First published in The Australian:
There has been a long debate about whether governments should pick “winners” when it comes to investing in industry development and innovation. Some say the market is better at picking “winners” and others that it only creates “crony capitalism.”
Not surprisingly, it’s a question of definition, which is the point often glossed over. Picking “winners” can mean picking industry sectors, or picking a particular company or a product.
Making choices is important in a rapidly changing world. We need to pick ‘winners’, and it’s about picking industry sectors or investment. It makes sense to choose those industries where we have a comparative advantage. It also makes sense to “pick winners” by investing in emerging strengths that could be the foundation of future industries, and for long-term strategic benefits.
Although international tensions can sometimes seem far away, the hardening of China on both an economic and political front looms large. It’s a reminder that we need to support industries that are critical to both our future economic competitiveness and national security.
We saw the concern about China leading the US Congress to recently approve a $3 trillion industry development and Covid-19 support package. Remarkably, it was without the usual rancour between political opponents. Some of that investment went into semiconductors, artificial intelligence and biotechnology – industries that even opponents could agree are central to the US’s future economic competitiveness and national security.
The Covid-19 pandemic is another reminder to pick ‘winners’ where it’s strategic. It drove home the importance of supply chain sovereignty, especially where it comes to protecting the health of our citizens. Initially, we focused on access to PPE, hand sanitiser and respirators, but it has now shifted to domestic vaccine development and manufacturing capacity. Simply put, we need this sovereignty capacity to protect us against current and future pandemics.
A case in point is the messenger RNA (mRNA) vaccine, a new, innovative type of vaccine. Rather than putting a weakened germ inside our bodies, an mRNA vaccine teaches our cells how to make a protein leading to an immune response inside our bodies. The vaccine production process is faster than that of traditional vaccines because the manufacturing process can be easily scaled up.
We have considerable mRNA-related research and development and industry-based capabilities in NSW. We can harness RNA technology for our sovereign vaccine capacity, but the technology also has the potential to deliver therapeutic interventions in other diseases, including cancer and autoimmune disorders. It’s the foundation of a future industry, a job creator and an obvious ‘winner’ to invest in.
But sometimes our future industries are not as visible, and this is where governments play an important role. They have the advantage of patient capital and longer time horizons, and can support emerging strengths that could be the foundation of future industries. There are a couple of ways this can be done.
“WE NEED TO SUPPORT INDUSTRIES THAT ARE CRITICAL TO BOTH OUR FUTURE ECONOMIC COMPETITIVENESS AND NATIONAL SECURITY”
One way is to nudge them along, by governments issuing a call to arms for innovative solutions to their problems, and then being the first customer for those solutions. This is not a new concept, and it has been used in the US with great success for nearly 40 years.
With this in mind, the NSW government recently released its $24m Small Business Innovation Research (SBIR) program over two years, for small and medium-sized enterprises to solve pressing problems facing government agencies. SMEs can submit an innovative solution, with successful applicants being awarded $100,000 to develop their ideas. A second round of $1m funding will be awarded to SMEs to “prove up” their idea – and if successful, the government will be their first customer.
The first-round SBIR program problems were practical and pithy as to the kind of solution required. They included how to count and locate koalas, how to recycle PPE that currently ends up in landfill, and how to help vision-impaired commuters navigate the public transport network. The program has the potential to help SMEs grow into future industries with an opportunity to sell their products here and globally.
Another way is to “place some bets” by co-investing modest amounts of funding to support infrastructure where there are emerging strengths. An example is the 2019 investment in the Sydney Quantum Academy. It’s now supporting the development of quantum technology businesses, linking students to industry through internships and research, and promoting Sydney as a global leader in quantum computing. The new NSW government Start Emerging Industry Infrastructure fund will also nudge along some other future industries.
Better transparency in our R&D ecosystem to connect universities and research providers to industry and investors in meaningful ways will also help support future industries. We don’t have the advantages as yet of a Silicon Valley or a Tel Aviv, for example, where the exchange of knowledge and expertise effortlessly occurs because of the critical mass of like-minded people and networks.
This is where government can help again by bringing all the parts of the innovation ecosystem together to reduce transactional complexity and uncertainty, and increase the opportunities to build future industries. An open-access online platform that links research “sellers” and infrastructure to research “buyers” and investors, and sources of guidance and advice, is one way to do just that.
The Covid-19 pandemic has inadvertently uncovered many truths. One is the need to pick “winners” when it comes to investment in industry development and innovation. We need to invest where there’s a comparative advantage, but also in emerging strengths and for long-term strategic benefits. Areas of emerging strength would just turn out to be the foundations of our future industries, which will create jobs and support our social and economic prosperity.
At the time of writing, Gabrielle Upton was the Parliamentary Secretary to the NSW Premier.