Business innovation – the development of new products, processes and organisational methods – is an integral component of industrial development. It is the way in which businesses adapt to changes in technology and markets and is essential to increase the productivity and international competitiveness of an economy.

Without business innovation, Australia will be unable to achieve our national economic ambitions. Adapting for the energy transition, implementing new digital technologies, diversifying our industrial base, and even simply building enough houses will all require a huge innovation lift from our businesses.

It is therefore very heartening to hear that business innovation in Australia is in rude health.

Most Australian businesses attempt innovation, most attempts produce successful results, and all industries – not just the tech sector – are doing it. We are also outcompeting our peers, with Australia ranking highly on international innovation league tables.

Readers might be quite surprised to hear this good news about innovation. Because, as we covered in a previous Research Note, Australia’s R&D performance leaves much to be desired. Australia business R&D has dramatically fallen over the last decade, and we have slipped toward the bottom of the international rankings.

What gives? Aren’t R&D and innovation somehow connected? And how can Australia be doing so well on business innovation when we do so poorly on R&D?

This Research Note attempts to get to the bottom of this paradox. Crunching data from the Organisation for Economic Cooperation and Development (OECD) and Ai Group’s own 2024 Industry Outlook Survey, we examine what is going on in the engine room of Australia’s innovative businesses.

The data tells a clear story: Australia excels at process innovation – deploying new technologies and practices to improve business performance – which we do across businesses of all sizes and industries. Our capability to “do something new” have led to us the top of the international leaderboard.

How many Australian businesses engage with innovation?

Let’s start with the good news: the majority of Australian businesses are engaged in innovation.

In 2021, some 67% reported they are “innovation active”, which means they are undertaking efforts to develop innovations. And 62% of businesses report they are “innovative”, meaning they have introduced the result of these development efforts into the operation of their business.

Based on the most recent counts, this suggests that 1.8 million businesses in Australia are currently engaged in innovation.

There are some slight differences between industries. The ICT and finance industries have the highest innovation rates, while professional services and mining rank the lowest. But while there are slightly higher rates in consumer-oriented sectors, the spread across industries is relatively modest.

And contrary to the mythology of the innovative startup, size doesn’t matter much when it comes to innovation. Activity rates are very similar for both SMEs (68%) and large businesses (65%).

Most reassuring is the fact that nearly all innovation efforts are successful. The split between activity and introduction rates are very small, with 92% of businesses who attempt innovation reporting it proceeds to a deployment result.

This shows that investing in innovation is a far less risky proposition than many might imagine.

Overall, this data paints a picture of vibrant innovation practices in Australian industry. Most businesses do it, and nearly all succeed when they do it. But how do we fare in international comparison?

How does Australian innovation perform in international comparison?

Australia performs quite well on innovation compared to our peers, sitting towards the top of the pack in the international ratings.

Australia ranks seventh out of 36 countries in the OECD innovation ranking. Our innovation rates are around 12 percentage points higher than the OECD average, where only 55% of firms are innovation active and 49% are innovative.

And even when we compare ourselves to ‘major economy’ peers, Australia comes out well. Our innovation rates exceed the likes of France, Ireland and the UK, countries that our innovation systems sometime try to emulate. And they are well ahead of the US, Japan and Korea.

Amongst major economies, only the noted innovation powerhouses – Germany and Canada – perform better.

Australia’s innovation performance is seemingly paradoxical, given our weak performance on research & development (R&D). With an R&D rate of only 1.9% of GDP, Australia sits 19th on the OECD ranking. Over the last decade we have slid seven places down the league table, as our R&D rate fell while our competitors’ rose.

This paradox points to an essential fact about innovation – it’s not simply the commercial application of R&D. Innovation can be achieved without R&D at all, and strong R&D performance is no guarantee of successful innovation.

Australia shows that R&D is not necessarily the pathway to commercial innovation.

What exactly are we innovating for in Australian industry?

The type of innovation done in Australia has a distinct profile. Many people make the casual assumption that innovation is simply about inventing new products. But business innovation activities can be classified into two main types:

  • Product innovation: the development of new goods and services that differ significantly from what is currently in the market.
  • Process innovation: the development of new or improved processes for core business functions.

