Sydney and Perth are home to a growing wave of founders and investors, showcasing Australia’s innovation potential, writes HSBC’s global head of innovation banking David Sabow.

Lifting labour productivity is one of the most significant economic challenges facing developed economies, and Australia is no exception.

This week in Canberra, a clutch of academics, economists, industry leaders and politicians will meet, charged with the responsibility of laying the groundwork for a uniquely Australian solution to this global challenge.

It is no secret that measured labour productivity (GDP per hour worked) has been in decline in recent years. In Q4 2024, it was no higher than in 2016, posing a real threat to Australia’s global competitiveness.

Complicating matters further, these productivity issues must be tackled against a demanding macroeconomic and structural backdrop.

Currently, Australia ranks below the OECD average in several key areas, including R&D investment (1.7% of GDP compared with the OECD average of 2.7%), education, tax and regulation.

Viewing this challenge as an outsider, I don't think Australia needs to reinvent the wheel. A potential remedy for its productivity challenges is already well within reach.

Visiting for the first time this month, I had the opportunity to witness several of its wonders through my own eyes, including the Harbour Bridge and Opera House — but as someone working in Silicon Valley, the size and scale of Australia’s growing innovation ecosystem is what impressed me.

For years, those of us living stateside have met and worked with Australian founders looking to take their business to the next stage, so the brilliance of Australian ingenuity came as no surprise.

Still, as is often said, to fully appreciate some things, you must see them with your own eyes. After a week spent meeting local founders and investors in Sydney and Perth, I see the immense opportunity innovation presents Australia’s economy.

Australians have always been good at innovating. While San Francisco retains its reputation as the epicentre of global innovation, Australia’s entrepreneurial spirit has a long history, from the Hills Hoist to the Victa lawnmower.

That entrepreneurial drive remains strong today. Companies such as Go1, Harrison.ai and Rokt are making their mark internationally, alongside a new generation of founders in fintech, climate tech, software, biotech and other innovation-led sectors. This is why Australia’s innovation ecosystem is attracting growing global attention.

While the local venture capital sector is still maturing compared with the US, it has an advantage: as a relative latecomer, it can draw on proven models and lessons from more established markets. Australia is delivering world-class innovation — and doing so with comparatively lean capital structures.

Valuations also tend to be more attractive, especially in early-stage financings, where average pre-money valuations can be 20–25% lower than in other markets. Combined with Australia’s top 10 global ranking for tech exit value, this positions the innovation economy to potentially deliver outsized returns in the years ahead.

This capital efficiency makes Australia a world leader in unicorn creation per dollar invested, according to Dealroom data. It is also home to one of the fastest-growing tech ecosystems globally, second only to India in enterprise value growth since 2020.

The VC community plays a vital role in building networks, guiding founders, accelerating startups and championing sectors, but it can only do so much.

For innovation to thrive, the public and private sectors must work together to nurture the ecosystem so it can realise its potential and compete sustainably on the global stage.

The world’s most successful innovation economies invest early and consistently in key public goods, such as digital and physical infrastructure, world-class research institutions, progressive tech-transfer programs, education policies and efficient regulation.

When the public and private sectors partner from the outset, they create economic incentives that attract both domestic and international capital needed to build the necessary infrastructure and reward bold research.

Boosting productivity will require coordinated action on many fronts — and the innovation ecosystem can play a pivotal role in delivering efficient economic growth in the years ahead.

Like a Victa lawnmower, it just needs fuel and a determined pull on the starter cord.