Costs and lack of skilled labour delay innovation among Australian businesses

Less than half of Australian companies implemented some type of innovation in FY22 and FY23.

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Innovation is one of the share market buzzwords of the moment amid all the hype around artificial intelligence these days.

Like most developed countries, Australia has a productivity problem.

AI is the latest innovation measure to gain attention, and it's touted as a game-changer because of its potential to make workers more efficient.

But it appears Australian businesses are lagging behind when it comes to implementing innovation.

Innovation activity falls in FY22 and FY23

A report released by the Australian Bureau of Statistics (ABS) today says only 46% of Australian businesses implemented some sort of innovation activity over the two years to 30 June 2023.

For the purposes of the survey, innovation was defined as the introduction of a new or significantly improved good or service, an operational, organisational, or managerial process, or a marketing method.

Overall, innovation activity fell from 52% of businesses over FY20 and FY21 to 46% over FY22 and FY23.

What's the problem?

The dip is at least partly due to the early COVID years skewing the results. The pandemic forced many businesses to quickly adapt to urgent new safety measures in their daily processes.

Another factor in the dip may be rising costs due to inflation, with the ABS finding economic pressures were the leading barrier.

A shortage of skilled workers was the second biggest reason why businesses were delaying innovation.

The report looked at two areas of innovation.

The first was goods and services, including new products and services, and new characteristics of existing products, such as fresh designs or packaging. The other was processes, defined as any improvement to the way a business is run.

Robert Ewing, ABS head of business statistics, said:

Businesses are now shifting their focus away from process innovation, to concentrating on their goods and services innovation. They're now adjusting to the current economic conditions as cost-of-living pressures hit households and businesses.

Which businesses are innovating?

The ABS research showed innovation was more important to the income of smaller businesses.

Microbusinesses, with four or fewer employees, had the greatest proportion (at 8%) of companies earning three-quarters or more of their total income from new or improved goods and services.

In contrast, less than 1% of large businesses with 200 or more employees said their new and improved goods and services generated three-quarters or more of their total income.

The most popular items purchased for innovation were new machinery, equipment, or technology.

This was followed by new marketing activities and training, both at 37%. 

What are companies spending on innovation?

The data shows three out of every four businesses spent less than $25,000.

One in five businesses said a lack of funds stopped them from attempting innovation in FY22 and FY23.

Among the businesses that did implement some innovation, 30% undertook measures that cost nothing.

Ewing said:

Of the businesses that spent nothing on their innovation activity, some were doing this by improving their marketing activities to attract new customers.

We heard businesses were using social media to advertise and promote their goods and services. While others focussed on improving internal work practices to adapt to economic conditions.

This shows that businesses continue to find ways to innovate that don't require substantial expenditure, which is especially important for very small businesses.

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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