Business

Growth is an evolutionary process that does not occur smoothly or continuously but rather occurs in spurts.

If this statement is correct, how do we ensure South Australia’s next decade is a spurt of growth, and not a steady decline? By identifying where new sources of growth exist. We want to be a city where the big business decisions are made here. This means promoting new ventures that bring new sources of growth, and are headquartered here.

A thriving knowledge economy is a prerequisite for innovation and growth. Knowledge intensive sectors of the economy are commonly responsible for higher rates of value-added growth. For example, consider the development of the Apple ipod which, in 2006, was responsible for around 41,000 jobs worldwide. 14,000 were inside the US. 27,000 were off shore. US workers (where knowledge was deployed in the design, R&D, software development and marketing) earned a total US$753m, while almost twice the number outside the US earned US$318m – less than half.

Communities that invest in knowledge-based capital see growth because knowledge can be leveraged – in R&D, design and new business models – over and over again without incurring costs of acquiring knowledge. Meaning that knowledge produces the ultimate economies of scale in production. In Australia, since 1974-75, average annual growth of investment in knowledge capital has been around 130% that of investments in physical assets such as machinery, equipment and buildings.

Companies like Google that are experiencing high growth are investing in their own knowledge capital. In 2009, physical assets accounted for only 5% of Google’s worth.

Even more important for South Australia’s economy is the need for us to compete in a globally integrated market through our ability to innovate. Research shows that in sectors particularly exposed to overseas imports, jobs and survival rates have fallen in firms that innovate less, but have been relatively protected in high-tech firms. Innovating is essential to competing, and competing successfully is the basis for growth.

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Adelaide’s existing ecosystem

As of June 2012, South Australia had 148,138 businesses and the second highest survival rate for businesses, after Tasmania (illustrating that ours is a resilient market operating lean business models), but this is in a declining trend. 814,400 people are employed across all sectors in the state.

“Business activity can create jobs and entrepreneurial opportunities, cultivate inter-firm linkages, enable technology transfer, build human capital and physical infrastructure, generate public revenue for government and offer a variety of products and services to consumers and other businesses..”

A major policy focus must be to grow the enterprise ecosystem in South Australia if we are to have a sustainable economy. This means engineering the right conditions to attract large listed corporations, large and mature family businesses, and to exploit the emerging potential of the micro and small sector.

Growth in business brings a series of cascading benefits to communities including;

  • companies with consistent growth rely on the goods and services around them; supporting the growth of new products and business models to service them – creating opportunities for small companies to scale up, boosting employment and driving innovation
  • high growth companies are able to continually create new opportunities, including ‘spin out’ companies and jobs
  • high value (and often disruptive) innovation comes from having smaller companies that are ‘placing small bets’ but these smaller companies operate ‘under the cover’ of larger enterprises demanding their services
  • Creating the right conditions for business start-up, survival and growth is essential. Industry groups like Business SA understand this, and have called for clarity in the government’s role in supporting business growth; and for this to be reflected in a coherent set of policies and programs across taxation, export assistance and skills development.

Growth is probability-based, requiring a range of growth initiatives to be in play at any one time. So we too need a range of strategies to be deployed if we are to generate growth in South Australia. This is one example where we need to walk and chew gum at the same time. Later in this report we offer some examples of where new sources of growth may be found.

So can we afford to attract new enterprise?

Evidence shows that cities that fail to compete in tailoring tax breaks for business, often fall behind. Attracting firms with financial incentives sends a signal that a city is “open for business” but evidence also shows that excessive competition to attract businesses can lead to economic loss.

There are a range of strategies available to cities like Adelaide to ensure costly mistakes aren’t made, including designing incentives to include independently verifiable requirements that firms actually generate the promised jobs and economic growth – or else pay back some of the subsidies, or getting citizens much more involved, by vetting proposed deals in a public forum where officials would have to spell out expected gains in jobs and growth. The logic is that officials would be more accountable to voters if the deal turns out to be nothing more than a costly give-away.

As a guide to the scale of financial incentives being offered to large global enterprises, the US city of Chicago lured Boeing from Seattle with $50m in tax incentives totalling around $100,000 per job, while the US state of Alabama offered Mercedes-Benz around $168,000 for each new job.

Adelaide can’t, and shouldn’t get in to a beauty contest based on financial incentives. But we can compete by offering a combination of financial and non financial incentives. This is where the South Australian quality of life plays a critical role, and the work of Brand South Australia moves from a sophisticated graphic device, to a solid strategy integrated with business investment, policy settings and an entrepreneurial public sector.

