In our 50th episode, I had the great privilege of exploring innovation, productivity and the Australian Business Model with Catherine Livingstone AC. Catherine is a distinguished and extraordinary contributor Australian public and business communities, having held a range of roles including CEO of Cochlear, chair of Telstra, chair of CSIRO, chair of Commonwealth Bank of Australia and currently Chancellor of University of Technology Sydney.
In this extended conversation, we set the scene with some discussion around industry and neoliberal policy and explored the role government played in the formative stages of Cochlear. The Australian Business Model, an idea that has been in motion over the past few years, was discussed and the phase change that is underway, at both scale and speed. While the global market will sort things out, there are policy and government decisions to be made to either accept ‘what is left over’ in contrast to how can we take control of the future that Australia wants. Catherine noted that industry policy has been tarnished in recent years with a sense that this currently is seen as corporate welfare or grants. Australia needs to look at its comparative advantage and take this to globally competitive advantage. We discussed examples from Singapore and Taiwan, and reflected on the recent podcast with Dr John Howard around the impact of issues of design and policy.
We also explored the question of ‘what is productivity?’ and drew parallels with health, in that everyone really wants it but it’s rather tricky to define! We discussed productivity and introduced the ideas of capital and technology deepening as a means to this very broad end. Catherine noted that solutions are at disaggregated levels and different in market and non-market sectors, and reflected on a recently published McKinsey study from the USA. Catherine introduced the need for investible propositions and the role of government signalling through policy and its convening power. We agreed that thoughtful design of industry policy needs to be at the centre of government thinking around what Australia’s future business model could be.
Catherine also contended that Australia has a challenge around research translation. We teased out what this means and connected the concept to investible propositions, reflecting back on the Cochlear experience. In identifying that Australia has a deep tradition in integrating technologies, we then explored why the capability to integrate hasn’t found its way into Australia’s ability to translate. We touch on factors such as management impatience, (sporadic) government funding and (changing) policy settings. The ‘Missing Middle’ was the centrepiece of the 2023 National Innovation Policy Forum. Catherine and I discussed whether there is, in fact, a missing middle and whether this nomenclature is helpful in improving Australia’s ‘innovation’ translation performance.
A concept that we’ve had on the podcast for some time is that Australia has a ‘demand side problem with innovation’. Catherine suggested that we are not good at communicating our successes, with a lot of innovation adopted internally and not necessarily in the form of a new venture. We noted that if you don’t have sectors looking to solve problems, or don’t have the sectors, you don’t have the problems! We then reflected on the need for government to become a demanding customer and how they may not be geared that way. I reflected on our recent discussion with Kerstin Oberprieler and her government procurement experience. Our conversation with Catherine reflected on a combination of risk aversion and brand familiarity driving current government procurement. Catherine noted that with things moving quickly, it’s harder for people, and specifically, bureaucrats, to be immersed in and informed as a purchaser. How do industry and government build better connection to be well informed buyers and sellers?
We closed our conversation with Catherine outlining her hopes for the upcoming Economic Reform Roundtable. Catherine shared an ambition for a whole-of-system review, where choices are made that are consistent in scale and impact – not laundry lists. Furthermore, activities should be implementable and their interdependence recognised, for which a systems view is required.
This was an extraordinary conversation, exploring a range of perspectives around the intersections of the innovation system, and government and business needs. While we touched on this in our most recent discussion with Dr John Howard in Episode 49, the discussion with Catherine connected to so many themes that we have explored in the podcast from case studies connected to translation with Ray Miller, Alan Finkel, Victor Pantano and Tony Peacock through to the 2024 National Innovation Policy Forum reflection with Jane O’Dwyer.
Transcript
CB: Hello everyone, and welcome to Tech Transfer Talk and for those that follow us, the 50th Tech Transfer Talk. My name is Cameron Begley, Managing Director of Spiegare. And joining me on this occasion, both in terms of being the 50th and leading into the Productivity Roundtable in Australia in a couple of weeks’ time, is Catherine Livingstone. For our Australian listeners will need little introduction, but for those listening slightly further away, Catherine has an unrivalled CV when it comes to talking about innovation and productivity, is current chancellor of the University of Technology Sydney, but more importantly has a wealth of experience across the innovation and private sectors, having chaired the Commonwealth Bank, Telstra and CSIRO. Catherine, I could go on but I shan’t. Welcome.
CL: Thank you, Cameron.
CB: It’s wonderful to have you with us today. The timing is exquisite with regards to the upcoming discussions in Canberra in the weeks ahead. Catherine, just maybe to get us going, how on earth did you find yourself so embedded in the world of innovation and making things come about by way of research, translation and commercialisation?
CL: I think it really started when I was working for Paul Traynor in the company called Nucleus, and it was from Nucleus that Cochlear was born. It was a research project and then, of course, was IPO’d out of Nucleus. But the point about Paul was that he had a vision for a medical technology sector in Australia. This is even before he really had a company that dealt with medical technology. So, his bold vision, and he was someone who didn’t take no for an answer, he made…
CB: That’s important.
CL: Yep. And he made sure he developed a very, very close and constructive working relationship with the industry ministers of the time. So, John Button, some people might remember, and because he saw it as really important that government and business worked together. We didn’t really talk about the word ‘innovation’ at the time. I think if you look back, innovation as a concept in Australia really came to the fore in about 2000 with that innovation summit, and then Barry Jones’ spaghetti diagram and Building Australia’s Ability I, II, et cetera. But what Paul had was a huge commitment to the national interest to Australia, hence the commitment to building a technology sector and doing it with government, in partnership with government.
