47.7.1 [25]

B RINGING THE MARKET TO BEAR ON RESEARCH

Task Force on Commercialisation of Research Department of Industry, Technology and Commerce

BRINGING THE MARKET TO BEAR ON RESEARCH

Report of the Task Force on the Commercialisation of Research

November 1991

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I.ea ------,--,.---- -~...... Australian Government Publishing Service=-= -· rf Canberra © Commonwealth of Australia 1991

ISBN O 644 22361 8

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Australian Government Publishing Service. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Commonwealth Information Services, Australian Government Publishing Service, GPO Box 84, Canberra ACT 2601.

Printed for AGPS by Pirie Printers Sales Pty Ltd Fyshwick, ACT 2609. CONTENTS

Letter of Transmittal V Acknowledgments vi Task Force Members vii Recommendations viii

1 Introduction 1 The Task Force Approach

2 Enhancing the Innovative Capabilities of Firms 4 Private Sector Research and Development Activities Factors Influencing the Development of Business Innovation Capabilities Government Programs Policy Implications and Recommendations

3 Capital Availability 17 Difficulties in Obtaining Capital Other Barriers

4 Aligning Public Sector Research to the Needs of Industry 22 Government Research Organisations Higher Education Cross Sectoral Funding Mechanisms Public Sector Technology Transfer Priority Setting and Long Term Strategic Research

Appendices 31 A Terms of Reference B List of People Consulted C Finance Survey D References

iii Sydney SBC Dominguez Barry Limited Level 6 Grosvenor Place A.C,N. 008 582 705 225 George Street Sydney PO Box N100 Grosvenor Place Sydney Australia 2000 DX 10423 Sydney Stock Exchange A subsidiary of Swiss Bank Corporation Telephone (02) 258 2555 Telex AA22553 Fax (02) 2582556

The Hon Ross Free, MP Minister for Science and Technology Parliament House CANBERRA ACT 2600

Dear Minister

I was pleased to accept your invitation to examine the issues involved in the commercialisation of research in Australia. It is in the long term interest of the economy to improve our performance in capturing in Australia the benefits of our world class research.

I commend the contribution of those in business and government who gave their views, time and information to the Task Force. I would like to thank the members of the Task Force for their valuable assistance and the Secretariat for their work.

Thank you for the opportunity to present this report.

Yours sincerely

Chair Commercialisation of Research Task Force 18 November 1991 ACKNOWLEDGMENTS

Many individuals and organisations put considerable time, effort and expertise into assisting the Task Force with its deliberations. It would be inappropriate to make particular mention of any person or body, as all contributed to building a detailed picture of the issues facing the commercialisation of research in Australia.

We would like to thank all those who contributed to the work of the Task Force, often producing information or making themselves available at very short notice.

A list of those who assisted the Task Force is set out at Appendix B.

vii TASK FORCE MEMBERS

Mr Ray Block {Chair) Strategist and Director SBC Dominguez Barry Limited

Mr Peter Fritz Managing Director TCGLtd

Mr John Gram Managing Director Hambro-Grantham: td

Professor Brian Johns Deputy Chair Trade Practices Commission

Dr John Parrott Director, Technology Development Division BHP

Dr John Stocker Chief Executive CSIRO

viii RECOMMENDATIONS

MAJOR RECOMMENDATIONS should be restricted to companies participating in government or industry sponsored networks. 1 The research and development (R&D) tax conces­ sion should remain at 150 per cent. 9 By the end of 1996,each higher education institution should be required to find an amount equivalent to 5 2 Market analysis and the development of market per cent of its total Commonwealth funding for entry strategies should be allowed as eligible "sup­ research from industry. In addition, at least 10 per porting activities" under the 150 percent tax conces­ cent of Australian Research Council expenditure and sion up to a limit of 10 per cent of total eligible 10 per cent of National Health and Medical Re­ research and development expenditure on the rel­ search Council expenditure should be set aside for evant R&D project. projects that have demonstrated commercial com­ mitment by industry. 3 The National Procurement and Development Pro­ gram (NPDP) should be extended to include private 10 A technology transfer and development company sector companies as purchasers. Commonwealth should be established to buy and sell intellectual and state government funding should be doubled to property and invest in and develop Australian tech­ meet current demand and cover the extension of the nology. Program to the private sector. 11 Australian superannuation funds should be encour­ 4 Where an Australian bid for Government purchasing aged by the Commonwealth to invest one per cent of is not the most competitive, but is the second orthird their notional assets in approved Australian venture best bid, the top three contenders should be advised anddevelopmentcapital projects. However, should of each bid and be invited to submit a revised bid. the superannuation funds be unwilling to commit Government purchases above SlOm generally and funds to industry development in Australia, those above $2m in strategic industries should be subject with more than 10 per cent of their assets overseas to a detailed industry impact statement before a should be required to invest one per cent of their contract is let. assets in venture and development capital. Where these investments are made through intermediaries, 5 A performance bond guarantee facility should be the IR&D Board should approve those intermediar­ established by the Government to assist companies ies. to achieve sales of technology within Australia. The Government should set aside $25m as an asset base for the guarantee facility. The performance bond OTHER RECOMMENDATIONS could take a similar form to the Export Performance Bond facility operated by the Export Finance and Industry Research and Development Board (IR&D Insurance Corporation. Board)

6 All state and Commonwealth organisations respon­ 12.l The IR&D Board should: sible for research should follow the lead of CSIRO and assess their research priorities in the light of continue to critically evaluate the management, national benefits and industry capability to commer­ technical and financial capabilities of applicants; cialise the results. rigorously monitor and assist the progress of suc­ 7 The Government should fund and establish demon­ cessful applicants through commercialisation; and stration networks specifically focused on addressing marketaccessimpediments. TheGovemmentshould provide formal advice to the government on com­ allocate an amount of S5m over the next three years mercialisation in Australia on an ongoing basis. to fund such demonstration networks and their bro­ kerage needs. 12.2 Firms receiving grants from the Industry Research and Development Board should be required, at the 8 The Government should underwrite in the National discretion of the Board, to use an adviser drawn from Interest the re-establishment of a pre-shipment ex­ the ranks of recently retired managers, directors or port finance facility through the Export Finance and engineers, selected by the Board because of their Insurance Corporation to assist companies to fund knowledge and experience. Such an adviser would the production of goods for export. The facility provide high level management advice, which might

ix involve financial management, advice on overseas government business enterprises. To achieve this, marketing or technical assistance. Advisers would 80 per cent of all Centres awarded in round three and, be required to regularly report to the Board. Funding as far as possible in round two, should be in areas for the adviser would be part of the grant. intended for economic development.

12.3 R&D syndicates should be allowed to continue These should have a minimum private sector funding claiming the 150 per cent tax concession, provided level of 25 per cent of the total Centre budget that all funds eligible at the relevant premium deduc­ (including all participant and CRC program funds) tion are used to undertake or support new R&D either as initial core funding or with a strong expec­ having genuine commercial purposes. Firms capa­ tation that this would be achieved by the time of their ble of, and with the intention of,commercialising the first major review. Centres intended for economic R&D should play a significant role in project man­ development failing to meet this requirement should agement. The IR&D Board should critically review have the continuance or level of their CRC funding the proportion invested in core technology (as de­ reconsidered at their first major review. fined in the legislation), acceptable organisational structure and level of guaranteed returns. The Board 14.2 The Government should enact legislation to ensure should be given discretionary power to set criteria that the clawback provisions of sections 73C and and approve syndicates. 73D of the Income Tax Assessment Act do not apply to CRCs so that industry contributions to CRCs are eligible for the full tax concession. Public Sector Research

13. I Government bodies that fund or carry out research Capital intended for economic benefit should be encouraged to continue to reallocate their resources to areas or 15. I Australia-wide legislation should be introduced al­ projects where commercialisation of research is lowing limited partnerships for professional inves­ likely. tors.

13.2 Thecharterofthe Defence Science and Technology 15.2 Changes should be made to the 'prudent man' rule to Organisation (DSTO) should be amended to allow it encourage superannuation funds to invest up to 3 per to work more closely with industry. DSTO should cent of their assets in venture and development establish more long term alliances with companies, capital investments. undertake a priority setting exercise to identify areas of potential commercialisation and set up industry 15.3 Superannuation funds should report on their Austral­ advisory groups to devise industry development ian venture and development capital investments in strategies based on DSTO expertise. their annual reports.

13.3 To encourage higher education and industry links, 15.4 Capital gains tax should be deferred on the capital joint industry and university appointments should be gain realised by original equity investors on the sale encouraged by government. of a small technology-oriented business which is rolled over into another small technology-oriented 13.4 Public sector organisations funding or performing business. The IR&D Board should have responsibil­ R&D should continually examine the option of ity for approving appropriate businesses. contracting out parts of their programs to industry. R&D intended for economic benefit should be per­ formed by those best able to do the research and best Other able to commercialise the outcomes. 16. I The Government should introduce constructive vol­ untary insolvency procedures, as recommended in Cooperative Research Centres (CRCs) the Harmer Report, and similar to those available in the United States. 14. I A significant financial commitment from end users should be a mandatory criterion for future funding of 16.2 Industries should be encouraged by government to all CRCs. Higher levels of financial commitment create research, development and innovation groups should be encouraged from the private sector and based on the AMIRA or Fraunhofer Institute models.

X 1 INTRODUCTION

Australia has successfully commercialised much of its cialisation is important because of the role it has to play in research and development (R&D) in the agriculture and improving Australia's economic situation. The principal mining industries, underpinning a significant part of the factors that have contributed to this situation areas follows. country's economic development. However, Australia has been less successful at commercialising R&D in many First, the world's demand for industrial raw materials and other industrial sectors. There have been many examples agricultural products is growing less rapidly than its de­ of world leading Australian inventions which have not mand for services and manufactures. This reflects the been commercialised in Australia. changing pattern of demand associated with higher aver­ age per capita incomes, the slow down in the rate of The successful commercialisation of research is ultimately population growth in most developed countries and the the profitable marketing of a product, service or process. achievement of economies in the use ofraw materials in the Commercialisation involves two essential ingredients. First, production of many manufactured goods. research and development leading to an invention with commercial potential. Second, capabilities in a firm to Secondly, the average prices of the products that Australia mobilise the skill and resources needed to transform the exports have been declining compared with the average invention into a saleable, competitive product, produce it prices of our imports. This is not simply a result of the and market it. current recession but is a long term trend which is likely to persist so long as the nation maintains its heavy depend­ Research and development may be performed within a ence on exports of primary products and simply trans­ firm or externally. If itis external (often in a public sector formed manufactures. research institution in Australia's case) mechanisms are needed to integrate the research outcomes to the needs of Thirdly, the continued subsidisation of agricultural pro­ the firm. duction and exports by the European Community and the United States is adversely affecting Australia's export This report is not intended to cover the many non-commer­ opportunities. To what extent the problem will be allevi­ cial ways research can benefit orenrich the world. Austral­ ated by the current round of GA TT negotiations is still ia's public sector research institutions undertake research unclear. for many non-commercial reasons, including social ben­ efits, defence considerations and the advancement of Lastly, a number of newly industrialising countries are knowledge. The purpose of this report is to examine why gaining an increasing share of world trade, particularly in Australia has a poor record of exploiting the commercial simple manufactured goods, putting additional pressure on benefits of research and to suggest ways of gaining more Australia to lift its own export performance, if it is to economic benefit from Australian research. remain internationally competitive.

Commercial potential in a research outcome is bestachieved These considerations underline the critical importance of if an identified market demand has been incorporated into structural adjustment in the Australian economy-an ad­ research planning and management decisions. justment which will require greater emphasis on the pro­ duction and export of new and more sophisticated manu­ In order to commercialise research, a wide range of skills factured goods. This is the area of world trade which is and resources are needed within the firm, including fi­ experiencing the most rapid growth at the present time and nance, time, management skills, distribution networks, this trend seems likely to continue. marketing skills, access to markets (especially exports), and technology. Past experience in the commercialisation It is worth emphasising that the world's buying power is process has been found to be a key ingredient in success. still heavily concentrated in the high income countries of North America, Europe and Japan and the residents of Australia's economic development in the twentieth cen­ those countries tend to seek variety and novelty in many of tury has owed a great deal to the nation's generous endow­ the goods and services they purchase. ment of natural resources and the enterprise of those who have been responsible for developing those resources. Research and development has a key role to play in securing a place for Australia in the world market for However, as the twenty first century approaches, it is knowledge-intensive and innovative manufactured prod­ apparent that continued heavy reliance on exports of ucts. Moreover, R&D must continue to assist the agricul­ primary products and simply transformed manufactures tural and mining industries to retain a significant share of will no longer suffice to guarantee an acceptable rate of world trade in those commodities. growth in employment and living standards. Commer- However, Australia needs to become more successful at to bear on research rather than how to commercialise commercialising the results of its research and develop­ research. ment. There are too many examples ofleading Australian inventions which have not been commercialised in Aus­ This requires a change in attitudes and a greater level of tralia. coordination of national efforts in education, innovation and industry development. A promising example of this is There needs to be a cultural change to the way R&D is the introduction of technology courses in both NSW and tonducted in Australia. In a report entitled New Game Victorian primary and secondary schools. Thinking for Australian Food Growers and Processors in Foreign Markets, David White of McKinsey and Company However, in education, we need to go beyond our current emphasises the need for R&D in Australia to be market emphasis on creativity and problem solving that we have driven. In another McKinsey report, Partners in Innova­ inherited from the UK. We need now to borrow from the tion: Business and Academia, Barker (1991), there is the German heritage and emphasise practical and scientific same emphasis on the market driving the research. (See competency linked closely to social and industrial aware­ Figure 1-1.) ness.

