Will the ASX 200 ever have its own Amazon or Google?

Recent study finds Australian companies lag behind international peers on innovation. What does this mean for the long-term future of Australian companies?

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A study released yesterday by the Australian Institute of Company Directors (AICD) and the Sydney Business School found that short-termism and conservative stances on governance risks are hindering innovation and technological advancement.

What does this mean for the long-term future of Australian companies?

Innovate or stagnate

Stagnant, complacent businesses never last long and rarely enjoy the growth and market share investors desire. At the twilight of the resource boom, Australia must now survey the new landscape and adapt to its contours.

As a 2017 report from Innovation and Science Australia identified, "the biggest growth opportunities will come from knowledge-intensive companies that innovate and export, as they are the most profitable, competitive and productive."

And yet one staggering finding from the AICD study was that only 3% of all AICD members surveyed possessed science or technology expertise. To have over 95% of AICD members have no expertise in the areas defining today's digital era is bewildering.

Not only that, only 35% of AICD respondents thought their organisation's board had the requisite skills to execute any innovation strategy.

Interestingly, about 75% of AICD respondents submitted that their company does have an innovation vision, yet 57% also said innovation was never or only occasionally on their board's agenda.

From this it seems innovation is more buzzword than KPI. Australia should not find itself in a position where directors are more likely to fire the next Steve Jobs than embrace him.

AICD's Managing Director and CEO, Angus Armour prefaced the report by saying "innovation should not be viewed as optional, or just a concern of the black t-shirt millennials of technology companies. It is a central part of corporate strategy and risk management."

Australia lagging behind other countries

The Global Innovation Index's 2019 report ranked Australia 22nd in the world and 6th in its region, behind regional neighbours like Singapore, South Korea, and Japan.

In line with this, the AICD study found that, as a share of GDP, Australia's expenditure on R&D fell in recent years, with Australia's R&D intensity below the OECD average.

What do these figures mean for Australia's investing environment? Quite a lot when one realises that in a business arena more competitive than ever thanks to globalisation, innovation and R&D are strongly linked to business success.

R&D spending and stock prices

New markets, new products, and new inventions hardly ever materialise out of thin air. It takes research and deliberate tilts at innovation to do that.

A 2014 report by Goldman Sachs found "a strong correlation between R&D and Sales Growth (8-year CAGR through 2012; R2 75%) and between the latter and stock price returns over this period (R2 71%)." 

And yet, in his 2018 address, Reserve Bank of Australia's Phillip Lowe cited data revealing that less than 20% of firms ranked R&D a first priority.

It is time that changed.

Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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