Unlocking Australia's R&D potential

Investment into Research and Development (R&D) plays a key role in driving productivity, which in turn leads to better living standards and economic competitiveness.

Concerningly, Australia’s business R&D spending has fallen to half that of peer countries, driven by low and declining R&D expenditure from large businesses and undermining productivity growth at a time where it is at a 60-year low. Over the past decade, large business R&D investment has declined by 24%, or $2.9 billion. Despite well-established links between R&D, productivity, and economic growth, Australia has not taken the necessary decisive action to improve R&D investment. This report identifies targeted policy measures that could help reverse the decline and unlock Australia’s R&D potential.

Large businesses anchor R&D ecosystems, making their underinvestment particularly concerning for Australia’s innovation future. This relationship is universal: no OECD country achieves strong R&D performance without substantial investment from large businesses. Australia clearly underperforms peers; large companies’ contribution to business R&D expenditure is 61% as an OECD average, compared to just 45% in Australia. The numbers illustrate this outsized influence. Just 5% of Australian businesses account for 48% of the country’s business R&D expenditure through the Research and Development Tax Incentive (R&DTI).

The impact of this investment extends far beyond the companies themselves. Large companies do not just conduct research; they generate knowledge spillovers that build innovation capacity across the entire economy. Former employees from major R&D-performing businesses have gone on to lead 1,800 other companies, collectively generating $77 billion in value added and employing 132,000 R&D workers in Australia. As large businesses pull back from R&D investment, Australia loses these multiplier effects that drive economy-wide growth, innovation, and productivity.

Australia underperforms on every dimension that drives business R&D decisions. Large businesses invest in R&D when the economics make sense; balancing costs, productivity (driven by factors including talent availability, institutions, and networks), and potential returns. While Australia has the institutional and talent foundations for strong R&D performance, it falls short when compared to international peers on costs and potential returns. Costs are relatively high, with R&D expenses 12% above the OECD average. Government support remains uncompetitive, with large business tax incentives 30% lower than in comparator countries.

Furthermore, Australia’s 30% corporate tax rate with no tax concessions for income from the domestic commercialisation of intellectual property (IP) makes domestic commercialisation less attractive, discouraging companies from developing Australian innovations locally.

Six targeted reforms could unlock $7.72 billion in annual economic output, generating $5 of value for every $1 of government expenditure over the next 10 years. These reforms are expected to cost on average $1.41 billion p.a. over this period, however the net fiscal impact is expected to be neutral when accounting for the additional tax revenue that government would make. These reforms include:

1. Simplify R&DTI rates to a consistent offset of 18.5% above the company tax rate
2. Remove the $150 million R&DTI cap
3. Introduce an R&DTI collaboration premium for partnerships between businesses and higher education or government research institutions
4. Introduce an R&D commercialisation incentive, providing a concessional tax rate of 10% for the Australian commercialisation of Australian-developed IP
5. Streamline R&DTI compliance requirements to reduce the administrative burden on businesses
6. Consolidate R&D grants into fewer, nationally significant programmes

This economic impact is largely driven by the productivity improvements associated with increasing R&D expenditure. In total, the proposed recommendations are expected to lift Australia’s productivity by 0.1%. This is a significant productivity reform – similar in scale to the Productivity Commission’s estimated impact of improving competition in the banking sector (0.11%) or expanding telehealth services across Australia (0.1%). The reform package will also drive an additional $2 billion in annual business R&D spending, significantly narrowing Australia’s gap with international peers.

Australia now stands at a critical juncture. The Strategic Examination of Research and Development presents a valuable opportunity to fundamentally reform Australia’s R&D policies, following years of reviews that have yet to deliver meaningful economic outcomes. With the economic case for R&D investment clearly established, Australia must move beyond analysis to the decisive action needed to restore international competitiveness and unlock the productivity growth essential for long-term economic prosperity.

Read and download the Full Report here.

Read and download the Summary Findings here.

Read and download the 1-page Factsheet here.