The old product-oriented system was to create the product, If there are obstacles to commercialisation in Australia, with theR&D in the foreground, and then make and sell the this will inevitably reduce the incentive for business firms product. The new emphasis must beon understanding the to undertake research and development in the first place. market desires, selecting the target market segments and defining the benefits of the product, then delivering value The consultations undertaken by the Task Force revealed in product, process, design, and manufacture. that there are some factors that hinder the commercialisa­ tion ofresearch in Australia. The significant factors can be The Task Force believes that Australia cannot afford to let grouped into three broad categories: technology drive our business direction; rather the market must drive the direction of business growth and innovative • those arising from the structure and characteristics of behaviour. Australian industry; • capital availability; and Following its consultations, the Task Force concludes that commercial returns from research are most effectively • those arising in the public research sector or in the generated by research undertaken in response to market interactions between the research sector and industry. demand. Unless research has relevance to a market then it will have no commercial potential. Indeed the task is Public sector research is especially important in Australia, perhaps more aptly described as how to bring the market because a higher proportion of research undertaken in

Figure 1.1 Integrated Commercial Development

©@1Iiru0Jil®W@tl@O @®w@O@;pmru@m\1

: !'~O~J.11:l /~~f!O.l~gy : : frqd?~t: rJ:e!elop:m:e!1~ : : P~o~~s~ ~~~"?~~~ : : ~~~~~ ~~~e~p~~~t: :

New or improved product or service on market

Source: Based, with permission, on: Barker & McKinsey & Com p;:iny lnc, ( 199 l J

2 Australia is performed in the public sector compared with a shortage of management skills in technology com­ the private sector. This means that a large proportion of mercialisation, especially in small business. research is at least potentially separated from the market place. In the view of the Task Force, this can only be The Task Force also recognises that the costs of commer­ remedied by project int,ractions at an early stage. cialisation are high compared to the costs of research. Too often, Australia has taken research to the market but failed The Task Force considers that there is insufficient interac­ to cover costs, let alone make a profit. Unless it is tion between government-funded research institutions and profitable for Australian business to exploit research, industry, which results in a lack of market oriented re­ commercialisation will not occur. search. There is also a lack of skills in bringing about transfer of technology from the public sector to the private Government programs established to encourage innova­ sector, to enable the rest of the commercialisation process tion in the private sector have to some extent been success­ to take place. To be effective, such transfer needs high ful. However, in the opinion of the Task Force there has level skill in negotiation, contract law and the development been a lack of emphasis on development and commerciali­ of intellectual property. sation. The Task Force is making recommendations to fine- tune some of these programs, so that they have an When a successful research outcome is obtained from increased emphasis on commercialisation in response to public sector research, leading to a patentor other intellec­ the market. tual property, this is not the end of the commercialisation process, only the start. The commercialisation process then encompasses the elements of design, production, The Task Force Approach marketing and distribution which are carried out by firms. The Task Force was established to address concerns about It became apparent to the Task Force that the structure of the lack of effective linkages between research and indus­ Australian manufacturing industry is such that the re­ try and to make recommendations to the Minister for sources required for commercialisation are not present in Science and Technology about ways to better commercial­ many firms. To undertake commercialisation, firms need ise Australian research. finance, management skills, marketing skills, distribution networks and access to markets. There are many impedi­ In conducting this study, the Task Force consulted exten­ ments to Australian industry having access to these re­ sively with senior people in government and private sector sources, many of them structural: research organisations, financial bodies, and firms of all sizes. It also drew on the extensive expertise of the the reluctance of Australian firms to co-operate with members of the Task Force to gain a more informed each other, to work together and build on complemen­ perspective about the barriers firms and research organisa­ tary strengths; tions experience in bringing research to the market. the small market size and limited industrial structure in The Task Force recognises that not all of the factors Australia; identified have easy solutions. Many require broad and insufficient export-driven manufacturing companies; long term structural change within Australian industry and the wider community. This change is beyond the scope of the legacy of Australia's past tariff protection which this Task Force study. However, the Task Force is making allowed manufacturers to use obsolete technology in a recommendations in areas where it has been able to protected market; identify actions targeted at improving the nation's com­ insufficient patient, long-term equity capital for high­ mercialisation efforts. technology, start-up companies; and

3 2 ENHANCING THE INNOVATIVE CAPABILITIES OF FIRMS

Introduction Firms in such industries look to research for information In the previous chapter it was argued that Australia needs about new technologies and about how to integrate them to gain more economic benefit from its research and technica11y with the company's business focus. Industries development activities in order to develop value-added where technological change is rapid, such as electronics, manufacturing and service industry capability. are characterised by relatively large R&D expenditures in relation to turnover (Table 2-1). Efficient mechanisms to In this chapter we discuss private sector innovation activi­ rapidly translate research results to the market ahead of ties and highlight critical factors affecting the develop­ rivals, that is to commercialise the research, are critical for ment of firms possessing the attributes and resources company growth and survival. required to commercialise research, and particularly to penetrate international markets. Firms in industries with more established technologies, such as iron and steel, or in industries where the product is Penetrating the export market with innovative products more uniform, such as commodities, are characterised by requires firms with access to substantial resources and lower business sector R&D expenditures in relation to management skills in areas including product develop­ turnover. Competitive pressures are no less intense in these ment, manufacture, distribution and service. Attaining this industries but the areas of innovation are more likely to be level of capability is thwarted by the characteristics of the improvements in process aiming to reduce costs and manufacturing environment. Australia has few manufac­ increase efficiency. Again the firm requires efficient mecha­ turing firms with the capabilities lO commercialise re­ nisms to identify, adapt and incorporate new ideas into its search results on the world stage. The Task Force has made activities. recommendations aimed at building up these resources.

PRIVATE SECTOR RESEARCH AND DEVELOP­ The Significance of Commercialisation Capability MENT ACTIVITIES

By commercialisation the Task Force means the genera­ Studies undertaken by the Research Committee of the tion of net wealth by the firm through the sale of products IR&D Board (1991) showed that a firm's R&D expendi­ and processes incorporating new ideas. It requires the ture positively correlates with its growth in sales revenue, manufacture, distribution and servicing of novel products productivity, new market introductions and market share. and processes with a subsequent benefit flowing to the These positive outcomes, while closely linked with prof­ company. Unless new ideas are successfully commercial­ itability are not the major determinants of profitability. ised there will be little benefit flowing to an innovating Other factors, ~uch as employee productivity, appear to company. It is the commercialisation of new ideas, of have a stronger influence on profitability than does R&D innovations, which 'brings home the bacon'. expenditure.

Competitive pressure is a strong motive for firms to seek Research and Development Expenditure out new ideas and subsequently commercialise those con­ sidered most valuable. In 1988-89 S1.7b was spent by the Australian business sector on R&D, the majority (68 per cent) in manufactur­ ing, with the remainder in services (25 per cent), chiefly Competitive advantage is sustained only through software, and in agriculture and mining (7 per cent). relentless improvement. Further analysis of the manufacturing component shows (Porter, 1990) that the industry sectors undertaking most R&D are elec­ tronics, computing and communications, pharmaceuticals The origin of new ideas might be diverse, including the and motor vehicles (Table 2-1). firm's customers, suppliers, assocfat~d companies, or from its own workforce. An important source of new ideas, and International Comparisons particularly their further development, is research. Compared with other OECD nations the Australian busi­ For products incorporating rapidly evolving technologies ness sector performs relatively little R&D, expressed as a competitive pressures are often intense as firms seek to proportion of Gross Domestic Product, ranking number gain advantage by introducing ever higher performance sixteen of nineteen nations. Australia is considered an products. R&D performer of medium size in absolute terms and

4 Table 2-1 Purpose of R&D in Relation to Production and Trade

Value Added Production Exports Imports _____...;Rcc.&:;;D:;;,...,.(S:::mc..:).______Research as %GDP Sm Sm Sm Business Publlc Total Intensity (,..(c)J (••• lb)) (••• {

Primary Industries Mining 5.3 13,947 11,833 1,436 106 91 197 Agriculture 3.8 14,468 7,286 598 23 613 636 Sub-total primary Industries 9 28,415 19,119 2,034 129 704 833

Service Industries Software 357 ;,cclc)J 357 1,•• i•)) Other 12 16 82 209 291 Sub-total service industries 73.9 12 16 439 209 648

Sub-total Econ D'ment 100 43,780 49,485 1,738 2,770

Community Welfare Health 337 337 Environment 114 114 Education 61 61 Other 54 54 Welfare 18 18 Urban & regional planning B 8 Sub-total Comm Welfare 591 591

Advancement of Knowledge Genera! 430 430 Earth, ocean and atmosphere n.e.c. 118 118 Sub-total Adv of Knowledge 548 548

Defence 205 205

TOTAL 100.0 43,780 49,485 1,738 2,436 4,115

Sources ABS 5354.0 Services Trade - Summary (1989-90) Australian Science and innovation Resources Brief (fonhcoming) ABS MX13A microfiche (1989-90) ABS MM 13A m,crofiche (1989-90) Agricul!ure and Resources Quarterly 3(2), June 1991 ABS 6203 Manufacturing Census (1988-89 and 1986-87) Oe1ailed R&O data for 1988-89 by socio-economic objective and field of science provided to OITAC by ABS June 1991.

Note (a) Classifications are in decending order of value added as a percentage of GDP based on latest available data (1986-87) {b) Production 1988-89 (c) Manufacturing expenditure for non-business sectors disaggregated by detailed socio-economic objective (disaggregated data not available for higher education institutions) (d) Total expenditure on R&O by firms in the indicated industries expressed as a percentage of the industry's total production. (e) Software R&D amounting to S40m was undertaken in non-business sectors but was largely directed to purposes of economic services and other categories. It is thus included within the R&D amounts shown for those categories.

5 within this group of eight nations, ranks number seven develop, manufacture, distribute and service innovative (0.51 per cent), below Switzerland, ranking top (2.14 per products required by the international market? cent) and Canada, ranking number six (0. 75 percent). This normalised comparison of business R&D performance Following its interviews with business representatives the shows that IargeR&Dperformers such as Germany, the US Task Force considers there are four major factors which and Japan spend 2.10 per cent, 1.98 per cent and 2.12 per affect the capability of companies to integrate research and cent respectively (Department of Industry, Technology development with their operations. These are: and Commerce, in preparation). • the small size and limited technological sophistication In the studies undertaken by the Research Committee of our manufacturing base; (IR&D Board, 1991) it was indicated that the gap between • the relative absence of large technology oriented com- Australia's business expenditure and that of other nations panies; could be partly accounted for by the fact that Australia has • the small domestic market; and a relatively small proportion of its manufacturing firms in • the limited availability of capital. R&D intensive industries, such as electronics, aerospace and pharmaceuticals. The first three factors are discussed below. The complex issues associated with capital availability are discussed in It also appears from the studies that a further contributing the following chapter. factor is that firms in Australia undertake lessR&D per unit of value added (or turnover) than their overseas counter­ These four factors impede the ability of firms to commer­ parts in the same industry. This may be because Australia cialise R&D. This is exemplified by the results of a recent has a high proportion of small firms. Small firms generally survey of Australian industry leaders which found an undertake less R&D per unit of tum over than do their larger overwhelming majority considered that in Australia 'there counterparts, perhaps because the diversity of operations are few financial rewards for developing new products' undertaken by large firms means they can appropriate a (Jones & Hill, 1991). greater return frum R&D can small firms. The Task Force believes these factors are not going to be The studies further indicate that Australian subsidiaries of overcome if left to the operation of the market alone. foreign multinational corporations, while undertaking less R&D than their parent organisation, undertake more R&D The Manufacturing Base than Australian owned firms in the same industry, consist­ ent with the conclusion that Australian firms underinvest Firms both shape and are shaped by the environment in inR&D. which they operate: they do not act in isolation. The presence of rivals provides competitive pressures, the There is evidence to suggest the situation is changing. existence of local or overseas suppliers influences infor­ Business sector R&D expenditure in Australia has been mation flows and production costs, the existence of highly growing at a faster rate than any other OECD country over demanding local customers encourages innovation and the the last decade, but since it started from a low base the presence of related firms provides networking opportuni­ present level still compares poorly with other OECD ties. nations. Compared with the larger economies of our major trading Despite the difficulties of comparing Australia with other partners the manufacturing sector in Australia is relatively countries it appears from these studies that Australian underdeveloped and is not characterised by a high level of manufacturing industry continues to underinvest in R&D. sophisticated production, marketing, networking or re­ It also appears that the ability of Australian firms to search across a wide range ofindustry areas. This impedes integrate R&D into business strategies is lower than for the ability of technology oriented firms in Australia to equivalent firms overseas. acquire and utilise up to date technological and market information. It reduces the opportunities for product spe­ cialisation and fornetworkingopportunities. These factors FACTORS INFLUENCING THE DEVELOPMENT militate against the development of commercialisation OF BUSINESS INNOVATION CAPABILITIES capability.

The reluctance of industry to invest in R&D and undertake The Australian manufacturing sector constitutes about 17 product development reduces the capacity of the nation to per cent of the economy compared to the OECD average commercialise the opportunities presented by research and of about 23 per cent. The majority of the sector's firms are development. not in high value added industries and undertake relatively little R&D (Figure 2-1). What is it about the Australian business environment that impedes the growth of firms with the management capa­ Of the approximately 31 OOO manufacturing firms in bilities and resources to take on board R&D results, and Australia, only about 1 800 (six per cent) undertake any

6 Figure 2-1 Proportion of Firms Undertaking R&D in Selected Industries (1988-89)

Food, Bev & Tobllcco :.'s:.:·./:·:.:.' ... I 3

Text, Clothing & Foot d 1

Wood, Wood Prod & Furn LJ 1

Paper, Print, Pub D 1

~m.~~&~ IV

Non-Metallic Minerals .... ·.. j 3

Basic Metal Products l:i) : 19:

Fabricated Metal Prods I 3

Transport Equip I 8

Other Machine & Equip I 21

0 10 20 30 Percentage of Firms in Industry

Source: ABS 8104 & 8203

R&D. Another I 200 companies in the services, mining Company Size and agricultural sectors undertake R&D (ABS 8104). A related aspect of manufacturing structure is that of Manufacturing firms in Australia also exhibit a low rate of company size. Of the nation's 31 249 manufacturing firms technology adoption. A recent study by the Department of with four or more employees, only 227 had more than 500 Industry, Technology and Commerce, using ABS survey employees and 22 227 had between four and 20 employees. results, indicated that only one third of manufacturing Australia has few large firms and a preponderance of very firms in Australia had adopted at least one of 22 new small ones (ABS 8203). technologies surveyed and, with few exceptions each technology had been adopted by fewer than five per cent Large firms, particularly technologically sophisticated of firms (DITAC, 1991). New management techniques, firms, constitute an important element in a nation's indus­ such as 'just in time' and 'total quality control' show an trial infrastructure. Large firms provide strong local equally low adoption rate. Touche Ross (quoted in Aus­ demand for component suppliers and constitute an impor­ tralian Manufacturing Council, 1991) found that the partial tant source of management skills, technical skills, produc­ implementation of new technologies by manufacturing tion facilities and marketing and servicing resources. They firms in Australia ranged from 17 to 34 per cent, substan­ are an important trialing and demonstration environment tially less than in the US which had an adoption rate of for their smaller counterparts. between 27 and 66 per cent. The paucity of large firms in Australia means that these The manufacturing sector in Australia is not highly export advantages are not as apparent in Australia as they are in oriented. With the exception of mineral processing, the our major ttading partners. sector exports less than 20 per cent of production. Market Size In the most recent World Competitiveness Report (World Economic Forum, 1991) Australia was ranked worst of all A further impediment to commercialisation is the small OECD countries for exports of manufactured products and size of the domestic market. There was overwhelming export flexibility, second worst for international alliances consensus among company representatives interviewed by and third worst of the 23 nations for export of goods and the Task Force that before Australian firms were in a services and for diversification of commodity exports. position to risk entering the export market it was highly

7 desirable that Lhe company esLablish a solid commercial concession is estimated to be S230m in tax revenue fore­ viability based on the home market. gone in I 990-91.

