ABS 2023 survey of business innovation and use of information technology
The Australian Bureau of Statistics Business Characteristics Survey is an annual survey on business innovation and use of information technology. The 2022-23 survey was recently released, and this post has extracted some of the results for the Construction industry.
First a few definitions. The ABS defines innovation as ‘the introduction of a new or significantly improved good or service; operational process; organisational or managerial process; or marketing method.’ Innovation activity is ‘any work that was intended to, or did, result in the introduction of an innovation.’ Firms are divided into innovation active and non-innovation active. An innovation-active business is one that introduced any type of innovation, had an innovation in development or abandoned one in the two years ended 30 June 2023. An innovating business is one that introduced any type of innovation during the two years.
The Business Characteristics Survey collects data on innovation and digital activities in alternate years, and the 2022-23 survey was on innovation. Approximately 7,000 businesses were surveyed by questionnaire, with a response rate of 82.5 percent [1]. The survey covers a wide range of factors and issues, with the data given by industry, employment size, and state. The data is shown as a percent of businesses within the estimated total number of businesses.
Firm Size and Innovation
For Construction, 30 percent of businesses introduced a ‘new or significantly improved innovation’ compared to 39 percent of all businesses. However, Construction with 35 percent of innovation active businesses compares poorly to the all industries proportion of 46 percent, and out of all industries Construction has the second lowest proportion of innovation active businesses.
The difference between large and small employers was significant, with 31 percent of Construction businesses employing 0–4 persons and 43 percent of those employing 5–19 persons innovation active, compared to 79 percent of those employing 20–199 persons and 60 percent of those employing 200 or more persons innovation active. Table 1 shows these proportions are similar for businesses that introduced an innovation or had one under development in 2023. Medium size Construction employers with 20-199 people were most likely to have abandoned an innovation [2].
Table 1. Innovation status by employment size
Innovation Activity
Innovation active Construction businesses reported better outcomes than non-active ones. As Figure 1 shows, they were more likely to have introduced a new product or service, and their increase in sales, profitability and productivity over the previous year was greater than non-innovation active businesses. The number of innovation active businesses reporting increased profitability and productivity was twice the number of non-active businesses.
Figure 1. Businesses reporting an increase
Source: ABS 8158
As a side note, it is interesting that for all construction 21 percent of businesses reported an increase in productivity, and 47 percent no change. There were also 19 percent of businesses with a decrease in productivity, Therefore, the overall industry level ends up without growth as the majority of businesses with decreasing or no growth cancel out the productivity increase in the other one fifth of businesses. The number of SMEs and the low level of innovation in Construction are important factors in the lack of productivity growth [3].
There were 13 percent of Construction businesses that introduced a new or improved good or service. Although 31 percent of those innovations were new to Australia or the industry, 75 percent of them were new to the company. Figure 2 shows the percentage shares of that 13 percent of businesses with new or improved goods or services by employment size, with 37 percent of businesses employing 20-199 persons and 25 percent of businesses employing over 200 introducing an innovation. Only 12 and 10 percent of micro and small innovators had an improved good or service. Around half of these goods and services innovations were developed internally.
Construction businesses are three times more likely to introduce a process innovation compared to a new good or service. There were 39 percent of Construction businesses that introduced a new or improved process, of which 3 percent were new to the world. Another 11 percent of those innovations were new to Australia or the industry, and 87 percent of them were new to the company. Figure 2 shows the percentage shares of that 39 percent of businesses with new or improved processes by employment size, with 73 percent of businesses employing 20-199 persons and 62 percent of businesses employing over 200 introducing an innovation. For micro and small firms with a process innovation, the percentage of innovators was 24 and 53 percent respectively. Two thirds of process innovations were developed internally.
Figure 2. Innovation active businesses by type of innovation and size
Source: ABS 8158
Although only 15 percent of innovation active businesses reported having an innovation strategy as part of the business plan, 19 percent sought out partners to collaborate with, compared to none and 9 percent for non-active businesses. The main sources of ideas were from within the company (54 percent), clients (36 percent) and suppliers (33 percent), followed by competitors (23 percent), consultants (17 percent) and industry association (13 percent). Only 2 percent reported sourcing ideas from universities, and none reported any research collaboration with universities.
