Chapter 1: Collaboration, commercialisation and patenting in Australia

Across a range of measures, the contribution of small and medium enterprise to innovation in Australia has been rising in recent decades.¹ The trend may reflect an increasing division of innovative labour, with many successful innovations relying on basic research by universities, startups who contribute to identifying its commercial applications and large firms who acquire and scale innovative ideas and practices.² This chapter explores the pathways to innovation in Australia and the relationship between patenting, collaboration and commercialisation.

At a glance:

• The number of SMEs in Australia that hold patents has increased at 5 times the rate of the number of SMEs in the economy, a pattern not observed for large firms.

• In Australia, young firms are more likely to patent than older firms. Furthermore, the efficiency of firms in converting R&D spend into patents decreases after a threshold level, indicating it may be higher in smaller enterprise.

• For smaller firms, flexibility in the patent process to influence the timing of patent grants increases commercialisation outcomes, by providing them time to obtain necessary resources.

• Firms that have recently been granted patents are more likely to form collaborations including joint R&D and joint commercialisation arrangements.

• Universities are a key source of know-how for Australian startups.³ Australian startups joined in their first year of operation by a PhD graduate are 9 times more likely than the average Australian new firm to eventually receive a patent.

Innovation relies on small and large firms, backed by external funding

Across a range of indicators, the contribution of small and medium enterprise to innovation in Australia has been increasing over recent decades. For example, in Australia, the number of SMEs that hold patents has increased at 5 times the rate of the number of SMEs in the economy, a pattern not observed for large firms.⁸ It is possible this trend reflects an increasing division of innovative labour in Australia, as has been observed for the US. Many successful innovations – such as the mRNA Covid vaccine – today start their life in university labs. Startups often play a key role in developing aspects of a technology and identifying its commercial applications. Large firms will often scale up and commercialise innovative ideas that they acquire from startups or develop in collaboration with universities.

In an innovation system that relies on effective knowledge transfer and collaboration, IP rights can play several roles. On one hand, patents can complement firms’ efforts to commercialise their innovations by excluding imitators. Conversely, for small and new firms, patents may also serve as a strategic substitute for commercialisation capability. Patents facilitate technology trade, for example between small innovators and larger firms with established commercialisation resources. By protecting innovators from copying, patents can also provide small firms the time necessary to obtain resources and financing.⁹

The study for IP Australia by the Australian Institute for Business and Economics (AIBE) found that in Australia large firms are more likely to patent than smaller firms. In addition, R&D expenditure (which is typically greater in larger firms) is positively linked to the number of filed, granted and retired patents attributed to the firm. However, young firms (aged between 0 and 5) are more likely to patent than older firms.

Building on AIBE’s analysis, IP Australia found that the strong positive relationship between R&D expenditure and patents holds only up to a point, estimated at around $868,000. Beyond that point, the rate of increase in patents from each dollar of additional R&D spend diminishes.¹⁰ The result may reflect higher efficiency converting R&D into patents within small firms. Researchers have documented the ‘preference of many engineers and scientists to work in smaller and more intimate organisations,’ which can result in efficiency gains.¹¹ For example, in large firms, managers may face large demands on their time to oversee existing product lines. In smaller firms, managers can find it easier to devote time to developing new products.¹²

Focusing on users of Australia’s patent system, the Motu/EPFL study found that a longer duration between patent filing and grant – such as when an applicant delays the patent process – tends to increase the likelihood that smaller firms will eventually commercialise a patent-protected product. The pattern was opposite to that observed for large firms. In addition, for small firms, applicant-side delays are linked to increased follow-on innovation within the firm.¹³ The same patterns were not observed for larger applicants. These results reflect the distinct challenges for innovative small firms to acquire or access commercialisation resources. The findings are consistent also with research identifying the timing of patent grants as an important determinant of licensing and commercialisation outcomes.¹⁴

Patenting firms are more likely to be involved in collaboration

As the AIBE study reports, collaboration is an integral feature of firms undertaking R&D activities in Australia. Collaboration is pervasive in Australian R&D, with various industries collaborating with overseas and domestic partners. Manufacturing firms and professional, scientific and technical services stand out as having the most overseas partners.

The AIBE study finds that patenting is positively related to a firm’s propensity to collaborate. The finding is based on conditional correlations and no causality can be inferred. For example, firms with patents may be able to safely disclose their IP to potential R&D partners, helping to facilitate collaboration. Conversely, firms that have engaged in patenting may enter collaboration as they seek to enhance their R&D activities. Collaboration may also result in patenting by generating innovation outcomes.