Financial incentives

Ireland’s success in attracting high profile global knowledge-based industries to Dublin has been attributed to generous financial incentives; specifically designed to appeal to R&D-intensive enterprise including;

A 25% R&D tax credit – designed to encourage companies to undertake new or additional R&D activity in Ireland.
incentives to generate qualifying patents – up to €5 million of annual qualifying income can be exempt from Irish tax
A maximum corporate tax rate of 12.5% on all corporate trading profits generated by RD&I activities
Non financial incentives

We are already strong in the non financial incentives that many cities struggle to offer, including those mentioned earlier; natural amenities, cultural amenities, symbolic amenities, built amenities

Adelaide was ranked 5th in the Economist Intelligence Unit’s 2013 Global Liveability Index. However when Mercer rated Adelaide’s infrastructure – measuring energy and water provisions, telephone, mail, public transportation, traffic congestion & airport effectiveness – Adelaide was placed 37th.

Continued, methodical and evidence based investment in the strategic infrastructure the state needs – and the avoided cost of infrastructure that is not critical to the performance of state growth, presence and market growth – must be maintained as a strategic plank in business attraction.

State and local government collaboration to roll out Adelaide’s ‘Vibrant’ agenda is an important start. A fresh State brand is a useful device for global audiences. Initiatives that upgrade city infrastructure in tandem with cultural programs, markets and ‘pop up’ style events can be an effective strategy to engage interstate markets.

However, short term and temporary events must not detract from investment in the long term upgrade of urban infrastructure such as our streets, squares and public spaces, public transport, trams, rail and road that catalyse private sector investment and business growth. These are essential in attracting, retaining and growing the enterprise culture in Adelaide.

Elements of an enterprise ecosystem

An ecosystem is an interdependent community – a self sustaining mix that is in balance with its surrounds. It implies a range of size, scale and types of enterprise that is not exclusive, and grows organically.

Adelaide’s enterprise ecosystem is currently out of balance. We have only one local business rated in Australia’s ASX Top 50 companies. Our SME sector which is our lifeblood, is struggling to survive or grow, let alone innovate. An emerging start up sector is searching for support and capital.

Governments, industry groups, communities and businesses and leading individuals must work together on a plan that tailors strategies for large corporate firms, family business and smart start up, micro businesses, that considers lower corporate tax rates along with an aggressive and creative campaign to an interstate and global audience. Enterprise needs digital infrastructure of a global standard; digital dark fibre, ubiquitous public WiFi, seamless transport as well as regular and reliable international flights and connections. It needs strong, bipartisan and vocal political support and the best environment for intellectual protection in Australia.

Why is ‘headquartering’ important?

Research shows that a corporation will direct around 70% of its donations to the city of its headquarters. Santos may be our largest, but it’s not our only significant ‘headquartered’ business. In 2011/2012, the Coopers Foundation distributed around $450,000 to 30 Australian charities, and has contributed around $1.75m since its founding in 2007.

Locally headquartered corporations generate revenue for their local community, support local not for profit, cultural, sporting and charity organizations. We need to grow this pool. So which are the right industries to attract?

The value of R&D-intensive industries

“Due to the increased internationalization of business R&D, foreign-controlled multinational enterprises are now seen by most governments as a central actor in national innovation systems and as a catalyst for upgrading in global value chains”

If we want to compete with other cities, and regional economies then we must move to a knowledge-intensive, value-based – not a priced-based – economy. This means promoting sectors that create value and can compete on the basis of higher value return for input.

An enabling environment for R&D includes;

  • advanced technology strategies and infrastructure
  • access to world class research and skilled labour
  • the cost of labour, especially for lower end R&D activities
  • other multi national enterprises active in R&D
  • public incentives to promote corporate R&D
  • smart intellectual property protection
  • climate and quality of life
  • language skills of the local population
  • bureaucracy and time associated with creating and functioning an R&D enterprise
  • An R&D-friendly environment means offering the best market for ideas to be converted in to products and services. This demands a contemporary, robust environment that promotes the development of new ideas, and provides the right conditions for Intellectual Property Rights, access to finance and market testing.

Demonstrating an industry-centred understanding of intellectual property rights and copyright would act as an agent to attract multi national enterprise, and small high value creating firms with limited capacities to negotiate or enforce their rights.

And it’s no small part of Australia’s economy. A 2012 study by Pricewaterhouse Coopers found that Australia’s copyright industries generated $93.2 billion in economic activity (around 6.6 percent of GDP), accounted for just over $7 billion in exports; and employed more than 906,000 people – or 8% of the nation’s workforce.

