Something strange is happening in Australia’s business world. At a time when technology is advancing faster than ever, when AI is reshaping entire industries, breakthrough medical treatments are extending lives, and clean energy is revolutionising how we power our world, Australian companies are actually investing less in research and development.
It doesn’t make sense, does it? Yet the data tells a clear story. We’re falling behind whilst other countries race ahead. Our competitors in Europe, North America, and Asia are doubling down on innovation. Meanwhile, we’re pulling back.
But here’s the interesting part: this decline creates a real opportunity for smart businesses. Let me explain why.
Australia’s R&D Spending Has Dropped to Historic Lows
The statistics are sobering. Australia’s economy-wide R&D intensity has fallen to 1.68% of GDP in 2021-22, well below the OECD average of around 2.7%. That represents a significant gap.
When we drill down into business spending specifically, the picture becomes even starker. Business R&D (BERD) rose in dollar terms to $24.41 billion in 2023-24, but remains only 0.9% of GDP, a rate that’s been flat since 2017-18. So whilst businesses are spending more absolute dollars, they’re not keeping pace with overall economic growth. The economy is growing. Innovation investment isn’t.
Here’s what makes this particularly concerning: just three industries, professional, scientific and technical services (38%), manufacturing (21%), and financial and insurance services (14%), together account for 73% of all business R&D. That’s an incredibly narrow base for a country that strives to be innovation-focused. We’ve put most of our eggs in three baskets.
The international comparison makes our position even more uncomfortable. Since 2008, most advanced economies have increased their R&D spending. The average across OECD countries has grown from 2.3% to 2.7% of GDP. Countries like the UK and the US have made particularly impressive leaps. France, Germany, and Japan have maintained high rates throughout.
However, Australia’s spending has travelled in the opposite direction. We’ve dropped from 2.2% to 1.7% of GDP, sliding from 12th to 19th place in the OECD rankings. We’re now the only major developed economy that has reduced R&D spending during this period. Think about that for a moment. Everyone else is investing more. We’re investing less.
For a country that prides itself on being innovative and tech-savvy, this should be a wake-up call. As a high-wage economy, Australia can’t compete on cheap labour. We need to compete on smarts, on developing better products, more efficient processes, and valuable intellectual property. Right now, we’re not doing that as well as we should.
What’s Behind Australia’s R&D Decline?
Understanding the “why” behind these numbers reveals why there’s opportunity hiding in the data. Ai Group’s research points to a narrow business R&D base, falling mining R&D, and a long-run decline in business R&D intensity despite increased indirect support through tax incentives. It’s not one simple problem. It’s a perfect storm of structural issues.
Australia’s Over-Reliance on a Handful of Industries
We have a structural vulnerability built into our innovation system. Three sectors carry the weight of 73% of all business R&D investment. When these industries thrive, our national R&D looks healthy. When they struggle, the entire country’s innovation effort takes a hit.
The mining sector perfectly illustrates this dynamic. During the boom years, mining companies poured money into R&D. They invested heavily in automation, sensing technology, and environmental management systems. Innovation was everywhere. At its peak, mining contributed a quarter of all business R&D in Australia.
Then the boom ended. Mining R&D collapsed by three-quarters. The industry went from innovation leader to laggard. And this wasn’t just a problem for mining; many technologies first developed for that sector (robotics, automation, advanced sensing) have applications across agriculture, manufacturing, and transport. When mining R&D dried up, it affected innovation across multiple industries.
But crucially, even when you strip out mining’s dramatic collapse, other industries also cut back their R&D intensity. So it’s not just about one sector. There’s a broader cultural shift happening, and it’s pushing businesses away from innovation investment.
More Government Funding Hasn’t Stopped the Decline
This presents a seeming paradox. The Australian government has actually increased support for business R&D significantly.
The Research and Development Tax Incentive (RDTI) provides substantial backing, with government support rising from about 12% of R&D expenditure during the mining boom to roughly 16-18% more recently. For income years starting on or after 1 July 2021, eligible SMEs receive a refundable offset equal to their corporate tax rate plus 18.5 percentage points. That’s genuinely generous support.
