefits from public investment in R&D must have regard to the likely payoff for the community from alternative spending options (opportunity cost).
Types of research and development
Basic research (also called pure research or fundamental research) works to gain a greater knowledge or understanding of the fundamental aspects of different fields of knowledge without specific applications or products in mind. The benefits of pure research are less clear and less likely to be captured by the innovator and, as such, pure research is less likely to be undertaken by the private sector.
Applied research looks at the practical applications of knowledge and is useful both for government in undertaking its own functions (for example defence research, research into biosecurity issues) and to the private sector in developing new products and processes.
The next step in the research and development chain is implementation, also known as experimental development. Implementation looks at embedding new discoveries within firms and workplaces. The benefits of implementation accrue very largely to the innovator. There are minimal spillovers involved.
Within Australia, research predominantly takes place in one of three sectors:
- universities - Australia’s higher education sector;
- publicly funded research agencies (CSIRO, Defence Science and Technology Organisation, Australian Nuclear Science and Technology Organisation, Australian Institute of Marine Science, Australian Institute of Aboriginal and Torres Strait Islander Studies, Geoscience Australia, Australian Antarctic Division etc); or
- the private sector.
Some research, particularly in the area of health, also takes place in the not-for-profit sector.
Not surprisingly, the different sectors have a different research focus. Chart 10.2.1 shows that Australia’s universities focus on public research; publicly funded research agencies focus on applied research; and the private sector focuses on implementation.
Source: Australian Government, 2013.
The Commonwealth Government provides some $8.6 billion in funding to research and development in Australia each year (Australian Government, 2013). The Government invests in research through a number of mechanisms.
There is direct Budget funding of around $1.8 billion per year to public funded research agencies, such as CSIRO and ANSTO.
The universities sector receives $2.9 billion per year, most of which comes through research block grants. Research block grants are distributed between universities on the basis of current research inputs and outcomes. Universities have considerable say over what research projects, personnel, equipment and infrastructure this funding should support.
There are six different broad schemes to support research and research training in Australian universities (Department of Industry, 2013): Australian Postgraduate Awards; International Postgraduate Research Scholarships; Research Training Scheme; Joint Research Engagement; Sustainable Research Excellence; and Research Infrastructure Block Grants.
The universities sector also receives the majority of Australian Research Council (ARC) funding each year. The ARC administers around $900 million in research funding each year. The ARC runs multiple different national competitive grants programmes, including ARC Centres of Excellence, and six streams of Discovery grants which fund basic research, six streams of Linkage grants which encourage collaboration between higher education researchers and other parts of the national innovation system, and a range of special research initiatives.
The ARC mainly funds the direct costs of research (particularly wages), while research block grants focus on the indirect costs of research (such as capital and on-costs).
Chart 10.2.2 shows that this funding for universities is then supplemented by small amounts of funding from a range of specialist research grant programmes across different portfolios.
Source: Australian Government, 2013.
The private sector receives government support of around $2.1 billion per year, most of which comes through the R&D Tax Incentive which provides a tax offset for businesses involved in research and development.
Chart 10.2.3 shows that the remaining $1.8 billion of funding each year is accessed by researchers across different sectors. This includes funding from programmes such as the National Health and Medical Research Centre (NHMRC) and Cooperative Research Centres (CRCs). The NHMRC provides almost $1 billion in competitive research funding each year to health and medical research – with funding going to the universities sector, the private sector, the public sector and not-for profits. CRCs provide medium- to long-term funding for collaborative research between universities and the private sector.
Source: Australian Government, 2013.
The last decade has seen strong growth in government funding for research and development, with funding growing by around 3 per cent per year in real terms.
Building research capacity
A strong research workforce is critical to Australia’s current and future research and development capability.
The Office of the Chief Scientist (Australian Government, 2012b) has highlighted the importance of a flow of graduates in the areas of science, technology, engineering and mathematics.
The 2012-13 Budget provided $54 million over four years to the Investing in Science and Maths for a Smarter Future initiative.
There is also a Research Workforce Strategy in place (Australian Government, 2011b) aimed at ensuring Australia has the workforce needed to meet its future research inquiries.
Quality research infrastructure is a critical component of Australia’s research and development system.
