Setting the right investment culture

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To pave the way for much-needed investment and future growth, Australia requires the right settings and investment culture.

Australia has traditionally needed to attract foreign investment to support Australia’s growing businesses. However, this requires them to be globally competitive. Local businesses compete for investment against opportunities globally, as overseas investors chase higher returns. Larger Australian investors are also potentially shunning local opportunities to invest overseas where there is a bigger addressable market. 

As we move closer towards 2020, the concern is that the settings in the Australian economy are not aligned to support investment locally.


Getting the settings right

There is no doubt we have natural advantages of being an economy which has been driven by industries such as resources and construction. But to compete globally in areas such as mining tech, fintech, and education technology, whilst also getting the settings right for newer industries, we need to build on opportunities rather than just buy into them. 

Australia needs to look at its investment culture if we want to nurture future growth.

A pathway to economic growth is underpinned by productivity and innovation, this requires the need to have the right settings for innovation. R&D spend is a critical element of innovation and thus productivity growth. It demonstrates the health of local investment, but at the moment we’re lagging behind. 


Lifting effective R&D spending

Earlier this year the Productivity Commission (PC) raised the issue of ‘capital shallowing’ (based on falling capital-to-labour ratios) and concerns about the marked slowdown in investment in capital. Investment in this day and age often involves capital commitments towards new technologies, so the PC highlighted that capital shallowing could impact skill development and innovation, along with research and development (R&D).

Our level of R&D spending is already problematic, Australia spends only 1.9% of GDP on R&D. PwC research shows that if we were to reach OECD top 10 levels in R&D we would need to spend approximately $13.7bn on R&D, or an additional $575 per person.

Companies that invest to put innovation and R&D at the core of their business benefit from productivity gains that provide new revenue, high growth opportunities and ultimately economic benefits.  

Private and family businesses contribute $600bn to Australia’s GDP. But limited access to capital (namely, investors comfortable with taking on risk) can mean that their innovation, R&D and growth potential is also hamstrung.  

The number of reported and unlisted ‘unicorns’ - a technology, or tech-enabled, business that reaches a valuation of more than US$1bn - in Australia can be counted on one hand. By comparison, countries like Sweden and Portugal have a higher proportion of unicorns in their economies when we take into account their smaller populations and levels of GDP. 

Golden opportunities (e.g. in the newer growth segments, including startups) may be missed or under-developed if investors shun higher-growth Australian opportunities in favour of foreign equities and lower-growth Australian assets which provide more stable income streams (without an opportunity for corporate reinvestment).

Australia’s investment decisions in 2020 should have regard to high-growth opportunities alongside our natural advantages. Why? Because if businesses simply stay in their lane, we risk squandering the wealth generated from our natural resources, capitalising on our natural advantages and risk failing to drive future economic growth.


Investment allocations - spending on skim lattes over startups

Australia’s investment in high growth capital is low compared to other countries.  Our angel investment, for instance, trails behind New Zealand, and is well behind the UK and US. LaunchVic recently highlighted that individual Australians spend $3.60 per person each year on venture capital investment.

By comparison, we spend more than $15 per person each year betting on the Melbourne Cup and over $150 per person each year on coffee. It seems we prefer skim lattes rather than allocating financial investment towards the next Australian success story.

More concerning than an individual perspective is the trend across Australian super funds (as a proxy) away from Australian-listed investments in preference for foreign equity investments. The move of superannuation capital allocations away from Australian listed equities is potentially due to a number of factors; higher and more sustainable long term returns not reflected in the domestic market, lack of innovation and structural issues relating to tax and productivity.

On taxes, the OECD recently identified that Australia has the third-highest effective marginal tax rate globally (the top four were Costa Rica, Chile, Australia and Argentina). The effective marginal tax rate identifies the impact that taxation has on the pre-tax returns required by investors to break even.

In response, we should consider how Australian businesses and those who invest in them (individuals and managers of capital) can be supported to attract capital to help forge the path for Australia’s future growth ambitions. 

The settings for investment culture needs to change if we want to nurture future growth.


The future is made today

We need to consider what kind of economy we want in years to come, and then make decisions which deliver on this vision. Action is required to prepare for what the economy may have in store next year.

Business leaders should be asking five key questions:
  • What are the structural barriers that currently discourage investment, and how might these be overcome?
  • Structural reform is required, so what form should this take and what is our role in advocating for, and designing these reforms?
  • If Australian investors and employees don’t understand the benefits of high-growth investing, what role can we play to champion the benefits of corporate investment in high-growth or startup businesses to these stakeholders?
  • How can R&D spend be at the core of our business planning in order to produce productivity gains?
  • Is our investment behaviour dictated by shareholder expectations and is it time for us to help shape a positive image for investment, to shift investor expectations and achieve capital deepening? 

 

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In 2020 we will deep dive into each of these issues. Only together can we solve these important problems and navigate the country through what is predicted to be a testing year for the economy. We call this, The Together Effect. Contact us to help become part of the solution.

Contact us

Jonathan Malone

Partner, PwC Australia

Tel: +61 8 9238 3371

Jeremy Thorpe

Chief Economist & Partner, PwC Australia

Tel: +61 (2) 8266 4611

Kieran McCann

National Thought Leadership Manager, PwC Australia

Tel: +61 (2) 8266 0252

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