Yet despite this, business R&D intensity continues to decline. More government money. Less business investment. This tells us the problem runs deeper than simply needing more incentives.
The government recognises this too. The Commonwealth has launched a Strategic Examination of R&D to lift performance and better link research with industry, acknowledging that current approaches aren’t delivering the desired outcomes.
The Research Skills Shortage Is Holding Businesses Back
There’s another critical bottleneck in the system: people. Specifically, finding qualified people to do R&D work.
Researchers, scientists, and technical specialists are in desperately short supply. In fact, 37.5% of businesses that need people with science and maths skills report they can’t find them. It’s the second-hardest type of role to fill in Australia right now. You can have all the funding in the world, but without the talent to execute, R&D projects simply don’t happen.
When you can’t hire the people you need for research projects, you’re naturally less likely to commit to big R&D investments. Why start an ambitious innovation project if you don’t have the team to execute it? It’s a rational response to a genuine constraint.
Recent analysis from Mandala Partners and the Business Council of Australia highlights that large businesses’ underinvestment and cost headwinds continue to weigh on outcomes, adding another layer of complexity to an already challenging environment. The problems are stacking up.
When Competitors Cut Back, Smart Businesses Move Forward
Now we get to the interesting part: the opportunity.
When everyone else is pulling back on R&D, the businesses that keep investing, or even increase their investment, can gain a significant, lasting advantage. Think about it strategically. Whilst Australia’s absolute BERD is growing again in dollar terms, intensity is flat because GDP has grown faster. This means there’s genuine market share to capture if your rivals pull back on discretionary R&D or delay projects.
The Australian government sees this opportunity too. That’s why they launched the Future Made in Australia initiative, committing $22.7 billion over the next decade to help transform our economy and build stronger industries. Government investment in R&D is estimated at $14.4 billion (0.52% of GDP) for 2024-25, with forecasts of $15.1 billion for 2025-26, showing that supporting innovation remains a genuine national priority despite the challenging numbers.
For businesses willing to invest in R&D during this period, especially those using R&D financing to fund their work, the potential rewards are substantial. You’re zigging whilst everyone else zags.
The Competitive Advantages of Investing During a Downturn
There’s an old investing principle that applies perfectly here. Warren Buffett famously advised people to “be fearful when others are greedy, and greedy when others are fearful.” The same logic applies to R&D investment. When others retreat, the bold move forward.
When R&D spending across your industry is dropping, businesses that keep investing gain several concrete advantages:
You can capture market share
Whilst competitors slow down their product development, you’re launching new offerings. You’re solving customer problems your competitors are ignoring. This lets you win customers, become the recognised leader in your space, and set the standards that others will eventually have to follow. By then, you’re already three steps ahead.
You attract better talent
Good researchers and developers want to work on exciting projects. They want to work for companies that value innovation and back it with real investment. When you’re investing in R&D during a quiet period, you become a magnet for top talent. Ironically, this actually helps solve those skills shortage problems we talked about earlier. Talent flows to opportunity.
You build valuable intellectual property
The patents, unique processes, and proprietary knowledge you develop now become assets that competitors can’t easily replicate. You’re building moats around your business, creating a lasting advantage. Whilst others are letting their competitive advantages erode, you’re strengthening yours. Five years from now, that IP portfolio could be worth more than your entire current business.
Customers notice and care
Your clients, especially business clients, want to work with suppliers who keep improving and innovating. They’re thinking about their own long-term success. Demonstrating ongoing R&D commitment strengthens these relationships and can help you win competitive tenders. It signals stability, ambition, and forward thinking.
You’re ready for the future
Perhaps most importantly, the technologies and products you develop now will define your competitive position for years to come. Cutting back on R&D today creates vulnerabilities that only become obvious later when the market accelerates again. And it will accelerate. It always does.
Tech-Heavy Industries That Aren’t Investing in R&D
Here’s another crucial insight buried in the data. There are entire industries in Australia that use enormous amounts of technology but don’t invest much in R&D. Agriculture, utilities, retail, construction, and IT services all fall into this category. They’re tech-enabled but not innovation-focused.