This poses particular problems for companies developing 150 Per Cent Tax Concession for Industry Research and innovative products for which the Australian market is Development small. This might occur for example where companies cater for niche markets or where the scale or characteristics The tax concession for R&D is the major program in the of the technology are such that only few units are required Government's package of measures to encourage R&D in domestically. Australian industry. It is available to companies incorpo­ rated in Australia, public trading trusts and partnerships of Consequently many innovative firms are forced to com­ eligible companies. Registrants for the tax concession in pete internationally without the security of the domestic 1988-89 totalled 2 003 firms, of which 1 154 were manu­ base. This places severe constraints on their ability to facturing firms. successfully commercialise research. The concession allows tax deductions of up to 150 per cent of eligible expenditure incurred on R&D, thereby effec­ GOVERNMENT PROGRAMS tively reducing its after tax cost. The concession will apply at a rate of 150 per cent until 30 June 1993, after which a The Commonwealth Government undertakes a range of rate of 125 per cent will apply indefinitely. programs which strengthen the skills and resources avail­ able to firms. These include: the National Industry Exten­ The Bureau of Industry Economics (1989) undertook an sion Service, which focuses on management and strategic initial impact review of the concession and concluded that thinking for small and medium sized firms; the IR&D it had a subslantial impact on the level of corporate and Board, which supports R&D, trialing and demonstration collaborative R&D in Australia, with about one third of the activities; the Partnership for Development Program which real increase in private sector R&D attributable to the is aimed at enhancing local R&D and export performance concession. These findings are supported by studies by Australian subsidiaries of overseas firms; and the carried out by the Australia Industrial Research Group and programs of Austrade which aim to enhance company the Centre for Technology and Social Change (1990). export performance. Of these, the programs operated by the IR&D Board are central to the commercialisation issue Syndication since they directly impinge on the relationship between R&D performance and the capabilities of firms to utilise The joint registration provisions of the 150 per cent tax research in capturing markets. concession allow a group ofcompanies to form a syndicate to undertake significant R&D projects which are beyond theresourcesofasinglecompanyorwhich are too risky for Industry Research and Development Board (IR&D a single entity to underlake. The risks and costofR&D are Board) Programs spread among the group with the tax concession helping to reduce the overall financial risk to investors in the syndi­ The IR&D Board was established to promote the develop­ cate. ment and improve the efficiency and international com­ petitiveness of Australian industry by encouraging re­ At 30 October 1991, 21 syndicates have been registered search and development activities. The Board provides an and funded, with a total eligible expenditure for the life of environment which supports innovation, particularly for the syndicates, of approximately S425m. small and medium enterprises, through the development of science, technology and research and their application to Discretionary Grams Scheme industry needs. Its programs are the major means by which the Government provides support to individual firms for Discretionary grants assist companies which have insuffi­ research and development in the manufacturing and serv­ cient Laxation liability to obtain adequate benefit from the ice industries. 150 per cent tax concession for R&D. In 1990-91, 69 agreements with a tOlal grant commitment spread into Programs administered by the Board are: the Discretionary future years of over $15m were signed. Grants Scheme; the Generic Technology Grants Scheme; the Advanced Manufacturing Technology Development Generic Technology Grants Scheme Program; the National Procurement ,and Development Program; and aspects of the administration of the 150 per The scheme provides grant support for the development of cent tax concession for R&D. The Board's budget alloca­ selected strategic technologies considered important for tion in 1991-92 is $3 7 .2m, which includes $Sm specifically the imernational competitiveness of Australian industry. allocated to the Advanced Manufacturing Technology Five technologies have been declared under the scheme: Development Program. The cost of the 150 per cent tax information technology; communications technology; new materials technology; biotechnology; and environmental

8 technology. In 1990-91, 24 agreements with a total grant tion and commercialisation activities and consequently commitment spread into future years of over $12m were their capacity not only to grow outside the domestic market signed. but also within it, given the opening up of the Australian market to international competition. Advanced ManufacturiQg Technology Development Pro­ gram (AMTDP) The Task Force considers that the extent to which firms commercialise R&D would be improved if they were in a TheAMTDP encourages the development, production and stronger position to manage and implement the innovation use of advanced manufacturing technologies in Australian process and to service major markets. industry through the establishment of linkages between developers and users ofa wide range ofadvanced manufac­ In recognition of the management requirements the IR&D turing technology. Areas include advanced computer con­ Board has increased its emphasis on management and trolled or microprocessor based equipment used in the other capabilities in evaluating grant applications. The design, production testing, or handling of a product, ad­ Task Force strongly endorses this approach. vanced manufacturing techniques or services, and ad­ vanced materials and related process technology. The Recommendation 12.1 program covers research and development, product devel­ opment, trialing, demonstration and projectrelated market The IR&D Board should: research. The program has a budget allocation of $Sm in 1991-92, its first year of operation. • continue to critically evaluate the management, technical and financial capabilities of applicants;

National Procurement Development Program (NPDP) rigorously monitor and assist the progress of suc­ cessful applicants through commercialisation; and The NPDP provides grant support for innovative projects undertaken jointly between leading edge users in govern­ provide formal advice to the government on com­ ment departments, business enterprises and agencies and mercialisation in Australia on an ongoing basis. supplying firms. Grant support is provided for joint research, development, trialing and demonstration projects. In 1990-91 twelve agreements with a total grant commit­ Management Skills ment spread into future years of over $2.5m were signed. The Research Committee studies further indicated that the more experience companies gained in R&D and its exploi­ POLICY IMPLICATIONS AND tation, the more likely they were to be successful. RECOMMENDATIONS In successful instances the research was part of overall To reap commercial return from the performance of re­ company strategy and the extensive resources necessary to search, firms need management knowledge and capabili­ follow through with the project were understood and ties as well as the manufacturing, marketing and servicing available. Not unexpectedly, the more successful the com­ resources to successfully and profitably integrate research panies were with commercialisation the more likely they into their operations. seemed to be to continue to use R&D to improve company performance. Studies undertaken by the Research Committee of the IR&D Board (1991) have highlighted the lack of knowl­ The Task Force considers that there is a role for the IR&D edge and experience within firms about the role of innova­ Board in providing information and advice to firms about tion in achieving company competitiveness. Issues iden­ how to manage and gain maximum returns from undertak­ tified include a lack of knowledge of the innovation ing and commercialising R&D. This could be accom­ process and of the need to integrate innovation strategy plished by a number of mechanisms however the most within the context of the firm's overall strategic directions. valuable are likely to involve direct personal involvement Research was often seen by the company as an end in itself, in the management of the project by those skilled in the with inadequate consideration of the financial, time and exploitation of research results. resource capabilities required to bring the process to commercial fruition in advance of the competition. Recommendation 12.2

The evidence suggests small and medium sized firms Firms receiving grants from the Industry Research and experience considerable difficulty in overcoming these Development Board should be required, at the discre­ barriers and are not well placed to capture adequate tion of the Board, to use an adviser drawn from the ranks benefits accruing from the commercialisation of R&D, of recently retired managers, directors or engineers, either through their own activities or through collaborative selected by the Board because of their knowledge and activities with other firms. This limits their own innova- experience. Such an adviser would provide high level

9 management advice, which might involve financial management, advice on overseas marketing or techni­ Australian Mineral Industries Research cal assistance. Advisers would be required to regularly Association (AMIRA) report to the Board. Funding for the adviser would be part of the grant. _ AMIRA is a research association with about 160 members in the minerals industry. The Association aims to promote the economic recovery of mineral Networking products by the mineral and associated industries of Australia through the development and adaptation As most Australian firms seeking to commercialise re­ of relevant science and technology. search, are small technology based start up firms they inevitably face major obstacles in surviving let alone The Association is highly market driven: it initiates succeeding. and coordinates jointly sponsored R&D contracts on behalf of member companies. Projects are To address this major structural impediment, firms seeking identified and defined by the Association which to commercialise research must identify strategies for then seeks financial support from members. Sup­ achieving the scale, capabilities, resources and critical ported projects are subsequently let to a relevant mass essential for market success. This is particularly research group and sponsoring companies encour­ acute in market areas where speed, market coverage, aged to participate with AMIRA in monitoring existing large players, or second generation products are project performance. Research reports arising from likely to limit the pioneer's initial competitive advantage. the contract are initially confidential to those com­ panies supporting the project. To help meet these critical mass requirements, access capabilities, and maintain the essential speed and flexibil­ Growth in AMIRA's contract spending has aver­ ity, small firms generally have no option but to operate aged 18 per cent in real terms since 1985 and through strategic alliances and networks. totalled 78 projects valued at $28m at end June 1990. Projects have important training and employ­ Networking is a mechanism through which firms can ment results, engaging around 100 tenured staff, 70 ameliorate these limitations. Networking involves inter­ research fellows, 90 postgraduate students and sup­ firm cooperation and collaboration where individual firms port about 50 other professional staff. contribute a share of the information and resources re­ quired to achieve an outcome unattainable by each com­ Major projects include pyrometallurgical research pany acting in isolation. funded by six companies and undertaken at the University of Melbourne, a fine grinding project Opportunitiesfornetworkingarisewhereverfirmsdrawon jointly undertaken by JKMRC, South Australian similar sources of information, technology, capital equip­ Institute of Technology and CSIRO and a signifi­ ment, labour supplies and materials, or face similar prob­ cant project on sulphide dust explosions undertaken lems of distribution and marketing. Typical examples of at the University of Sydney. cooperative opportunities include: to purchase raw mate­ rials in bulk, to coordinate and share training facilities, to share equipment and infrastructure, to jointly research and develop new products and new markets, to exchange The Task Force commends the recent collaborative initia­ market know-how and to engage in joint production or tives undertaken by the Australia Manufacturing Council, marketing. the National Industry Extension Service (NIES), industry and State Government bodies, aimed at raising awareness An example of successful networking is AMIRA which of networking concepts and exploring the role of govern­ undertakes pre-competitive R&D in the minerals industry ment, industry associations and unions in networking (see AMIRA Box). AMECON is another example. It has promotion. It notes the $0.5m annual budget allocation in built up a quality and efficiency program around its 1991-92 and for the following two years for networking Australian suppliers of ANZAC Frigate components in activities by NIES. The Task Force similarly commends order to meet the exacting requirements of the Australian the networking activities of Austrade's trade enhancement and New Zealand Departments of Defence. An example scheme and their establishment of twelve networks of ofa successful network grouping overseas is theFraunhofer companies and industries with strong export potential. Institutes which undertake research, developmentand prod­ uct evaluation activities, among others, for German indus­ The Task Force is impressed with the potential for cluster­ try and government (see Fraunhofer Box). ing of small companies in the machine tool industry associated with the Camtron Division of the Metal Trades Industry Association in Victoria, and also commends the formation of clusters in the information processing and communications industries. These take advantage of

10 existing Commonwealth industry initiatives under the The Task Force endorses this view and believes networks Partnerships for Development Program and the telecom­ need to be formed on a much more substantial basis than munication equipment policy. Major users of technolo­ is currently the case if small companies are to achieve the gies, such as the utilities and major government business critical mass necessary for effective production and mar­ enterprises could take a leadership and participatory role in keting, particularly in relation to exporting. A stimulus to network formation. · the wider establishment of networks could be achieved through the funding of brokers to assist in the formation and initial running of demonstration networks. Such a program Fraunhofer Institutes could be coordinated by NIES, but should take advantage of existing brokerage and networking expertise ofindustry The Fraunhofer Institutes carry out research and associations, employer associations and unions. development of direct relevance to German industry and the needs of the State. In some countries, notably the United States, some net­ work arrangements and joint technology ventures may be There are 37 Institutes operating with an annual regarded as anticompetitive agreements which run the risk budget equivalent toabout$A545m,of which 80 per of breaching the anti-trust laws. In Australia, the legal cent is derived from contract work from both govern­ position is somewhat different and it is unlikely that the ment and industry. The Institutes have a staff of competition laws would prevent the establishment of around 6 OOO. networks of the kind described here.

Their main aim is cooperation with industry in the The Task Force has been provided with the following fast commercialisation of new technology and re­ advice from the Trade Practices Commission. search. Some of the Institutes address the needs of "The Trade Practices Act may apply to some joint particular industries such as construction, but most activities, particularly where the arrangements include specialise in particular technologies including mi­ joint decisions on price or otherwise substantially lessen cro-electronics, information technology and pro­ competition. However, public benefits often inherent duction automation. within joint venture arrangements may be considered under the authorisation provisions of the Act under The activities of the Institutes are broader than which parties may obtain an exemption from certain of research and development and include new technol­ the restrictive trade practices provisions of the Act on ogy demonstration, technology advice, productevalu­ the strength of the public benefits being sufficient to ation, standards certification, organisational struc­ outweigh the anticompetitive detriments. The public ture and economic studies. benefits obtainable from an R&D network could, for example, form the basis of authorisation. While networking arrangements allow firms to reduce The Commission has in the past considered a numberof effort in undertaking certain activities, spread risk and joint venturearrangements under the authorisation proc­ undertake other activities which are beyond the reach of ess. Two examples serve to demonstrate the effect of individual firms, this does not guarantee their formation. the authorisation provisions. Firms may not be aware of the benefitS of networking, • Authorisation was granted for a joint venture involv­ particularly when they have no prior experience and are ing the manufacture of insulin on grounds including uncertain about the likely benefitS relative to the costs of the improved access to technology that would flow collaboration. Network establishment is also a difficult from the arrangement. The public benefits out­ and time consuming process. weighed the anticompetitive effect of the reduction in the number of competitors that would result. This was recognised in a recent Bureau of Industry Eco­ nomics report ( 199 la) dealing with networking issues. • Authorisation was granted for a proposed joint ven­ ture development of natural gas reserves in south­ west Queensland. The authorisation also allowed Given the limited knowledge about networking ar­ the joint marketing of the product with public ben­ rangements in Australia it may be judged appropri­ efits recognised in the effective utilisation and devel­ ate for the government to conduct or sponsor experi­ opment of natural resources." ments through a limited number of pilot programs and demonstration projects to promote the idea of Recommendation 7 networking arrangements. The Government should fund and establish demonstra­ (BIE, 1991a) tion networks specifically focused on addressing mar­ ket access impediments. The Government should allo­ cate an amountof$5m over the next three years to fund such demonstration networks and their brokerage needs.

II Recommendation 16.2 the design, manufacture and marketing activities of the firm. This is best accomplished if the R&D is undertaken Industries should be encouraged by government to by the firm. The close association of in-house R&D create research, development and innovation groups performance with the day to day activities of the firm based on the AMIRA or Fraunhofer Institute models. means opportunities to improve firm performance through R&D can be better identified and implemented.