Building on the AIBE study, IP Australia found that for R&D-active firms patent grants are positively linked to both joint R&D and joint commercialisation arrangements. In addition, Australian firms that acquire intangible assets from partners, such as technology licenses, patents or other IP assets, are on average granted more patents than their peers. In-licensing IP can provide critical access to components needed to develop more complex technologies.

More research is needed to understand the causal mechanisms behind these ‘stylised facts.’ Nevertheless, taken together, they highlight the role of patents in collaboration and commercialisation and the importance of collaboration to innovation in Australia.

Spinouts and patenting

To explore the origins of innovative ideas and practices in Australia, IP Australia is examining the characteristics of Australian startups. A particular focus of the research is on the employment trajectories of their early joiners – employees that joined a firm within its first year of operation.

US research shows that entrepreneurship by employees is a key driver of innovation, geographic clustering and industrial growth.¹⁵ When employees of established firms found or join “spinout” ventures, they often target submarkets ignored by their previous employers. A spinout refers to a new company that is created from technology, research, or IP that originated within another organisation. The originator may be a research institution (e.g., a university) or existing company.

Figure 1.1 shows how startups that eventually receive a patent in Australia compare to the average new firm in the economy, and how they compare to the average startup in professional, scientific and technical services, being one of Australia’s most patent-intensive industries.

Compared to the latter, those that eventually receive a patent:

• Are 2.4 times more likely to have been joined by an employee who was previously with a university (10.5% of patent producers vs 4.4% on average).
• Are 4.6 times more likely to have been joined by at least one PhD graduate (11.6% of patent producers vs 2.5% on average).

Spinouts are a key means by which research from universities is commercialised. At the same time, as US research shows, the impact of public science on corporate innovation strongly depends on the training of human capital by universities.¹⁶

Based on IP Australia’s analysis, inter-industry mobility – employees joining startups from firms in the same industry – appears to be an important driver of startup performance. In Australia, patent-producing startups are around 3 times more likely than the average new firm to have employed at least one worker who came directly from another patent-holding employer.

Source: ABS, PLIDA, 2022; ABS, BLADE, 2022.

Knowledge transfer via employees

The diffusion of know-how is critical to successful technology transfer and innovation.¹⁷ A key way that firms access know-how is through employee mobility – by hiring new people and by maintaining ties with employees that exit to join other firms.¹⁸ Mobility can provide firms with direct access to innovative knowledge or intellectual property. In addition, by enhancing a firm’s stock of knowledge, mobility can improve a firm’s absorptive capacity – it’s ability to identify, understand and exploit valuable external knowledge.¹⁹

In Australia, firms with a higher proportion of new joiners (relative to a firm’s existing employee base) tend to patent more, but only when those joiners have come from:

• university employment or are recent graduates
• patenting firms in the same industry or, to a lesser degree, patenting firms in other industries
• small patenting firms or, to a lesser degree, from larger patenting firms.

Looking at employee exits and their relationship to patenting, few significant effects are observed. An exception is when an employee exits to join a small patent-holding venture. For Australian firms, both hiring employees from small patent-holding ventures and losing employees to such ventures is linked to higher patenting by both parties.

Several explanations are plausible. As prior research shows, a firm’s patent performance can influence preferences among inventors to work for that firm.²⁰

Conversely, employee mobility can facilitate the exchange of know-how, especially if the employee maintains social ties with their previous employer.²¹ As the employers become more aware of each other’s innovation activities, this may spur innovation effort and/or patent portfolio building.

Source: PLIDA, ABS, 2024; BLADE, ABS, 2024. Note: Firm size is identified based on a firm’s number of full-time equivalent (FTE) employees, consistent with ABS definitions: micro, 0–4 employees; small, 5–19 employees; medium, 20–199 employees; large, 200+ employees. For every one percentage point change in joiners from each cohort, the log of firm’s expected number of filings increase (or decrease) by the respective coefficient, holding other variables constant.

Understanding collaboration and the roles for IP in innovation

Innovation relies on collaboration and effective mechanisms for transferring know-how, such as dynamic labour markets. In turn, effective knowledge transfer can compound the economic benefits of investment in IP and innovation.

New microdata has the potential to dramatically improve our understanding of innovation pathways, vital to ensuring the IP system remans fit-for-purpose.

View our economic research papers.