CB:Yeah. It was certainly an interesting time. And let’s go back to John Button. It might be an interesting place to start. Certainly someone who inspired industry policy and it sounds like Paul was also focused on an industry approach for the medical technology sector. Yet at the same time, one might argue, there was an embracing of the free market, neoliberal approach or neoliberal philosophy of ‘Well, we’ll just trade our way through, things will be great at what we’re great at and trade everything else’. Yet that sits somewhat in contrast to that. Don’t you think that someone had a vision of a sector to be built from scratch?
CL: Well, I don’t think so. I mean, it was embedded in free market in the sense that that whole development, if I take the Cochlear example, which was part of Nucleus. I mean, the government contributed the public interest grant, but with really tough milestones. Really tough.
CB: Interesting.
CL: And Nucleus/Cochlear had to go and meet those milestones in terms of the technology translation, which we might come back to later…
CB: Yes.
CL: Using the IP from Melbourne Universit and really, it was up to Nucleus to prove that there was a market for the cochlear implant and, and ultimately to be profitable or not in that quest for a market. So, the free market was there. The government had just seen there was this world-beating IP sitting in Melbourne University. And it wasn’t going to go anywhere because Melbourne University didn’t have any more money. And it’s not the role of a university to go forth and start building prototypes and then scaling up, because universities just don’t have the money. So, it’s the intervention by government to say ‘There’s really good IP. Someone needs to do something about it. We’ll go and find that someone’ which was Nucleus, and there was an RFP at the time. ‘And we the government will share the risk. So, we’ll put the public interest grant in. But there will be very clear milestones. And at the end of the day, when Nuclus/Cochlear is successful, they’ll pay us a royalty’. Which is exactly what happened.
CB: It would seem then that that model gets replicated in part, we look at what we have today. There are echoes of risk sharing there at milestones and government support. But that sounded like a very, very well-structured participation or intervention investment from the government.
CL: I think that’s the point. It was thoughtful and it was well-structured, I would say well-designed. And I think what we have seen probably in the last decade or so, from the policy perspective, is too much change. Every time we have, not just a change in government but a change in minister, and I’m talking about industry ministers in particular, we see a change in policy. So, it’s really hard for business to organise itself around a policy environment that’s constantly changing. Whereas this one that supported Cochlear was a very long-term policy, because it was going to take a long time to get from prototype through to market, etc. So, that consistency over time, whereas we don’t have that consistency now and nor do we have the thoughtful design. We have cherry picking, we have ad hoc, we have announceables. And I’m not commenting on either side or whichever side of politics here. It’s been a consistent pattern. And until we accept that from the government side, there has to be long-term, consistent policy, which doesn’t mean it can’t change and it can evolve. It can be fine tuned, but we have stop-start and between the stop-start, that can be an interregnum of two years, three years.
CB: I would like to come back to those issues of ad hoc and policy shift. Where I’d perhaps like to take our conversation, if I might Catherine, is this notion of an Australian business model. This idea has been circulating in the innovation conversation. It came up in the National Innovation Policy Forum, of which you’re a significant thought leader in. And I noted that in some remarks that you made actually, this idea that drift is no longer an option. I guess what I interpreted that as, Well, let’s just let the free market sort that out, and we’ll allow markets to dictate what we’re good at and be good at that’, and so on and so forth. But are we having a shift in ideology at the moment? And what prompts me to ask that, is the Future Made in Australia and these issues of sovereign interest that seem to be percolating through Biden, and the Inflation Reduction Act was an example, FMIA (Future Made in Australia) was another, are we at a point of phase change?
CL: Well, we absolutely are. I mean, I would say as far as Australia is concerned, we are. There are so many elements that are. Whether, for example, it’s as basic as climate change. And the east coast of Australia is now threatened in high population areas repeatedly, which is a huge economic cost as well as obviously personal distress. We have a massive wealth transfer happening and intergenerational wealth transfer in the context of superannuation structure, which is now $4 trillion; every time you turn around, it seems to go up another trillion dollars. We’re also dealing on the geopolitical front, as we know. And then on the technology; AI is really as fundamental, if not more fundamental as the internet was in terms of a shift. So, there’s definitely a phase change going on because all of these dynamics are happening at scale and at speed, and they’re the two crucial elements. This isn’t a gentle evolution. This is a huge momentum, huge force, huge change. So, that’s Australia, then globally, of course, those same issues are manifest across the globe. And for us, unless we think about it, so, it’s fine, there’s a free market and let the market sort it out. But the market is the global market and it will sort it out and we will be left with what is left over. I’m sort of over-characterising it, but I’m not sure that I am really, which is why you have to take control of your own future. And that’s the role of government working with business and community to say, ‘Well, what sort of future do we want? Let’s think about it and let’s work out what we have to do’. But that is not saying government should go around cherry picking on policy. So, we’ve been very lucky in Australia. And you look at the sort of decadal benefits we’ve had, whether you go as far back as, you know, the ‘sheep’s back’, and then you get Bass Strait and all the wealth that came from the discoveries there, all our resources boom generally, and then the China boom. And then you get to, you know, 2010, 2015. And that’s when we see things drifting. Because we haven’t got those big boosters happening. Probably as a society, we’ve become very comfortable with just letting it happen, whatever it is. And that is not a well-governed economy.
CB: It’s an economy that has just been allowed to evolve and be subject to global trade patterns, not necessarily one that has had an industry policy that perhaps, touching back on our comments about Senator Button all those years ag. In 2015, one might argue, as the speed was coming out of China, that’s where industry policy needed to start reformulating. But perhaps we were so wedded to the free market and comfortable, we missed that opportunity or missed that signal.