Yet the report goes on to note a ‘perfect storm’ generated by the rise of digital means of production, the rise of internet use and other technology-related factors has impacted the growth of copyright-related industries, and that appropriate regulatory models that support this high value sector are yet to be developed.

In South Australia, this suggests that around $6.2bn of annual economic activity and 42,245 jobs could be at risk without a contemporary regulatory framework in place.

Adelaide – Australia’s creative capital – must set the pace in designing a 21st C framework for intellectual property rights that balances exclusive rights and competition, but also recognises the disruptive nature of information technology and the increasingly open source character of value creation.

A number of OECD countries are rethinking their Intellectual Property frameworks. Adelaide can be the global leader in a new generation of intellectual property protections that attract the R&D investment of multinational enterprises keen to register copyright and design rights, to commercialise, prototype and trial in Adelaide’s market. We can simplify and streamline the registration for products with short product cycles which are common in high value creating technology focused firms.

Attracting highly skilled workers for innovation

In a knowledge economy, people are assets. So any initiative to attract R&D intensive companies to establish a presence in Adelaide must include policies to attract and retain skilled migrants with innovation skills, and expertise in science, design and engineering. In fact, because location decisions are commonly made because of personal relationships, “governments are advised to provide targeted support to talented scientists in a flexible and personalized manner, and to build upon their expertise for investment promotion purposes”.

Global firms are increasing their spend on R&D in subsidiaries away from headquarters and this constitutes a powerful mechanism of international technology transfer which can enable host locations to develop specialized clusters and integrate better in to global value chains. It can also ease access to Foreign direct investment.

Adelaide must compete for talent in areas where we have strength, and where we apply a creative approach to genuine innovation in new sectors that have a high growth future, but work in smaller, highly connected economies like ours.

Getting serious about growing these sectors demands that we assemble passionate, talented and skilled champions from across government, the private sector and from leading centres of research, with licence to call for reform where it’s needed most.

We have experience with this model of broad scale engagement and a skills-based taskforce, but we also have experience with bold, evidence-based and ambitious reforms being watered down or stifled by governmental process.

Universities as hubs in the knowledge economy

The growth of the high-value knowledge economy will be greatest in those cities where knowledge is created and effectively exchanged. Adelaide can do more to integrate research and innovation in our industry value chains. Our smaller scale allow this to happen more broadly and systemically than the chance encounters and fraught logistics of larger cities.

The primary source for research comes from our universities. Universities attract talented researchers, teachers and post graduate students on their global ranking. But South Australia’s universities are yet to be ranked within the top 200 globally, and only the University of Adelaide is ranked in the top 10 nationally.

The growth and performance of our universities matters, and must be seen as a priority. Commercialisation of research can yield big returns.

The best way to support our Universities is to demonstrate innovation in product development that results from research partnerships. This requires our researchers to have an industry mindset, and an industry with a patient respect for the research environment. This is something we must continue to foster if we want to be a global test bed for ideas and innovations.

Universities make ideal developers. Our universities are not only centres of teaching and learning, but are also highly valuable partners in the long term development of the city. University capital is generally patient capital; projecting returns over decades and developing assets that enliven the city, commerce and the night time economy.

We have traditionally viewed Universities as discrete training providers, and not as strategic partners in the growth and development of Adelaide. And not as essential hubs in the innovation network.

So where do we start?

Commit to attracting several large and successful businesses to South Australia to signal a significant shift toward Adelaide, to other global and interstate players. Lessons from these first few could be used to design an ongoing enterprise attraction program.

The program should comprise financial and non financial incentives such as;

1. Develop a focused rationale to attract enterprise sectors that are R&D-intensive, and support complex value chains such as; pharmaceuticals, nanotech and biotech, medical and health-related technologies; defence, space, and flight technology, simulation, sensing and robotics and ICT-intensive industries from the emerging fields of big data, digital and green technology networks, and new media

2. Ensure advanced innovation skills exist in overseas trade offices with authority to negotiate directly with inward investors on R&D-related incentives

3. Move first to assemble a nationally respected, high profile taskforce of industry, policy experts and leading researchers with experience in commercialisation to prepare a milestone vision document to rethink Intellectual Property in the 21st Century; the legal and financial implications of technology and globalised business. Further, partner with the Australian Government, and a regional body such as ASEAN to ensure a regional framework results to foster translation of intellectual property between jurisdictions.

4. Consider the role of social enteprise. Australia’s not for profit sector remains an untapped resource for smart, well-connected and socially responsible enterprise. Adelaide can be Australia’s centre for social enterprise; building on strengths we are known for.