Pre-shipment Finance Facility to Encourage Network The Task Force believes there is a case to expand theR&D Formation capability of companies through the greater contracting out of government R&D requirements. The lack of availability of pre-shipment finance is seen by industry as a major deterrent in the drive to develop Recommendation 13 .4 networks opening export markets. Public sector organisations funding orperformingR&D A pre-shipment finance facility was offered by the Export should continually examine the option of contracting Finance and Insurance Corporation (EFIC) between 1984 out parts of their programs to industry. R&D intended and 1988, but was discontinued because of the very high for economic benefit should be performed by those best level of claims experienced. The Task Force believes that able to do the research and best able to commercialise the Government should again make pre-shipment finance the outcomes. available under the National Interest provision oftheEFIC Act, but that this be limited to companies supported under a network program. This will limit the size of the pre­ Government Purchasing shipment finance facility needed for export expansion. Government purchasing is another mechanism whereby Recommendation 8 government can strengthen the R&D commercialisation capabilities of companies. The Government should underwrite in the National Interest the re-establishment of a pre-shipment export Government is a major purchaser of products em bodying finance facility through the Export Finance and Insur­ the results of R&D. It is a leading edge purchaser in ance Corporation to assist companies to fund the pro­ information and communications technology, industrial duction of goods for export. The facility should be electronics and scientific and medical equipment. In restricted to companies participating in government or information technology alone it comprises approximately industry sponsored networks. 40 per cent of the market.

Government purchasing is based on three main principles, Contracting Out value for money, open and effective competition, and support of local.industry. The arrangements provide for Technology oriented firms can also obtain experience and Departments to purchase on grounds other than the lowest capabilities in commercialising research through the pro­ tender, and include an assessment of the life cost of the vision of greater opportunities to secure government con­ product including parts and servicing, product quality and tracts for R&D services. performance, and the ability of suppliers to offer quality of output and to offer the warranties, delivery and service The Australian Government contracts out relatively little arrangements required. Purchasing guidelines indicate of its own R&D requirements to industry. OECD member that there are substantial reasons why agencies should take nations typically contract out between 15 and 25 per cent advantage of the local supplier base. Purchasing agencies, of their total government R&D expenditure to firms. further, are not obliged to accept any particular bid but can Australia by comparison contracts out only about three per choose to further negotiate with one or more individual cent of its R&D expenditure (Figure 2-2). companies.

Contracting out R&D enables firms to build up their in­ Additional purchasing requirements supporting Austral­ house research capabilities, gaining experience in R&D ia's information technology (IT) industry have been put in performance and benefiting from increased skill levels, place. These include the maximum use of outsourcing for both in technical and management areas, and from equip­ testing and maintaining in-house IT capabilities, that ment acquisitions associated with the contract. The exist­ government agencies are to actively explore opportunities ence of the contracting agency minimises risks to the firm for local industry participation, including collaboration in funding the project. where appropriate, and that agencies must assess opportu­ nities for possible participation by local industry for IT The development of in-house R&D activities is an impor­ purchase proposals of all short listed suppliers. tantelementin developing R&Dcommercialising capabil­ ity. To be most effective R&D should be integrated with

12 Figure 2-2 Proportion of Government Funded R&D Performed by Business

us 4E UK ; 30 Norway 27 France 25 Germany 24 Sweden 20 Italy 19 Netherlands 19 Spain 16 " Denmark 14 Canada 13 Ireland 13 Belgium 13 Austria 9 Finland 7 Switzarland 7 Iceland 7 Japan 5 Greece 5 Australia IIIIIIIB3 Portugal :J 1 0 10 20 30 40 50 Percentage of Government R&D funds

(Source; OECD 1991 , latest year available) (Data is direct government funding of business R&D as a proportion of direct government funding of business R&D plus general university funds. Indirect funding data is not available.)

The Task Force believes industry development objectives Rer;ommendation 4 in government purchasing should be more general and not restricted to the IT industry. It may be appropriate, for Where an Australian bid for Government purchasing is example, to broaden the interpretation of the 'Value for not the most competitive, but is the second or third best Money' criterion to include industry benefits that cannot bid, the top three contenders should be advised of each be appropriaLed by the purchasing agency. bid and be invited to submit a revised bid. Government purchases above S 10m generally and above $2m in The Task Force, however, further believes stronger meas­ strategic industries should be subject to a detailed ures are required to encourage government purchase of industry impact statement before a contract is let. Australian products and recommends that where an Aus­ tralian bid for a purchase by government is not the most competitive, but is the second or third most competitive, Expansion of the National Procurement Development then the top three contenders be advised of each bid and Program invited to submit a revised bid. This approach would ensure the most competitive tender was ultimately selected A further mechanism to assist small and medium sized and an additional opportunity would be provided for front­ firms build up their commercialising experience and estab­ running Australian firms to win the contracL. lish a track record is through the IR&D Board's National Procurement and Development Program (NPDP). The Task Force further notes that the Australian Industry and Technology Council (AITC) has recently indicated The program has recently been expanded to include the that it is undertaking an investigation into the value of development and purchase ofproducts not only for govern­ requiring the development of an impact statement for ment instrumentalities but also for firms contracting to industry development in the case of major purchases with government. The change recognises that risk aversion is a view to encouraging government departments and busi­ not restricted to public sector purchasing bodies, but is ness enterprises to assess the benefits flowing to industry more widespread in the economy. from purchasing decisions. The Task Force endorses this direction. From its discussions the Task Force is impressed by the substantial impetus the program can provide firms and

13 suggests it be further expanded by removing the require­ the contract obligations the bond defaults to the intending ment that purchasing firms be necessarily linked to govern­ purchaser. While this is a relatively routine process the ment. The Task Force acknowledges that it may be amount of bond required is often beyond the resources of necessary to closely monitor and limit the types of projects small firms. The company supplyingtl1e product may have supported by the expanded program. The IR&D Board to bear the full cost of production and delivery prior to might draw on the experience of its existing Advanced receiving payment from the purchaser. In these situations Manufacturing Technology Development Program the company supplying the product may make an arrange­ (AMTDP) which features minimal involvement by gov­ ment with a bank or other financial institution to guarantee ernment in the development of manufacturing technology that the bond will be paid if called upon by the purchaser. between private sector parties. This change would create Providing bond guarantees for small and medium sized extra financial demands on the NPDP. firms constitutes a significant risk and financial houses invariably insist on full security. The Task Force recognises that a formal review of the program is currently being conducted by the Industry A Performance Bond facility exists under the Export Commission. The Commission is due to present its report Finance and Insurance Corporation (EFIC). The facility on 3 I March I 992. assumes part of the risk by insuring the finance institution against claims on the bond. The Corporation provides Recommendation 3 insurance on bonds, indemnifies financial institutions pro­ viding the bonds and in special cases will issue a bond The National Procurement and Development Program itself. However at present EFIC is unwilling to provide (NPDP) should be extended to include private sector such support without substantial security. The Govern­ companies as purchasers. Commonwealth and state ment has addressed the needs of exporters to a limited government funding should be doubled to meet current extent with the establishment ofa$50m bond facility under demand and cover the extension of the Program to the the National Interest provisions of the EFIC Act. private sector. The Task Force recommends that a similar facility be established for the domestic market to provide perform­ Performance Bond Guarantee ance bond guarantees or insurance cover on bonds for the development and sale of innovative products. The per­ While the above recommendation helps alleviate the reluc­ formance bond guarantee would operate in a similar way tance of Australian firms and government to jointly de­ to the Performance Bond Facilities operating under EFIC. velop innovative products, it is evident from consultations undertaken by the Task Force that reluctance is not solely Recommendation 5 related to the technical and production uncertainties of the project. Another reason for the reluctance is the lack of A performance bond guarantee facility should be estab­ surety that the innovative company will be in a sufficiently lished by the Government to assistcompanies to achieve strong financial position to not only undertake the R&D but sales of technology within Australia. The Government also to remain financially solvent in ordertoprovide follow should set aside $25m as an asset base for the guarantee up service and advice upon completion of the project. facility. The performance bond could take a similar form to the Export Performance Bond facility operated The Task Force is aware of a number of instances where by the Export Finance and Insurance Corporation. Australian customers would not buy innovative Australian products without an assurance that the orders would be meet. On one occasion an Australian company was re­ R&D Tax Concession Initiatives quired to form an ~lliance with a large overseas company to reassure the Australian government purchaser that the Technology oriented firms can build up their experience company would deliver as promised. The alliance in­ and competencies in commercialisation by performing creased the price of the contract from $5m to $7m. Inter­ R&D in response to market need. estingly, in this instance the Australian company is now the recognised world leader in the technology in question, and from which it attracts substantial export contracts and The existing 150 per cent tax concession provides a licensing income. substantial stimulus to the development of innovation strategies within the private sector and to their perform­ A similar situation is faced by Australian exporters where ance of R&D. overseas purchasers require a level of security that the Australian company would meet its contractual obliga­ The report 'Technology Strategies in Australian Industry' tions. by the Centre for Technology and Social Change (1990) reported that the concession had resulted in companies 're­ The lodgement of a bond by the company supplying the examining their R&D strategies and linking them more product can overcome this difficulty. Should it fail to meet effectively into their business strategies.' Between 35 and

14 50 per cent of firms surveyed by T ASC had changed the aggressive stance in securing a place in world markets for type ofR&D they performed in response to the concession. knowledge-intensiveand innovative manufacturing goods. Yet the evidence suggests the development of technology The concession has been instrumental in substantially strategies in Australian industry, while growing under the increasing the R&D expenditure of the surveyed firms. stimulus of the tax concession, has not yet reached a high Sixty four per cent of large and 42 per cent of small level. communications firms surveyed had substantially increased their R&D as a result of the concession, as had 25 per cent of large R&D performing firms and 35 per cent of food The character of technology strategies adopted by processing firms. The increase was found to be greatest Australian firms is becoming increasingly aggres­ among those firms already performing a substantial level sive and oriented to international competitiveness. ofR&D. However there may be a need to match technology strategies far more closely to competitive strategy to The Task Force is concerned that the effectiveness of this achieve effective outcomes. stimulus to undertake R&D and to better integrate it with the firm's business strategy would be negated by the (Centre for Technology and Social Change, 1990) planned reduction of the concession to 125 per cent in 1993. The study further commented that there is 'disturbing' The planned reduction halves the financial benefit of the evidence that R&D managers may be insufficiently in­ concession to companies. At the commencement of the volved in technology strategy formulation, at least in large concession when the corporate tax rate was 49 per cent and firms. the tax concession at 150 per cent, the after tax benefit to the company for each dollar spent on R&D was 24.95 The Task Force believes there is a case for using market cents. With the reduction in corporate tax rate to 39 per analysis to stimulate the formulation of innovation strate­ cent the benefit reduced to 19.5 cents and this will be gies within firms. However it also recognises the consid­ halved to 9.75 cents when the concession drops to 125 per erable difficulties involved in implementing this principle cent. The value of the concession has been further eroded at a reasonable cost to the Government. The Task Force by the dividend imputation system. therefore suggest that the Government limit market analy­ sis and market entry development claims to a proportion of A recent paper by the Bureau of Industry Economics the total amount of eligible R&D expenditure claimed for (1991 b) investigated the cost of capital, including capital any project. for R&D purposes, in Australia, Japan, the US, Germany and the UK. The BIE found that the cost of capital in Recommendation 1 Australia for R&D projects was amongst the highest of the surveyed countries in 1990 and will become higher than The research and development (R&D) tax conces­ these other countries once the tax concession is reduced to sion should remain at 150 per cent. 125 per cent in 1993. Recommendation 2 Given the powerful impact of the concession on manage­ ment attitudes and responses the Task Force believes it Market analysis and the development of market would be inappropriate to reduce the concession to 125 per entry strategies should be allowed as eligible "sup­ cent. porting activities" under the 150 per cent tax conces­ sion up to a limit of 10 per cent of total eligible The Australian Science and Technology Council (1991) research and development expenditure on the rel­ recently reached a similar conclusion in discussions with evant R&D project. companies as part ofits 'Research and Technology: Future Directions' report, commenting that 'ASTEC therefore believes that the R&D tax concession should remain Syndication permanently at 150% after 1993'. The aim of syndication is to provide the opportunity for To further strengthen the effectiveness of the concession in projects, which are too big or too risky for any one aligning R&D activities in response to market needs the company, to be undertaken by a group of companies. It is Task Force considers that a component of the costs in­ intended that such ventures will lead to new Australian volved in market analysis and the development of market products and the establishment of new industries in Aus­ entry strategies for which the R&D is undertaken should tralia. Syndication also provides a mechanism to attract also be eligible for the concession. funds for R&D investment.

The Centre for Technology and Social Change notes that The financial structures of syndicate arrangements as they there is an increasing need for Australia to pursue a more currently exist are complex and questions have been raised

15 about the emphasis investors place on minimising risks and Bankruptcy Provisions obtaining guaranteed returns. This has led to modifica­ tions to the Act which have the effect of reducing the extent A significant amount of company research is lost through of tax deductibility for the R&D to a level more commen­ business failure. About 80 per cent of small businesses in surate with the level of financial risk assumed by the Australia fail within five years. Studies in the United States investor. · suggest that the failure rate is higher for companies trying to commercialise research. They rarely have a positive There are also concerns about the extent to which some cash flow, have few bankable assets and their long infancy syndicate structures are directed towards achieving genu­ places them at greater risk of insolvency from downturns ine commercial outcomes, that is outcomes which have a in the business cycle. reasonable probability of resulting in the development of new Australian products or industries. In 1988, the "General Insolvency Inquiry" by the Austral­ ian Law Reform Commission made broad ranging recom­ These concerns have resulted in a level of uncertainty by mendations designed to improve bankruptcy and corporate investors and delays in obtaining approval for syndicates insolvency procedures. from the IR&D Board and the Australian Tax Office. The proposed voluntary administration scheme adapted ToresolvetheuncertaintytheTaskForceconsidersthatthe from United States legislation, should assist the early IR&D Board, which currently assesses the eligibility of the recovery of businesses from financial difficulties. It allows R&D component of syndicates, be given discretionary the preservation, where practical and possible, of the power to detennine the eligibility of syndicates based on property and business of the company in the brief period their capabilities and willingness to undertake R&D in­ before creditors are in a position to make an informed tended for commercial outcome. decision. This assists an orderly and beneficial administra­ tion whether creditors decide to wind a company up or Recommendation 12.3 accept a compromise.

R&D syndicates should be allowed to continue claim­ A key feature of the proposed scheme is that during a ing the 150 per cent tax concession, provided that all moratorium of up to 35 days, secured creditors would be funds eligible at the relevant premium deduction are restrained from enforcing their rights. The proposal incor­ used to undertake or support new R&D having genuine porates the right of secured creditors to challenge in court commercial purposes. Firms capable of, and with the a moratorium sought by a hopelessly insolvent business. intention of, commercialising the R&D should play a significant role in project management. The IR&D Recommendation 16.1 Board should critically review the proportion invested in core technology (as defined in the legislation), ac­ The Government should introduce constructive volun­ ceptable organisational structure and level of guaran­ tary insolvency procedures, as recommended in the teed returns. The Board should be given discretionary Harmer Report, and similar to those available in the power to set criteria and approve syndicates. United States.

