Only 2% of Australian businesses innovate in ways that are entirely new to the world, the remaining 98% hold immense potential for productivity gains through what economists call knowledge diffusion.
This process, which involves the enhanced used of established technologies and practices, is a crucial yet often overlooked driver of economic growth. For a country like Australia, knowledge diffusion is the key to unlocking enhanced productivity.
The Current State of Australian Manufacturing
Australia’s manufacturing sector is a cornerstone of the economy, contributing significantly to employment and GDP. However, many businesses within this sector struggle to keep pace with their global counterparts. A large segment of these businesses lags in essential areas such as management practices, technology adoption, and overall productivity.
For instance, numerous firms perform little to no assessment of their performance, missing out on key motivators and pathways for improvement. This gap between current practices and best practices hinders the sector’s ability to compete effectively on both national and international stages.
Why Knowledge Diffusion Matters
Knowledge diffusion refers to the process by which innovations, technologies, and best practices spread across businesses and industries. In the context of Australian manufacturing, diffusion can bridge the gap between the average business and its high-performing peers.
By incrementally improving the operations of many businesses, rather than focusing solely on the few that lead with groundbreaking innovations, Australia can achieve substantial aggregate productivity growth.
Consider the adoption of modern accounting software. While only a small fraction of firms might be developing new financial technologies, thousands of businesses can significantly enhance their efficiency and accuracy by simply implementing existing software solutions. Similarly, adopting advanced manufacturing techniques or integrating artificial intelligence into production processes can elevate productivity across the board.
The Decline of Key Diffusion Mechanisms
According to the Australia Government’s Productivity Commission, several troubling trends indicate that the mechanisms facilitating knowledge diffusion in Australia are weakening:
- Reduced Investment in Machinery and Equipment: Investment in physical capital, which often embeds new knowledge and best practices, has declined as a share of GDP. This reduction hampers the ability of businesses to modernise and improve their production capabilities.
- Stagnation in Intangible Capital Investment: Investments in software, research and development (R&D), and other forms of intangible capital have plateaued, limiting the sector’s ability to innovate and stay competitive.
- Decreased Labour Mobility: As workers move less frequently between businesses, the exchange of ideas and practices slows. Labour mobility is a key driver of knowledge transfer, as employees bring their experiences and expertise to new workplaces.
- Lower Rates of Business Churn: The decline in firm entries and exits reduces the dynamism of the market. High churn rates are essential for fostering an entrepreneurial culture and ensuring that resources are allocated to the most productive and innovative firms.
Enhancing Productivity with Knowledge Diffusion
Addressing these challenges requires a strategic focus on improving the overall business environment. Unlike policies that primarily aim to stimulate novel innovation—such as grants, venture capital, and public research initiatives—the solutions for enhancing diffusion lie in creating a conducive environment for businesses to adopt and implement existing innovations.
Industry associations play a pivotal role in mediating information flows and fostering knowledge diffusion. They can aggregate insights from their members, identify best practices, and help businesses apply these lessons to their own operations. However, many businesses remain unaware of how far they lag behind their peers. Government bodies like the Australian Tax Office (ATO) and the Australian Bureau of Statistics (ABS) possess valuable data that, if shared with businesses, could highlight performance gaps and motivate improvements.
Partnering with Innovative Startups
To further address knowledge diffusion, manufacturers should actively seek partnerships with innovative startups such as Knowledge Orchestrator.
These startups specialise in orchestrating the flow of knowledge and facilitating the adoption of best practices across industries. By collaborating with entities like Knowledge Orchestrator, manufacturers can gain access to cutting-edge tools and platforms that streamline the implementation of new technologies and processes. Startups in this space provide tailored solutions that address specific diffusion challenges, enabling manufacturers to enhance their operational efficiency and competitiveness more effectively.
Strengthening knowledge diffusion can lead to significant economic rewards. Enhanced productivity across millions of businesses can boost real GDP, increase gross national income, and improve individual well-being. Additionally, a more dynamic and competitive manufacturing sector can better absorb global technologies, driving further innovation and growth.
Conclusion
While Australia’s focus on fostering new-to-the-world innovations is commendable, the real opportunity for productivity gains lies in the widespread diffusion of existing technologies and best practices. By creating a supportive business environment, enhancing labour mobility, encouraging foreign investment, and leveraging data effectively, Australia can unlock the full potential of its manufacturing sector. Knowledge diffusion is not just a complementary strategy to innovation—it is a fundamental driver of sustained economic growth and competitiveness in the global market.
As Australia navigates the complexities of the modern economy, prioritising the diffusion of knowledge will ensure that its manufacturing sector not only survives but thrives, contributing robustly to the nation’s prosperity and resilience.