With three industries accounting for roughly 73% of BERD, founders in AI/software, advanced manufacturing, fintech, and biotech can find genuine white space in under-invested niches. These are sectors ripe for disruption.
If your business operates in one of these underinvested sectors, this is even better news. You’re not trying to out-innovate pharmaceutical giants with billion-dollar R&D budgets or aerospace companies with decades of accumulated IP. You just need to invest more in R&D than your direct competitors, and many of them aren’t investing much at all.
That’s a fundamentally more achievable goal. Especially when you use R&D financing to fund your innovation work without draining your cash reserves.
Using R&D Financing to Maintain Innovation Without Breaking the Bank
Understanding the opportunity is one thing. Actually acting on it is another challenge entirely, especially when budgets are tight and economic uncertainty makes every dollar count.
This is where smart use of R&D financing makes a transformative difference. When competitors cut or defer projects to avoid short-term expenses like interest costs, you can keep building by borrowing against your already-incurred eligible R&D and bringing forward the expected RDTI cash flow. This is non-dilutive financing; you’re not giving up equity, not diluting your ownership. And it’s flexible once funds are received.
How R&D Financing Preserves Your Operating Cash
Cash flow is king. Everyone knows it, but few truly manage it well.
One of the biggest benefits of R&D financing is how it fundamentally changes your cash position. Instead of paying for all your innovation work out of your operating cash, which can strain even healthy businesses, financing lets you spread the cost over time, whilst still doing the work. You maintain momentum without breaking the bank.
Here’s a practical example. Your business identifies an R&D opportunity that needs $500,000 over the next year. Without financing, that’s $500,000 coming straight out of your bank account, week by week, month by month. This could make it harder to pay other bills, handle revenue dips, or deal with unexpected expenses. You’re constantly juggling.
With R&D financing, you can access capital against your already-incurred eligible R&D spending, bringing forward part of your expected RDTI rebate. This keeps your operating cash available for day-to-day needs whilst still letting you pursue the innovation project. Yes, you’ll pay interest. But that’s the price of maintaining flexibility and seizing the opportunity, usually a worthwhile trade-off when you’re gaining a competitive advantage.
This is especially valuable right now, when many businesses face pressure from multiple directions, like inflation, rising wages and increased costs. Understanding the inflation impact on R&D-intensive businesses helps put this in context. R&D financing means you don’t have to choose between managing today’s expenses and investing in tomorrow’s growth. You can do both. That’s powerful.
Why Now Might Be the Perfect Time to Build R&D Capability
If Australia’s R&D performance is at multi-decade lows, basic logic suggests we’re likely closer to the bottom than the top. Policy signals remain supportive even as settings evolve, with the Strategic Examination of R&D and the SRI Budget Tables showing R&D remains on the national agenda. This matters enormously for medium-term planning.
Businesses that build strong R&D capabilities now, during the quiet period, whilst others hesitate, will be best positioned when things pick up. And they will pick up. When market conditions improve and confidence returns (as it inevitably does), you’ll already have your projects running, your team in place, your processes refined, and your innovation systems humming.
Your competitors who pulled back, however. They’ll need time to rebuild. They’ll need to hire people, restart projects, dust off abandoned plans, and get their innovation engines running again. That delay creates a sustained advantage for you. An advantage that extends well beyond your initial investment period. You’ll be capturing market share whilst they’re still trying to get organised.
Understanding the True Cost of R&D Financing
Let’s address the elephant in the room. Some businesses worry about financing costs, especially with interest rates higher than they were a few years ago. This concern is understandable. It’s also often misplaced.
Consider these points carefully.
- First, the competitive advantage you gain through sustained R&D typically creates far more value than the interest you pay. If your innovation helps you win more customers, create new revenue streams, or work more efficiently, the interest cost becomes a rounding error compared to the benefits. You’re trading pennies for pounds.
- Second, when your competitors are cutting R&D partly because they’re worried about costs like interest payments, their caution amplifies your advantage. You’re not just gaining ground through your own investment; you’re also benefiting because they’re underinvesting. It’s a double win.
