New businesses face growing barriers to innovation investment

A report released today by the Bankwest Curtin Economics Centre (BCEC) has found new Australian businesses face growing barriers in accessing early stage venture capital investment.

The new report, Positioned for an ideas boom? Productivity and innovation in Australia, examines Australia’s productivity and innovation trends and international standing, along with barriers to innovation and business start-ups. The report also identifies Australia’s innovative hot spots and the most innovative cities.

Key findings of the report include:

• Around one-fifth of Australian businesses report a lack of access to additional funds as the greatest barrier to innovation.
• The share of investment devoted to early stage business expansion has almost halved over the last decade, from 30 per cent to 16.1 per cent.
• Venture capital and Later Stage Private Equity (LSPE) per investee company is the highest in Queensland at $15.6 million.
• Business research and development (R&D) expenditure for Western Australia relative to Gross State Product (GSP) has halved since its peak of $20,000 per $1 million in GSP in 2008-09, to around $10,000 per $1 million in GSP now.
• Only 7.7 per cent of Australia’s innovation active firms are collaborating internationally.
• Australia’s larger businesses are more likely to be innovation-active than micro and small to medium enterprises and are more likely to produce innovations that are new to the world.
• Newcastle produces more patents per person than all other non-capital cities in Australia.

Professor Alan Duncan, BCEC Director, said incentivising new business ventures was critical to the delivery of Australia’s innovation strategy, and in this regard, tax incentives for early stage investment, support for small business innovators, and reduced penalties for business failure are key to its success.

“Pre-seed through to early expansion business funding as a share of total investment has fallen by half over the last decade,” Professor Duncan said.

“The harsh economic environment leading to more risk adverse behaviour on the part of investors, may explain part of the fall in early stage venture capital funding. Whatever the explanation, it is critical that we foster an environment in which creative entrepreneurship and the pursuit of innovation is encouraged.”

Western Australia’s business R&D expenditure peaked at $20,000 per $1 million of GSP in 2008-09, but has since fallen to around $10,000 per $1 million of GSP.

“It’s no surprise that Western Australia’s business R&D spending rose sharply over the course of the resources boom, but for R&D spending in WA to have dropped by half in the five years since the high water mark in 2008-09, must be a cause for concern,” Professor Duncan said.

A new innovation index developed by BCEC researchers for Australia reveals a number of hotspots of relatively high innovation, especially in outer suburbs adjacent to city centres.

New South Wales ranks highest with eight of the top 20 most innovative suburbs in Australia, followed by Queensland with seven and Victoria with five.

“Queensland shows the greatest increase in innovation performance in the last five years, with 13 suburbs ranked in the top 20 most improved regions in Australia for innovation activity,” Professor Duncan said.

“These hotspots arise from recent urban growth but also show the benefits of supporting the innovation activities of new businesses – many of which are small to medium enterprises.”

There has been a progressively more intense use of technology and capital for most market industry sectors in Australia over the last two decades. This process of ‘capital deepening’ has seen capital to labour ratios more than double over the last two decades.

“A successful ‘ideas boom’ will lead to an increased use of technology in production and, in many ways, this presents Australia with an excellent opportunity to develop a ‘smarter’, more productive workforce,” Professor Duncan said.