From a productivity viewpoint, process innovation is just as, if not more, important than product innovation. It is process innovation that increases efficiency, lowers costs, and allows a business to pivot to new markets.

And it is process innovation that Australia does best. 58% of Australian businesses are engaged in process innovation, accounting for the majority of the 67% which are innovation active. Less than half as many (28%) target product innovation.

Most innovation in Australia is about ‘doing something new’ rather than ‘inventing something new’.

Surprisingly, this orientation to process innovation is common across all industries. For some – such as mining and utilities – this reflects the fact they produce a commodity product that is difficult to innovate. But even higher technology industries with product differentiation like manufacturing, ICT and finance all display a strong process innovation bias.

Large businesses are also more likely than SMEs to do product innovation. This reflects the fact that product innovation, which requires launching new products into the market, demands a degree of scale. But process innovation is slightly more common in SMEs given its lower overheads.

What are the innovation strategies of Australian businesses?

Australia’s strength in process innovation is reflected in the innovation strategies which businesses deploy. Data from the 2024 Ai Group Industry Outlook Survey shows that productivity improvements are the main way we innovate.

The top innovation strategy, pursued by two-thirds of innovation-active businesses, is integrating new technology into existing processes. This is the simplest, but often most effective, form of innovation: acquiring commercial technologies and refitting them into your business. It plays a critical role in helping bring Australian industry up to the global technology frontier.

Changes to how a business operates – either through process innovation (55%) or business model innovation (32%) – are also important. Business model change is an often-overlooked but critical component of innovation, and can help better position a business to enter new markets or compete more effectively.

By contrast, inventing new goods and services is less common. Only 15% of innovation active businesses are targeting ‘new to the world’ product innovation, while 25% pursue ‘new to Australia’ products.

Overall, this data shows that the innovation orientation of Australian business is squarely focused on productivity improvements. Technology and process is the target of most innovators, with product invention less common.

What is holding innovation back in Australia?

Despite Australia’s strong innovation performance, we could always do better. When we ask businesses what is inhibiting their innovation efforts, they provide a surprisingly mundane answer: it’s the exact same barriers to success that affect business operations as a whole.

The most common barrier to innovation is uncertainty regarding business conditions (55%). As innovation involves risk, this is somewhat unsurprising. When businesses are uncertain regarding future trading conditions, their capacity and appetite for change and risk is lower.

Stable and secure business conditions enables innovation.

Indeed, this might explain why Australia performs so well on innovation metrics. Prior to the pandemic, Australia had enjoyed a world-record setting 29 years without a recession. And our economy was less impacted by major disruptions – such as the GFC or COVID – than our peers.

Skill shortages, a perennial business challenge in Australia, are also highly ranked (41%). Innovation inherently demands change of a business, and it is unlikely their existing workforce is correctly configured to see a project through to deployment. But with many specialist occupations in short supply in Australia, our limited skills pool can hold innovation back.

Some businesses point to funding issues – such as uncertain financial returns (30%), access to funding (28%), and government grants (26%) as an innovation inhibitor. This is especially challenging for established businesses in traditional industries, which are unlikely to be able to tap innovator-friendly funding options such as venture capital or related grant programs. 

But finding innovation partners is not identified as a major problem. Only 13% report they lack commercial partners, and only 3% lack university partners. This is significant, given that much of the focus in innovation policy in Australia on mobilising the research sector for commercialisation. This data suggests such an approach fails to identify the real pain points – certainty, skills and funding – facing Australian innovators today.

Overall, these are a very “BAU” set of business inhibitors. Indeed, they are the same factors that Australian businesses cite regarding their general investment or employment intentions. Innovation is viewed in much the same way as other major business decisions. Indeed, this reaffirms how innovation is very much mainstreamed in Australian business thinking. Most businesses attempt innovation, their activity is shaped by normal business factors, they mostly target productivity improvements, and nearly all who attempt innovation get a positive result. Innovation isn’t something exotic that belongs to tech companies and startups, but a normal part of business life in Australia. And we have standing on the international rankings to prove it.

Dr Jeffrey Wilson

Dr Jeffrey Wilson is Ai Group's Director of Research and Economics. He leads our economics team, and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities. He specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.