16 3 CAPITAL AVAILABILITY

Introduction Industry Research and DevelopmentBoard. In this way the Task Force surveyed promising companies which had The availability and cost ofcapitalare critical factors in the potential for growth. commercialisation ofresearch because commercialisation requires investment in research, design, development, The questionnaire received a high response (almost 50 per plant and equipment, marketing and training. A firm's cent of the firms surveyed responded), indicating the decisions about commercialisation are influenced by their importance ofcapital to innovative businesses. The results ability to finance that investment. show that a large proportion of the companies that had sought capital over the past three years had been at least A firm with adequate profits can either fund such invest­ partially successful. However, it appears that in the past ment internally, or attract funds from external sources. A year it has been much more difficult to obtain capital, start-up venture, or a firm attempting to grow from a small partly because of more restrictive bank lending practices. base, has little chance of making the required investment from its own resources and often will have difficulty in attracting funds, whether in the form of debt finance or DIFFICULTIES IN OBTAINING CAPITAL equity finance. Small and medium sized firms, particularly those which are technology oriented, have particular problems in ob­ Debt or Equity Finance? tainingequity capital. They often have few tangible assets, limited cash flow, possibly negative net worth and a For the growth of small and medium sized businesses, there limited track record. The major assets of a technology­ is no doubt that equity finance is preferable to debt finance. oriented company may be in intellectual property. Often The major drawback of debt capital is that cash flow has to there is a long lead time before profitability is possible. be consumed in servicing debts and making regular repay­ ments. Also, borrowers are at the mercy of fluctuations in Their small size, high risk and lack of traditional indicators interest rates. of performance precludes small and medium sized firms from serious consideration by most finance sources. Some Equity capital, on the other hand is more difficult to come firms surveyed also believed thatthe insistence on property by, because itisa higher risk investment and because of the securityby Australian banks made borrowing difficult. lack of liquidity of investments in unlisted firms. How­ ever, equity finance does not impose the same pressure of regular repayments. Equity investment can be more Australian loans officers mouth platitudes about patient, because it has the prospect of capital growth as well export generation but are not prepared to seriously as income. It should however be noted that many small and consider cash flow lendingto increase export vol­ medium-sized firms are reluctant to forgo some level of umes. Corporate lending in Australia does not control of their business in return for equity investment. happen without real property security from major shareholders. Many firms say that it is easier to obtain debt finance than equity investment to fund their development and growth. Respondent to questionnaire This assertion is borne out by a survey conducted by the Task Force which shows that 70 per cent of the surveyed firms who sought debt finance were successful in obtaining The difficulties relating to the availability of capital are it, compared to a success rate of 45 per cent for firms worsened by the a lack of awareness in the finance market seeking equity finance. of how to value technology and assess the characteristics of technologically oriented firms. The Task Force undertook a survey of the experience of a group of companies in obtaining capital in order to develop a better understanding of the significance of capital to Is There a Shortage of Capital? technology oriented business in Australia. (See Appendix C.) The survey sought information on the experience of There are two opposing views on the availability ofcapital companies in obtaining capital over the last three years. for Australian firms. One view is that there is no shortage of capital, because the high risk involved in this kind of The Task Force circulated the questionnaire to companies business naturally means that capital is scarcer. Indeed, that had been invested in by the Management and Invest~ some financial institutions claim that there is no shortage ment Companies or that had received grants from the of money available to fund "good" investments with the

17 potential to return satisfactory profits, after taking account of the risks involved. They state that the difficulty is the In Australia the term 'venture capital' has become shortage of good investments. synonymous with high technology business start-ups and is now automatically associated with high risk The Industry Commission (1991) acknowledges the inher­ investment providing long term and uncertain returns ent handicaps of small and medium sized businesses and to investors. suggests that this has been compounded in recent years by the adverse economic climate. However, apart from Venture capital in fact embraces the provision of suggesting that there is some scope for initiatives to patient equity, debt and management assistance to improve information and liquidity for investments in un­ small to medium sized businesses with the potential listed companies, the Industry Commission rejects any for above average growth. measures to improve the access to capital by small and medium sized businesses. The investment may be to provide:

On the other hand, according to some finance providers, • seed capital; there is no source of funds for start-up firms, especially • start-up capital; those that are technology based, without government initiatives, because the risks are considered too high for the • development capital to fund growth; or private sector. However, if the best of these innovative • acquisition capital. firms do not obtain the funding and management support required for growth,an important source of innovation and The term 'venture and development' capital is used the commercialisation of research will be lost. in this Report to denote the entire spectrum of venture capital investments. It has been suggested that the growth in the venture capital industry over the past seven years should provide the source ofcapital for these businesses. However, the history There are few specialist venture capital firms seeking new of the venture capital industry in Australia shows that it is investments. Those still operating prefer established serv­ no longer a source of equity capital for these businesses. ice and distribution businesses, avoiding startups and technology based firms.

The Venture Capital Industry in Australia Australian venture capitalists with experience in the costs of commercialisation are now making larger (at least $1 m) The Management and Investment Companies (MIC) Pro­ investments in "quality" companies. They are investing in gram was established by the Government in order to profitable firms that have a sizable capital value. Austral­ stimulate the development of a venture capital market ian venture capitalists are thus not currently catering forthe following the findings oftheEspieCommittee (1983). The financial needs ofearly stage, smaller companies. Accord­ essence of the MIC Program was to have licensed invest­ ingly young technology firms have been unable to attract ment funds managed by multi-skilled management teams, patient equity, capital, other than through the sale of who actively monitored the performance of portfolio com­ controlling interests. panies in which the investment pools have invested. The major investors in the market recognise the high risk By July 1987, the venture capital market appeared to be involved in venture and development capital. They are developing and a number of non-MIC venture capital currently concentrating on short term investments and are investment groups had been established (BIE, 1987). unwilling to wait for returns over the longer term. However, following the stock market crash in October 1987, MICs concentrated their investment in their existing The Task Force considers that there is currently a shortage investments and most non-MIC funds adopted more tradi­ of finance for these companies because there are some tional investment strategies. State public sector funds imperfections in the market including such "short-termism" which had been very active retired from the provision of and the lack of a successful venture capital track record in finance for small businesses. Australia.

Since October 1987 and the "flight to quality" by investors, most MICs have only been able to raise capital through Because of Australia's distance from tl1e major capital guaranteed, low risk schemes, despite the 100 per international markets, the size of Australian cent tax concession. Less than 10 per cent of the capital domestic markets and the lack of a history of raised by MICs is available for new investment at the 'big winners', professional investors current time (MIC Licensing Board, 1991). overcompensate the risk/return trade-offs.

Respondent to questionnnaire

18 Institutional Investment pooled investment because of the lack of experienced specialist investment management teams with demonstra­ One potential source of equity finance for small and ble track records. medium sized firms is financial institutions, especially superannuation funds. Major institutions (life insurance Further, they do not have, and do not want to have, and superannuation funds) are the main providers of specialist staff to undertake the people-intensive, time­ capital in Australia. By the tum of the century, some consuming process of searching for, assessing, making and commentators believe that superannuation funds will have monitoring direct investments as well as realising these S600b in assets. illiquid investments in small businesses.

Some of those consulted by the Task Force suggest that In the United States between one and three per cent of since the current growth in superannuation funds has been assets from pension funds (the equivalent of Australia's induced by government policy, the funds are morally life insurance and superannuation funds) is invested in obliged to make investments that are in the national venture capital. There is also a large mutual fund commit­ interest, such as investments in industry development. ment to high technology industry funds. The Task Force Others argue that since small and medium -sized businesses believes that Australia's superannuation funds should in­ are forced to contribute to superannuation funds, the funds vest a similar amount in venture and development capital should be required to invest in small and medium-sized in order to fund the development of Australian industry. businesses. A paper by the actuaries, TPF&C (1991), recommends that The growth in superannuation fund assets will tend to development capital, which is funding for the expansion divert private sector savings and capital investment from and growth of firms, deserves consideration by superan­ banks to superannuation funds. Superannuation fund nuation funds. Based on an assessment of risk, return and investments focus on property, secure financial instru­ covariance, they found that the inclusion of a small propor­ ments and a small number of top companies, whereas tion of high risk capital enhanced the expected returns of private individuals may invest in a broader spectrum of portfolios. companies, and banks lend to a wide range of companies. The paper suggests that trustees of larger superannuation The growth in superannuation fund assets has therefore funds should consider a small allocation of between one reduced the access of small and medium sized businesses and three per cent to this asset class, concentrating on to funds from banks and private individuals. For this development capital. reason the Task Force considers that superannuation funds should be encouraged to invest in venture and development Such a change, although welcome, does not address the capital. needs of young, early stage companies. The Task Force considers that there is a shortage of capital for such firms, There are some recent indications that superannuation particularly those that require venture capital. funds are considering investments in small and medium sized businesses. One of the major difficulties is that the institutions generally deal in large amounts of capital, which are completely out of proportion to the scale of The bank has been involved as an intermediary investment that is required by most small and medium between researcher/inventor and organisations who sized firms. The gap between the major institutions, which might be able to assist the researcher in bringing the are the main providers of capital, and the smaller technol­ product to market...the overall level of enquiries ogy-based Australian firms is so great there will probably received by the CBA and the difficulties we have never be a direct flow of capital from those institutions into experienced with many potentially worthwhile small and medium-sized Australian firms. projects lead me to conclude that there is no patient, long term investment market for small/medium busi­ Savings institutions have not been significant providers of nesses with a high R&D component. venture capital in Australia, either directly or through MI Cs or other pooled investmen tfunds, other than leveraged Ian Payne, Deputy Managing Director, buyout funds established during the 1980s to buy and Commonwealth Bank restructure large mature businesses through the provision of equity with substantial debt finance.

The Government has attempted to encourage wholesale institutions, particularly superannuation funds, to invest Because these businesses are considered to be a high risk, through development capital pooled funds in private com­ it is difficult for them to attract capital, in particular equity panies, whereas the funds' current preference is to restrict capital they require for growth. These businesses have the equity investments to highly liquid leading Australian and potential to provide the basis for a strong and innovative overseas equities. However, they are reluctant to consider industry in Australia.

19 Unlike the Industry Commission (1991), I.he Task Force mate. Accordingly it considers that action is warranted to does not believe it is appropriate to simply wait until I.he overcome this short term focus. economic climate improves, but believes I.hat action is needed now, before too many of Australia's promising Major institutions invest in asset classes and I.he asset firms disappear. classes are largely determined by actuarial advisers. In the main the asset classes consist of fixed securities, equities, The Task Force considers I.hat superannuation funds have overseas funds, property holdings and cash. At the moment a role to play in the development of Australian industry, there is no asset class to cover unlisted securities, which ·and that they would make a significant contribution by includes equity holdings in unlisted companies. investing a small proportion of their funds in venture and development capital. There is a belief among some capital managers that until development capital is regarded as an asset class, there will Australian superannuation funds invest part of I.heir funds not be a reasonable investment from financial institutions overseas, as a means of spreading risk and maximising into Australian industry. The Task Force supports the returns. Of I.he total $130b in assets of superannuation introduction of development capital as an asset class, in funds and approved deposit funds in Australia, $I.6b or line with overseas practice. about 1.2 per cent is invested overseas (Australian Bureau of Statistics, 1991). During the Task Force's consultations, the following ini­ tiatives were also suggested as ways of overcoming the The Task Force believes that where a superannuation fund perceived shortage of capital. invests more than 10 per cent of its assets overseas, it should allocate a small proportion of its funds to invest­ ment in Australian venture and development capital to Limited Partnerships support Australian industry. Many venture capitalists suggest that the introduction of Recommendation 11 Australia-wide limited partnerships legislation would as­ sist the growth of the venture capital industry. A limited Australian superannuation funds should be encouraged partnership is a hybrid structure which incorporates fea­ by the Commonwealth to invest one per cent of I.heir tures of a company and a partnership. notional assets in approved Australian venture and development capital projects. However, should I.he Limited partnerships consist of one or more general part­ superannuation funds be unwilling to commit funds to ners, who manage the business and have unlimited liability industry development in Australia, those with more and one or more limited partners. Limited partners invest lhan 10 per cent of their assets overseas should be in the partnership but do not participate in its management. required to invest one per cent of their assets in venture Their liability is limited to the extent of their contribution, and development capital. Where lhese investments are unless they become involved in the management of a made through intermediaries, the IR&D Board should partnership whe(e upon they lose their limited liability. approve those intermediaries. The terms of the relationship between I.he general partners and the limited partners are set out in a partnership agreement OTHER BARRIERS A limited partnership offers the advantage of limited According to some finance providers, barriers to greater liability for investors without the imposition of company venture capital and development capital investment by tax. However, partners are subject to tax individually. finance houses arise from the mechanisms used to compare therelativeperformancesofthefunds. Thesecomparisons Limited partnerships are the most common vehicle for are based on quarterly returns, thusnotencouraginginvest­ raising and investing in venture capital in the United States ment with a view to long term returns, but encouraging a and the United Kingdom. They are viewed as modified short term outlook. partnerships and in Australia are generally governed by state partnership legislation and the common law. Harper (1991), believes that although there is 'short termism' in the real market, the operation of the financial Although Queensland, Western Australia and Tasmania market ensures that short term investors are driven from the have limited partnerships legislation, there has been reluc­ market or are neutralised by the activities of those who tance to use this form of business organisation because of exploit the profitable long-term opportunities. doubt about whether limited partners retain their limited liability status when operating outside their state of origin. Despite this, the Task Force believes on the basis of its Australia-wide legislation which recognises the limited inquiries that there is a short term focus, particularly by liability oflimited partners from other states, would over­ major institutional investors in the present economic cli- come this handicap.

20 The Task Force considers that the introduction of Aus­ Reporting of Venture and Development Capital tralia-wide limited partnerships legislation is imperative Investments for the growth and development of the Australian venture capital industry. In order to encourage public scrutiny of venture and development capital investment by superannuation funds, In the past limited liability has been seen as a "reward" for the Task Force considers that superannuation funds should increased disclosure by companies, which results in in­ be required to publicly report on their venture and devel­ creased protection for investors. There may be some opment capital investments in their annual reports. concern that limited partnerships allow investors to have limited liability without requiring increased disclosure. Recommendation 15.3

For this reason the Task Force considers that limiting Superannuation funds should report on their Australian participation in limited partnerships to professional inves­ venture and development capital investments in their tors, who do not need a high level of protection, will meet annual reports. the needs of the venture capital industry.