- Third, the RDTI provides substantial support that helps offset financing costs. Eligible SMEs receive a refundable offset equal to their corporate tax rate plus 18.5 percentage points; other entities receive a non-refundable offset tied to R&D intensity. This significantly improves the economics of your innovation investment and can materially help cover financing costs.
Learning how to improve cash flow with R&D finance can help you model exactly how the numbers work for your specific situation.
Five Strategies to Maximise Your R&D Investment
Recognising the opportunity matters. Getting financing helps you act on it. But to truly succeed, you need a disciplined approach to your R&D work. Here are five strategies that separate successful innovation programmes from expensive experiments.
Align Every R&D Project with Clear Business Objectives
The best R&D programmes aren’t grab bags of interesting projects. They’re not science experiments for their own sake. They’re focused initiatives that directly support your business objectives and sharpen your competitive edge.
Before diving into specific R&D activities, get crystal clear about where you want to create an advantage. New products that differentiate you in the market? Better processes that let you deliver value more efficiently or cheaply? New services that meet customer needs in fresh ways? Be specific. Write it down.
Your R&D activities should flow directly from these priorities. Every project should have a clear line of sight to business impact. This ensures your innovation investment creates genuine commercial value, not just interesting technical achievements that look good in presentations but don’t move the needle on revenue or profit.
Create Repeatable Processes for Innovation
Successful innovation isn’t about random experimentation. It’s not about hoping something works. It’s about having a systematic approach that generates reliable learning and drives towards specific outcomes.
The RDTI actually gives us valuable guidance here. To qualify, your activities need to explore outcomes you can’t know in advance, and they need to follow a systematic process from hypothesis to experiment to results. This isn’t bureaucracy. It’s smart practice.
Develop clear processes for how you identify opportunities, evaluate their potential, resource and run projects, and capture and apply what you learn. These processes don’t need to be complicated or restrictive. But having structure ensures your innovation work consistently creates value rather than burning cash on dead ends.
Documentation: Your Key to Tax Benefits and Better Outcomes
Good documentation serves dual purposes, and both matter. First, you need it to claim RDTI benefits. You need clear records of what you were trying to discover, how you approached the problem, what results you got, and what you learned. No documentation, no claim. It’s that simple.
But second, and this is the part many people miss, documentation actually improves your results. When you clearly articulate what you’re trying to achieve, how you’re tackling it, and what you’re learning, it forces intellectual discipline. Clearer thinking. Better decision-making.
It helps you avoid repeating mistakes. It makes knowledge transfer within your team seamless. It creates valuable intellectual property records that can become genuine business assets.
Many businesses see documentation as administrative overhead. Paperwork. Box-ticking. In reality, it’s a force multiplier that makes your R&D more effective whilst also making it easier to claim government support. Win-win.
Leverage Universities and Research Partners to Fill Skills Gaps
Australia’s shortage of research talent is real and challenging. But it doesn’t have to be a roadblock. Instead of getting stuck because you can’t hire full-time research staff, think strategically about partnerships.
Universities, research organisations, and specialist R&D providers can all play valuable roles in your innovation work. These partnerships give you access to specialised expertise, advanced equipment, and research capabilities that would be prohibitively difficult or expensive to build in-house.
The RDTI programme explicitly supports collaborative R&D, recognising that innovation often works best when businesses partner with external research providers. This isn’t a workaround. It’s an intentional feature of the system. Exploring these options can help you pursue more ambitious R&D than you could manage purely with internal resources.
Play the Long Game: R&D Is an Investment, Not an Expense
Here’s perhaps the most important mindset shift. R&D is fundamentally a long-term investment. Some innovation activities deliver quick wins, and those are great. But the most significant competitive advantages often take time to develop.
This long-term orientation is especially important during uncertain economic times, when there’s intense pressure to focus only on short-term results. Next quarter’s numbers. This year’s profit. That pressure is understandable. It’s also potentially dangerous if it causes you to underinvest in your future.
Businesses that maintain their R&D commitment through challenging periods, supported by R&D financing to manage cash flow, are consistently the ones that emerge strongest when conditions improve. They’ve been planting trees whilst everyone else worried about the weather.