CL: Well, I think industry policy unfortunately has been tarnished with the ‘Well, it’s just corporate welfare or it’s just grants’. And that’s not what good industry policy should be. It should be strategic, it should be thoughtful, and it should look at the comparative advantage that an economy has and where that can be taken to being a globally competitive advantage. So, I mean, you can take examples like Singapore, and Singapore decided to be, among other things, an economy that basically refines a huge proportion of the world’s crude. But it doesn’t have any oil.
CB. No.
CL: But it used its geography thoughtfully. You look at it, Taiwan, which decided from a standing start to have a semiconductor industry. You look at South Korea, which, has led to a consumer electronics industry.
CB: Indeed.
CL: So, having a view about, well, what’s an economy good at or it could be good at and then fostering that, which does not necessarily mean pouring lots of money into it. In fact, that’s the last thing you should do because you’ve got to think about the design side.
CB: Yeah, there are great examples. And the question that always comes to my mind is who thought Seattle was a good place to build planes? Or who thought Denmark might be the world leader in wind turbines, which was the example John Howard recently shared with us. And as you say, they are issues of design and policy, not entirely about putting money in. Obviously, some money will eventually flow, but it’s about policy design and systems. But it does beg the question as we sit here in 2025, it begs the question what choices should be made? Or perhaps the better question is how these choices should be made? Because ‘what’ might have us picking particular things that may not be helpful, but how do we get these decisions made around moving comparative advantage to competitive advantage? Do you have a sense of the criteria?
CL: Well, let’s look at what we’re good at. So, the comparative advantage. So, you know this is just off the top of the head. We have an incredible heritage in medical research. So, there is definitely room for thinking more about pharmaceuticals. Then you take it to something which is an even higher technology. You could look at bioengineering. So, this could be nanoscale scaffolds that carry vaccines, for example, and make sure they get to the right part of the body. So, using the convening power of government and whether it’s federal or whether it’s state, to say, ‘What can we see emerging going into the research area? What is there?’ That’s exactly how the Cochlear research came to be identified. So, that’s using current strengths and saying where can that go? Look at the space industry which has survived in spite of the lack of government interest, can I say, in the last several years? But we have an incredible advantage in our location.
CB: We do.
CL: And we have really an impressive number of smaller businesses in the space sector. And look at the ag sector and now you can take the technology in that sector that’s developing is again, quite extraordinary. So, where can that be taken? So, you don’t have to start with a blank sheet of paper. You start with where you are, what you’re good at. And how can you be better?
CB: Yeah, indeed. I think it’s an excellent point, actually, that you don’t have to start with a blank piece of paper. I sometimes get the sense everyone feels that’s where you have to start. ‘Oh, we’ve got to start and redesign the whole thing’. But the point you’ve made there, I think, is that we are where we are. And let’s look at what those assets are and assess them for their comparative advantage. Not go ‘What could we, of all the choices we have, what could we choose as opposed to what we have in front of us?’ The other idea that I just wanted to explore with you, which I think feeds into the notion of comparative advantage being taken to competitive advantage, is a turn of phrase that I think you shared with me, actually, Catherine, before we started talking today, around technology makers, integrators and takers. And I think about that in markets, really, you’ve got market makers and price tags and the like, but I was interested in that particular choice of phrase around technology because clearly Australia’s got different verticals or different industries. We’ll have different mixes of those three opportunities.
CL: And that’s right. That’s why thinking about it as a business model, the country’s business model. Where are we going to earn the income to pay for all of the social services that we want in the well-being of society? So, if you start as we just discussed, with various sectors, which are, you know, stronger or not, and understand what posture we are going to have in those sectors. Now in medical research, you could argue we’re a technology maker.
CB: Yes.
CL: We come up with really novel concepts and technology which, and it’s through technology makers that make the most money because that’s the biggest return. But you don’t want to be the technology taker-in for everything because you pay the premium price for whoever developed it. But what Australia is very good at is technology integration.
CB: Yes.
CL: And we can take concepts from others, both nationally and internationally, and put them together and come up with clever solutions which are products.
CB: Yes.
CL: And it’s that integration capability that is crucial to our ability to earn the income as a country that we need, because we’re good at it. Now, how do we stay good at it is another question.
CB: Yeah. Where does that, where do you think that integrated capacity and capability reside? Where in Australia does it reside? I mean, for example, is it the applied research institutes, for example, or is it the SMEs or maybe a bit of a too broader question, Catherine, but I’m curious to explore where that capability lives.
CL: The capability is apparent where there are problems to be solved. And if you look across the economy, across different sectors, the really smart solutions is really people solving a problem. And Australians are good at problem solving. And maybe because we are a smaller economy, maybe because we don’t have the huge resources that others have. We can’t spend the money on years and years of investigation in certain things, we have to solve the problem. You know, you look at the resources sector, the ag sector, medical sector, really elegant solutions. So, we focus on a problem and we try to solve it.
CB: It’s a really nice way to sort of identify the integrators and where they live. They live where problems are being solved, which in its way, for the sake of the conversation, I’ll turn it into a segue around the question of how do we get productive or more productive? If we’re really good at solving problems, is our productivity dropping because we’re running out of problems to solve? Or is our productivity dropping because we’re getting slower at solving the problems? I’m very simplistic, and the answer might be none of the above.
