Improving business dynamism now critical for Australia’s economy

Australia ranked 22^nd out of 64 countries in the IMD World Competitiveness Yearbook 2021 (WCY) released this week. This places us closer to top performing Switzerland than bottom performing Venezuela, but nevertheless indicates that there is more work to do if we want to build our post-pandemic prosperity.

Australia has a dynamism problem.

Australia’s success over coming decades will be underpinned by having a dynamic and vibrant business sector that is innovating and creating new sources of value in our economy.

Yet the WCY clearly shows that Australia has a dynamism problem. From a list of 15 ‘key attractiveness factors’, survey respondents ranked ‘dynamism of the economy’ and a ‘strong R&D culture’ 12^th and 15^th respectively.

Australian management practices are contributing to a lack of dynamism.

International research shows that management practices are an important driver of large differences in performance across firms. Better management at the firm level ultimately contributes to greater prosperity, productivity and innovation at the national level.

The WCY shows that Australia is most clearly lagging on management practices, ranking 58^th compared with 35^th only a year ago. This poor result is not surprising. Joint research by the Department of Industry, Innovation and Technology and the University of Technology Sydney estimated that only 6 per cent of Australian firms rank in the highest category on strategic management, while around 58 per cent rank in the lowest category.

Businesses also need dynamic managerial capabilities – in other words being able to identify areas of competitive advantage, seize these opportunities, and innovate. Last year’s WCY identified entrepreneurship as the most important competitiveness issue facing Australia’s economy. This year’s WCY revealed that Australian businesses are still lagging on entrepreneurship and dynamic managerial capabilities. Rankings were low for entrepreneurship of managers (60^th), awareness of changing market conditions (43^rd), company agility and responding quickly to opportunities and threats (both 56^th), and flexibility and adaptability in the face of new challenges (39^th).

A willingness to take appropriate risks ultimately leads to value creation, yet Australia ranked 44^th for entrepreneurial fear of failure. This is consistent with AICD data, which shows that around three quarters of company directors believe that there is a risk-averse decision-making culture on Australian boards. Excessive focus on compliance over performance was identified as the key reason, followed by short-termism.

One way to improve management outcomes is through greater diversity. Encouragingly, Australia performed well in the WCY in terms of gender diversity (see graph). But other dimensions of diversity – cultural and educational backgrounds, breadth of experience – also matter for improved decision making. Company directors identified a lack of boardroom diversity as one of the top three factors contributing to a risk-averse decision-making culture on Australian boards, according to AICD.

Another way to improve management outcomes is through openness to external ideas. Australian managers are regularly criticised for being too insular. The World Management Survey found that firms more exposed to external influences – such as exporters or multinational corporations – have better management capabilities. The WCY rankings highlight that this remains one of our biggest challenges. Australia ranked particularly poorly on attitudes towards globalisation (50^th) and foreign ideas (53^rd). International experience of senior managers was better (25^th). Increasing exposure to external influences is challenging while international borders are closed. It remains to be seen whether recent repatriation of talent, and the Federal Government’s $550 million package to attract businesses and talent from overseas, will provide a lasting boost to the management ranks of local businesses.

Business dynamism and competitiveness will be critical ingredients for Australia’s post-pandemic prosperity. The WCY highlights that many aspects of business dynamism are lagging our peers and need urgent attention. CEDA will be undertaking further work on this topic as part of its Business Dynamism and Competitiveness research program This program will include conducting surveys of management practices within CEDA member companies and their management to better understand how Australian managers can become more dynamic, entrepreneurial, and innovative.