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Measuring Innovation The concept of innovation is easy to grasp and we can see innovation occurring around us. But the phenomenon as a whole is difficult to measure. It has an intangible element to it – the ideas and experimentation that may not be measured precisely, even by the businesses that benefit most directly from it. Innovation cannot simply be located, recorded or quantified – it is often elusive. Consequently, efforts to measure innovation typically rely on a patchwork of indicators covering factors that can be measured.

National Measures In Australia, the Business Characteristics Survey (BCS) collects information about the broad types and status of innovation across Australian businesses annuallyxii. In 2012 – 2013, 20 per cent of all businesses were involved in product innovation, while 20.2 per cent and 18.8 per cent were involved in organisational and marketing innovation respectivelyxiii. However, innovation intensity varies widely across industries (Figure 2).

Figure 2: Businesses innovating by industry

Manufacturing, wholesale and retail trade, and arts and recreation services all demonstrate a strong emphasis on innovation with 40 per cent or more businesses innovating in each of these industries.

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The BCS survey also measures inputs to and outputs from innovation. For example, the acquisition of new machinery, equipment or technology as well as licences, patents and other forms of intellectual property. However, these measures don’t always capture innovative activity. For example, R&D expenditure is a staple of innovation indexes around the world, seen to be a vital catalyst for innovative capacity. But R&D expenditure is recorded disproportionately by large scale firms and does not correlate well in Australia with levels of innovation activity. Figure 3 shows that industries such as wholesale trade, information, media and telecommunications, and agriculture, forestry and fishing, all exhibit minimal R&D expenditure, but as seen in Figure 2 , high proportions of businesses in these industries report being innovative.

Figure 3: R&D expenditure by selected industry

Moreover, different indicators present different cases for innovation across regions, as seen in the data from the National Innovation Map (http://www.industry.gov.au/Office-of-the-Chief-Economist/Pages/National-Innovation-Map.html). Patent applications and R&D spending are two measures that underpin Australia’s innovation mapxiv. But using patents (Figure 4) and R&D expenditure (Figure 5), for example, depicts highly concentrated innovative activity within the city of Sydney, whereas new business start-ups (Figure 6) portrays a greater diversity.

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Figure 4: National Innovation Map by indicator: Patents

Figure 5: National Innovation Map by indicator: R&D expenditure

Figure 6: National Innovation Map by indicator: New business start-ups

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Patents and R&D expenditure are clearly part of the innovation story, but their spatial distribution brings a strong bias towards the inner parts of our capital cities, underplaying the extent of innovation occurring in the rest of Australia.

No single measure can capture the full complexity of the innovation process.xv

Multiple measures of innovation are much more useful, and a multifaceted innovation index is better able to reflect innovation activity. But which measures can be trusted to give a reliable account of innovation in a contemporary economic context? The way innovation happens is changing, and so are the ways we measure it. The RAI’s research builds on the information in the National Innovation Map on patent and trademark applications, business R&D expenditure and business start-up rates. It adds information for every LGA on the presence of an R&D institution; the proportion of workers with qualifications in science, technology, engineering and maths; the proportion of workers in knowledge intensive business services; and the proportion of people running their own business. These additions paint a rich picture of the drivers and outcomes of innovation across Australia, enabling comparison of regions strong in the traditional innovation factors of R&D, with those strong in the contemporary drivers of business dynamism. The RAI’s work recasts Australia’s innovation map, and shines a light on our most innovative non-metropolitan regions.

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[In]Sight's Regional Innovation index An ideal innovation ecosystem will incorporate a variety of the factors outlined in this report. These factors are not confined to urban Australia, but are prevalent across the country and within regions. Each region has a unique blend of characteristics which support innovation activity, as well as areas in which it needs strengthening. The revised [In]Sight - Innovation index incorporates two dimensions of the concept of innovation:

1. Research and Development (R&D) and Science – reflecting the traditional view of innovation focused primarily on technical expertise in R&D, and the measurement of those developments through applications for patents; and

2. Business Dynamo – reflecting a broader concept of innovation that incorporates additional factors which drive innovative activity in the business sphere.

These two sub-indexes are combined to provide an overall index. To map and assess each region’s innovative capacity, the RAI has made significant updates to its own innovation theme index within [In]Sight: Australia’s Regional Competitiveness Index. In particular, the additions contrast old measures of innovation focused on R&D with more contemporary approaches that take into account the commercial environment surrounding a region, commonly referred to as its Business Dynamo. The additions are not designed to pit one measure against another, but instead showcase the diverse innovative capacity of regional Australia. While not perfect measures, these updates provide a much more holistic understanding of regional innovation activity than work done in the past.

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