The government has responded to calls to invigorate Australia’s defence innovation enterprise with a commitment to stand up a new program in the Department of Defence with funding of $3.4 billion over the next decade. The Advanced Strategic Capabilities Accelerator will bring together industry, research organisations and various government entities to feed the acquisition pipeline with next-generation capabilities. Given the accelerating pace of technological development, such focus is vital for any nation that wants to maintain a sovereign industrial capability relevant to the global security landscape.
But innovation is hard. Most of it fails. The statistics are undeniable, and yet the challenge of forming policies that account for this plagues similar efforts around the world. Picking winners seems easy ex post. But it is also easy to tally the cost of a consistent inability to do so ex ante. Government policy must strike a balance between incentivising success and accepting failure.
A return to first principles suggests that Australia is still striving to find that balance. A key characteristic of research and development is positive externalities: benefits accruing far beyond the original source of investment as ideas spread. The impossibility of an innovator capturing a substantial portion of the total value created means that R&D suffers from chronic underinvestment. An important role of government is addressing such market failures.
How is Australia doing in this regard? A few statistics paint the picture.
The Australian Bureau of Statistics reports that government defence-sector spending accounted for 1.7% of approximately $35 billion in economy-wide R&D in 2021–22. The United States, whose GDP is 16 times larger than Australia’s, spends around 30 times more in aggregate. The US Department of Defense alone reported spending US$107 billion ($166 billion) on R&D in 2021, a figure suggesting that US government defence-sector R&D accounts for close to 15% of its economy-wide total. Perhaps the US is an outlier, but Australia is surely an outlier in the opposite direction. The OECD estimated Australia’s gross domestic expenditure on R&D in 2019 at 1.80% of GDP. The figure for the entire OECD was 2.56%.
Outcomes bear out that assessment. The OECD reports 2019 Australian venture-capital spending at 0.035% of GDP, relative to a US figure of 0.5%. Five applications were made to the Patent Cooperation Treaty for class F41 weapons patents from Australian sources in 2019, just 1.5% of the OECD total for a country that makes up more than 2% of the group’s GDP. The US secured more than 33% of weapons patents, a number in line with its GDP contribution. Aerospace and defence imports from the US were nearly five times larger than Australian exports over the past five years.
Defence’s $3.4 billion R&D commitment is welcome but is a long way from correcting the imbalance. If we may safely assume that an order-of-magnitude increase in defence R&D funding is not in the cards, the structure of the reorganised Australian defence innovation ecosystem becomes even more important. Again, some benchmarking is in order.
While DARPA and its notable successes capture headlines, the reality of the US strategy for a defence innovation ecosystem is far more complex. It comprises a wide array of players across federally funded R&D centres, university-affiliated research centres, laboratories, non-profits, private businesses and various government agencies. One recent analysis counted 72 different defence organisations that are active participants in the commercial technology pipeline, from the Defense Innovation Unit and Joint Rapid Acquisition Cell to AFWERX and the Office of Naval Research.
Some broad strategies stand out. First is acknowledgment that diverse perspectives are critical to creativity. Success requires bringing together the right voices at the right time and in the right place to create a solution that meets the operational requirement. Brilliant new ideas come from unlikely sources, and from combinations of knowledge rather than great thinkers in isolation.
Second is a focus on the steps in the process where good ideas tend to die. This problem is commonly known as the valley of death, but evidence suggests there are many phases that present similar challenges and require different solutions. Carrying basic research from the laboratory into prototyping requires a different skillset than turning a prototype into a product, as does scaling up manufacturing. A single organisation is unlikely to execute such disparate tasks effectively. The US’s Small Business Innovation Research and Small Business Technology Transfer programs are designed to address this problem. You have likely heard of some of the companies that have received federal support from these programs.
And finally, whatever the handwringing about the need to simplify defence acquisition processes, there’s no way to have one’s cake and eat it. Creating an ecosystem to address problems such as these demands complexity. Innovators should be focusing on core expertise and not learning to navigate the defence acquisitions bureaucracy. The US Small Business Administration and Office of Small Business Programs, among others, run a multitude of programs to facilitate contracting, incentivise small businesses and their potential customers, and educate industry participants on how to play the game.
It’s not difficult to argue that the US’s propensity to throw money at problems is surpassed only by its facility for wasting it. One could make a parlour game of naming US innovation agencies and guessing at the number of past studies highlighting their poor performance. Nevertheless, the Advanced Strategic Capabilities Accelerator and the broader Australian defence innovation ecosystem can take valuable lessons from studying its approach.
Innovation is messy. Thinking we can design a system that will consistently pick the winners and turn them into national champions is a fool’s errand.
Innovation happens in deep markets. All of the failure required to produce the odd success creates churn, and churn requires an opportunity to move on and try again.
Innovation requires a laser focus on the mission and—for a medium-sized economy like Australia’s—competitive advantage. The only way to win in the long term is to incentivise Australia’s innovators and then facilitate pathways for them to sink or swim in international markets.
Of all the lessons from the economics of innovation, perhaps one is the most relevant: whatever the attention captured by market leaders, it is sometimes a better strategy to be a follower. Countless companies have sunk billions into a false start only to see competitors seize upon its eventual success and carry it to new heights. This principle applies to the management of an innovation pipeline no less than to the innovation itself. Defence would benefit from capitalising on the investment others have made in identifying winning strategies.