A collapse in R&D spending is crimping Australia’s long-term growth potential and shrinking the pool of globally competitive companies worth owning. Written by Todd Hoare and published in the AFR.
For decades, investors could rely on the “lucky country” to deliver steady growth, rich resource profits and a resilient economy. But that luck is fading.
A collapse in business investment and research and development is crimping Australia’s long-term growth potential and shrinking the pool of globally competitive companies worth owning.
A recent warning in the Australian Financial Review about sagging business investment pointed to a lower “speed limit” for economic growth – the pace the economy can sustain without stoking inflation and further Reserve Bank tightening. The implications for policy, household incomes and investors are significant, and may ultimately leave capital seeking better returns offshore.
Australia’s post-pandemic labour productivity growth is bettered only by Mexico, though Mexico’s much younger workforce (average age under 30) gives it a natural demographic edge.
While the economic reform roundtable has rightly reignited debate about tax and regulation, much of Australia’s weak productivity performance reflects structural change rather than a collapse in efficiency. The fastest-growing sectors – the care economy, government services and the NDIS– are essential but low-productivity by nature.
Weaker mining output has dragged down the national average. It’s been more than a decade since Australia last saw meaningful structural reform. The Hawke-Keating and Howard-Costello eras reshaped the economy, from superannuation and a floating dollar to industrial relations and the GST.
Whether today’s reform efforts can deliver anything close to that scale or merely patch over a decade of stagnant living standards remains unclear. According to the Organisation for Economic Co-operation and Development(OECD), real household disposable income per person rose just 3.5 per cent in Australia over the past decade, compared with 8.9 per cent in Canada, 20.6 per cent in the United States and 8 per cent in the United Kingdom. Across the OECD, the average increase was 18.7 per cent.
Australians are working just as hard but getting far less ahead.
The government’s R&D and Innovation white paper, tabled earlier this year, showed national research spending has been sliding for more than a decade.
Gross expenditure on R&D has fallen to 1.68 per cent of GDP, well below the OECD average of 2.7 per cent. That puts Australia only slightly ahead of Hungary, Greece and Turkey, and at about half the level of world leader Israel. Business investment tells the same story.
Business expenditure on R&D has been in steady decline for more than 10 years. According to the Business Council of Australia, large-company R&D spending has dropped 24 per cent, or $2.9 billion, over the decade. The global contrast is stark. In the US, the One Big Beautiful Bill Act has restored full expensing of domestic R&D costs – a major incentive for companies to reinvest.
China has accelerated home-grown research at a pace few economies can match. OECD data shows China’s R&D spending has climbed to 96 per cent of US levels, up from 72 per cent a decade ago.
Europe is also moving ahead. In 2023, the EU spent €381 billion on R&D, almost 60per cent more than in 2013. Australia’s total outlay, roughly $40 billion, has gone backwards in real terms.
At home, the Productivity Commission has deferred recommendations until the government’s Strategic Examination of Research and Development reports later this year.
The BCA has urged Canberra to act sooner, supporting full expensing of capital investments, as the US has done, while opposing a shift to a “cash-flow” tax.
Unless policymakers and businesses move decisively, Australia risks losing not just its competitive edge but an entire generation of innovation-led growth. For investors, that means one thing: the best returns on capital are increasingly being generated elsewhere.
Governments aren’t the only ones to blame. Shareholders in some of Australia’s largest companies also influence how much risk boards are willing to take.
CSL, one of Australia’s few global biotech success stories, recently acknowledged R&D failures that prompted a reset: consolidating its research footprint, cutting costs and launching a $750 million buyback while shifting towards licensing third-party innovations.
By contrast, Novo Nordisk has chosen to expand its R&D pipeline in obesity, diabetes and cardiovascular disease, and to increase its R&D ratio in coming years. CSL is responding to shareholder pressure for returns today; Novo is investing for returns tomorrow.
The long-term payoff for investors could be vastly different. While both strategies carry risk, they highlight how investor expectations can shape corporate decisions– and a board’s willingness to reinvest in growth.
Australia’s Strategic Examination of Research and Development, due in December, will outline how to rebuild the national innovation system. The challenge will be turning those recommendations into action, and ensuring business and government move together. But investors shouldn’t wait for Canberra to lead the way.
If Australia continues to underinvest in innovation, competitiveness will erode and the local investment universe will narrow – fewer innovators and more mature, low-growth companies reliant on population growth rather than productivity.
Investors seeking genuine growth will need to look where innovation is rewarded: the US, parts of Europe and increasingly Asia. At home, opportunity still exists in smaller, capital-light businesses that use technology to scale without heavy physical investment.
In both cases, the edge will go to economies – and companies – that create their own momentum through reinvestment and reinvention.
The “lucky country” still has time to prove its luck was never luck at all, that it was built on effort, reform and ambition. Staying prosperous will mean creating its own good fortune, by investing, innovating and keeping pace with a faster world.
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