Digitisation and IT
Differences in investment in information and communication technology (ICT) capabilities between innovation active and non-active businesses was marked. Figure 3 shows more innovation active businesses increased expenditure on cyber security, IT and training in 2023, and only 8 percent of non-active businesses increased expenditure on ICT. Significantly, nearly 25 percent of innovation active Construction businesses increased their use of digital technologies but no non-active businesses did, highlighting the growing divide in the industry between those firms that are digitising their operations and those that are not.
Figure 3. Businesses reporting an increase
The weights given to factors considered important for digitisation in construction are generally similar to other industries, particularly in access to skills and capability building. However, there is a greater knowledge gap in construction and less investment in digital technologies compared to all industries, and only 7 percent of Construction businesses had a digital business strategy, compared to 12 percent of all businesses.
Figure 4. Digitalisation factors important to the business's innovative activity
Source: ABS 8158
Benefits and expenditure
The benefits of innovation for Construction businesses were found to be similar to other industries, although a reduction in costs was not as common. In Figure 5 there are, however, two benefits where construction businesses did notably better than other industries, in improved safety and environmental benefits. The safety result is no doubt due to the importance of improving safety in one of the most dangerous industries, and with 25 percent of businesses reporting and improvement this is a good indicator of industry improvement. Similarly, there were nearly twice as many Construction businesses reporting improved environmental benefits, 14 percent, compared to 8 percent for all businesses, which is probably reflecting industry efforts to reduce waste and energy consumption.
Figure 5. Type of benefit from innovation
Source: ABS 8158
As Figure 6 shows, at 35 percent Construction has the second lowest proportion of innovation active businesses, Agriculture is lowest with 34 percent and Information media and telecommunications highest with 63 percent. The ABS found 37 percent of Construction businesses spent nothing on innovation, and for 50 percent of innovation active businesses expenditure on innovation was only up to $25,000.
At the other extreme, 6 percent of businesses spent between $50,000 and $250,000, and 4 percent more than $250,00. Only 5 percent of Construction businesses got Government financial assistance, and most of them received it from state governments. For a quarter of businesses a shortage of funds was a barrier to innovation, and one third of Construction innovation was targeted at products or processes internal to the business [4].
Figure 6. Proportion of innovation active businesses
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Source: ABS 8158
What Can Be Done to Increase Innovation?
The ABS survey highlights the many issues in Construction innovation. Only 12 percent of businesses reported having a digital culture, few innovations were new to the world, and expenditure on innovation was low. Innovations came from within the business or from clients, suppliers and competitors, not universities or research organisation. How could this performance be improved?
The survey did not ask specifically about R&D tax rebates, but it is unlikely these will have been claimed by many businesses because of their complexity, difficulty to substantiate, requirements for documentation, and the lack of familiarity with the rebate for accountants doing SME tax returns. This may be an area where industry associations might help by providing information, standardised forms and lists of qualified advisors and accountants.
There are very many startups offering software solutions for construction, and a recent phenomenon has been the billions in venture capital going into construction technology. Setting up a demonstration and testing centre for contech is a possible area for collaboration between construction companies, with perhaps government. The centre would provide reports with evaluations of specific systems such as embodied carbon estimators, procurement platforms for materials and components, financial and timekeeping software, robotic and safety management systems. For construction firms, particularly SMEs, getting started on digitisation or choosing new software is challenging because there are so many offerings and no impartial reviews of their quality and suitability.
Large firms such as tier one contractors and manufacturers could be the centre of an innovation consortium, where they coordinate the efforts of a number of smaller firms in developing and applying an innovation. This could be short-term partnership, probably one or two years, focused on a specific innovation and making it work. For example, a contractor with some subcontractors could work together on a new or improved process, or a manufacturer with some customers could work on a new or improved product. This would improve the industry’s innovation culture and increase participation in innovation activities, and might also get access to the tax rebate for SMEs.
A previous post argued for BIM mandates. That post concluded ‘BIM mandates are important because the use of BIM unlocks the potential of digital construction, and affects the organisation of suppliers of materials, products and services for construction of the built environment as well. The deeply embedded nature of the culture and processes of this production system, and the large number of small firms involved, slows technological diffusion and limits voluntary uptake of new technologies like BIM. Therefore, government mandates in particular and client’s mandating BIM in general are needed.’
BIM mandates are a blunt instrument and do not address the problems of cost, difficulty of use, and entrenching the few providers of the systems. However, large contractors doing major projects already have BIM capabilities, so making BIM a requirement on major projects is not problematic. It is an issue for SMEs and on smaller projects where the cost is not justified, although an interesting question is where the cutoff point is. Unfortunately, at present there is no alternative to BIM as the path to digitised construction.
