Growing manufacturing: what role for industry policy?

Ai Group Chief Executive Innes Willox.

Whenever there are calls for governments to divert our fragmented industry policy efforts and to concentrate their attention on “what we are really good at”, alarm bells should ring.

It is true that governments have important roles to play in fostering the development of Australian industries. It is also true that our industry policies are fragmented and that much can be gained from giving them greater cohesion. But entrusting governments, their advisors and selected consultants to conjure up the list of ten mega-bets on future winning industries is a recipe for failure. Of course, by implication, it relegates a whole heap of other industries to also ran status. Worse than that, it is a lost opportunity to invest in capabilities that can be used in whatever we are good at. And much of what we are going to be good at is simply unpredictable.

A quarter of a century ago, when the dot com boom was gathering pace, it was fashionable to identify mining as a sunset industry whose time was passing and to advocate for a concerted effort to get on board the future giant of e-commerce. As it turned out, this was about half right: e-commerce was an emerging giant. But it was also half wrong: mining did not fade and instead it became responsible for the biggest investment boom in Australia since the gold rushes and for turning our current account deficits into surpluses.

Going further back, at a time when we were generally winding back tariffs on manufacturing and on rural subsidies, the auto assembly industry was singled out as the road to securing an advanced manufacturing industry. Of course, we didn’t call it “advanced manufacturing” then – the fashion was more for ‘elaborately transformed manufactured goods’. But the auto assembly industry did not turn out as was hoped. No doubt it could have been done differently and with greater flexibility, but the point is that it wasn’t done differently; it did not adapt; and the government-designed car plan got stuck in the slow lane and eventually turned into a dead end.

The car plan did, as a by-product, see the development of a whole heap of manufacturing expertise that has been able to be transferred and redeployed into the modern advanced manufacturing industry. With the benefit of hindsight, it would have been a much better use of resources to invest more directly into the development of capabilities that could be deployed into a range of industries and businesses.

An alternative though still proactive approach to industry policy would include the allocation of resources to the following practical areas:

Developing the capabilities of small- and medium-sized businesses

Australia’s very successful experience with the Entrepreneurs’ Programme is a case in point. This business advisory program could be extended and much better linked up with other capability development policies: including those in the various states and territories – particularly in the areas of digital capabilities and export capabilities. Where there are significant gaps and a fair bit of wasteful duplication, efforts to forge greater coherence would be well worth the inter-government and infra-government cooperation required to achieve it.

Linking up the Industry Capability Networks 

The Industry Capability Networks operating in each state are important resources and would benefit from stronger national coordination driven by the objectives of generating greater value. This could include through the integration with digital platforms and consistent linking with private sector and government initiatives including their procurement policies and industry development strategies.

Supporting high-growth industries and businesses

A much-scaled down version of the picking of the mega industries are the many much smaller-scale policy initiatives that identify and seed-fund areas of expertise by developing plans and approaches to the development of related industries. This approach has had some successes with a variety of state, territory and federal initiatives including the Growth Centres.

Admittedly, the industry-wide approach also has weaknesses. Identification of potential opportunities can be coloured by the latest fads and by the interests, experiences and expectations of those involved. Political and interest group input can divert concentration away from areas of inherent merit towards areas with fewer genuine prospects. Perhaps more importantly, identifying specific areas does not fit well with the serendipitous nature of business success deriving from firm-specific advantages evident in a wide variety of, often unexpected, industries.

A more concerted and coherent focus on businesses exhibiting strong firm-specific capabilities would complement the industry-focus applied in the Growth Centres and other initiatives. Lessons can be gleaned from the approach of New Zealand Trade and Enterprise (NZTE) that encourages and supports businesses with export potential and ambition with tailored services and links them to capability development services available from a wide range of providers.

Innovation

Australia has the makings of a world-class innovation system. We have great research expertise; we are building channels for much broader and deeper collaboration between the business and research sectors; and we have invested in a variety of Centres of Excellence and innovation networks and while it has declined in recent years, we have many businesses who are active in R&D.

On this foundation can readily be built a much more extensive and more comprehensive approach to encouraging and supporting innovation. A start would be to publicise and celebrate the successes we have – for example in the Innovative Manufacturing CRC.

Australia also has, or at least had a very effective program supporting business research and development. The Research and Development Tax Incentive (R&DTI) at one time supported Australia’s rapid rise in the OECD league table of business expenditure on R&D. Since about 2008, successive governments have chipped away at the program and a proposal is currently before the federal parliament to further wind back the scheme. Dropping that proposal and instead supporting business efforts to innovate would be a smart way to reinvigorate business sponsorship of domestic R&D.

Industry policy doesn’t need to require governments to make big calls on the future. It can be much more modest and much more ambitious than that. By building on and linking up the wide range of existing policies and programs, we can add breadth and depth to the ranks of our successful businesses and give them the opportunity to develop Australian industries in whatever areas they are good at.