Recommendation 15.1 Rollover of Capital Gains Tax

Australia-wide legislation should be introduced allowing The Task Force considers that investors in small businesses limited partnerships for professional investors. who wish to sell up to take advantage of a more attractive proposition are encouraged to remain in a lower perform­ ing business in order to reduce their capital gains tax The 'Prudent Man' Rule liability.

Legal requirements on superannuation fund trustees, espe­ The Task Force recommends therefore that there be provi­ cially the "prudent man" rule, oblige them to be more sion fora capital gains tax rolloverunderwhich tax liability cautious with their funds than they would be when acting is deferred if the proceeds of an asset sale are reinvested. as individuals. According to the Industry Commission and some commentators (Finn and Zeigler, 1987), this may This issue was considered by the HouseofRepresentatives lead them to allocate less to smaller or riskier firms, than Standing Committee on Industry, Science and Technology they might without such constraints. (1990), which recommended that such provision be avail­ able to all trading firms. In order to maximise the effect of Some commentators suggest that there should be changes this provision and to limit the cost to revenue, the Task to the prudent man rule to allow a small proportion of Force recommends that this be limited to small technology venture capital investments. As suggested by the Austral­ orien red businesses. ian Small Business Association in its submission to the Industry Commission, it may be necessary to take steps, as Recommendation 15 .4 in the United States, to broaden the interpretation of the concept of the prudent man. Capital gains tax should be deferred on the capital gain realised by original equity investors on the sale of a Recommendation 15 .2 small technology-oriented business which is rolled over into another small technology-oriented business. The Changes should be made to the 'prudent man' rule to IR&D Board should have responsibility for approving encourage superannuation funds to invest up to three appropriate businesses. per cent of their assets in venture and development capital investments.

21 4 ALIGNING PUBLIC SECTOR RESEARCH TO THE NEEDS OF INDUSTRY

This chapter focuses on the activities of public sector research organisations and examines their relationship OUTLAY ON PUBLIC SECTOR RESEARCH BY with industry,. because the Task Force considers that the COMMONWEALTH relationship is one of the prime factors in ensuring research 1990-91 1991-92 is commercialised. $m outlays $m est.

CSIRO 421 448 Aligning public sector research to the needs of industry is DSTO 227 221 particularly important in Australia because, compared to Other R&D Agencies 212 222 other OECD countries, a high proportion (60 per cent) of Australian Research Council 172 242 Other Higher Education R&D 815 840 Australia's research is carried out in the public sector. Five Co-operative Research Centres 20 percent is carried out by Government Business Enterprises Industry R&O incentives 360 362 35 the Rural R&D 82 105 and per cent is by private sector. NH&MRC 95 103 Other Health R&D 12 19 The consultations undertaken by the Task Force indicated Other R&D grants 26 26 that successful commercialisation depends on continual TOTAL 2422 2607 feedback between end users and researchers - between those analysing the market, production and design aspects and !hose analysing the underlying technology. Source: Science and Technology Budget Statement 1991-92 (Budget related paper No. 6) Note Figures represent Budget appropriations. not the total A brief overview of major agencies involved in the per­ level of Government support. formance or funding of research in the public sector is set out in this chapter and consideration is given to mecha­ nisms aimed at further aligning their role and activities to the needs of industry. The Task Force examined Federal government funded research organisations and funding programs, with special emphasis on their attention to commercialisation. The Overview most significant of these organisations are discussed be­ low. The Australian public sector spends about $2.6b on R&D each year and of this about $1.Ib is intended to have economic benefit (Deparunent of Industry, Technology Commonwealth Scientific and Industrial Research and Commerce, 1991 ). Over half thepublicsector research Organisation (CSIRO} is carried out in government research agencies, mostly Commonwealth, with the remainder in higher education. CSIRO's main task will be the conduct of strategic No public sector research organisation in Australia has and applied research in suppon of national eco­ commercialisation of its research as its sole objective. nomic, social and environmental objectives Public sector research is undertaken Lo further Government objectives in defence, social and environmental policies, (Ministerial Guidelines, 1988). as well as for economic development. Research under­ taken for non-economic purposes can also have commer­ cial outcomes. For example, research into our natural CSIRO is Australia's largest research body and, wilh over environment can have outcomes with commercial poten­ 70 per cent of its research intended for economic benefit tial. (CSIRO, 1991), is the most significant public sector re­ search organisation in terms of potential for research commercialisation. CSIRO is unique in the breadth of GOVERNMENT RESEARCH ORGANISATIONS research undertaken - from radio astronomy to diseases in wheat, from genetic engineering to building construction. Public sector research agencies vary widely in independ­ ence, focus, clients, size and funding, resulting from the While CSIRO is mainly funded by direct appropriations wide range of objectives and functions of government from the Commonwealth, an increasing proportion of R&D. The value of the research conducted by a public funds come from collaborative ventures with industry and sector research organisation must be assessed by taking government, from government grants and from earned account of all its objectives. revenue. In 1991-92 it is estimated that more than $154m

22 of CSIRO's budget of $635m will come from external Compared to CSIRO, DSTO has a much greater emphasis sources. on electronics, communication, aerospace technology, product construction and engineering. Unlike CSIRO, CSIRO covers a large number of disciplines and has wide which is a statutory authority, DSTO is an integral part of experience in attempting to commercialiseresearch. Stud­ the Department of Defence. ies by the Bureau of Industry Economics (in preparation) have found that economic returns from the portfolio of DSTO's principal interactions with industry result from CSIRO research are significant. However, CSIRO reports assisting the Department in transferring products it has difficulties in finding companies willing to commercialise developed into commercial production. most of their discoveries. CSIRO noted a shortage of innovative firms, the precarious viability of some firms Quantifying the benefits of R&D carried out by DSTO is and a lack of venture capital. difficult, but studies of 75 projects from the past ten years have shown $2.66b in savings to Defence. Also the value During 1990, CSIRO developed a methodology for assess­ of the larger contracts placed with Australian industry ing national research priorities and deciding its own priori­ which result directly from DSTO's research since 1987 is ties and strategies in response. The method is based on $1 481m. assessment of: In recent years DSTO has given greater attention to • attractiveness.combining the potential benefits to Aus­ improving links with industry, including non-defence sec­ tralia in economic, environmental and other social tors, and increasing the commercial return from its capa­ terms and Australia's ability to capture these benefits by bilities and resources. It also promotes commercialisation converting technological progress to commercial or of the non-defence applications of its technologies. other gains; and There has been some comment that DSTO is a resource for • feasibility, combining what research could potentially industrial development that is currently under-utilised. accomplish and the national capability to achieve re­ The Task Force believes that it is not realistic to assume search goals in a timely way. that there are a large number of significant inventions in DSTO waiting 10 be commercialised. CSIRO examined 16 major areas of research directed to national economic, environmental and social objectives to DSTO has recognised the value of its skills to other reach conclusions on national priorities. organisations and has several Memoranda of Understand­ ing with other groups, for example with Telecom on CSIRO has changed its resource allocations in response to broadband ISDN. One option for improving the commer­ these priorities, both within Divisions and Institutes, and cialisation focus would be for DSTO to expand the number corporately at a rate of three per cent per annum. An and range of long term alliances with firms. The Task example of the results of this reallocation is an increased Force considers that DSTO should undertake a priority emphasis on strategic research in the minerals sector and setting exercise to identify areas of potential commerciali­ research on environmental aspects of economic develop­ sation and set up industry advisory groups to devise ment. Priority assessments will be regularly repeated at all industry development strategies based on DSTO expertise. levels of the Organisation. Following the Wrigley Report, the Defence Department and DSTO are reviewing whether all DSTO' s current Defence Science and Technology Organisation (DSTO) research should be conducted in-house. Commercialisa­ tion could contribute to the orderly expansion of the industrial base and a greater capacity to support Defence The mission of the DSTO is to contribute to the activities. development and implementation of Australian de­ fence policies through the application of science and The Task Force notes that DSTO has not been required to technology and through the provision of assistance obtain significant outside earnings. The argument has to the Australian Defence Force, the Department of been that DS TO does obtain 99 per cent ofits earnings from Defence, other defence agencies and, as necessary in its direct client. Although Defence Force requirements the national interest, Australian industry. will always take precedence, it is critical that DSTO develop good long term links with firms with a view to commercialising innovations originating in the Organisa­ tion. DSTO is unlike other public sector research agencies in that it has a single client that it works for directly. While The Task Force believes that within the limits of the DSTO has freedom to carry out research on its own Defence Force requirements, DSTO should carry out an initiative.all but one percent of its allocation must be spent exercise similar to that of CSIRO and ANSTO to identify on research intended to benefit the Defence Forces. the industrial capability available for commercialising its

23 innovations and should concentrate its efforts in those Australian Institute of Marine Science (AIMS) areas where Defence requirements, research expertise and industrial capacity coincide. The role of AIMS is to advance the development of · Recommendation 13 2 national knowledge of the marine environment; to communicate this knowledge so that it can be ap­ The charter of the Defence Science and Technology plied to the development, conservation and manage­ Organisation (DSTO) should be amended to allow it to ment of marine resources; to create opportunities for work more closely with industry. DSTO should estab­ technological and commercial development and to lish more long term alliances with companies, under­ foster co-operation between researchers with similar take a priority setting exercise to identify areas of interests. potential commercialisation and set up industry advi­ sory groups to devise industry development strategies based on DSTO expertise. AIMS is required to earn external revenue equivalent to 30 percent of its appropriation and has been given five years to reach this target. In 1990-91 the Institute earned 24 per • Australian Nuclear Science and Technology cent of appropriation from external sources. The Institute · Organisation (ANSTO) also operates within the Cabinet decision that it should ·. achieve a targetof25 percent applied research in five years ·. from I July 1990. ··· ANSTO' s corporate objectives are: Early this year AIMS commissioned an externalconsultant • to ensure that ANSTO's applied research, com­ to advise on opportunities for commercialising the Insti­ mercial and training activities in nuclear science tute' s research and to identify priority industries and and associated technologies contribute to Aus­ agencies to target for external earnings. . tralia's industrial innovation and environmental and health management; and . State Government Research Agencies • to ensure that Australia has the technical expertise and credibility essential to further its non-prolif­ State government research organisation expenditure is eration and wider national and international nu­ approximately $300m per annum, corresponding to about clear policies and interests. one fifth of all public sector research undertaken in Aus- ·.• tralia. About 80 percent of state agency research is directed ···• at economic development. ANSTO has developed Jinks with industry users. It has entered into several joint ventures with industry, set up A detailed examination of state government research was Australian Radioisotopes as a separate commercial enter­ not possible in the time available to the Task Force, prise and is actively pursuing commercial collaborations. however it is clear that the states undertake significant While ANSTO has a strong commitment to longer term amounts of research for the agricultural sector. research it now has a strategy of 70 per cent applied research to 30 per cent strategic. HIGHER EDUCATION

A country which is strong in research and weak in The primary role of the higher education research sector is applying that i:esearch is not strong in the global to undertake advanced teaching and research for the ad­ perspective. vancement of knowledge and the cultural, social and economic benefit of the nation. (ANSTO, 1991) The higher education sector carries out about 27 per cent of the nation's R&D. About a quarter of the research ANSTO has been required to work towards earning exter­ undertaken in the sector is intended for economic develop· nal revenue equivalent to 30 per cent of its appropriation ment. by 1993. It has already reached this target. The Organi­ sation has recently undertaken a clientanalysis and priority Higher education in Australia has its origin in the British setting exercise similar to that conducted by CSIRO to university system, where links with the private sector have further drive its commercialisation agenda. not been a tradition. Links with the commercial sector by Australian universities are patchy ,and although increasing in importance, are not considered by the Task Force to be as strong as they could be.

24 Funding Mechanisms ofpost-graduate training. In 1992, of IOOOnew Postgradu­ ate Research Awards provided, 100 will be Postgraduate There are three major sources of funds for higher education Research Awards (Industry). research: operating grants, and funds disbursed by the Australian Research Council and the National Health and The second program, the Australian Research Fellowship Medical Research Coundl. Other sources of funding (Industry) Scheme provides support to researchers for include grants from the Cooperative Research Centres between three and twelve months on at least a half-time Program, the Industry Research and Development Board, basis in an industrial or commercial environment. rural R&D corporations and councils, contracts, bequests and self-generated revenue. In 1992 the ARC will provide additional funding to support collaboration between industry and higher education insti­ Higher education operating grants cover infrastructure and tutions. The Collaborative Research Grants Program will salaries forteaching and research. In 1991-92 the research support researchers bringing advanced knowledge and component of general operating funds totalled $680m, techniques to bear on social or economic problems or equivalent to 70 per cent of the sector's total research opportunities. An important objective of the Program is allocation from government of $1.08b. the development ofcooperative links between industry and higher education institutions. Individual institutions receive operating grants on the basis of their educational profile. Educational profiles have in Industry involvement in other ARC programs is largely the past focused on teaching, however increased promi­ through the Key Centres for Teaching and Research and nence is now being given to the institution's research and the Special Research Centres. Key Centres are located at research training functions. existing departments in universities and institutes of tech­ nology and aim to boost expertise in areas relevant to national development and promote cooperation between The Australian Research Council (ARC} higher education and industry. Special Research Centres support large projects on the basis of their research excel­ The ARC is the main external funding agency for higher lence as well as the relevance of their work to Australian education research. The Council makes recommendations economic development and international trade. to the Government on the most effective distribution of Commonwealth research funds. It also provides informa­ tion and advice to the National Board of Employment National Health and Medical Research Council Education and Training on research priorities, coordina­ (NH&MRC) tion of research policy and means of strengthening interac­ tion between the public and private sectors involved in The objective of the NH&MRC is to advise the Australian research and development. Research funding from the community on the achievement and maintenance of the ARC programs in 1991-92 is estimated to be $242m. highest practicable standards of individual and public Expenditure in 1990 is shown at Table 4-1. health and to foster research in the interests of improving these standards.

Council programs include fellowships and awards, the Table 4-1Australian Research Council Funding 1990 provision of project and program grants for research, $m funding for particular medical institutes and centres such as the Walter and Eliza Hall Institute, equipment grants ARC Grants 63.3 ARC Fellowships (including industry fellowships) 9.1 and special initiative and investigation grants, and funding Special Research Centres 8.8 research units such as the Social Psychiatry Research Unit. Key Centres for Teaching and Research 6.4 In 1991-92 the NH&MRC budget is $10Im (Science and Postgraduate Research Awards (incl. lndustry) 34.3 Infrastructure 25.7 Technology Budget Statement 1991-92, Budget Related Other 8.2 Paper No.6).

