Since the beginning of the noughties, the foremost issue in innovative industries has been uptake – establishing it, measuring it, commodifying it and competing with it. Government’s have tried to compel it – by tying funding programs to it, offering funding to those who partner to produce it, demanding reporting on it and producing free advertising for those who succeed at it. Yet despite the significant investment of public and private funds over this period, the 2013 Australian Innovation System Report echoes the sad refrain of at least a decade of reports, successive Chief Scientists and a variety of think tanks and consultants: Australia’s industry productivity and levels of business-to-research collaboration on innovation continue to compare poorly with other developed countries. But why does that matter?
Whether you’re a government or an individual, everyone wants the money they spend to get them what they wanted. There are really only two ways Australian Governments of all levels use the money to which they have access: to provide services or to achieve a policy end. When it’s the former, they tend to use the word “spend” and specific dollar amounts, as in “we spent $X million on front line services this financial year”, and it’s generally about the stuff they are obliged to do to keep the lives of their constituents functioning. And, just as you and I spending our hard-earned on groceries and utilities, so long as those services are provided as agreed, they’re satisfied. Sure they’d like their dollar to go further, but effectively it’s a straightforward transaction and then its done, albeit on a large scale.
When it comes to policy ends, the language can get a bit more fluid and with it, the intended results. For example, “incentives” are offered in the form of “funds” to “assist” with implementing new behaviours or activities, often as a way to offset the cost of doing the new thing they want us to do and with that, to reduce the perceived risk of the desired change. Where a more immediate response or reaction is required, the public sector will often “invest” to make sure those priorities it considers are important occur.
Why does the public sector invest in innovation? Because it believes the return it will secure on its investment will benefit the people who gave the public sector the resources to invest, (that’s us) at least as much as any other use to which those resources could be put, and most likely, far more. To get to the bottom of what they return is, whether the return is really that good and, for that matter, why the investment should be made with our/public money in the first place, we need to go back a couple of steps.
Why is any investment needed? At its most basic, because the person who wants to do something either hasn’t got enough money to do what they want to do they way they want to do it, or they do have the money and don’t want to use their own money to do it for some reason. Often that reason is risk – if they do it, and it doesn’t work or it turns out they need more resources than they thought, they may be left with nothing, not even the completed Whatever. So the person – let’s call them “Fred” – goes to someone else and asks them to give them the resources.
So far, the transaction isn’t dissimilar to going to a bank for a loan – Fred needs money, the bank has money, Fred asks the bank to let him use its money and if it will, Fred will pay them a fee for the privilege of being able to use its money instead of having to use his. Which he probably doesn’t have, so it’s also partly a fee for the privilege of Fred not having to wait and miss out on the thing he wants to do until he has found/saved all the money he needs to do it on his own.
Here’s where the two concepts diverge and, as it often is in commerce, the point of divergence is really all about risk. When Fred asks the bank for a loan, Fred knows the bank expects and will require more of him than just paying the fee to use their money in the form of interest for every month/year he has use of any of that money. They will also expect him to pay back the full amount he borrowed, and usually they’ll expect him to do so by paying regular instalments over time. These instalments not only mean they get their money back to use for other things gradually instead of having to wait until the very end of the agreed term of the loan. They also give the bank the comfort of knowing with every instalment that Fred is still able to make payments. The bank will want to know if Fred is running out of money, and it wants to know early enough to make sure it can get what he owes while he still has some.
Banks don’t like risk. They like certainty: knowing they have done everything they can to make sure they get what is “theirs” back as well as the reward agreed for “giving” it to you (or Fred) in the first place. And that’s the essence of a loan – from a bank, a neighbour or the person in your kid’s class – it’s not yours, you can use it, but then you have to give it back. And it’s why one should be choosy to whom you loan things – the kid who trashes everything they own is not who the one to whom you want your kid loaning their brand-new, highly-prized, expensive Whatever.
An investment, by definition, involves a higher level of risk. It starts from the premise that the resource may not be returned in its entirety. Effectively, it accepts that the kid may well trash the Whatever, and it does so because the benefit that could come from them having access to the Whatever is sufficiently good that it is worth the chance of it not coming back in one piece. Or any pieces.
And note that I said the benefit “could come”. Not “will”. Not even “should”. Some people use those words about an investment, but the truth of the matter with any investment is that there is always a chance what you expect to happen – the benefit you expect to get from giving your Whatever to Fred or the hapless kid – may not happen.
So why would anyone ever invest anything in the first place? Because they believe what will result from them giving their Whatever outweighs the risk. For example, if the hapless kid is the coolest kid in the class, and your child is angling for improved social status, they may consider the risk of their Whatever getting trashed worthwhile (you might not, but that’s a different issue). It’s a decision they make based on how much both they and the hapless kid value the Whatever, whether the hapless kid has a track record of rewarding those who are good to them, just how hapless the kid really is and how badly they want to be cooler (Again, parents are not relevant right now).
The same is true for any other investment, with pretty much the same variables. The trashable Whatever becomes the resources to be used which, when it’s money is usually spent on/with third parties and can’t be returned. The decision-making variables are effectively the same:
- The ability of the investee (ie the person/company we’re investing in) to deliver the promised return on investment.
- The track record of the investee in delivering return on investment previously.
- The importance of achieving the particular return on investment promised to the investor.
- The importance of the investment to the investee, particularly as it is reflected in what value the investee is prepared to offer the Investor ie the rate and/or form of return.
The recurrent theme? The motivation of the promised return on investment.