Translating research into economic benefits for Australia: Rethinking linkages POSITION PAPER

Translating research into economic benefits for Australia: Rethinking linkages POSITION PAPER OcTObER 2013

2 Translating research into economic benefits for Australia: Rethinking Linkages Executive Summary Improving productivity and facilitating economic growth are key priorities for Australia. Technological innovation based on research plays a key role in addressing these priorities. Collaboration between publicly funded research organisations and industry is crucial to improving the translation of research into productive outcomes that increase the nation s output. However, there remain fundamental systemic barriers to increasing this collaboration in Australia. Technology-based small and medium enterprises play a vital role in the Australian economy. However, there are major gaps in the funding mechanisms available to support high-growth potential SMEs to engage in collaboration. New approaches suited to SMEs, such as voucher programs, are needed. Targeted procurement schemes can be used to support SMEs. Technology intermediary organisations have an important role to play in facilitating linkages. This paper describes how these mechanisms can be used to improve productivity through the creation of successful collaborations 1. This paper draws on discussions at a recent ATSE-ACOLA workshop. 1. collaboration is an important mechanism to TRANSlATE research into productivity 1.1. Productivity in Australia can be enhanced through increased connectivity Collaboration between business and publicly funded research organisations (PFROs) 2 is crucial to improving the translation of research into productivity. However, experience has shown that effective collaboration between business and PFROs can benefit from independent facilitation to build trust and to establish momentum between parties. SMEs play a vital role in the Australian economy Small to medium enterprises (SMEs) play a major role in the Australian economy. They account for more than a third of gross domestic product (GDP) and almost half of private sector industry employment in Australia. Many SMEs need to develop or licence technology and helping SMEs do this enables them to contribute to economic growth. 1.2. Reasons for collaboration A relationship with a PFRO can benefit a company in many ways, for example by creating talent pipelines and developing technology or capability roadmaps. Collaboration with a PFRO can provide business with affordable and rapid access to PFRO skills, people, equipment, facilities and ideas and so contribute to improved productivity. PFROs often have strong brands and international networks that can be leveraged. PFROs can provide a problem solving service to business which can be a useful way of initiating collaborations. In support of this, some leading OECD countries have increased funding for university research to support business. Collaboration with industry can benefit PFRO researchers by developing innovative receptors and improving researcher understanding of how to pitch their capabilities. In many leading OECD countries, excellence in research goes handin-hand with impact and collaboration with business. The UK Imperial College is a good example of a university that conducts excellent research and is strongly engaged with industry. In the UK there are various incentives for researchers to engage with industry. Some Australian universities have recognised the benefits of building stronger linkages with industry. For example, the University of Queensland Collaboration and Industry Engagement Fund (CIEF) is an internal grant scheme to support the development of competitive grant proposals that provides seed funding to encourage new industry-linked research and supports cross-disciplinary activities. 1 This paper draws on discussions at an ATSE-acola workshop Translating research into productivity: rethinking linkages, held on 9 August 2013, Brisbane; it does not necessarily reflect the views of all participants. For workshop details see page 8. 2 includes government laboratories, such as CSIRO and ANSTO, universities and medical research institutes.

