Quantifying the economy-wide returns to innovation for Australia

Abstract

Innovation plays a vital role in driving Australia's economic growth, and the desire to quantify this relationship is ever present. This article quantifies the relationship between domestic gross expenditure on research and development (R&D) and gross domestic product (GDP) per capita growth to estimate the return on investment (ROI) to innovation for Australia. This article adopts the Jones and Summers (2020) approach to quantify the ROI of gross R&D spending for Australia. This novel yet simple macroeconomic approach complements other existing methodologies. It quantifies only economic benefits, excluding non-monetary societal and environmental benefits. The baseline results state that $1 of R&D investment creates an average of $20.8 in economy-wide benefits in today's dollars, and investment in R&D creates an average annual return of 104% for Australia. Importantly, this baseline result can be recalculated with adjustments to account for specific features of innovation activity. Incorporating a 10-year delay between R&D and payoffs, combined with a correction for building R&D into new capital inputs (known as embodied capital deepening) to account for the additional time and costs associated with R&D expenditure yields lower results of $3.5 of economy-wide benefits and 10% average annual return for every dollar spent on R&D. Even when corrections are applied to the baseline for conservative estimates, the economy-wide returns to innovation are comparable to historical private investment returns in Australia.