What else could government do, beside simplify the tax rebate and mandate BIM for major projects? Investment in digital capability through training and skills is needed. An example is the NSW Institute of Applied Technology that opened in 2023 as a collaboration of three universities, TAFE, Microsoft and CPB Contractors, with a microcredential stream in construction that has subjects in CAD, BIM, cloud computing, automation and robotics.
More funding to develop new standards for prefabrication and modular building for the Australian Building Codes Board would be good, as this would speed up the process and help get the insurance and finance industry support needed for this part of the industry to grow and reach its potential. The June Building Ministers Meeting considered ‘a national scheme supporting the safety and reliability of building products’ and ‘noted the ongoing engagement .. with industry to support greater use of prefabricated and modular construction methods.’ Obviously still a long way to go there.
Conclusion
The Business Characteristics Survey is a relatively new publication from the ABS, this is the second time it has run. The survey collects data on innovation and digital activities in alternate years, and the 2022-23 survey was on innovation. The results are presented as the percentage of businesses that undertook innovation related activities that resulted in new or improved goods or services or an improvement in processes.
Over the two years to 2023, 30 percent of construction businesses introduced a new or significantly improved innovation, 35 percent were innovation active and 50 percent of them spent up to $25,000 on innovation. Innovation active businesses increased their sales, profitability and productivity more than non-innovation active businesses. Innovation active Construction businesses were three times more likely to introduce a process innovation compared to a new good or service, with 39 percent introducing a new or improved process.
There are significant differences between large and small employers, with 31 percent of Construction businesses employing 0–4 persons and 43 percent of those employing 5–19 persons innovation active, compared to 79 percent of those employing 20–199 persons and 60 percent of those employing 200 or more persons innovation active. Micro and small firms also reported more difficulty in funding innovation activities and were less likely to have an innovation under development in 2023. The low level of innovation is an important factor in the lack of productivity growth in Construction, and the number of SMEs affects the industry’s level of innovation.
Differences in investment in IT between innovation active and non-active businesses was marked. Innovation active businesses increased expenditure on cyber security, IT and training but only 8 percent of non-active businesses increased IT expenditure. Nearly 25 percent of innovation active businesses increased their use of digital technologies, but no non-active businesses did, highlighting the divide between firms that are digitising and those that are not. At 35 percent, the survey found Construction is the industry with the second lowest proportion of innovation active businesses.
The ABS survey highlights the many issues in Construction innovation. How could this performance be improved? Access to R&D tax rebates may be an area where industry associations could provide information, standardised forms and lists of qualified advisors and accountants. A demonstration and testing centre for contech is an area for collaboration between construction companies, with perhaps government. Innovation consortiums could improve the industry’s innovation culture and increase participation in innovation activities. BIM mandates should be used on major projects. Government could increase investment in digital capability through training and skills, and funding to develop new standards. A goal of increasing innovation active construction businesses by 50 percent over a decade would take the industry from the bottom toward the top of Australian industries.
[1] The ABS estimate for the total number of businesses was 1,016,252, so a survey of 7,000 is 0.7 percent. There were 193,844 construction businesses and if 0.7 percent were surveyed that would be around 1,350 in the survey sample.
[2] The estimate of the number of construction businesses employing 0–4 persons was 142,242, for those employing 5–19 persons was 41,042, employing 20–199 was 8,494 persons, and employing 200 or more persons was 166.
[3] A recent Reserve Bank Research Paper by Majeed, Hambur and Breunig on Monetary Policy and Innovation found ‘ monetary policy, both domestic and foreign, and economic conditions can have medium-run effects on productivity and output by influencing the amount of innovative activity that occurs.’ In the three years after an increase in interest rates innovation by SMEs was much more affected than innovation in large firms employing more than 200 people, and ‘contractionary monetary policy shocks lead to an increase in the likelihood that firms report that lack of funds is significantly hampering their ability to undertake innovation. This is almost entirely driven by SMEs, which is consistent with the evidence that SMEs have a larger decline in innovation following a monetary policy shock’. For Construction this confirms both that the low level of innovation is an important factor in the lack of productivity growth, and the number of SMEs affects the level of innovation.
[4] The ABS notes that there is a high degree of uncertainty around many of the survey results, particularly for the employment size data, because of the sample size.
