The Productivity Challenge and Innovation

Australia's productivity growth has slowed in the current decade. While much of this is not policy-related there is a pressing need to do better, according to the Productivity Commission in its Annual Report, released today.

Productivity Commission Chairman, Gary Banks said: 'The challenges confronting Australia lend urgency to policy efforts to raise national productivity, and pursuing the right approach to innovation is key to achieving this.'

The Commission's annual report examines the pattern of productivity growth over the last thirty years, the future outlook and the scope to improve productivity by stimulating innovation.

The Commission found that, following a surge in productivity over the 1990s, growth has slowed to below the long-term average. The slowdown cannot be fully explained, but is in large part due to the combined effects of the mining export boom and drought. Compared with the 1990s, more effort in enterprises also seems to have gone into expanding production through investment and new hiring, rather than cost cutting.

Productivity growth arises from many small, everyday improvements within organisations to improve the quality of products, service customers better, and reduce costs. This often involves adopting and adapting technologies developed elsewhere, as well as investing in research and development.

The Commission points to three policy 'planks' for driving innovation - incentives, flexibility and capabilities. It emphasises the role of competition in stimulating innovation, combined with a regulatory environment that facilitates change within enterprises.

Gary Banks observed: 'International evidence suggests that it is market competition, rather than government assistance, that is the main driver of innovation and its diffusion throughout an economy.'

The Commission noted that governments can make important contributions through ensuring healthy competition, workplace flexibility and careful investments in platform capabilities, such as human capital and infrastructure.