Since 2001, the government has provided a series of funding programmes for large-scale research infrastructure, including the Major National Research Facilities Program ($183 million over five years), the Systemic Infrastructure Initiative ($246 million over five years), the National Collaborative Research Infrastructure Strategy (NCRIS — $542 million over six years) and the Super Science Initiative ($901 million over four years). This investment has created assets and generated expertise which have positioned the Australian research sector strongly in world terms, both to compete with the best researchers around the world and to participate in global collaborations of direct benefit to Australia.
The NCRIS programme terminated on 30 June 2011 and the Super Science Initiative terminated on 30 June 2013. Recognising the importance of the facilities established under NCRIS and Super Science, Universities Australia agreed in 2012 for the then Minister for Tertiary Education, Skills, Science and Research to reallocate $60 million of existing research block grants under the Higher Education Support Act 2003 to fund an interim block grant – the Collaborative Research Infrastructure Scheme – to support some of the operations of the most critical research infrastructure facilities to 31 December 2014.
In the 2013-14 Budget, the Government announced it would provide $185.9 million over two years to continue the NCRIS to allow the most critical existing research facilities to continue to deliver maximum benefits to the research community. This funding terminates on 30 June 2015.
A more strategic approach to research funding
Given that the government does not have an unlimited budget for research and development, it is important to be strategic about where Australia’s research dollars are spent.
Funding for Australia’s publicly funded research agencies can be directed to those areas which are most important for government policy development and research (for example, funding for the Defence Science and Technology Organisation, or for accurately mapping Australia through Geoscience Australia).
The Government also has a set of Strategic Research Priorities which are intended to drive investment in areas that are of immediate and critical importance to Australia and its place in the world. The Research Priorities are designed to foster a more coordinated and strategic approach to research in Australia.
Currently, the societal challenges outlined in the current Strategic Research Priorities are:
- living in a changing environment;
- promoting population health and wellbeing;
- managing our food and water assets;
- securing Australia’s place in a changing world; and
- lifting productivity and economic growth.
Collaboration between participants in the conduct of public sector research is crucial. For example, universities, not-for profit organisations and the private sector collaborate in health research and development.
Australian businesses report that they have relatively low levels of collaboration with universities or other research institutions within Australia (ABS, 2012). Compared to other OECD countries, Australia does not perform strongly in the intensity of collaboration between industry and universities (OECD, 2013).
There is a range of Commonwealth programmes in place to support collaboration. CRCs (around $150 million per year) support end-user driven research partnerships between publicly funded researchers and end-users. The Linkage programme provides competitive grants funding for collaborative R&D projects, with partner organisations providing around $2 (in cash and kind) for every $1 of ARC funding. Within the Research Block Grants system for universities, the Joint Research Engagement (JRE) scheme gives emphasis to end-user research by encouraging and supporting collaborative research activities between universities, industry and end-users, beyond those specifically supported by competitive grants.
Importantly, though, it is not entirely the role of government to regulate the level of collaboration between different research sectors. There are inherent incentives for public and private sector researchers to collaborate to share funding, knowledge and intellectual property. Currently, Australian industry does not necessarily see the lack of collaboration with universities as an impediment to innovation (ABS, 2012).
Furthermore, funding collaboration can often lead to benefits accruing to the private sector proponent, with minimal public benefit or positive spillovers.
It has long been recognised (for example, Marshall, 1890) that grouping specialists together brings benefits through increased economic and productivity growth. These benefits can arise from:
- access by employers to a greater pool of skilled labour, facilitating the entry, exit and restructure of firms;
- access by skilled labour to a greater pool of employers, attracting workers;
- specialisation amongst firms and workers;
- reduced transaction costs through proximity to supply chains, cheaper infrastructure and markets; and
- information exchange.
Many examples of such beneficial ‘clusters’ exist, such as Silicon Valley, the Parkville biomedical precinct and the London financial services district. These cluster examples all evolved organically. This is not to say that they arose spontaneously; all of them arose following deliberate investment decisions by firms and research institutions. However, neither the organisations involved nor relevant governments planned their creation.