CL: Yeah. Well, if it were that simple, it would be great. If I can go back to productivity, and I think what worries me is the current discourse. People are using the word productivity as if it’s a standalone concept, an integrity in its own right. And it’s actually a derivative.
CB: Yes.
CL: It’s an emergent concept. It’s like health, for example. If I say to you, ‘Do you want to be healthy?’ You say, ‘Of course’. Then you have to say ‘how’. Well, you need exercise, you need diet, you need sleep, etc., etc.. Productivity is the same. Do you want to be productive? Yes. So, what do you need? You need an economy. We need skilled people. We need great infrastructure. And by infrastructure I’m not just talking about the sort of physical roads, etc. ,I’m talking about AI infrastructure, research infrastructure. We need really good ideas because we need a feed of IP coming through that helps those solutions emerge. And of course, I think you’d have to say in our economy, we do need the affordable and abundant energy for all sorts of reasons, not least of all the demands of AI. But of course we need manufacturing. So, you can characterise productivity at the aggregate level across an economy. That’s fine. And that assumes that we’re using the right measures, which include the capital deepening concept. And I might come back to that.
CB: Yes, I do want to touch on that concept of deepening. Yes.
CL: But to find a solutions you have to go to a disaggregated level. You have to go into the economy, into which sectors, and there’s the market, non-market sector, if you call them sectors. But that is one major distinction, as we know, because the non-market sector, the productivity has been declining about three times as fast as the market sector. Then if you go into the market sector, you say, ‘Well, which subsectors? Is it falling in mining? Is it falling in financial services? Is it falling in smaller organisations? Is it falling in larger organisations?’ And there was a study by McKinsey, the US, and I think I’m right in the decade from the 2010 to 2019, 5% of the firms were responsible for 80% of the productivity improvement.
CB: Wow.
CL: So, you need to go to a firm, well, sector by sector, firm by firm, and understand what the issues are. So, in this call for ‘We must improve the productivity in the economy. ..’
CB: Waving your hands, isn’t it? It’s like we should all be healthier.
CL: That’s right. It’s a lot harder to find those solutions and to face up to the individual issues. I mean, there’ll be some sectors that don’t have enough skilled people. There’ll be other sectors where the IR issues are a constraint. We haven’t invested enough in our rail infrastructure around the country. So, that’s a major productivity negative when the trains can’t run. So, there are many answers to how we can increase our productivity. But they are at the disaggregated level and, in many cases, they’re inconvenient answers.
CB: I’m not sure there will be any convenient answers in this conversation, Catherine, whether market or non-market, I don’t think there will be convenient answers or simple answers available to us. I am interested, just momentarily, to dive into the non-market piece. There are likely fewer economists than tech transfer professionals listening to us today, but you never know your luck. The non-market piece, are you referring predominantly to government services in that non-market piece? Is that what that means?
CL: Yes. So, both direct, the public service as a sort of direct, but then all of the healthcare, aged care, education…
CB: All the services from which, spring from government funding of one sort or another.
CL: That’s right.
CB: Yes, I just wanted to get that definition clear, because there might be some folks out there that think, ‘Oh, well, health services are actually a market’, and maybe the private sector of health care is, but the public sector certainly is not.
CL: It’s non-market. Yes. Yeah.
CB: So, as we dive in sector by sector and look at this wicked problem, I just want to come into this momentarily from the tech transfer and commercialisation perspective, which is where we spend a lot of our time. This idea of trying to raise productivity through improved commercialisation, more research translation, whatever it might be. I’d put it to you that in order to do that, we need propositions that are investable because the private sector who come in to invest in these things, don’t typically invest without having a proposition that they can see a return on their capital for. And one of the factors that normally sits alongside that are the policy settings that surround a particular investment. And I just wanted to unpack this idea of an investable proposition and the policy consistency that’s needed to support those sorts of investments. And we touched on a little bit earlier. So, I’m just sort of circling back to it a little.
CL: Well, that’s right. And that’s, if I come back to government, and it’s not always about the money from government. It’s the convening power, it’s the signaling from government that this sector or this activity is considered important. Now, some might then interpret that as saying ‘yes, so government’s put money into it’. Maybe it’s money but maybe it’s other regulatory environments. Maybe it’s supporting the infrastructure for that sector. Maybe it’s supporting the skills that that sector needs. So, government can do a great deal, not just write checks. But if people see that government thinks that particular sector is important, then they’ll mobilise around that sector because they’ll believe with government support, there’ll be the necessary inputs, there’ll be critical mass, and then that becomes an investable proposition. One project out on its own with no concept of being on the government horizon is important for the country, that’s not an investable proposition for most people.
CB: I just want to dig in a little bit about the cheque writing aspect of all of this. And you made a, I think, a great point earlier, Catherine, that from time to time it can be seen or assumed, if I’ve got your phrasing right from earlier, that this is all about cutting a cheque to the private sector, and that is not the conversation we’re really having here. Government may need to put money into uplift skills to build supporting infrastructure, things that have broader spillover benefits and that, indeed, needs funding. But it’s not, I guess, the throwaway notion of once cutting a cheque to a particular corporate entity, and then that solves the problem.
CL: Well, it doesn’t solve the problem and probably just creates probably more, more problems.
CB: Very fair point.
CL: It comes back to thoughtful design of a policy. I really believe that industry policy is at the centre now of thinking through what our future business model is. Thinking through the design. Exactly as you’ve said, ‘What infrastructure do we need? What skills do we need? What research do we need?’ And all of that can happen before government even thinks about putting the money in.
CB: Indeed, it should be a necessary prerequisite…
CL: Absolutely.
