Frontier Insights

Technology is seemingly transforming the world around us. From agentic AI and robotics to the prospect of practical quantum computing, one can be forgiven for thinking that innovation is accelerating at an unprecedented pace. Yet at the same time, we are seeing slowing productivity growth across the developed world, including in Australia. Geopolitical tensions and increasing political polarization across many advanced economies are also consistent with a growing zero-sum mentality, which does not align with the positive-sum possibilities created by technological advancement and its potential to expand the economic pie. Taken together, these seemingly contradictory signals make the present trajectory difficult to interpret, fuelling vigorous scholarly debate and sharply divergent narratives about the state and future direction of technological and economic progress, from techno-optimism to techno-pessimism.

Part of the reason for this disagreement, both among experts and across society more broadly, is that innovation is inherently difficult to measure. Innovation involves the creation of ideas and approaches that did not previously exist, making simple counts of inventions or ideas inherently incomplete. Any attempt to quantify innovation will therefore capture only part of the underlying reality. Despite this difficulty, recent scholarly evidence lends support to the view that we may have entered a period of innovation stagnation. In a highly cited 2020 paper, Nicholas Bloom and his co-authors show that across seven important industries, ranging from semiconductors and medical technology to agriculture, the amount of research effort required to sustain a given rate of growth in output has risen dramatically since the 1970s. In other words, it now takes substantially more research input to generate the same amount of progress. This suggests that research productivity has declined sharply, consistent with a slowdown in the kinds of significant innovations that allow industries to overcome diminishing returns. An even more direct piece of evidence comes from a 2023 Nature paper by Michael Park and his co-authors. They find that both academic papers and patents have become less disruptive over time. Their measure captures the extent to which a new idea displaces or redirects attention away from the work that came before it. The results suggest that genuinely path-breaking ideas have become less common.

Research by RMIT’s Finance and Frontier Innovation Cluster points in the same direction. Using advanced natural language processing and data analytics, the researchers effectively “read” every patent on record, capture the underlying technological idea it contains, and compare that idea with the entire history of prior patents to determine how genuinely novel it is. This makes it possible to distinguish between genuinely radical inventions, more incremental or routine advances, and patents that are largely redundant because they closely resemble existing ideas. The data reveals that while the total number of patents has risen sharply since the early 1970s, the number of radical inventions has largely plateaued since the early 2000s. These are the inventions most likely to open up new technological possibilities and support sustained productivity growth. Notably, this levelling-off closely coincides with the period in which productivity growth also began to weaken across many advanced economies. The Cluster’s evidence offers a uniquely direct window into the evolution of technological progress, showing that despite an explosion in patenting, genuinely radical innovation have stagnated.

What May Be Behind This Stagnation?

Radical and transformative innovation is central not only to long-run productivity and economic prosperity, but also to our ability to confront increasingly complex challenges such as environmental constraints, demographic change, and resource scarcity. Documenting a slowdown in this kind of innovation is therefore significant in its own right. But an even more important question is why it has occurred. Understanding the forces behind this stagnation is essential if we are to identify what may be holding back technological progress, and what can be done to reverse it.

Answering this question has become an active and important area of research, including within RMIT’s Finance and Frontier Innovation Cluster. There is no single, definitive explanation for why radical innovation appears to have plateaued, but a number of broader economic and institutional trends offer plausible clues.

One possibility is that the environment in which firms operate has gradually become less conducive to the kinds of risks that radical innovation requires. Radical innovations are, by their nature, rare and extreme outcomes. They sit at the extreme end of the typical bell shaped distribution. Most ideas fail or deliver only modest improvements, while a very small number produce extraordinary advances.

Since the turn of the century, however, firms have been subject to substantially greater oversight and control. Corporate governance reforms introduced in the wake of scandals such as Enron and WorldCom, together with the rise of institutional ownership and greater attention to ESG and stakeholder concerns, have strengthened accountability and reduced the scope for extreme corporate outcomes. In many respects, this has been beneficial. Better governance and stronger oversight can reduce misconduct, limit catastrophic failures and improve the way firms are managed.

But systems designed to reduce the probability of extremely bad outcomes may also reduce the willingness or ability of firms to pursue the kinds of unconventional, uncertain and high-risk ideas that occasionally produce extremely good outcomes. If regulation, governance and monitoring increasingly push firms towards safer and more predictable outcomes, they may also make it harder for the rare, radical discoveries that sit at the opposite end of the spectrum to emerge. It is therefore entirely possible that by making firms more disciplined and resilient, we have made them less willing to tolerate the experimentation, uncertainty and failure from which transformative innovation often arises. Researchers at RMIT’s Finance and Frontier Innovation Cluster are actively pursuing this important research agenda with far reaching implications about the institutions and regulatory frameworks that would better balance the needs to discipline and resilience with the needs for radical innovation.

Another possibility lies in the changing structure of the startup ecosystem, where many transformative innovations have traditionally emerged. Over time, large incumbent firms have come to account for a growing share of economic activity, and increasingly dominate the innovation landscape. The share of researchers and engineers employed by large firms rose from around 48% in 2000 to almost 60% by the late 2010s. Strikingly, research shows that when the same inventor moves from a small firm to a large incumbent, their salary rises by around 13%, while their innovative output falls by roughly 10%. This suggests that the environments in which those innovators work are less conducive to producing the kinds of radical ideas that drive long-term progress. Rising market concentration and the growing dominance of large incumbents may therefore be another factor contributing to declining research productivity and the stagnation of radical innovation. Researchers at RMIT’s Finance and Frontier Innovation Cluster are examining these dynamics, including the role of investors and the broader innovation system in supporting startups and creating the conditions in which genuinely transformative ideas are more likely to emerge.

What hopefully emerges from this discussion is that our understanding of the current state of innovation, particularly its most radical and transformative forms, remains far from complete, with some of the most important questions still unanswered. Our ability to generate radical breakthroughs, alongside the steady flow of incremental improvements, will be central not only to future productivity and prosperity, but also to our capacity to confront challenges such as climate change, demographic pressures and resource constraints. Creating an innovation system that can nurture genuinely transformative ideas, while still balancing the need for accountability, stability and broader social objectives, is evidently not simple. But if radical innovation is becoming harder to produce, understanding why, and designing institutions that allow it to flourish, should become a priority not only for researchers, but for policymakers, investors, businesses and the wider innovation ecosystem.