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Discussion Paper Released for Strategic Examination and Review of Australia’s R&D System

In the May 2024 federal budget, The Albanese Government announced a strategic examination and review of Australia’s R&D system to align it with national priorities and improve outcomes.

In late 2024, Industry Minister Ed Husic then announced specific details to launch the review. It was noted that the review will assess how to maximise the value of R&D investments, strengthen industry linkages, and support national priorities, and that the review will examine existing systems, such as the Research and Development Tax Incentive (RDTI), and explore broader strategies to ensure Australia remains competitive in global innovation.

The review is led by:

• Robyn Denholm, Chair of Tesla;
• Emeritus Professor Ian Chubb AC;
• Professor Fiona Wood AO;
• Dr Kate Cornick.

The discussion paper for the review was released today and it confirms the Terms of Reference require the panel to consider opportunities to:

• Maximise the value of existing investment in R&D, across government, universities, philanthropy and industry
• Strengthen linkages between research and industry, allowing greater mobility of researchers and innovators between sectors and addressing barriers to meaningful collaboration
• Support the achievement of national priorities, including mechanisms to improve coordination and impact of R&D funding and programs across government and through our science agencies
• Drive greater R&D investment by industry, and boost creation and industry adoption of innovation
• Uplift Australia’s overall R&D intensity.

From initial review of the discussion paper, it seems to be wide ranging and holistic.

Some notable extracts from the discussion paper include:

• Public funding systems and regulatory arrangements that governments implement substantively frame the R&D system. However, most sectors in the economy finance the bulk of their research activity through resources generated in their own sector. For example, 94% ($19.4 billion) of BERD and more than half (51%, or $7.2 billion) of higher education expenditure on R&D (HERD) is supported from own funds. As a result, both public and private R&D performing organisations have a high level of autonomy in determining where their R&D effort is focused;
• Governments have a modest level of influence in funding terms, providing less than 20% of total R&D funding to non-government sectors (Figure 11). However, they play an important strategic role in the R&D system. They incentivise innovation, support core capability and ensure long-term economic prosperity. Reform and improvements to the R&D system need collaboration and engagement from all players in the system. Reform needs to give flexibility for each organisation to excel, derive value and continue to invest in a more sustainable system;
• Australia’s BERD intensity is significantly lower than the OECD. It has been sliding since its peak of 1.37% in 2008–09. The manufacturing sector has historically been the dominant contributor to higher R&D intensity in peer countries. In Australia, manufacturing has both lower R&D intensity and contribution to Gross Value Added than peer countries. Australia has higher R&D intensity in ICT than peer countries, but its ICT contribution to Gross Value Added (GVA) is lower at 2% (ABS, 2023). ICT R&D has cross-cutting benefits captured in other sectors. Further, ICT is an important pathway for the future as an enabling technology. New emerging technologies will significantly impact future industries and need R&D investment to exploit new opportunities;
• Over the past 15 years, R&D investment by small and medium-sized enterprises (SMEs) in Australia has grown. This trend adds to the dynamism of the economy and pathways for innovation. The growing reliance on SMEs to drive BERD in Australia contrasts with other advanced economies. Elsewhere, BERD is dominated by large companies that can support larger, sustained investments in R&D over longer time horizons. Relying only on SME efforts is unlikely to achieve the scale of investment growth needed to compete with global industry, especially in deep research. Encouraging and expanding contribution to R&D by SMEs (including startups) remains important to building the capacity for innovation in the Australian economy. However, it must be part of a broader effort to strengthen business R&D at all levels and firm sizes;
• The growing reliance on SMEs to drive BERD in Australia contrasts with other advanced economies, where large companies primarily lead BERD. In Australia, large businesses have decreased R&D expenditure. This crosses most industry sectors, excluding professional, scientific and technical services. Larger firms spend more on both the research and development components of R&D in absolute terms. However, studies describe a ‘division of labour’ between small and large R&D conducting firms. Smaller firms are reported as providing breakthrough applications, while larger firms focus on developing innovations to create value. The contribution of large businesses to Australia’s R&D system needs to lift. Large businesses can be central pillars in innovation ecosystems;
• Public investment guides national priorities and leads the R&D system on where and how to focus efforts. In 2024–25, the Australian Government will invest an estimated $14.4 billion in R&D across 14 portfolios and 151 programs. Of this, around $12.1 billion (84%) is ‘bottom-up funding’. This includes the R&D Tax Incentive (RDTI), PFRAs, research block grants, and competitive grants through the Australian Research Council, National Health and Medical Research Council, and Medical Research Future Fund;
• Much of the Commonwealth’s R&D funding is funding through broad-based mechanisms. This includes entitlements to businesses, competitive grants and block funding to universities and PFRAs such as CSIRO and ANSTO. For example, funding for businesses through the RDTI is broad-based across industry sectors and open to businesses of all sizes. This ‘bottom-up’ or ‘patient capital’ investment is vital because it allows researchers, entrepreneurs and businesses to pursue their own ideas. This leads to diverse and unexpected breakthroughs that can increase innovation and address a range of societal challenges. However, funding for ‘top-down’ or purpose-led R&D remain subscale, disjointed and focused on grants.

Swanson Reed intends to participate in the consultation process for questions of the review which may impact R&D Tax Incentive policy.

In recent years, there have been calls from some to make significant changes to the R&D Tax Incentive (including changing from a broad, market based, self assessment programme to a grant based system which is assessed based on government identified areas of strategic priority). We believe any such change would be a mistake and undermine business confidence and empowerment to make timely and significant investment decisions.

Swanson Reed is pleased that the discussion paper released acknowledges that funding through broad-based mechanisms (such as the R&D Tax Incentive) is vital because it allows businesses to pursue their own ideas which leads to diverse and unexpected breakthroughs. In our view it also allows for a more rapid and dynamic response from business to emerging industry needs.

Swanson Reed believes that a strong, stable and certain R&D Tax Incentive is a key to maintaining business confidence to undertake long term investments in R&D and we will continue to call for stability in the programme.

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