CB: …you’d contend, before any ‘direct’ in inverted commas, direct funding goes, all that preparatory work. John Howard, when he spoke about the ecosystems that are needed for these things to thrive, and you just made the point, Catherine, a disconnected initiative or investment opportunity, disconnected from policy or from the national context is not an investable proposition.
CL: Correct.
CB: And that comes back to that policy ecosystem piece that’s necessary to underpin it. I also just want to touch on the notion of commercialisation and translation. And just to tease out from you, you’ve got different definitions of these two things or that they’re interchangeably used, but in a way…
CL: They should not be.
CB: Yeah, they should not be.That might be a better way to put it. I’m interested to explore that. I suspect that’s a lot of your observation over many years in the system seeing commercialisation happen but translation not. But I’m interested to explore your observations on this.
CL: So, I always go back to the TRL scale. And it’s a very simple tool but it’s very elegant, I think. It helps you make sure that when you’re having your conversation with someone, that you’re both understanding exactly where, can I say, the IP is up to?
CB: Yeah.
CL: And so universities and research institutes as we know, it’s mainly working in the TRL 1 to 3, maybe a bit of 4. Commercialisation happens at the other end. You know maybe TRL 7 but definitely 8 and 9. What happens in the middle is how you get from the idea through to, back to the investable proposition on the part of business. That is the translation zone, that is called sometimes the ‘valley of death’. And too often, people talk about translation and commercialisation as if they’re the same thing or they’re interchangeable, and they could not be more different. I would argue that Australia is very good at research, high quality research across multiple domains. I would say that in terms of commercialisation, we’re as good as or as bad as, whatever international comparators. Where we don’t succeed, rather than where we fail, can I say, is not recognising that translation activity is pivotal. You can’t get from TRL 1 to 3 to 7,8,9 without going through 4,5,6. And though 4,5,6 is full of failure, disappointment, having to start again, money, risk. It’s the absolutely toughest time in the evolution of an idea through to commercialisation. And unless, and until, we recognise how different that phase is, and this is back to the technology integrators, that’s where we should be really good and when we succeed, we are really good. But it’s a different activity from commercialisation and research. So, using Cochlear as the example of recognising that translation is different from research and different from commercialisation, the fact that the government came in with a public interest grant and said, ‘Well, Cochlear, if you can take this IP, develop the prototypes and take it through the clinical trials, to a point where it can start to be commercialised. That was the translation zone; that’s what the government funded. And it funded that, in conjunction with Nucleus, Nucleus was funding as well, but the government with the grant made it possible. But the government applied very strict milestones such that you couldn’t get the next tranche of funding unless the milestone in that translation phase was met. And so, there was such a disciplined focus on that translation activity. Not trying to confuse it with subsequent commercialisation. Recognising it built on the research, but it wasn’t doing more research. It was turning those ideas into something tangible, which was a cochlear implant, which was then, at the end of that translation phase, able to be implanted in a person. And that’s when the commercialisation could start.
CB: Yeah, that’s a terrific explanation of it, Catherine. I’m fascinated though, I accept that we’re fantastic at research. I think all the evidence is there, as a nation, we’re fantastic at it, and I would like to think we’re as good as everyone else is commercialisation. I’ll take the glass half-full, if I might. Why is it that we’ve lost or perhaps not been able to cultivate this translation capability, but particularly if I might, when we go back to that integrator strength that we have in solving problems. And yet, we don’t seem to be able to translate from TRL 1,3 through to 4 to 6, what might be missing or what have we lost on that journey, do you think?
CL: Well, there are still very good examples of where it is successful. I think the issue is we’re not recognising it as a separate type of activity…
CB: Right.
CL: Either from the management point of view, necessarily. So, management or perhaps in a business, particularly when funds are scarce, want to get through to commercialisation very quickly, but they haven’t done the discipline of translation. And so, there’s a failure there. Government funding because it’s been stop-start in many cases over 20 years. So, businesses might set their strategy according to one policy envelope and then that changes. I mean, there have been instances where cheques have been in the mail, government policies change, cheques have been cancelled. Business fails because it was relying on that cheque.
CB: Yeah.
CL: So, I think the explicit recognition of that separate phase. And how does it get funded either by the business, by government or both, on the very high-risk translation ventures without risk sharing. And that’s of non-dilutive capital as well. That’s a very important point because once you say. ‘Well the private sector can fund. So, go off and get venture capital funding’. And although people say there’s now good venture capital funding in Australia, it’s not as much as is needed. So, then you get offshore venture capitalists, very dilutive. And then you get the IP going offshore. So, if we’re serious about developing certain sectors and maintaining that competitive advantage, we have to recognise the importance of having non-dilutive funding at the early translation phase.
CB: Have we lost the non-dilutive component? I’d contend over the last ten years, Catherine, Australia has had a significant uplift in venture capital activity and funds and venture capitalism. But have we lost the non-dilutive approach to funding through translation in Australia, which is impinging on our ability to get through this?
CL: Well, that’s the stop-start in the government policy.
CB: It’s perhaps not so much that it’s gone in its entirety, but its sporadic and unreliable nature makes it too hard for those organisations in translation to actually either depend upon it or are at such risk, it disappears and they disappear along with it.
CL: That’s correct.
CB: Right. Because the other thing that strikes me as we talk about this is the idea of patience and risk. Are we patient? And you just touched on it as you were talking about not recognising this phase, where industry in particular wants to go quicker without necessarily going through the gears. To use an automotive expression, you can’t get to fifth gear without going through first, second and third. Have we lost patience, either industrially or indeed from a government perspective? These things just take too long.
