21 February 2018

2030 Plan’s R&D trigger point misses the target

This month’s “2030 Plan” from Innovation and Science Australia made many excellent recommendations about how Australia can seize a place among top-tier innovation nations.

Unfortunately, it also made one recommendation that shows a basic misunderstanding about what drives commercial research and development decisions. If implemented, it would give competitive advantage to importers and encourage Australian manufacturers to shift their R&D offshore.

The report recommends introducing a “trigger point” for research and development tax incentives. Companies that allocate more than 1 per cent of total expenditure to R&D would receive a tax incentive, while companies that spend less than 1 per cent on R&D would not.

It’s a good outcome for the foreign multinational manufacturer that does R&D in Australia but little or no local production. With few local production costs, they should easily clear the hurdle and gain an advantage over local companies.

It’s also a good outcome for many emerging start-ups and small to medium enterprises, which are typically overweight R&D costs relative to production costs, so they’ll pass.

But for many established Australian manufacturing companies, an R&D trigger point would remove their entitlement to R&D tax incentives.

Australian manufacturers typically have very high production costs. They employ people here, they buy and process raw materials here, they pay (a lot) to use energy here, they run and maintain plants.

They also do lots of R&D: often spending millions or even tens of millions each year to improve their products and systems and remain competitive. But when production costs are measured in billions, many still won’t clear the hurdle presented by a 1 per cent trigger point.

What message is this sending? It says that the type of practical, commercially focused R&D that prevails in global manufacturing enterprises, namely the commercialisation and continuous improvement of technologies, products and processes, is not encouraged by Australia’s R&D tax incentive.

Consider Dulux. This year, Dulux celebrates 100 years in Australia but the centenarian shows no signs of slowing down. DuluxGroup employs about 3000 Australians and this year will open a new $165 million paint factory in Melbourne.

Dulux’s success is underpinned by investment in pure sciences and commitment to R&D in Australia. It is one of our largest employers of industrial chemists and has 130 dedicated R&D professionals. It collaborates extensively with the tertiary sector and other publicly funded research organisations. As a result, Dulux leads the Australian paint market against two US-owned global giants that do almost all their R&D outside Australia.

Under the proposed trigger point, Dulux would receive no R&D tax incentive. Over time, it’s likely Dulux would scale back R&D investment and ultimately outsource R&D to “upstream” global providers, to be carried out offshore in the US, Germany and China.

Surely this is not the outcome we want from the scheme.

We should encourage many forms of R&D in Australia: blue sky thinking in our start-ups and academic institutions, globally significant research from leading multinationals and, just as important, commercial R&D from companies that continue to invest in production and jobs alongside research in Australia.

The uncomfortable truth for governments is that they have little influence over whether or not a business chooses to do R&D — customer demand and competitive pressure will determine that. What governments can influence — significantly — is where the business chooses to do R&D.

At a time when our neighbour New Zealand is reinstating generous incentives to lure R&D to its shores, we should not be winding back incentives here.