TOTAL 155.8 Medical research is an area in which Australia has a demonstrated research strength. However, Australia has (National Board of Employment, Education and Training An­ not grown the large scale medical industry needed to nual Report, 1989-90) capture the economic benefits of high quality research or to provide the financial resources to support further re­ search activity. Of current ARC programs, two are directly focused on building bridges between higher education and firms. The However a promising recent development is the setting up Australian Postgraduate Research Awards (Industry) pro­ of AMR.AD which has established a number of collabora­ vide support for students to undertake projects supported tive agreements and strategic alliances with other pharma­ jointly by industry and higher education institutions as part ceutical companies.

25 -~

The Factor F scheme in pharmaceuticals allows limited private sector would also help to achieve the desired advantages to participating pharmaceutical companies linkages. provided that they actively export and undertake R&D. The long term aim of Government initiatives such as Factor Recommendation 9 F should be to stimulate the growth of a medical industry able to complement and reinforce Australia's excellence in By the end of 1996, each higher education institution medical resea{ch. should be required to find an amount equivalent to 5 per cent of its total Commonwealth funding for The Task Force notes that a concurrent study is examining research from industry. In addition, at least 10 per in detail ways to improve the commercialisation of medi­ cent of Australian Research Council expenditure and cal research. 10 percent of National Health and Medical Research Council expenditure should be set aside for projects that have demonstrated commercial commitment by Commercialisation of Higlter Education Research industry.

While recognising the primary objectives of higher educa­ Recommendation 133 tion research as being the advancement of knowledge, the training of research personnel and the dissemination of To encourage higher education and industry links, basic research results, the Task Force considers that sup­ joint industry and university appointments should be port for research in this sector could be more oriented encouraged by government. towards commercial outcomes. Strategic and tactical research undertaken in conjunction with firms can be highly intellectually challenging and provide research CROSS SECTORAL FUNDING MECHANISMS training equivalent to that gained through basic research. The Task Force is not convinced that the pursuit of Cooperative Research Centres Program academic goals precludes a commitment to contribute to goals tl1at benefit the economy. The Cooperative Research Centres Program, launched in May 1990, funds up to 50 Cooperative Research Centres Interaction has been strong in some areas, such as in the (CRCs). minerals industry. Perhaps this is because of the existence of the Australian Minerals Industry Research Association (AMIRA). AMIRA provides a well organised pre-com­ The objectives of the Program are: petitive research infrastructure with the expertise and • to support long-term high-quality scientific and capability of utilising academic skills and knowledge in technological research which contributes to na­ the service of their industry. However, with few excep­ tional objectives, including economic and social tions higher education interactions with manufacturing development, the maintenance of a strong capa­ and service industries in Australia have not been strong. bility in basic research and the development of The Task Force notes that while Australian universities internationally competitive industry sectors; obtain 2.6 per cent of their research funds from industry, the average for the OECD is about 5 per cent and some • to capture the benefits ofresearch, and to strengthen nations obtain as much as 9 per cent. the links between research and its commercial and other applications, by the active involvement The Task Force believes that the commercialisation of of the users ofresearch in the work of the Centres; higher education would be more effective if Australian • to build Centres of research concentration by universities considered commercial linkages as an integral promoting cooperative research, and through it a part of the research environment in much the same way as more efficient use of resources in the national do US and European Universities. In the US, for example, business linkages can be an integral part of academic research effort; and appointment procedures. • to stimulate education and training, particularly in graduate programs, through the active involve­ The Task Force believes that higher education institutions ment of researchers from outside the higher edu­ should demonstrate an increased commitment to commer­ cation system in educational activities.and gradu­ cialising research intended for economic outcomes and ate students in major research programs. develop relationships with companies to facilitate effec­ tive exploitation. One approach would be to ensure that research funding for higher education is more closely related to the end user. This would require changes in the These Centres link outstanding research groups in univer­ way funds are disbursed by government to higher educa­ sities and government research institutions with research­ tion institutions. Increased encouragement for the move­ ers and users in industry and other sectors of the commu­ ment of people between public sector research and the nity. They are intended to have a balance between longer

26 term strategic research and short-term market-oriented concerned that such reassurances may have been at the projects in order to forge links between science and expense of alienating the potential end users of the re­ industry. search.

The CRC Program will help to increase strong and inter­ The Office of the Chief Scientist advises that 12 of the first active links between various publicly funded research 15 CRCs include industry participants and that $59m is organisations and the private sector. The Task Force being contributed by industry over seven years. This is 11 believes that the Program has established strong and per cent of the total value of the Centres ($524m). There effective contacts between some of Australia's best re­ is also the prospect of significant future industry commit­ search groups, firmly linking those groups to the users of ments on a project by project basis which will increase this research, whether these be in industry or government. figure. Interaction will help all parties understand the constraints and meet the priorities of the others. According to CSIRO, proposals for the second round, which are being considered now, show growing industry Direct Commonwealth funding for the Centres will reach interest, with potential industry contributions of well over $100m a year (in 1990-91 dollars) in 1994-95, when all $200m. Centres should be fully established. The total contribution from all participants, including CSIRO and government The Task Force supports the changes to the second round research institutions, must at least match the Common­ guidelines which aimed to strengthen the commercial wealth contribution. goals of the program and lead to a balance between Centres involving government sector end users and industry. The The Task Force is concerned that in its consultations with Task Force considers that this will be achieved if 80 per industry, it encountered widespread criticism of the out­ cent of the second and third round Centres have significant comes of the first round of the CRC Program, on the industry participation. grounds that it was insufficiently oriented towards the The Task Force notes that all CRCs are required to have needs of industry. Many of those consulted felt that there active participation by the end users of the research but that was too great a focus on research rather than on commer­ a significant financial commitment is not mandatory. The cialisation. There was also concern about legal frame­ aim of requiring active participation is to ensure greater works and about access to the 150 per cent tax concession for industry participants. likelihood that the research will be commercialised or used to benefit society. While many of those who were critical recognised the In the experience of Task Force members, the level of excellence of the research involved, they were very con­ commitment of firms to a project is reflected in the extent cerned that the Centres lacked relevance to industry. They to which they are willing to provide funds. A strong believed that the research carried out by the Centres should financial commitment by the end users is an essential be both excellent and relevant to industry. indicator that they intend to develop the research.

Concern was expressed that the second round of CRCs The Task Force believes that about half the funding from would alsoresultin a preponderance of non-commercially the participants should come from end users, making their oriented Centres despite increased industry membership contribution about 25 per cent of total CRC funds after on the selection panels. In support of this belief several government funding under the CRC program is included. companies cited one of the criteria for second round CRC applicants which seemed to imply that commercial outputs The Task Force realises that some Centres may need to were to be avoided. prove their commitment to commercialisation before com­ panies will participate and that other companies prefer Centres will be expected to establish and maintain participating by contracting research on a project basis. long-term programs of basic or strategic research, Allowance for these preferences should be made when without immediately identifiable applications. It is estimating the degree of industry involvement. expected that these will be complemented by a series However, the Task Force believes that when each Centre ofshorter-term, more applied research projects which undergoes its first major review (expected to be at a few will be embedded in the overall programs of the years before the end of the contract), the level of industry Centre. (italics added) support should be examined. If a Centre fails to meet the required level of industry funding, consideration should be (Department of Prime Minister and Cabinet, 1991) given to reducing or discontinuing its CRC Program funding. The Task Force believes that the purpose of this criterion may have been to reassure public sector researchers that the The Task Force also is concerned about the availability of research did not necessarily have to be applicable, rather sufficient research management skills to effectively run an than that it should not be applicable. The Task Force is effective research program at all 50 intended Centres.

27 Recommendation 14.l Traditionally most rural research fund grants have been awarded to CSIRO and state research agencies. However, A significant financial commitment from end users since the Corporations have been formed, funding for •... should be a mandatory criterion for future funding of university research has increased as has research into post- < all CRCs. Higher. levels of financial commitment production activities and market analysis. Some concern should be encouraged from the private sector and has been expressed that the Corporations may move to government business enterprises. To achieve this, more short term research at the expense of the long term .80 percent ofall Centres awarded in round three and, potential of the sectors. Most of the Corporations are as far as possible in round two, should be in areas developing comprehensive research strategies for their .. ··• intended for economic development. industries with a view to improving commercial outcomes. .··.· ..

These should have a minimum private sector funding The Task Force notes that Australia has traditionally level of 25 per cent of the total centre budget invested a considerable proportion of its research in agri­ (including all participant and CRC program funds) culture and that farmers understand better than most the either as initial core funding or with a strong expec­ benefits it has brought. The growth over the last decade in tation that this would be achieved by the time of their industry funds going into rural research suggests farmers' first major review. Centres intended for economic concern for the long term viability of their industries has development failing to meet this requirement should not in any way lessened. have the continuance or level of their CRC funding reconsidered at their first major review. PUBLIC SECTOR TECHNOLOGY TRANSFER With regard to tax related issues, one of the major reasons that some companies have been reluctant to become in­ The transfer of technology from public sector research volved in the CRC Program has been the uncertainty about organisations is especially important in the Australian whether the full 150 per cent tax concession applies to economy where a high proportion of research is carried out contributions to the CRCs. The Australian Tax Office has in the public sector, and hence is not always directly recently advised that the ctawback provisions of the In­ aligned with the needs and capabilities of industry. come Tax Assessment Act apply to the CRC program. There is a need for intermediaries in the commercialisation The Task Force considers that this situation will severely process who act as facilitators and brokers, bringing to­ inhibit both participation by industry in the CRCs and the gether researchers with commercially valuable technology commercialisation of the CRC research. or capability and a firm able to benefit from the technology or capability. Recommendation 14.2 Universities and some research institutions have strength­ The Government should enact legislation to ensure ened their commercial role through the establishment of that the clawback provisions of sections 73C and technology transfer organisations. They provide commer­ 73D of the Income Tax Assessment Act do not apply cial liaison, consultancy, legal and patenting services to to CRCs so that industry contributions to CRCs are their host institution. eligible for the full tax concession. CSIRO's technology transfer company, SIROTECH, ad­ vises on technology transfer matters associated with the Rural Industry Research Corporations and Councils majority of CSIRO' s contracts, and monitors and manages CSIRO'sequityportfolio. Ithasstrongskillsinpatentsand The principal research funding agencies for rural indus­ commercial law. Changes are being made to integrate tries are administered through 18 R&D Corporations and SIROTECH more within the fabric of CSIRO; the Chief Councils reporting to the Minister for Primary Industries Executive of SIROTECH is a member of the CSIRO and Energy. The Corporations and Councils were estab­ Executive Committee and the Boards of CSIRO and of lished to encourage greater end-user participation in re­ SIROTECH are now identical. search and ensure industry research organisations are more active in the commercialisation of research, the realisation Most higher education technology transfer organisations of industry opportunities, and the transfer of technology. are small and lack the skills and resources required for effective technology transfer. The largest have turnovers Research expenditure undertaken through these bodies in of about $20m per annum. 1991-92 is expected to be $188m, of which approximately 40 per cent will be collected from industry levies. All but Some, like Unisearch at the University of NSW, three of the orporations are funded on a dollar for dollar Technisearch at the Royal Melbourne Institute of Technol­ basis up to a maximum of0.5 percentofthegross value of ogy, and Anutech at the Australian National University, production of the commodity. The remaining three are are profitable. Others are in a difficult financial situation. predominantly funded by Government.

28 Many are required to be self-funding and so technology The Government should facilitate the establishment of the transfer is only a small part of their activities. ATG but should not play a major role in its management. An initial Commonwealth equity holding, with sale to the Factors that limit the effective transfer of technologies in private sector at a later stage, would be one option. The these intermediaries are the wide ranging scope ofresearch ATG would probably need to have a S50m capital base, undertaken within anyone organisation and the wide range with the Commonwealth having a 20 per cent minority of related industry both within Australia and overseas to shareholder status. which it might apply. Recommendation 10 Many existing technology transfer bodies do not possess the resources, expertise nor charter to widely source, A technology transfer and development company supply and negotiate technology transfer. They are also should be established to buy and sell intellectual not in a financial position to further develop and market property and invest in and develop Australian tech­ promising technology. nology.

The Task Force believes that a substantial technology transfer and development company, an "Australian Tech­ PRIORITY SETTING AND LONG TERM nology Group", (ATG) should be established. Like the STRATEGIC RESEARCH British Technology Group it could become a centre of expertise in intellectual properly law, technology transfer The Task Force commends CSIRO for undertaking the and international negotiations. important task of priority setting, which is aimed at in­ creased commercialisation of research and will undoubt­ The ATG would identify technology-based profit opportu­ edly benefit the Australian economy. As noted above, nities, invest in their further development, and license, sell ANSTO has now also been through a detailed assessment or joint venture the developed technologies for profit. oftheneedsofitsend users with a view to the commerciali­ sation potential of its research. The ATG's strengths would need to be: The Task Force considers that the if a similar priority • expertise in the evaluation of technology, protection setting process were underlaken by all public sector re­ of intellectual property, management and leadership search institutions, the research prioriti~s of the public of research and development programs and in the sector would become much more closely linked with international marketing of developed technology; industry needs and capabilities.

• capital to invest in further development of technolo­ Recommendation 6 gies and the protection of intellectual property; All state and Commonwealth organisations respon­ • access to national and international sources of tech­ sible for research should follow the lead of CSIRO nology and markets for technology; and and assess their research priorities in the light of national benefits and industry capability to commer­ • the building of a critical mass ofexperLise in technol- cialise the results. ogy transfer and development. In the context of the priorities setting exercise organisa­ To be viable, the ATG would require a strong portfolio of tions should consider the types of relationships they might commercial prospects. Participating research organisa­ establish with firms. The evidence suggests establishing tions could provide intellectual property in return for long term relationships provides an efficient mechanism to equity. The ATG would not necessarily have exclusive capture most economic benefits from research. rights to buy intellectual property from government funded institutions but could negotiate with indi victual institutions The basis for a relationship between a public sector re­ to have first right of refusal. search organisation and a firm need not be specific, but should rather identify areas of mutual interest from which individual projects can be developed, funded and ex­ The Task Force considers the ATG should be majority ecuted. For example CSIRO and BHP are working to­ Australian owned and controlled and operate on private gether on research into waste management and have sector lines. Ownership could include major funds, major entered into a Memorandum of Understanding. The area research organisations and some existing technology trans­ is one that will grow in importance and is close to BHP's fer organisations, both in Australia and overseas. It would core business interests. be expected to be financially self-supporting in the long tenn. Another example of close relationships between public sector research organisation and firms is AMRAD, which has brought together several medical research organisa-

29 tions and companies to carry out research in promising ers that more initiatives are needed to bring researchers and areas. Part of the motivation is the desire by companies business closer together. Although some progress has been who depend on research to develop a productive relation­ made, the Task Force believes that a more collaborative ship with some of the world's best researchers. culture should be encouraged so that part of a research institution's research is undertaken with a view to commer­ Similarly, the Strategic Research Foundation (SRF) in cial outcomes, in conjunction with particular business Victoria has developed mechanisms for the selection, enterprises. evaluation, funding and development of major collabora­ tive research initiatives with industry. Research manage­ Commercial linkages should not dominate the activities of ment and commercial business linkages are built into Governmentfundedresearch institutions, rather they should SRF's initiatives from the early stages. A promising be factored into each institution's approach to research initiative is the solid oxide fuel cell technology involving management in a manner consistent with the objectives CSIRO, BHP, State electricity authorities and others. and priorities of the organisation.