3 1.3. Barriers to collaboration remain While the relationship between collaboration and improved research translation from PFROs is becoming increasingly well known, fundamental systemic barriers to collaboration between industry and PFROs remain. These include financial barriers, cultural barriers, information asymmetry (lack of knowledge of who is doing what research, where), differing timescales for conducting research (even applied research operates over much longer timescales than business) and a lack of absorptive capacity (research will flounder unless it is taken up by the right, knowledgeable organisational receptors). These barriers are discussed in more detail below. Financial: Shortages of capital, particularly for hightechnology SMEs, is a significant barrier to investing in research collaboration. The lack of capital for investment in start-ups and high growth SMEs in Australia has been particularly critical since the start of the global financial crisis. Many SMEs have cash reserves to last only a few months. This can lead to an overriding short-term focus. Existing government support programs designed to facilitate collaboration and industry-pfro linkages present significant barriers to many SMEs: high application costs and long delays in funding decisions can preclude many SMEs from participating because they simply do not have the resources or the ability to wait for lengthy grant cycles. Cultural: There are significant cultural differences between industry, particularly SMEs, and academia which results in a mismatch of needs, goals and priorities. This poses a range of challenges for collaborative projects, from defining success to the timeliness of project delivery. PFRO researchers operate on very different timescales to the businesses sector. Likewise people in industry often lack the understanding of how research providers operate and how to find the right group able to handle their particular requirement. One approach to addressing this could be to facilitate relationship-building. Aligning graduate research programs with the needs of industry could help universities to develop productive exchanges. Disincentives: Disincentives for university researchers to engage with business remain a fundamental problem in Australia. Academics are under various performance pressures and metrics which can make them reluctant to engage with industry if the activity is considered likely to detract from formal performance requirements. This problem has recently been exacerbated by the introduction of the Excellence in Research Australia (ERA) with its emphasis on publications in highly ranked journals. Australian universities should be encouraged by government to diversify their performance and promotion criteria and reward strategic collaboration with industry. Encouraging early career researchers to engage with businesses can be particularly challenging but can have valuable outcomes. For example, speed meeting sessions designed to introduce young scientists to entrepreneurs can struggle to fill places, but feedback from those researchers that have participated is that it had a very positive impact. Risk v reward: Large companies are generally risk averse. SMEs, on the other hand, are often more accustomed to risk. The high potential for failure of SMEs may fuel a risk-averse culture in government-funded innovation support programs. There is a need for governments and companies to shift their focus from potential risks to the potential rewards from collaborations. 1.4. Overcoming barriers to translating research to productivity Creating strong strategic collaborations Boeing is an example of a company that has fostered collaboration to achieve productivity gains. It has a long standing relationship with Australian researchers. The strength of Boeing s relationships with universities and companies around the world and ability to collaborate across the innovation system are key to the company s success. The Boeing 787 Dreamliner was created by a consortium of members from around the world to span the innovation chain working together on a common goal in a precompetitive environment. Some common key criteria of successful collaborations include choosing the right partners to collaborate with, at the right time, and recognising the importance of individuals in making relationships work. Working in a pre-competitive environment allows competitors to work together. Good, commercially oriented project management on both sides of a partnership is crucial to achieving outcomes from collaborations, as are simple agreements that can be executed quickly. Identifying a common goal or value proposition around which to build a collaboration is crucial to success. Aligning the expectations of parties and agreeing on a focus early is important but some flexibility is desirable to allow outcomes beyond the original concept to emerge. Absorptive capacity is important to maximise the outcomes of collaboration. As an example, EM Solutions is a small Australian SME engaged in innovative product design and manufacture. It has developed broadband radio equipment used in satellite and microwave telecommunications networks. By incorporating its own novel IP with CSIRO s, EM Solutions was able to embark on a large-scale product development