CL: You know, I mean this is generalising and they do take time. It’s a question of whether you can maintain the momentum. And you need money to maintain the momentum. And you’re either raising it through, usually venture capital and/or getting the benefit of this non-dilutive funding. You know, it’s life that certain activities don’t succeed. That’s the way it is. You can’t expect 100% success but to fail, among other things, because of inconsistent government policy, is a waste.
CB: Do we fail as a consequence of impatience at times?
CL: Well, I don’t know. I mean, again, this would be generalising, but not recognising the fact that that translation phase needs a particular skill set and way of managing it, and deliverable of milestones. And if one’s not working, you need to find another one and etc. and you need to plan that you do have the funds to get through that phase, or at least get far enough through that you can get the next tranche of funding. And again, whether it’s dilutive or non-dilutive capital, but you can’t hope for the best.
CB: Hope is not a strategy.
CL: No.
CB: The translators who are sitting in this scaleup world, Katherine Woodthorpe joined us talking about scaleup a couple of years ago. She sort of led the charge, at least from our discussions, and it’s become more of a thing with the ‘missing middle’. Then Minister Husic announced, I think in ‘23, the ‘missing middle’ idea, what I’ve observed. And I’m going to go with a bit of a generalisation here, Catherine, is that the translation or scaleup phase happens less and less within larger organisations, and tends to take root in startups or small to midsize organisations. And I think you’ve suggested that perhaps that outsourcing, for want of a better word, relies on those companies to exist. But do we have enough of them in the areas that we need them in this country?
CL: Well, this comes back to deciding where we want to have the focus as part of the country’s business model. And if you build critical mass in a sector, as we have, for example, in the resources sector, and you, then you have this ecosystem of smaller organisations and SMEs who are doing that translation activity and attempting to scale up. And quite often they’re then acquired by the larger organisation. So, it’s a smaller organisation that’s actually borne the translation risk. But if they succeed, then of course, they get the benefit of being acquired, if you like. But where we don’t have enough critical mass in sectors, the dominant companies tend to be SMEs and they’re fragile. They’ll talk about the ‘missing middle’ is somewhat frustrating, in the sense, that you see repeatedly. You get an SME and it’s done well and then it’s acquired. And I’m again, we’re doing a lot of generalising here, Cameron…
CB: We are.
CL: But if you see the number that are acquired by offshore companies so that IP moves offshore, but that SME never grows up into the ‘missing middle’. You can’t have Fortress Australia where you have a situation where, you know, acquisitions are blocked. But I do think there’s an argument for thinking about, well, what conditionality should be around those with, particularly many of them have been beneficiary of government-funded research and whatever. So, the retention of high value jobs in Australia is really what we want. And we need to think about that.
CB: Conditionality is a really interesting idea. I’m familiar with that idea. I think it’s Mariana Mazzucato who talks about conditionality around government investment. And we won’t call them grants, but let’s call it government investment, where you’re looking to retain value and build sovereign capability.
CL: I’m not a proponent of Mazzucato’s ideas.
CB: Thats okay. Don’t have to be.
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CL: Um, and this is a very difficult question that, that we haven’t grappled with. But all I’m saying is that you can’t complain about a ‘missing middle’ without understanding how it gets missed.
CB: Yes, yes.
CL: It gets missed because the frequency with which the smaller organisations move offshore or are acquired by larger corporations in Australia. And without sectors which have enough critical mass, it’s harder for those smaller organisations to grow in their own right. So, it’s like the productivity point. You can say, we need to solve the ‘missing middle’ problem. Yes, but we need to understand how it happened. And, you know, some solutions may not be palatable.
CB: No, I think that’s actually a really interesting, not only set of observations, but just a way of framing the ‘missing middle’ problem, if I can call it that. You know, it does prompt the question in my mind, Catherine, so, is it a problem where successfully taking our innovation, we’re getting it through translation to a certain point, through new ventures or through SMEs, and their success is reflected in their acquisition. Whether that’s rolled up into a bigger Australian company or taken onshore, it reflects a certain type of success.
CL: That’s correct.
CB: So, what exactly is the problem? We’re looking at a spot on the x-ray, but we’re not actually sure if it’s something we need to worry about.
CL: We need to worry away at it to understand it better. Again, without a bit more focus on those sectors that we really think are going to be enduring for us, for the next ten years plus. Perhaps, we can build the middle in those. Maybe.
CB: So, by having the industry policy at the centre of the model, you then get to make different sets of choices, whether they’re policy, investment, whatever they are. But you get a different set of choices because you’ve got a strategy from which to hang these decisions off the back of. You get to choose whether the ‘missing middle’ is really an issue for us in sector A or sector B, and that then opens up a more nuanced conversation about translation, ‘missing middles’, innovation, demand for innovation coming out of the research sector, et cetera, et cetera.
CL: There might be infrastructure that’s needed, for example. So, that signals that maybe an investment might be required. So, if you look at AI and all the discussion on AI. AI is not, it’s not a generic concept. I mean, there are so many different aspects to AI.
CB: It’s a little like health and productivity.
CL: It is, So, and talking about investment in AI. So, people say, great, we’ve got all these data centres. but data centres, they’re just data storage. So, yes, it’s capital investment but it’s data storage. But then you go to the concept of AI factories where you have the investment, but you actually also have the capability because in those factories there is actually AI running. And it enables access to AI on the part of smaller organisations, for example. So, to the capability of AI, not just storing data. Then that leads to this concept of compute capacity. And you would have seen a couple of weeks ago, the UK has just announced a huge investment of about £2 billion in developing sovereign compute capacity. So, we might have lots of smaller AI organisations, but to enable them to grow into that ‘missing middle’, they’re going to need infrastructure, in terms of compute capacity. So, are we prepared to make that investment as a country? Because that will have to be a national investment.