The Task Force considers that the development of long­ Recommendation 13 .1 term relationships involving commitment by industry and public sector research organisations is crucial to effective Government bodies that fund or carry out research commercialisation. Shifting priorities and resource allo­ intended for economic benefit should be encouraged cation towards long term relationships provide clear sig­ to continue to reallocate their resources to areas or nals throughout the organisations of where future priorities projects where commercialisation of research is and opportunities lie. likely.

To ensure maximum economic return from government support for public sector research, the Task Force consid-

30 APPENDIX A TERMS OF REFERENCE

The focus of the Government's industry policy is to effective linkages between Australian research and the develop the competitiveness and export orientation of market place, including: Australian industries in order to improve the nation's trade performance. To further this objective, the Government • mechanisms to facilitate commercialisation of good announced in the March 1991 Industry Statement a study Australian research; to examine mechanisms to improve Australia's commer­ cialisation of research. • mechanisms to ensure the needs of Australian industry are adequately researched; It is recognised that many exploitable ideas and discoveries have not been proceeding through the commercialisation • financial mechanisms to encourage commercialisation; stage and many needs of Australian industry are not being adequately researched. For these reasons, Australia is not • a regulatory and business environment to encourage deriving all the benefits it might from its strengths in commercialisation; and research. • firm structures and relationships that facilitate commer­ The Minister for Science and Technology has therefore cialisation. appointed a Commercialisation Task Force to analyse Australia's performance in commercialising research, the impediments to commercialisation and methods of im­ The Task Force shall draw upon the expertise of business, proving the commercialisation of research. the financial sector, key individuals and interested organi­ sations. The study should examine both private and public The Task Force will report and recommend on possible sector models including the British Technology Group and models to promote commercialisation and encourage more brokerage services.

31 APPENDIX B PEOPLE CONSULTED

Mr Nick Callinan Mr Druce Managing Director Manager Advent Management Group AUSTRADE

Mr John Haupt Mr Ralph Evans Manager, New Technologies Managing Director Aerospace Technologies of Aust Pty Ltd AUSTRADE

Mr David Main Mr Hunter Manager, Planning Technologies Managing Director Aerospace Technologies of Aust Pty Ltd AUSTRADE

Mr Brian Mullery Mr Clive Palmer Managing Director Chairman Alliance Finance Aust Commercial Research Ltd

Mr Peter Cameron Mr Roger Buckeridge General Manager Director AMDEL Australian Computing and Communications Institute Mr John White Chief Executive Officer Prof David Midgely AMECON Director Australian Graduate School of Management Mr Jim May Director Mr Arthur O'Sullivan AMIRA Managing Director Australian Industry Development Corporation Mr Peter Cassidy Manager, Development Captial Mr Consandine AMP Investments General Manager Australian Industry Development Corporation MrL Hall Chief Manager Mr Bob Smith Investment Operations Financial Controller AMP Investments Austek Microsystems

Mr Ralph Ward-Ambler Mr Bill Mountford Director Director AMRAD Australian Manufacturing Council

Mr John Grace Professor Max Brennan Managing Director Chair AMRAD Australian Research Council

Dr John Morphett Mr Bruce Cooper General Manager Corporate Marketing & Business Development ANUTECH AWA Limited

Mr Duncan Wallace Mr Morris Newman General Manager Chairman Applied Research Pty Ltd Bain & Co

Mr James Kirby Mr Richard Gibson Consultant Director ATG Environment Technology Trust Bain&Co

32 Dr John Hendry Mr Vanda Gould Managing Director Chairman BHA Computers Pty Ltd Continental Venture Capital

Mr Russell Fynmore Mr Joseph Shlegeris Executive General Manager Director Corporate Development Continental Venture Capital BHP Mr Len Dainsford Mr Peter Laver Partner, Indirect Taxes General Manager Coopers & Lybrand BHP Mr Jeremy Pooley Mr Terry Chuah Senior Manager, Industry Policy Manager Coopers & Lybrand BHP Venture Capital Mr John Innes Mr Harold Tilley Group Executive Managing Director CRA BLE Capital Limited Dr Colin Adam Mr Gemmell Director, Institute of Industrial Technologies General Manager CSIRO BLE Capital Limited Mr Bob Ward Mr Mike Daling Chief Defence Scientist Managing Director Defence Science and Technology Organisation Calgene Pacific Dr Bob Hawkins Mr Tony Kjar Director, Bureau of Industry Economics Vice President Dept Industry, Technology and Commerce Comalco Aluminium Mr Ken Pettifer Dr John Eady Director, Food Products Section Managing Director Department of Industry, Technology and Commerce Comalco Foundry Products Dr John Ryan Ms Debra Lyn Deputy Director Structured Financing Products Group Bureau Industry Economics Commonwealth Bank of Australia Department of Industry, Technology and Commerce

Mr I K Payne Dr Harvey Anderson Deputy Manager Director Principal Project Officer Commonwealth Bank of Australia Bureau of Industry Economics Department of Industry, Technology and Commerce Mr Ken Mitchell Structured Financing Products Group Dr Hazel Moir Commonwealth Bank of Australia Assistant Director Bureau of Industry Economics Mr Ian Gust Department oflndustry, Technology and Commerce R&D Director Commonwealth Serum Laboratories Mr Adrian Caddy Assistant Secretary Mr Brian MacNarnee Development Capital and Business Taxation Branch Managing Director Department of Industry, Technology and Commerce Commonwealth Serum Laboratories Mr Geoff Hallinan Mr Roger Allen First Assistant Secretary, Light Industries Division Chairman & Chief Executive Department of Industry, Technology and Commerce Computer Power

33 Mr Doug Stuart Mr Ian Fraser Director, Aerospace B Section Managing Director Department of Industry, Technology and Commerce ETP Pty Ltd

Mr Paul Robinson Mr David Fisher Director, Industry Development B Group Executive Department of Industry, Technology and Commerce Export Finance and Insurance Corporation

Mr Keith Besgrove Mr Ed Tweddell General Manager, National Industry Extension Service Managing Director Department of Industry, Technology and Commerce Paulding

Mr Noel Benjamin Mr Ken Windle Director, National Procurement Development Program Managing Director Department of Industry, Technology and Commerce Glaxo Australia Ltd

Mr Ashley Cross Mr Chris Hudson Assistant Director, Industry Development Arrangements General Manager Department oflndustry, Technology and Commerce Goodman, Fielder, Wattie

Mr Drew Andison Mr Ken Sayers Director, Tax Concession Section Manager, New Projects Department of Industry, Technology and Commerce Hawker de Havilland

Mr John Grant Mr Bob Wells Assistant Secretary, Information Industries Branch Assistant Secretary Department of Industry, Technology and Commerce Department of Health, Housing and Community Services

Dr David Williamson Mr Joe Mohrich Assistant Secretary, Science and Technology Policy Branch Managing Director Department of Industry, Technology and Commerce Helitech Industries

Dr Mike Fitzpatrick Mr John Coughlan First Assistant Secretary, Innovation Division Director Department of Industry, Technology and Commerce Howard Florey Institute

Dr Michael Pitman Mr Clark Chief Science Adviser Director S&T Development Department of Industry, Technology and Commerce IBM Australia

Mr Bob Wells Mr Finn Assistant Secretary, Small Business Unit General Managing Director Department of Industry, Technology and Commerce IBM Australia

Ms Bev Clark Ms Barbara Gibson Assistant Secretary Manager, R&D Aerospace & Biological Industries ICI Australia Department of Industry, Technology and Commerce Mr Doug Shears Mr Bob Samarcq General Manager First Assistant Secretary ICM Australia Pty Ltd Resource Processing and Environment Division Department of Industry, Technology and Commerce Mr Garry Banks Commissioner Dr Ralph Jensen Industry Commission Assistant Secretary Resource Processing Branch Mr Ed Visbord Department oflndustry, Technology and Commerce General Manager Industry Commission

34 Mr Tony Maletta Mrs Jean and Mr Colin Austin Director Executive Director & Chairman Industry Commission Moldflow Pty Ltd

Mr John Taylor Mr Brian Powell Managing Director General Manager Innovation Management Montech Pty Ltd

Mr Graham Blackman Dr Eigil Neilson Managing Director Executive Chairman Institute of Drug Technology Peptide Technology

Mr David Hale Mr Geoff Lehmann Managing Director Partner Interactive Health Care Services Price Waterhouse

Mr James Fox Professor Ralph Slatyer Managing Director Chief Scientist lnvetech Limited Department of Prime Minister & Cabinet

Mr John N Almgren Mr Peter Farrell Chief Executive Officer Chairman J N Almgren Pty Ltd ResCare Limited

Mr Barry Davies Mr Jeff Bentley-Johnston Manager, Corporate Strategy Managing Director Kam brook Group Australia The Research Department Pty Ltd

MrKoKoike Dr David Cook Director Executive Director Komark Pacific Pty Ltd Australian Nuclear Science and Technology Organisation

Mr Tony Oxley Mr Lincoln Wood Managing Director Centre Director Labtam Australia Pty Ltd Royal Melbourne Institute of Technology

Mr Peter Boek Mr Ian Shedden General Manager Chairman Leading Edge Technologies Ltd Shedden Technology Management Ltd

Mr Graham Mr Henry d'Assumpcao Executive Director, Corporate Banking Group Director Macquarie Bank Limited Signal Processing Research Institute.

Mr Rob Maclean Mr Peter Couldry Managing Director Director McKinsey & Co Inc Sola Optical

Mr Denis Hanley Mr Phillip Kelly Managing Director Manager, Investment Banking MEMTEC State Authorities Superannuation Board Chairman, Industry Research and Development Board Mr Martin Smith Mr Rod Smith Development Capital Manager General Manager State Authorities Superannuation Board Merino Wool Harvesting Mr Peter Sheehan Mr Bob Greenelsh, Manager Chairman MIM Marketing of Technology Strategic Research Foundation MIM Holdings Ltd

35 Mr Stephen Derrick Mr Andrew Duff Managing Director General Manager Strategic Research Foundation The Knowledge Precinct

Ms Jo Staines Mr Richard Kaan Project Manager Managing Director Strategic Research Foundation Unisearch

Mr Tony White Professor Don Aitkin Deputy Managing Director Vice Chancellor Sydney Water Board University of Canberra

Mr Paul Green Mr David Midgley General Manager Australian School of Management TCGLtd University of New South Wales

Mr John Riedl Prof Chris Fell Chief Executive Officer Pro Vice Chancellor Research Techniche Ltd University of NSW

Dr Peter Dallimore Mr Keith Peterson Director Executive Director, Uniquest Ltd Technology Innovation Management University of Queensland

Mr Bob Taylor Prof Ron Johnston General Manager Director, T ASC Techsearch Inc. University of Wollongong

Mr Wragge Dr Andrew Davis Executive General Manager ADPRO Business Manager Telecom Research Laboratories Vision Systems

36 APPENDIX C FINANCE SURVEY

1 In the last three financial ye~rs has your firm sought external finance (debt or equity)? yes

no Thank you, no more questions.

2 What type of finance was sought and/or obtained? sought obtained yes/no yes/no debt equity

3 Did you seek or obtain the finance from Australia or overseas? sought obtained yes/no yes/no Australia

overseas

4 If sought overseas was this because of failure to obtain finance in Australia? yes/no

37 5 From what type of organisation did you seek or obtain the finance?

sought obtained yes/no yes/no venture capital firm

bank

finance company

private individual

unrelated company

other (specify)

6 To how many different organisations or individuals did you make an application before you were successful in obtaining finance? Do not include informal approaches.

Australian overseas applications applications

one

two

three

more than three

7 lid your application, either initially or revised, provide information about projected turnover and return on investment for the firm?

yes

no

If yes what were the figures? sales growth return on ( % pa) investment ( % pa)

year 1

year 2

year 3

year 4

38 8 What reasons were given for refusing your application or any of your applications?

Australian Overseas applications applications

application not refused

no reason given or no response from finance provider

not investing at present outside our investment criteria

collateral considered inadequate

business plan considered not sufficiently developed

not convinced of firm viability

other (please specify)

9 The Task Force would greatly appreciate any comments you might also like to make on:

the relative ease of obtaining finance in Australia compared with overseas

the approach taken by Australian financiers in assessing proposals compared with their overseas counterparts

the different conditions needing to be met to secure finance in Australia compared with overseas.

Could you please send it by Friday 20 September to Pat Boling by (preferably) fax on (06) 276 2188, or by mail to:

Science and Technology Policy Branch Department of Industry, Technology and Commerce GPO Box 9839 CANBERRA CITY ACT 2601

September 1991

39 APPENDIX D REFERENCES

ANSTO (1991), ANSTO Strategic Plan ... an update 199112-1995!6

Australian Bureau of Statistics (ABS), Catalogue No 8104, 1988-89, Research and Experimental Development Business Enterprises in Australia

Australian Bureau of Statistics (ABS), Catalogue No 8203, 1988-89, Manufacturing Industry Details of Operations in Australia

Australian Bureau of Statistics (ABS) (1991), Catalogue No5656.0, Assets of Superannuation Funds and Approved Deposit Funds

Australian Law Reform Commission (1988), General Insolvency Inquiry

Australian Manufacturing Council (1991), Networking and Industry Development

Australian Science and Technology Council (ASTEC) (1991),Research and Technology: Future Directions

Barker, Rand Brady J, McKinsey and Company Inc, (1991) Partners in Innovation: Business and Academia

Bureau oflndustry Economics (BIE) (1987), Review of Venture Capital in Australia and the MIC Program

Bureau of Industry Economics (BIE) (1989), J50 per cent Tax Concession; Interim Report, Program Evaluation Report No. 7, AGPS, Canberra

Bureau of Industry Economics (BIE) (1991a) Networks: A Third Form of Organisation, Discussion Paper No 14

Bureau ofindustry Economics (BIE) (1991b), Australia's Cost of Capital, Discussion Paper No 15

Centre for Technology and Social Change (TASC) (1990), Technology Strategies for Australian Industry

Commonwealth Scientific and Industrial Research Organisation (CSIRO) (1991), Data Book

Department of Industry, Technology and Commerce (DITAC), (1991) Australian Science and Innovation Impact Brief 1991

Department of Industry, Technology and Commerce (DITAC) (in preparation), Australian Science and Innovation Resources Brief

Department of Prime Minister and Cabinet (1991), Cooperative Research Centres Program, Guidelines for Applicants, Second Round

Espie Committee (1983), Developing High Technology Enterprises for Australia

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