Think of R&D investment during a downturn like planting an orchard. You won’t harvest fruit immediately. It requires watering, pruning, and patience. But in a few years, you’ll have a productive orchard generating ongoing value whilst competitors who didn’t plant are still trying to get seeds in the ground. By then, you’re already harvesting.
Australia’s Economic Future Depends on Innovation
Let’s zoom out for a moment and look at the bigger picture. All of this sits within a crucial context: Australia’s position in the global economy and where we’re headed.
As an advanced, high-wage country, we fundamentally can’t compete on cost alone. We can’t be the cheapest. We’ll never win that race. Our competitive advantage has to come from the quality, innovation, and intellectual property embedded in what we make and how we work. There’s no other sustainable path forward.
The Future Made in Australia initiative recognises this economic reality. By committing substantial government resources to supporting economic transformation, the Australian government is signalling clearly that strengthening innovation is a genuine national priority, not just rhetoric. The Strategic Examination of R&D shows policymakers are actively working to improve the system and better connect research with industry outcomes. They’re taking this seriously.
But, and this is crucial, government policy alone won’t turn around Australia’s declining R&D performance. That requires businesses, especially start-ups and growth-focused companies, to recognise the opportunity and take decisive action. The government can create conditions. You have to build the businesses.
For international innovators looking to enter the Australian market, the current environment presents a unique window. You have access to a transparent incentive system, clear data about the landscape, and active policy work creating momentum. All whilst local financing tools can help you smooth cash flow as you establish operations. It’s actually a remarkably good time to enter, despite, or perhaps because of, the challenging headline numbers.
The businesses that will define Australia’s next chapter of economic growth aren’t the ones waiting for perfect conditions. They’re not following the crowd or playing it safe. They’re the companies that spot opportunity in challenging environments, use resources like R&D financing to maintain momentum, and build the innovation capabilities that will drive their future success.
How to Access R&D Financing While Your Competitors Stand Still
If you’re running a start-up or a growth-focused company, now is genuinely the time for a strategic examination of R&D financing. Not despite the current environment, but precisely because of it.
The combination of declining overall investment, strong government support through programs like the R&DTI, and the longer-term policy framework of Future Made in Australia creates a window of opportunity. When you’re ready to explore how R&D financing could work for your business, understanding the inflation impact on R&D-intensive companies and learning how to improve cash flow with R&D finance can help you make informed decisions about your innovation funding strategy.
Rocking Horse works with Australian businesses to access the capital they need for innovation activities. They lend against incurred R&D in the current financial year; you don’t need to complete your claim before applying, and no personal guarantees are required. Whether you’re looking to understand how R&D financing could support your growth plans, maintain R&D investment without straining cash flow, or structure your innovation funding to maximise tax incentive benefits, having experienced partners who understand both the financial and strategic sides can make all the difference.
Declining National Performance, Rising Business Opportunity
Australia’s R&D system is at a turning point. The numbers are concerning. The trends are worrying. The international comparisons are uncomfortable. These are the facts.
But they also reveal an opportunity for businesses willing to take a different approach. A contrarian approach. A smart approach.
When most of the industrial base is underinvesting in innovation, when competitors are pulling back, when economic uncertainty is making everyone cautious, that’s exactly when sustained investment can generate the greatest competitive advantage. That’s when the bold separate themselves from the timid.
The question isn’t whether Australia’s R&D performance will eventually recover. It always does. Cycles always turn. Priorities shift. Investment ebbs and flows. That’s the nature of economic systems.
The real question is whether your business will be positioned to benefit when that recovery happens. Will you be ready? Will you have the capabilities, the IP, the products, the processes, the team? Or will you be playing catch-up whilst competitors who kept investing race ahead, capturing the opportunities you’re only just starting to pursue?
The businesses that will emerge as leaders over the coming years won’t be the ones that played it safe. They won’t be the ones who cut costs and hope for the best. They’ll be the organisations that saw declining R&D performance as an opportunity, not just a challenge. They’ll be the ones who had the confidence and the courage to invest in innovation, whilst others hesitated.
Australia’s R&D performance might be declining. The headlines might be gloomy. The statistics might be concerning. But for your business? That could be exactly what creates the conditions for breakthrough success.