Planning for a blue collar Australia: the role of venture capital and SMEs

Labor has finally delivered the detail of its much-awaited vision for shaping Australian industry beyond the mining boom in the shape of a $1 billion jobs plan.

But will it deliver? In the second of his two part series, UWA Professor Tim Mazzarol examines plans to skill up local companies – and in particular smaller businesses – currently missing out on lucrative industry contracts.

Getting local industry – especially smaller players – ready for the big league is no small task.

One of the reasons our companies miss out on so much work is due to capacity and quality. My own discussions with procurement managers from major resources firms and their prime contractors suggest that it is not always cost that drives their purchasing offshore.

These major resource projects are operating at world’s best practice. The project owners and prime contractors have rigorous quality standards that must be met before a supplier can bid for this work. To be pre-qualified for a supplier list requires a firm to meet substantial benchmarks of performance across quality, capacity, financial and health and safety areas. This is a necessary price of entry into the big league, but it can be a daunting hurdle for small firms.

Clustering for innovation

The government’s Jobs Plan proposes investing over $500 million into the creation of 10 Industry Innovation Precincts to help develop the capacity of local firms. This idea builds on the concepts of industry clustering that have formed the basis of some successful international models. It is part of what forms a National Innovation System.

While such innovation clusters can be successful, they require a long-term outlook and cannot be expected to change our industrial base quickly. South Korea has made successful use of this industrial clustering and innovation precinct model to help transform its economy from the ruins of the Korean War. Yet this was a 60-year journey and was facilitated by the presence of major corporations such as Samsung, Hyundai and LG, plus a government that was prepared to take a strong leadership role.

Lifting our global innovation performance

Australia’s performance on the Global Innovation Index (GII) published in 2012 suggests that we ranked 23rd overall. Key areas of weakness were the way in which our business community invests in R&D and whether it generates valuable intellectual property or relies on overseas imports. Here, we ranked 61st and it can only be wondered what our ranking will be if our major corporations are denied any R&D tax concessions, as proposed by the government.

The GII study also highlighted weaknesses in how we formed clusters and strategic linkages between our universities and industry. There was a poor ranking in our funding of universities and the number of science and engineering graduates we produce from them. Worker productivity was also an area of concern.

Although the idea of clustering manufacturing and related firms into special precincts has merit at a conceptual level, the challenge will be to successfully implement such schemes. Here there needs to be a well-considered role for universities and other research organisations, to cost-effectively work with industry. This is not easily achieved when dealing with SMEs who, by their nature, lack the time and resources to engage in long-term fundamental research projects.

There must also be a clear role for major “focal firms” that can help to anchor the supply chain network and assist the smaller firms to engage with international markets. We don’t have Korea’s Samsung, LG or Hyundai to help lead the way. Further, if our major global corporations are resources firms that no longer get a tax break for investing in R&D, will we see such engagement from the big end of town?

Venture financing

The package of measures contained in the jobs plan that target the nation’s SMEs has many good ideas. A $350 million Innovation Investment Fund (IIF), changes to taxation for venture capital investors and enhanced small business support schemes all have a positive sound to them. Once again, their true value will be in how they are implemented.

The jobs plan proposes enhancing the existing Early Stage Venture Capital Limited Partnerships (ESVCL) and Venture Capital Limited Partnerships (VCLP) programs. The investment threshold for the ESVCL will fall from $10 million to $5 million. There will be adjustments to the VCLP to enhance the treatment of profits and losses for Australian investors.

As I have explained in an earlier article, venture capital is important for a small number of businesses that are seeking to grow beyond the level that can be managed from normal retained earnings and debt financing.

Early stage firms, particularly start-ups, generally cannot secure VC financing. These firms may sometimes secure informal VC from “business angels”, but they are a notoriously difficult group of investors to systematically track. Further, the performance of VC investments over the past decade has not been attractive.

Helping the little guys

A feature of the jobs plan is support to encourage the financing of innovative start-up firms. This has some merit however, we must be careful not to focus too much on venture capital fuelled high-tech start-ups.

The experience of Germany and its vibrant medium sized “Mittlestand” group of companies has demonstrated the power of supporting existing firms. These German SME manufacturers have built their competitiveness on innovation, strong management, a dedicated and skilled workforce, and a close alliance with customers and suppliers. Most are family-owned firms in low to mid-tech industries that don’t seek venture capital funding.

The jobs plan proposes a new Growth Opportunities and Leadership Development (GOLD) program. For SMEs that work via the proposed innovation precincts, there will be access to a range of business support services including assistance with accessing researchers and management education at the Mt Eliza Leadership 21 program.

It is encouraging to see provisions in the jobs plan for enhancing both management skills and workforce development skills within Australian industry. The creation of a Centre for Workplace Leadership will be a feature of this plan. But there is much to do. Australia has performed poorly on the World Management Survey and this requires a much greater investment in small business management education and development than we have seen so far.

A good start, but let’s see the alternative

The jobs plan is a well-considered strategy that has clearly taken on board a number of key industry reports. There are many good ideas contained within it, although many are little more than adjustments of pre-existing schemes. The big idea of innovation precincts will require careful, long-term management and this should be done by industry and not government. I also consider that cutting the R&D tax concession for large firms demonstrates a myopic perspective and may prove counterproductive in the longer term.

However, what the jobs plan seeks to achieve is a fundamental change in the way Australia’s manufacturing sector works, how industry works with universities and how SMEs work. These are big challenges and will require years to realise their goals.

In the current political climate it will be interesting to see if this vision can ever be realised. It will now be up to Tony Abbott as leader of the federal opposition to respond with an alternative vision for Australia’s industrial future.

Read part one: Planning for a blue-collar Australia: will Labor’s jobs package deliver?

Tim Mazzarol receives funding from the Australian Research Council, Co-operative Bulk Handling Group, Capricorn Society Ltd, the Government of Western Australia and Co-operatives WA. He is also President of the Small Enterprise Association of Australia and New Zealand (SEAANZ), a not for profit association founded in 1987 that is dedicated to advancing research, education, policy and practice for small to medium enterprises.

The Conversation

This article was originally published at The Conversation. Read the original article.

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