Exports promoted as cure for economic woes

High value-added, environmentally sustainable exports are vital to Australia’s self-determination as a nation in a global  economy.

The 2003 Innovation Lecturer, Evan Thornley, sent a clear message to business and government – support exporters.

He argued that because exports improve or increase national wealth, they are the key to solving unemployment and environmental under performance – the defining social challenges of out time.

Export earnings flow more directly to the national bottom line than domestic earnings and they can deliver an economy of scale that is not possible in Australia’s small domestic market.

Building up valuable exports requires innovation in the broadest sense, not just invention, he argued. But, innovation based on customer need is more valuable.

Hence, the organisation that “owns” the customer is the natural owner of the technology underpinning the innovation.

“Customer research, sales, branding and distribution are all harder and more important than technology in isolation.”

Customers are the starting point

“Finding, understanding, reaching and winning and retaining customers is essential … and hard,” Thornley said.

Effective customer research, distribution and branding win customers.

At LookSmart, the hardest challenge wasn’t the capital raising, the management recruiting, or development of the technology or product – it was distribution, he said.

He lamented that Australian debate is dominated by a production-centric mentality that lumps everything into “a bucket called commercialisation and frequently confuses innovation as a customer-driven process with new technology development, or invention”.

He attributed this situation to the focus on commodity industries and placing too much value on production inputs, such as research and development, labour market reform, and education spending. Customer research, branding and distribution tend to be after thoughts.

Compounding this situation is Australia’s domestically-focused monopolies or oligopolies in the areas of retail, banking and telecommunications.

As for research and development, he advocated that the owners of customers can outsource research and development to minimise risk. He likened LookSmart to Cochlear, the bionic ear company, as it is a technology integrator, not a technology maker. LookSmart outsourced much of its research and development by acquiring what it needed.

For example, when the company needed sophisticated customer tracking, reporting and data warehousing capabilities, it bought a company that had the best technology in the market.

“When you own the customers, you become the natural owner of the technology. We have made four such acquisitions in the last four years,” he said.

Government should take up the role of leader

Thornley challenged what he called the “twin false prophets of innovation and commercialisation” because they occur in “quasi-commercial, primarily government funded organisations that have few established customer bases or product lines to drive commercial innovation”.

Thornley stressed he is not an advocate of big government and throwing money at problems.

“Rather, I believe in powerful government that understands national interest and delivers it.

This means government must start to lead by having a focus and strategy.

“Research and development must generate deep expertise in a limited number of key fields where we have access to customers, pressing social needs or both.”

The logical start is industries with a globally significant market share that can be transformed into higher value roles.

An example is the longstanding problem of Australia being a global leader in wool exports, yet its participation in the value chain is still profoundly limited.

For government to create the environment for success it should support customer driven innovation in existing companies with strong sales and distribution, rather than devoting the more than $4 billion of public money to research and development in areas related to private sector industries.

“If this were Silicon Valley, we’d say we are running the world’s biggest and most diverse start-up – with $300 million per month ‘burn rate’ and a hope that it will J-curve its way into a strong return on investment over years to come.”

He cited a report boasting that since 1980, 100 companies had spun out of CSIRO with a total of $200 million in revenue between them.

While recognising that CSIRO has other goals, “I would not be excited by that rate of return so far on the more than $6 billion that would have been invested in this period.”

Labour market deregulation is a furphy

Thornley argued that superior productivity in the USA is less driven by labour conditions and more by the market being 30 times Australia’s size. The only way to achieve these scale advantages is to export.

“Our manufacturing exporters, according to recent Austrade data, pay on average 40 per cent higher wages than domestically focused employers. They invest 2.3 times as much in training. They have higher employment growth rates and greater security. They are truly the A-team of Australian business.”

Some ideas to stimulate debate

Thornley’s message to government was clear – support exporters. He acknowledged that the means of achieving this is less clear, but gave a few examples.

• Rebalance tax

Cut in half the corporate tax on earnings from exports to drive exports and capture the attention of both management and the investment community

• Set competition policy

Outlaw predatory pricing – domestic oligopolists should grow their profits by investing in exports, not crushing domestic competitors

• Fix corporate governance

Governance problems are endemic in the incestuous corporate board environments and the poor regulatory and prudential environments

• Boost human capital

Don’t ask young people who have been highly educated in Australia to leave as soon as they complete their studies. Overseas students should be encouraged to stay as they are human capital already paid for, as the Americans would say, on someone else’s nickel

• Improve employee share ownership

Although rewards for employees are somewhat random, due to stock price volatility, people are likely to work harder and better if they also own a direct share of the rewards. This helps create a competitive culture where everyone realises they have to play in the global A-grade together.

The way ahead

“I have spoken little tonight directly about innovation and about technology or research and development hardly at all. That is not because they are not important, but rather because, as I said at the beginning, the best advice available from business leaders far more successful than I has been largely ignored.

“I have tried to analyse why and propose some tentative solutions that will invigorate that debate.

“As the anonymous insider ‘Deep Throat’ said to Bob Woodward during the Watergate scandal that re-wrote American politics: ‘Follow the money … just follow the money’.

“We need to apply the ‘Watergate principle’ if we are going to solve our twin scandals of unemployment and environment – the defining challenges of our age.”

Evan Thornley, the 2003 Warren Centre Innovation Lecturer and Warren Centre Innovation Hero is Chairman of LookSmart, the company he and Tracey Ellery founded in Australia in 1995. Thornley and Ellery, have recently purchased Pluto Press Pty Ltd, a social issues publisher.

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