Jensen, P.H and Webster, E. (2011), Submission to the Victorian Competition and Efficiency Commission’s Inquiry into a State-based Reform Agenda, July.
It is well-known that productivity growth is the primary force underlying continued economic growth and prosperity. However, sustained productivity growth is not automatic and its growth will fall below its socially-optimal level if left to the unfettered market. There are clear and well-accepted theoretical reasons for careful government intervention – in the form of industrial policies – to promote productivity growth. VCEC’s inquiry into a State-based reform agenda tackles many of the areas where governments (and in particular State governments) may play a useful role. In this submission, we focus our attention on one area – innovation – since that is the area of our specific interest and expertise.
An increase in output per worker (i.e. productivity) is only achieved via:
• Enhancement of worker skills and capabilities;
• Discovery of new and useful forms of knowledge and ideas; and
• Improvement in economic coordination (competition, rule of law, institutions etc).
Investment in plant and equipment is subject to diminishing returns and will not deliver ongoing improvements to productivity. Compared with research funding for education, skills and competition, there is very little research into the economics of new and useful forms of knowledge and ideas. In this submission, we argue that Australia’s standard of living will not be sustained unless more resources are allocated to understanding the complexities of the innovation process. We argue that there are four fundamental problems: i) the lack of firm-level data on innovation; ii) insufficient research capability in innovation economics; iii) the dearth of empirical evidence on government interventions; and iv) the need for more inter-disciplinary research.