Innovation v Regulation: How Turnbull’s Pitch Fell Short

The fundamental problem with the Turnbull Government’s innovation statement is that it is a category error. The only thing governments can do to the “culture” of innovation is hurt it.

When he first took the leadership, Malcolm Turnbull was right to describe our economic growth challenge as one of boosting innovation. The problem has always been what on earth that means.

Now we know. The policies in Monday’s innovation statement try to do two things. Unfortunately, they’re both underwhelming.

First, the Government wants to buy innovation. All those tax offsets, capital gains tax exemptions, and adjustments to the way the tax office treats company losses are trying to trade government revenue for corporate innovation. Same with the money for the CSIRO and the incubator support program, money for “landing pads” in Silicon Valley and Tel Aviv, and money for quantum computing.

Can governments buy innovation? Unlikely. This is a longstanding debate in innovation policy. It is certainly true that if you throw an unlimited amount of money at professional researchers they will eventually research something useful. But as my colleague Sinclair Davidson has pointed out, the OECD is unable to find any relationship between economic growth and public spending on research and development. The OECD speculates that public spending on research crowds out private spending on research.

More prospective is the second approach taken by the Turnbull Government’s innovation statement: clearing existing regulatory barriers to private sector risk taking and entrepreneurship. In this category are the insolvency reforms – which reduce bankruptcy periods from three years to one year – safe harbours for insolvent trading, and changes to the law governing employment share schemes.

Yet these policies are miserly in comparison to the generous policies on the spending side. They barely scratch the surface.

The thing about regulatory barriers to innovation is that they exist for a reason: either because they have constituencies who support them, special interests who rely on them, or politicians who lean on them for populist benefit.

The real barriers to innovation are those steadily accumulating regulatory burdens that hold new products and services back for government approval and divert the attention of entrepreneurs to regulatory compliance.

Think how data retention has gunked up the internet industry, how the regulatory uncertainty of the NBN has slowed down telecommunications investment, how financial innovation is held back by the labyrinth of regulatory controls on financial products. The Australian Government’s left arm doesn’t know what its right arm is doing.

For instance, it takes a special kind of cognitive dissonance to ignore the fact that while the Government is trying to create Apple-like and Google-like companies in Australia, it is at the same time trying to target the real Apple and Google for what is alleged to be corporate tax avoidance.

One of the big reasons these firms have apparently low tax profiles is because they take advantage of the research and development tax credits successive governments have introduced to boost innovation.

The other reason that they have low tax profiles in Australia is simply because they’re not Australian companies, and much of their economic activity occurs offshore. Yet under the Federal Government’s multinational tax avoidance legislation (which passed both houses last week) the tax office will estimate how much tax they reckon multinational firms like Google and Apple should be paying, rather than how much they are strictly liable to pay under current tax law.

This legislation creates enormous uncertainty and is almost guaranteed to push economic activity and innovative firms out of Australia. Why would multinational companies risk being taxed twice? How on earth can the Turnbull Government reconcile its anti-global approach to corporate tax with its apparently pro-global vision in the innovation statement?

In the specific case of Google, the difference between innovation rhetoric and policy practicality is even more stark. Under our archaic intellectual property laws, an Australian Google would be unlawful. Google in the United States relies on a fair use defence in copyright legislation to copy the text of websites onto its servers for searching. But we have no equivalent fair use provision to allow such uses. Google would be legally vulnerable in Australia: our copyright laws constitute “a significant and unacceptable level of business risk”.

Yet the Australian Government has repeatedly rejected introducing a fair use exemption for copyright, despite the advocacy of the Government’s own law reform commission. Movie studios and record labels don’t want fair use, and have lobbied hard to prevent it.

The economist Mancur Olson developed an influential and depressing theory of economic growth in his 1982 book The Rise and Decline of Nations. In Mancur’s view, innovative, entrepreneurial economies develop powerful special interests over time that can prevent the sort of regulatory reform that economies need to grow.

So ask yourself this. Are there any major special interests who will be upset by what the Turnbull Government proposed in their innovation statement this week? Not really. Sadly, for all the Government’s sound and light, very little has been “disrupted”.