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R&D spending cut crimping productivity growth

R&D spending cut crimping productivity growth

(4 June 2019 - Australia) The Productivity Commission has singled out declining investment in research and development (R&D) and a lack of innovation by local corporates for Australia's 'mediocre' productivity growth.

The commission warned Australian corporates were experiencing their first period of 'capital shallowing' as the count of enterprises described as 'innovators' was no longer trending higher.

Labour productivity (output per hour worked) rose by 0.4 percent in the 2017-18 financial year. Multi-factor productivity, which excludes gains due to increasing worker numbers, improved by 0.5 percent. Both measures were well short of their long-term averages which sat at 2.2 percent year-on-year from 1974 to 2017. The commission said it appeared some of the weakness was directly attributable to a slowdown in capital investment by the nation's businesses. Capital input use lifted by two percent in 2017-18, compared to the long-term average of four percent.

The commission commented that the slide in capital spending was broad based and not restricted to a particular sector such as manufacturing or mining. Of the 16 ANZSIC industry sectors monitored by the commission, only four have lifted their real investment levels since 2016. "The current weakness in labour productivity can be partly attributed to a marked slowdown in investment in capital, so much so that the ratio of capital to labour has fallen. This is troubling because investment typically embody new technologies, which complement people's skill development and innovation. The share of businesses that are innovators - which goes beyond R&D spending - is no longer growing. There is also some evidence that investment in performance assessment within business - a key feature of good management - is also declining" the report found.

Ahead of the 2016 election, Prime Minister Malcolm Turnbull announced an innovation policy while the Coalition also put in place a A$20,000 accelerated depreciation program (now increased to A$30,000) aimed at encouraging firms to lift plant and equipment (P&E) capital expenditure (capex). The commission confirmed the problem may be associated with the changing nature of the Australian economy, with more activity driven by the services sector rather than traditional areas such as manufacturing, warning this would have longer-term ramifications. "The decline in the relative importance of capital-intensive sectors in favour of the service sector implies long-run weakening of capital deepening, meaning that labour productivity improvements will increasingly need to be driven by innovation and greater efficiency."

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