4 and commercialisation program to develop a first-to-market broadband radio that was co-funded by the customer. A critical factor was that although CSIRO had been identified by a large customer requiring the product, both recognised they required a commercial partner to develop it. Financial reasons, such as access to capital, are a key driver for collaborations. This can create alignment, but it is important to have a clear understanding on both sides of a collaboration of who pays. Simple, one-page agreements with SMEs, that can be finalised quickly, are also important. Individuals are crucial to the success of collaborations, by providing champions for a partnership and facilitating mutual understanding of the interests of all parties. Multiyear stable government programs that support collaboration are important to endure beyond the individual relationships that started them. Networks, centres, clusters and precincts can help build critical mass and engage researchers with the private sector, taking into account the importance of individual relationships. They can be complex to manage, and therefore strong leadership is critical to their success. 2. Approaches TO support collaboration for SMEs Some existing schemes are not well suited to SMEs Complexity, inconsistency and instability are key problems of Australian schemes designed to assist SMEs. Stability is a key criterion of successful support mechanisms used around the world. For example, the US Small Business Innovation Research (SBIR) scheme has been in place for over 30 years. Australian schemes are often abandoned before they can be fully evaluated. Overlap between schemes and insufficient demarcation between federal and state government programs can be a challenge. This is exacerbated by government agencies stretching funds across a large portfolio of programs, which diminishes available support in each and results in some lacking critical mass. Some existing mechanisms to encourage industry-pfro links are applicable to large companies but are not well suited to the needs of SMEs. For example, the Cooperative Research Centre (crc) Program involves high entry costs, such as complex legal and contract negotiations, up-front financing and time commitment requirements, and long funding turnarounds. SMEs face a similar challenge with the time commitment and matching fund requirements of Australian Research Council (arc) Linkage Grants, which put the control and the incentives with academics, not industry. Alternative approaches are needed that put SMEs in control and also take advantage of strategic supply chain alliances. Many existing schemes are designed to be researcherdriven rather than led by industry. However, Industrial Transformation Research Hubs is an example of a successful program (operated by the ARC) to bring researchers and industry together to work in a few priority areas. It is a researcher-driven program that may produce outcomes that the industry partners have an option to adopt. On the other hand, Industry Innovation Precincts funded through AusIndustry are business-driven and are useful to more established businesses seeking to increase sales, export and to collaborate to grow. Enterprise Connect has one program, Researchers in Business, which provides grants to allow PFRO researchers to undertake placements in business to develop new ideas or solve problems. Voucher schemes are effective for SMEs Voucher schemes provide an appropriate mechanism for an SME to collaborate with a university, placing control of the collaboration with the SME. Voucher schemes span the funding gap, spread risk and generally do not require matching funds. These schemes operate in a number of OECD countries. The Victorian Government s Technology Voucher Program is an example of a successful Australian voucher scheme. Over 500 vouchers have been issued over a three year period to companies to allow them to work with PFRO s. Much of the appeal of the scheme to company and researcher alike is that the decision on the voucher is taken rapidly (within five weeks), and that the parties agree to a simple one page agreement. Lengthy, complex legal negotiations are often cited as a key barrier for companies and PFRO s getting together to carry out an initial pilot piece of collaborative research. Targeted procurement schemes The US Small Business Innovation Research (SBIR) Program is a demand-side measure that has now been copied or adapted by a number of other countries. The US SBIR has existed for nearly three decades, but changes following reviews and a strong promotional effort by the US Small Business Administration have given it a considerable boost in the past 10 years. The US Congress established the SBIR Program by requiring major research funding agencies to set aside a small percentage of their budget. This set-aside is used to fund contracts with small business to develop new products and services of interest to these agencies. A key benefit to small business is that the SBIR program does not require matching funds. There is a short lead time for applications, and review processes are rapid. A number of

5 OECD countries have adopted modified forms of the US SBIR scheme. The Victorian Government operates such a scheme. The Commonwealth Government has planned a pilot SBIRtype scheme in its Enterprise Solutions Program but it is constrained by insufficient funding. 3. Technology Intermediaries Technology intermediaries (also known as accelerators or incubators) are an important mechanism to address the barriers to collaboration between industry, particularly SMEs, and PFROs. These organisations play a vital facilitation role to catalyse collaborations between SMEs and PFROs and help to ensure they run smoothly, particularly for SMEs. They also play an important role in reducing the risk of new collaborations. There are a number of examples of intermediaries helping firms take up new technology in other OECD countries e.g. the UK Catapult Centres. of interrelationships and opportunities. The link between research provider, technology developer (e.g. a SME), and technology user (e.g. a customer) is a stylised form of value chain. Such value chains will not naturally assemble unless all components in the chain understand the financial endgame, and the associated risks, incentives, and rewards. The benefit of involving an intermediary in assembling such a chain is that core skills can be retained to help all parties build trust, and to overcome the challenges associated with information asymmetry, absorptive capacity, and project management that were identified earlier. Collaborative arrangements succeed only if barriers are recognised and de-risked early in the collaboration. The presence of other complementary assets in the collaboration, and experienced mentors in the form of a technology intermediary, can help create the conditions for Victorian Centre for Advanced Materials Manufacturing Victorian Centre for Advanced Materials Manufacturing (VCAMM) provides an example of an advanced technology incubator that operates from initiation to market realisation, working with SMEs to prepare them to collaborate and then catalysing collaboration with universities and government. VCAMM provides industry with a way to access research, provides SMEs with support solutions, and assists SMEs with planning, to identify appropriate resources and technologies, and to find partners. VCAMM operates differently in the various stages in the innovation process, covering such things as project management, protection of IP and acting as a portal for SMEs to access CRCs and other government programs. Technology intermediaries identify, connect and facilitate communication between parties at all stages of technological innovation, from research to product, whilst being able to differentiate between them. This allows a better assessment of sharing the risks and rewards, determining where weaknesses lie and optimising the benefits of government intervention. Access to information, and assistance with problem identification and solutions are key challenges for SMEs. Technology intermediaries provide people with the right background and experience to assist an SME and help to find the right sources of support. This may include assistance with developing a business plan, addressing a technology problem or access to research. Technology intermediaries can make use of a voucher scheme to help an SME access support from PFROs. The diagram on page 6 shows how the technology intermediary model can be fostered to help achieve the goal of improving collaborative outcomes from Australia s research potential. Value chains provide a powerful set successful collaboration. For example, the explicit presence of a technology user can not only help provide financial incentives to align the collaboration, it can help inform the research and create the virtuous circle on which ongoing innovation depends. 4. The role of government industry and innovation policy in supporting collaborations Policy consistency and continuity of assistance measures Governments have an important role in providing continuity of support measures and incentivising collaboration between PFROs and industry. A holistic systems thinking approach to innovation policy is needed. Policy consistency is vital, the assistance provided needs to address SME needs, with minimal compliance requirements. Incentivising collaboration requires recognition and reward of efforts by PFRO researchers to increase engagement and

6 Figure 1 Technology intermediaries and their relationship networks. Technology users eg. Business, government, others Funding, opportunities, defining problems New products, services, problem solving Ideas, skills, research outputs TECHNOLOGY INTERMEDIARIES Finance, sales, test sites Research providers eg. PFROs Research outputs, ideas, facilities Angel & Venture Capital Investment guidance commercialisation Research developers eg. SMEs Note: Government policies, programs and actions can affect each of the network nodes shown. Frequently a combination of different measures might be needed aimed at different nodes in the network. Examples of government influences include: For research providers government provides research grants and other incentives and sets priorities. For technology developers government provides grants, procurement programs and measures such as a R&D tax concession. The National Collaborative Research Infrastructure Strategy (NCRIS) is a good example of an infrastructure support scheme that brings together users from public and private sectors. For technology users government provides procurement programs and measures such as a R&D tax concession. For technology intermediaries government measures include ARC linkage, voucher programs, matching levies and programs such as the CRC program. foster cultural exchange. The ERA, while encouraging more attention to quality in university research, is discouraging external collaboration because of perceptions that this may result in fewer articles in leading scientific journals (even though the UK experience shows that, with appropriate incentives, industry collaboration and research excellence can still coexist). Complementarity between state and federal government programs for facilitating industry-pfro collaborations It is important to have strategic cooperation between all levels of Government to avoid duplication and ensure complementarity. State Governments generally have a better understanding and knowledge of the micro and small businesses in their jurisdictions and are well placed to interact directly with SMEs and facilitate their links with PFROs (e.g. through local assistance, offices). The Commonwealth Government is better placed to manage national measures to encourage businesses to seek PFRO and other business collaborators. The Commonwealth Government also needs to balance the ERA with a complementary measure that rewards industry collaboration. Involving larger companies with requirements for new technology in SME technology development Funding is the major impediment confronted by SMEs in bringing their new technology to market and neither the financial markets nor governments are prepared or able to address this need. In a period when government resources are constrained, other solutions have to be found. Large profitable companies are a potential source of support for Australia s SMEs. When a large company needs new technology it would be logical for them to consider investing in a potential supplier of the required technology. Early identification of a lead customer prepared to co-invest in commercialisation is another option. Tax measures or a grant program could encourage large companies to support SMEs to develop the technologies they need. Extending the R&D tax concession to large companies that do this would be a simple cost-effective

