Closing the R&D funding circle

Across August and September 2024, The Australian Government Treasury ran a consultation to assist with revitalising National Competition Policy. Members of the wider community were invited to make submissions pertaining to competition policy in Australia. This is the 2nd of my two submissions. The 1st is here.

About Paul Klink (Author)

I studied physics and maths at university and progressed into a career in software development. Across the last 27 years I have worked as CTO and then managing director of companies specialising in the development of brokerage and exchange trading platforms. Recently my interest has been drawn to ‘productivity’ and I developed the concept of a Productivity Exchange. My company, Xilytix is creating the productivity technology needed by such an exchange.

The work within Xilytix is heavily R&D oriented so it will apply for an AusIndustry Research and Development Tax Incentive¹. To improve upon my previous R&D TI applications, I decided to investigate how R&D subsidies improve the generation of innovation and creative destruction within an economy. This resulted in the article, “Understanding R&D Subsidies - A software perspective” which introduces the basics of how R&D subsidies work and also describes an approach which reconciles the use of scientific methodology within software R&D.

Researching R&D subsidies piqued my interest in the interplay between: knowledge, R&D and productivity. This, combined with my experience of trading markets, led me to consider how competition could be used to better exploit knowledge within R&D and better drive productivity within our economy.

Knowledge Competition

The NCP consultation paper refers to the changing nature of competition and the evolving focus of the NCP; from its focus on road and rail to information highways and digital platforms. With the current rapid advances in automation and AI and the growth of the knowledge economy, it is likely that the this focus will start to encompass ‘knowledge’.

One of the benefits of introducing competition to a product or service, is that it increases the ability to price the product/service. This in turn, leads to the economy better exploiting that product or service for the benefit of the wider community. So … could we use competition policy to better exploit ‘knowledge’ in our economy?

The funding gap

In Australia, we fund universities to undertake research for the purpose of creating new knowledge and developing expertise. We separately subsidise firms to undertake research and development (R&D). R&D is vital for our economy as it generates innovation which leads to creative destruction. However it is also has higher risk than normal business activities and subsidies are required to encourage firms to carry out R&D.

Knowledge is one of the key inputs into R&D. Its acquisition is an important part of any R&D project. There are numerous ways knowledge can be acquired: reading publications, browsing the internet, engaging specialists, innovation scouting², and collaborating with research partners/organisations. Collaboration is an effective way of acquiring knowledge however it also comes with the risk of knowledge leakage³.

Universities are the largest research organisations in Australia. Increasing collaboration between universities and firms undertaking R&D would greatly assist the development of innovation in Australia. Yet while we fund both of these parties, the funding does very little to promote collaboration (the gap).

This submission proposes a variation to the funding of research in Australian universities which uses competition to incentivise universities to increase collaboration with firms undertaking R&D. Figuratively, close the gap in the funding circle.

A knowledge market

For a market to work, both sides (buyers and sellers) need to:

1. Want what the other side is offering, and
2. Have confidence that the other side wants what you have.

Universities (sellers) have knowledge and expertise which many firms carrying out R&D (buyers), desire. However what can the firms offer in return, which the universities would want? To understand this, we need to better understand universities’ business model.

As discussed in my other NCP submission, “University competition - Exporting skills or improving domestic skills”, it seems universities are focused on growing their international business and use their research reputation and ranking to attract international students. Accordingly, their knowledge and expertise is highly valued internally in the pursuit of increasing their research reputations.

If firms wanted to ‘buy’ knowledge and expertise from universities for their own R&D projects, effectively they would need to compete against the “pricing” set by this high internal value. Large, well known, firms could potentially match this price by contributing their own funding and expertise. The brand association may also be a valued contribution. However small firms and start-ups with limited funds and low brand awareness probably could not compete with this internal price.

Confidence is also an important element in a market. A person needs to believe that their what they offer in a market is valued. Without that confidence, they will not try to participate. Let me illustrate this with my own personal experience.

When browsing the internet for research information for Xilytix, I came across an interesting and relevant paper from a researcher at a South Australian university. I was tempted to reach out but did not do so as I assumed the researcher would not be interested in communicating with me. Xilytix could not fund any research, my people networking skills are not very good and I have no experience in how to handle knowledge leakage. So I did not attempt to enter this market. If most other researchers in small firms are not affected by such a lack of confidence, then this is something I personally need to address. However if many other researchers are not entering this knowledge market because of similar confidence problems, then the problem is systemic and inhibiting the development of collaboration skills which would greatly benefit R&D within Australia.

Funding the market

In order to address the above issues, I propose the following:

1. AusIndustry is given responsibility for a significant proportion of the research funding provided to universities.
2. Universities compete for this funding by engaging with firms which are carrying out R&D subsidised by AusIndustry.
3. AusIndustry measures the engagements by requiring both firms and universities to record quantitative and qualitative information covering each engagement.
4. Universities receive a portion of the AusIndustry funding based on the level of engagement they achieved. The greater the engagement, the higher the funding.

This level of funding needs to be large enough to compete with the value universities assign to knowledge and expertise for their internal use. Only then will management encourage their researchers to search and engage with firms interested in their knowledge and expertise.

On the flip side, this will also give firms and their employees the confidence to engage in this knowledge market. They now are able to offer something that the universities value.

Benefits of an active Knowledge market

1. The obvious benefit is that knowledge can be better exploited by R&D within firms to generate more innovation, leading to greater creative destruction in our economy. Or more concisely, improve our economy’s productivity.
2. Universities will become more responsive to the knowledge demands of firms undertaking R&D.
3. People’s level of expertise in R&D will improve as they gain experience in networking and collaborating with knowledge providers. In the future, it is likely that firms will outsource more R&D activities so collaboration skills will become critical⁴.
4. As a side benefit, this will allay the growing sentiment that Australian Universities are out of touch with their local communities⁵. There is a perception that their heavy focus on international research reputation comes at the expense of engagement with local priorities.

© Paul Klink 2024: No AI Training⁶