CB: So, data storage is one thing. Computing power, I’m sensing from you is the enabling piece, the enabling infrastructure that allows capability and productivity new products to spring from.
CL: Well, it’s the compute capacity that enables the AI, the AI that is actually doing something. We need that compute capacity in a way that we’ve just never known.
CB: Well, that’s a great example, actually, of policy meets infrastructure meets future industry and productivity opportunities. So, I’ve contended for a little while, Catherine, that, and to some extent we’ve touched on it already, that Australia doesn’t have a supply-side innovation problem; it’s got a demand-side innovation problem. What I mean by that is government/industry don’t seem to be investing in and embracing the things that are coming out of our research sector. Do you think that’s got some validity, that hypothesis?
CL: That’s a very tough one. I think there’s a great deal more embracing than we recognise.
CB: Okay, I’m good, I’m good with that…
CL: Yeah. And in many small ways, as well as the big ways. So, it’s this mantra of ‘we’re not good at commercialisation’ has taken hold, then we don’t look adequately. And probably the universities have not done a good enough job. And the research institutions, the CSIROs, et cetera haven’t done a good enough job of highlighting where there has actually been adoption of the research.
CB: Yeah.
CL: Because often is it adopted inside an organisation rather than necessarily creating a new organisation. So, you know, the spinoff arguments. But again, I know it’s a very circular conversation, but unless you have, you’re right about the demand-side in the sense of, unless we have really robust sectors that are looking for solutions to the problems that they have. If you don’t have the sectors, they don’t have the problems, therefore they’re not looking for the solutions. So, the resources sector is very demanding in terms of innovation and looking for solutions. And I would say the space sector again could be very demanding. So, you need the vibrant sectors to be demanding. This comes back to government as a demanding customer. And I don’t know how many reviews of innovation and innovation systems and capacity in Australia have been done. I mean, it’s it’s, it must be over 100 by now. Most of them, most of them will recommend that government procurement in some way. And the procurement word is very unfortunate. But government as a demanding customer. So, government’s got a problem; it needs a solution. It’s the customer to the company. In Australia many of the companies are small companies. Government doesn’t like to take the risk on a small company. So, we’ll go offshore and find a larger company rather than taking the risk on the smaller company. And sometimes that risk will turn into a risk and sometimes it will be very successful. But we have instances of Australian, smaller Australian customers having to go offshore to find the beacon customer in the governments in other countries
CB: We do. There’s a perversion in the procurement process.
CL: That’s right. So but this is not procurement being generous. This is procurement saying ‘We’ve got a problem and where can we find the solution? And should we look at local companies first and see if they can deliver the solution?’
CB: But they’re not geared that way. Government, but state,federal are not geared in that way at the moment. And I wonder, John Howard mentioned this concept of the rise of the integrity agencies. And is there a fundamental risk aversion that sits within the government system now that says, ‘Oh, I’m just going to pick the brand and I’m not going to take the risk?’
CL: Well, the evidence would suggest that’s the case. And, you know, again, with that over generalising, but there are enough instances of smaller organisations which say that they were part of a government procurement process. They had a solution, and in fact, they were rejected in favour of an offshore company. So, I think there’s enough evidence there. But there have been instances where, at federal level and at the state level, I know in New South Wales, where this concept of government is a big customer and procurement has actually had courage for a while. But then it’s again, it’s not consistent enough, but there’s no doubt it’s a very important part of demand for innovation. The government has a very significant role here as a demanding customer.
CB: The phrase that I’ve heard used is the role of ‘market maker’, where they can use their procurement power not only to support SMEs and acquire domestic technology, which is as good as anything abroad, but also that idea of creating a market or creating a sufficient scale that would allow industry to, to gather around it, to start actually providing those services. And I’ve heard of examples in the past around computing services predominantly.
CL: Defence is an example.
CB: Defence is, defence is just the perfect example. It’s interesting. We actually had Kerstin Oberprieler on the podcast a couple of months back, and the story she shared, Catherine, almost flies in the face of this conversation. Where actually someone from the federal government took a risk on procuring her services because they heard what she had to say and they were exposed to new ideas. And this will sound horrible. It was only ten years ago, like it was within the last decade that that happened. And yet, when she shared the story, I struggled to imagine it happening today. And yet we’re only talking a decade ago.
CL: Yeah. Yeah. And you’re talking about the risk aversion?
CB: Yeah, the risk aversion.
CL: I think it’s partly risk aversion. And it’s partly familiarity and confidence of understanding. So, because things have are moving so quickly and technology is changing so quickly, and so much of it is not things you can see because so much is software. It’s harder for people who aren’t immersed in it all the time to be an informed purchaser. And it’s tough, I think, if you’re in government to have the confidence that you are an informed purchaser and therefore, there’s a natural tendency to go for the brand, that would seem to be the reliable well-known. So, there is actually a role, an important role, on the part of industry, making sure that government, as a general term, is well-informed. And business, industry tends to go to government when it’s got a problem and it needs money or needs something changed. It would be helpful if we had a situation where there was more connection between government and industry. Just getting to know each other so that you develop within government centres of excellence, of knowledge of certain sectors so that they can be more informed, not just as a purchaser, but also as a policymaker.