7 Small Technologies Cluster The Small Technologies Cluster (STC) demonstrates the role of a technology intermediary serving as an incubator accelerator for new emerging and enabling technologies. The STC operates the Victorian Government s successful technology voucher program and sponsors collaboration between SMEs, and between SMEs and universities. Placing students in companies during vacation periods has been one of the novel approaches adopted by the STC. The STC has 30 companies in residence, just under half of which are from universities. measure. Even where large companies are disinclined to provide investment funds for technology development in SMEs, they could provide a commitment to purchase the technology in the event that it is successful. This could in turn provide SMEs with access to other sources of funding such as venture capital. Evaluating and measuring success of current schemes Australia has a number of examples of industry-public sector research collaborations (such as the CRC program, csiro, Rural R&D Corporations) however there has been very little work done across these different approaches to understand what has worked in successful cases and what did not work in others. Undertaking such a study could help to draw lessons that improve the design of those models and increase collaboration. 5. conclusions & recommendations 1Productivity and economic growth in Australia can be enhanced through increased collaboration between business and PFRO researchers. However, in Australia there are fundamental systemic barriers to securing this innovation dividend. We also lack best practice incentives to encourage collaboration between PFRO researchers and industry, particularly SMEs. The Commonwealth Government should put in place measures to overcome the barriers and disincentives to collaboration between PFRO researchers and business and establish new measures to encourage collaboration, particularly for the benefits of SMEs. Specific funding should be allocated on the basis of the impact of university research. PFROs should implement measures to overcome the barriers and disincentives to collaboration between their researchers and business, and should encourage collaboration particularly with SMEs. 2Technology intermediaries are a proven mechanism for achieving productivity gains and economic growth through collaborations. These intermediaries are particularly important for growing our SMEs. There are some good examples in Victoria and in other OECD countries. There is an opportunity to apply these models in other States. State and Territory Governments should establish technology intermediaries to help SMEs in their jurisdictions grow. 3Voucher schemes offer an effective mechanism to enable SMEs to collaborate with PFRO researchers. There is scope for more widespread adoption of this model to address the gap in the funding mechanisms available to support high growth potential SMEs. State and Territory governments should adopt voucher schemes to help SMEs collaborate with other firms and access the resources of PFROs. 4SBIR-type schemes use procurement to link researchers with potential customers. They are successful in other OECD countries and in Victoria. Unless customers exist to pay for innovation, its pursuit can be pointless. With a customer at the head of a value chain, funding of development is more assured, requirements are better informed, risk is reduced, and stakeholders will line up. Other State and Territory Governments should follow Victoria s lead in adopting SBIR-type schemes. The Commonwealth Government s pilot Enterprise Solutions Program scheme should be allocated additional funding so that it can achieve critical mass. 5Incentives for large profitable companies who are potential customers for new technology to invest in SMEs who can supply the technology would open up a new source of funding for commercialising good ideas. The R&D tax incentive should be reintroduced for those large companies that commission the development of technology based products from Australian SMEs.

8 Workshop Details A recent workshop held on 9 August 2013, Customs House, Brisbane explored how Australia can maximise the translation of research into improved productivity, with a focus on how industry-research linkages can raise productivity at the firm level. The workshop involved more than fifty key thought leaders from industry, government and research from Australia and overseas. Details of the workshop program, issues paper, presentations, participants and other ATSE publications can be accessed at the ATSE website. The workshop was co-sponsored by ATSE and the Australian Council of Learned Academies (ACOLA) and discussed issues which are part of the remit of an Expert Working Group convened under ACOLA s Securing Australia s Future program. Acknowledgements ATSE gratefully acknowledges the contributions of the workshop speakers and participants, and the assistance and guidance of the Steering Committee: Dr John Bell FTSE (co-chair), Professor Peter Gray FTSE (co-chair), Dr Rowan Gilmore FTSE, Mr Peter Laver AM FTSE, Ms Leonie Walsh FTSE. Contact For further information please contact Harriet Harden-Davies, Manager, Policy & Projects, ATSE. Email policyresearch@atse.org.au or telephone (03) 9864 0900. About ATSE The Academy of Technological Sciences and Engineering (ATSE) is an independent not-for-profit organisation. Its Fellowship, composed of more than 800 outstanding scientists, technologists and engineers, drives its mission to foster excellence in technological sciences and engineering to enhance Australia s competitiveness, economic and social wellbeing and environmental sustainability. The Academy provides robust, independent, evidence-based policy advice on science and technology issues to government, industry and the community. More information on the Academy can be found at www.atse.org.au. Translating research into economic benefits for Australia: Rethinking Linkages Australian Academy of Technological Sciences and Engineering The Australian Academy of Technological Sciences and Engineering (atse) ATSE Office Level 1, 1 Bowen Crescent, Melbourne VICTORIA 3004, australia Phone +61 3 9864 0900 Fax +61 3 9864 0930 Websites www.atse.org.au www.stelr.org.au www.crawfordfund.org Mail address Email GPO Box 4055, policyresearch@atse.org.au Melbourne VICTORIA 3001, australia