The Hon Peter Malinauskas MP
Premier of South Australia
State Administration Centre
200 Victoria Square
ADELAIDE SA 5000

Dear Premier

In accordance with the terms of reference you provided me on 23 September 2025, I am pleased to submit the South Australian Productivity Commission's Final Report on our inquiry into "Building our R&D Intensity to Deliver a More Productive and Competitive State".

Background

Successive state governments have been trying to boost South Australia’s R&D intensity and economic complexity for decades. While some initiatives have been successful, collectively the innovation programs of the past four decades have failed to materially lift South Australian business R&D, business innovation, or exports of complex goods and services.

It is time for a new approach.

South Australia has an opportunity to build on the momentum from recent educational reforms and the newly established Adelaide University, to position our state to seize the benefits of transformative opportunities in coming decades.

Economies around the world are being reshaped by rapid technological change, intense competition for talent, and a global “winner-takes-all” race to secure the industries of the future.

Geopolitical shifts, combined with South Australia’s stability and lifestyle advantages, mean that there have been few better times to attract and retain talent in areas of comparative advantage.

Top research talent is critical for driving innovation and economic growth. Highly skilled individuals not only bring complementary expertise, partners, and investment, but also help develop local talent and future generations of innovators. Economic research increasingly shows that returns from talent are highly concentrated in star researchers surrounded by world class teams, making strategic talent attraction a powerful lever for boosting business innovation, new firm formation, and long-term economic competitiveness.

R&D

R&D sits at the heart of a process that ultimately drives sustainable, long-run growth in productivity, household incomes and living standards.

Business R&D delivers substantial economic benefits, with average private returns of 10–20 per cent and social returns approaching 60 per cent yet, generally, firms invest well below the socially optimal level without government support.

Supporting R&D that meets the needs of the local economy is one of the most valuable long-term investments governments can make to drive economic growth and complexity. This creates more high-quality jobs, raises incomes, and generates more government revenue to sustain high-quality public services like healthcare and schools.

South Australian businesses currently spend 0.7 per cent of GSP (or $1 billion per year) on R&D. This needs to increase by 70 per cent to match NSW or Victoria, needs to more than double to reach the OECD average and more than triple to match benchmark US states.

The current characteristics of South Australian businesses, and state and federal supports already in place, mean new State Government policies aimed at businesses are unlikely to deliver an uplift of this magnitude.

Rather, in our view, university associated research institutions represent the greatest current opportunity to boost South Australia’s R&D intensity, if they are effectively linked to the local business sector, and focused on strategic opportunities for the state, where economic opportunity, state and national priorities, and existing research strengths come together.

Recommendation

We therefore recommend that the South Australian Government builds five world-class "Frontier Technology Institutes". These will be independent research institutes associated with the state’s universities, each with annual funding of $10 million for a minimum of 10 years.

The five focus areas for the Frontier Technology Institutes should be carefully chosen through a structured world class assessment and selection process run by a small international expert panel. These focus areas must be aligned to the state’s economic strategy, local business needs and areas of existing research strength, market opportunities, and federal R&D support.

Funding should be used to attract world-class researchers and research translators, develop local talent, and build deep, effective connections with industry. Evaluation of the Institutes should be transparent and timely, based on economic outcomes that will benefit the state and justify ongoing use of scarce public resources.

This recommendation is designed for the state’s current economic structure. It is informed by a substantial body of domestic and international economic research, modelling and policy evaluations and case studies of international best practice. We have also drawn on lessons learnt from recent policy successes (e.g. state government investment in the establishment of AIML) and failures (e.g. SAHMRI’s flawed priorities and high risk commercial behaviour), input from local experts (across industry, research and government), and findings from previous Commission inquiries.

The Economic Case and Financing

Our modelling predicts that the expected net benefit of our recommended policy will be to increase GSP by $397 million (0.21 percentage points) by 2035-36.

Every $1 the South Australian Government spends on the Institutes up to 2025-36 is expected to generate economic output of $3.70. This is a significantly higher cost-benefit ratio than alternative policies to boost GSP, such as infrastructure spending, which international evidence suggests boosts economic output by $1.20 for each $1 spent at best.

This long-term policy will require long-term financing. We recommend funding the proposal via a payroll tax surcharge of 0.4 per cent on organisations with a national payroll greater than $100 million. We do not recommend a new tax lightly. But a new revenue stream will help ensure this policy has the dedicated resources and necessary scale to achieve its objectives, without increasing public debt and to project low sovereign risk. Our entire state, including large businesses subject to the surcharge, will ultimately benefit from the stronger, more resilient local economy this policy will help to generate. If our design recommendations are followed, taxpayers can rest assured that surcharge funds will be productively invested and not diverted to less productive activities.

Our review of options indicates this is the most feasible and efficient funding mechanism. Importantly, a large firm payroll tax surcharge is preferred on competitiveness grounds as South Australia would still have the lowest (headline and effective) payroll tax rate for large firms of any state or territory.

Summing Up

This policy is intended to be the logical next addition to the State Government’s existing economic initiatives. In time, once the Frontier Technology Institutes are established, it will be necessary to assess whether government intervention should develop further to support the expected new R&D intensive firms generated by the Institutes and the broader innovation ecosystem.

We believe this ambitious policy has very good prospects of materially contributing to the delivery of a more productive and competitive state, lasting income growth, and higher living standards for future generations of South Australians.

Acknowledgement

We are grateful to all stakeholders who have contributed to this inquiry. Throughout the consultation process we have been struck by stakeholders’ enthusiasm for a bold new approach to boosting R&D intensity, and for working together across industry, research and government to realise the state’s economic potential. We also thank the South Australian Department of Treasury and Finance for its modelling of funding options.

On a personal level, I am also very grateful for the good work of my colleagues Ms Melissa Wilson, Mr Steve Whetton and the rest of the Commission team.

Yours faithfully

Adrian Tembel

PRESIDING COMMISSIONER AND CHAIRMAN

Contacts

Presiding Commissioner and Chairman

Adrian Tembel
T: 08 7085 1888
E: adrian.tembel@sa.gov.au

Inquiry Lead

Steve Whetton
T: 08 7085 1893
E: steve.whetton@sa.gov.au