CB: Yes, indeed, that is a two way flow of both information and benefit, I would contend. And I might even just take that idea of that relationship, Catherine, and extend that further, that government and industry, both having those conversations with the research and innovation community would be equally beneficial in terms of getting to know each other, and understanding needs and opportunity and the emerging opportunities that may or may not be out there.
CL: Yes, as long as you do it with a great deal of specificity. Too often seeing, you’ve got business people in there from a range of sectors together with research people, and they’re from a range of sectors, it’s very hard to get a substantive conversation going.
CB: It is. It needs time to build that sort of thing and it does need curating or managing. But I would contend deepening that understanding would actually help, to some extent with my assertion of the demand side problem, if government understood some of those capabilities. Government, as an example, could be seen as investing in research to solve a problem slightly different to procuring services.
CL: Indeed, but that requires a deeper knowledge of a narrower landscape rather than a once over lightly.
CB: And to that extent, we mentioned a concept earlier around deepening, and I’d just like to quickly touch on that so that folks aren’t hanging on that idea. Capital deepening I intuitively get because I think of a deeper pocket. But when I think of technology deepening, I’m interested in what that means for you.
CL: Well, what it means for me is, for example, a number of things. Investment in people and skills. So, if you look at the productivity measures, there isn’t anything that takes that into account. So, for example, a company that builds some infrastructure, physical infrastructure, that’s capital. That’s capital deepening. But the fact that they’ve taken, you know, a cohort of graduates and put them through a program and developed them over 2 to 5 years. That’s technology, could b,e if, depending what it is, that’s technology deepening. But it doesn’t come into the capital deepening question. But so much, now yes, there’s capital, but the capital needs the skills to go with it. You need the technology deepening the skills for the capital. So, then adding to that concept is the investment which has a real return on investment, in the technology sense. So, for example. the SKA (Square Kilometre Array). So, that’s a capital investment. But the potential, if you like, innovation dividend from that hopefully will be quite extraordinary. So, not all capital is created equal. So, that you have to look at the return that different capital might yield. So, I quoted data centres and AI factories, they might in dollar terms look the same as a capital investment. But in terms of a, one is a really technology deeply capital, the AI factories versus the data centres. So, we do need to look at, when we talk about capital deepening, what is the technology dimension, and are we deepening our technology capability as part of that capital deepening?
CB: Yeah, and particularly from a government investment perspective, both of those concepts need to be held simultaneously, not leaving the technology deepening or skills deepening to the side.
CL: That’s right.
CB: Yeah, okay. So, Catherine, just in drawing things to a close, what are you hoping for coming out of the Productivity Roundtable, with a particular focus on innovation and, perhaps more specifically, the translation piece that we’ve had a really good conversation around. what are you hoping for? And perhaps I won’t ask what you expect, but I’ll just ask what you’re hoping for?
CL: Well, I think what I’m hoping for in the first instance is that the Roundtable takes a whole of system view, because if it’s looking at solutions without context, that may not serve us well. I would also hope that choices are made and choices that are consistent in terms of their scale and impact. In other instances, when you have these roundtables and you see choices come out and they’re a laundry list, and some are trivial and some are so ambitious in their target that they almost aren’t implementable. So, some sort of levelling of initiatives so that they are at the right level of scale and degree of difficulty, but that the interdependence element is recognised, which is why you need to take a systems view.
CB: I think they are pretty good ambitions to have a whole-of-system view. I think that’s arguably sorely lacking, and particularly when we touch back on our translation conversations and the role of ecosystems to drive translation through. What is it that, just too close, what is it that industry and sector leaders are going to do to make some of this come about? So, it’s very much an industry and private sector question here. What role do they have to play to bring this systems thinking forward?
CL: I do think there’s a recognition, sort of the two elements. You need to have the community foundations, right. So, you need to have, you know, health care and housing and education, security and so on. So, having that dimension then linking it with, well, what are the prosperity drivers? If you’ve got the community foundations being strengthened, what are the prosperity drivers? Industry is very clear on skills and capability, and I distinguish that from education. Education is a community foundation. You know, that’s the sort of early childhood, K-12. But skills and capability is where you go to the VET, higher ed, immigration. So, industry is very clear on that. Industry is very clear that it needs IP. That needs the ideas. Whether they come through the research sector, wherever they come.
CB: Wherever they come from.
CL: Industry knows that it needs infrastructure, whether it’s transport, logistics. I spoke about rail. Whether it’s utilities. We spoke about AI factories, data centres. The role of infrastructure is pivotal. And industry also knows it needs energy and affordable energy and abundant energy. So, I don’t think there’ll be any disagreement on that. I mean, we haven’t gone into things like the taxation.
CB: No.
CL: We don’t want to go there.
CB: I didn’t want to have a tax conversation tonight, Catherine, if you’ll forgive me.
CL: No, but I do think the federal state arrangements, I would hope that that comes onto the table as well. And it’s a long time since they’ve been, if you like, thought through what makes sense, what doesn’t make sense, in a prospective view, and for the sort of business model that the country wants.
CB: I think that is a pretty fair list of things that industry and the private sector can bring to the conversation. That’s been a very powerful set of thoughts you’ve had there, Catherine, and I’m very appreciative of you spending some time with us talking about productivity, but also the innovation system and the intersections of those things. And I hope that some, if not all, of your aspirations come through in the coming weeks and months ahead. I think they’re the right things to be hoping for. So, Catherine, thank you so much for joining us on the podcast. It’s been terrific having you.
CL: Thanks very much, Cameron.