Given the demonstrated economic success of clusters, some governments have implemented policies to stimulate the formation and growth of clusters within their countries or regions. Governments intend for cluster initiatives to stimulate regions experiencing structural change, build new technology-based industries or build competitive advantage in existing clusters. Government initiatives can include things like facilitating links between researchers and firms, marketing the cluster, funding R&D and providing common use infrastructure for use by cluster participants.
Analysis by researchers at the Harvard Business School found that access to relevant skills and capital and a competitive business environment were far more important than government intervention in the success of clusters, and that clusters created deliberately by government rarely become independent of government funding (Ketels, 2003; Preissl and Solimene, 2003).
An article for Bloomberg Business Week (Wadhwa, 2010) put the situation starkly:
Many of the hundreds of cluster-development projects that have been started around the world since the 1980s have either failed or are on life support, including Tsukuba, Japan's science city, and Egypt's 'Silicon Pyramid'. Because they typically die a slow death, you don't read about the failures on the front pages of newspapers. Political leaders long ago held press conferences to claim credit for advancing science and technology, management consultants earned hefty fees, and real estate barons reaped fortunes. Taxpayers were left holding the bag.
The best policy interventions would be those where government can make an improvement to the business environment in Australia.
Potential areas for reform
Research infrastructure is a critical component of Australia’s research system (see Chart 10.2.4). However, there is currently a lack of certainty around funding for research infrastructure beyond 2014-15.
Without ongoing funding, established facilities will not deliver their maximum benefit to the research community and much of the value of the initial investment will be lost. Should established facilities be required to close, the cost of re-establishment would be significantly more than that required for their ongoing operation and maintenance.
The Government should make a commitment to ongoing funding for critical research infrastructure in Australia. This could be informed by a review of existing research infrastructure provision and requirements.
A strategic approach to research funding
Funding for Australia’s publicly funded research agencies should be directed to those areas which are most important for government policy development and research, or which have the highest expected spillovers.
Given the significant investment in research there is a need to ensure Strategic Research Priorities are clearly defined and pursued from a national perspective and not through the artificial construct of individual portfolios and programmes.
Agencies such as the ARC take into account the Strategic Research Priorities in allocating their annual research funding.
However, the current strategic priorities are relatively broad and risk encompassing research projects that are only tangentially linked. The Government’s applied research effort could be better focussed if these strategic priorities were more narrowly defined. This would provide clearer guidance to the sector about the Government’s priorities while continuing to provide funding to support a broad range of basic and applied research.
CSIRO is by far the largest publicly funded research agency in Australia and the single largest employer of scientists, with more than 6,500 people conducting and assisting with scientific research at 57 sites in Australia and around the world.
CSIRO undertakes research across a huge range of policy areas, some of which have more public interest than others, some of which involve private collaboration and some of which involve collaboration with university researchers.
Changing CSIRO into an FMA Act body (a non-corporate Commonwealth entity under the PGPA Act) would enable the Government to have more visibility over CSIRO's work and a clearer say over their spending and savings decisions.
As discussed above, there are already incentives in place for researchers to collaborate to share funding, knowledge and intellectual property. This suggests that government should only play a targeted role in this space.
Currently there is a range of programmes designed to encourage collaboration between universities and the private sector. Given that all of these programmes have the same objective, there would be efficiency benefits in consolidating them. CRCs should be abolished and funding rolled into the ARC. As part of this transition, consideration should be given to allowing longer funding periods for ARC grants.
The Collaborative Research Network programme, which provides funding for larger universities to collaborate with smaller, less research-intensive and regional universities, should also be abolished. Excellence in Research for Australia data shows that while Australia's major universities have overall higher research ratings, regional universities also rate highly in specific subject areas (Australian Research Council, 2012). Where there are areas of shared research interest, academics already have incentives to collaborate between universities (both within and outside of Australia). A specific funding programme to encourage additional collaboration is likely to actually encourage a misallocation of research resources, as researchers vary their preferred research proposals to meet the programme requirements.
Given that the evidence base shows that government intervention is not generally useful in establishing industry clusters, Government should pull back from this area, abolishing the current Industry Innovation Precincts programme.
Consolidating research programmes
The discussion of research funding above outlines the main government funding sources for research in Australia. However, there are some 150 other minor research funding programmes and agreements scattered across the various government agencies and departments, ranging from research into wind forecasting capability, to national acoustics laboratories, to a study of jet fuel exposure syndrome (Australian Government, 2013).
In some cases these particular pieces of research will either match Government’s explicit priorities, or have high spillovers.
However, in a number of cases, the research is not well targeted and the public benefits appear minimal. In these cases, the Commission considers that these smaller programmes should be abolished, or consolidated.
Even in the case of larger research programmes, there may be good reasons for consolidation. A reduction in duplication of administrative support and processes could be achieved by better aligning ARC and NHMRC grant processes (but keeping the medical research funding pool separate). This would reduce administrative costs to the Commonwealth and should also decrease the cost to researchers of applying for grants.
The Department of Industry website (Department of Industry, 2013) identifies six different schemes to support research and research training in Australian universities: Australian Postgraduate Awards, International Postgraduate Research Scholarships, Research Training Scheme, Joint Research Engagement, Sustainable Research Excellence, Research Infrastructure Block Grants. These multiple streams of research block grants and postgraduate scholarships could be streamlined, looking for options to better align funding for the direct and indirect costs of research.
There is an array of Rural Research and Development Corporations in the Agriculture Portfolio which are co-funded by industry (through a compulsory levy administered by the Commonwealth) and by government. These corporations do not receive the benefits of the research and development tax incentive.
In return for a government contribution, the Rural Research and Development Corporations are expected to fund some research that has broader public good objectives. The wider industry and community have access to the outcomes and benefits of the corporations’ research in order to maximise spillovers.
Changes to the current funding model, consistent with Productivity Commission recommendations, would reduce the amount of government funding and better reflect the mix of private and public benefits. In particular, the current cap on dollar for dollar matching of industry contributions by government (currently set at 0.5 per cent of gross value of production) should be halved over a 10-year period.
A new, uncapped subsidy at the rate of 20 cents in the dollar should be introduced for industry contributions above the level that attracts dollar-for-dollar matching. Duplication of administrative support and processes should be reduced by aligning ‘backroom’ processes across the various Rural Research and Development Corporations.
Industry-specific research programmes
The government provides support for basic and applied research (informed by the Strategic Research Priorities) across a range of areas. In recognition of positive spillover effects, government support for research and development is available through a range of tax and spending programmes (such as Research and Development tax concession) available to all sectors. Other research which is critical for government’s own operations is supported through the publicly-funded research agencies.
At the level of implementation of research, government should not be ‘picking winners’ and supporting research and development for one sector above other sectors. Sector-specific research programmes risk distorting labour market and investment decisions and hence decreasing overall productivity.
The Commission considers that sector-specific grants (such as those through the National Low Emissions Coal Initiative and Carbon Capture and Storage Flagships and the Innovation Investment Fund) should be abolished.
Support for renewable energy research already comes through the Renewable Energy Target and potentially under the Government’s Direct Action Plan, so further support through the Australian Renewable Energy Agency should not be required.
The Australian venture capital sector is small and relatively new. While there are definite private benefits to Australian companies from the commercialisation of their intellectual property, the public benefits from commercialisation and support through the Innovation Investment Fund are less clear. The venture capital sector receives government support through existing tax concessions.
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Australian Government 2008, Review of the National Innovation System - Venturous Australia, Australian Government, Canberra.
Australian Government 2009, Powering Ideas – An Innovation Agenda for the 21st Century, Australian Government, Canberra.
Australian Government 2011a, Focusing Australia’s Publicly Funded Research Review, Australian Government, Canberra.
Australian Government 2011b, Research Skills For An Innovative Future – A Research Workforce Strategy to Cover the Decade to 2020 and Beyond, Australian Government, Canberra.
Australian Government 2012a, 2012 National Research Investment Plan, Australian Government, Canberra.
Australian Government 2012b, Mathematics, Engineering & Science in the National Interest, Report produced by the Office of the Chief Scientist, Canberra.
Australian Government 2013, The Australian Government’s 2013-14 Science, Research and Innovation Budget Tables, Australian Government, Canberra.
Australian Research Council (ARC) 2012, Excellence in Research for Australia 2012, National Report, ARC, Canberra.
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