Yes, process and entreprenurial innovation is crucial - but let's not forget the importance technical innovation.

It is always hazardous to make a distinction between technical and non-technical innovation, lest one be accused of favouring one over the other. As has been pointed out, technical innovation is still a critical area where Australia is falling behind the rest of the world.

Business spends only the equivalent of one per cent of GDP on R&D, half the OECD average and a third of that of the leaders - even Icelandic business does better. Our venture capital sector which might fund businesses to come from research is 0.1 per cent of GDP - again even Iceland manages more. Australia accounts for a mere one half of one per cent of global exports in technology-intensive industries.

The fact is there are few R&D driven business on the stock exchange other than the familiar, Cochlear, Resmed and CSL. Most of our top companies are banks or miners. Multi nationals from Ericcson to JDS Uniphase have voted with their feet and ceased large scale R&D in Australia while most global giants in pharmaceuticals and IT spend a fraction on R&D locally compared to overseas rates.

Innovation comes from entrepreneurs - and rarely from science.

There is a pervasive Australian myth that goes something like this: innovations come from brilliant scientists who pass on their discoveries to grateful businessmen and women and, eventually, the consumer. This linear progression does occur, but is a rarity compared to the real source of Australian innovation - the entrepreneur.

The world's stock of science and technology is increasing at a rapid rate and, in fact, there is already enough of it around to fuel a number of industrial revolutions. What is in short supply are the people who can assemble technologies and ideas into a coherent business plan, raise the finance and assemble the team that can turn all these inputs into something consumers value - in short, into an innovative product or service.

Is it right to use interest rates to reduce demand, when Australia's real economic issue is a lack of supply - of skills and infrastructure?

There is a crying need for a bit of innovative thinking among those who manage our economy. The reserve Bank has taken the interest rate sledge hammer to our economy more than once too often already.

This is especially true in this particular episode of economic overheating.

A lot of inflationary pressures are coming from areas outside the reach of domestic interest rate policy, such as global movements in oil prices, food prices and commodity prices. These rises plus our housing shortage and the health needs of an ageing population are driving internal inflation, to be sure.

This idea of shortages is the key. Interest rates can only affect domestic demand. Australia's core domestic contribution to inflation is linked more to lack of supply than excess demand. We haven't invested enough in skills and infrastructure and when resources of any kind get scare, prices rise.

The car industry, of course is doomed...or is it?

In this year when there is more bad news coming from the car manufacturing sector, it is sometimes hard to appreciate just how much things have changed since the bad old days of protectionism.

Our cars used to be expensive and somewhat dated technologically as they were engineered, designed and manufactured for our rather small domestic market. Nissan was forced to close its local manufacturing and Mitsubishi has long been teetering on the edge.

But while Ford is vulnerable, Toyota is powering ahead and GM Holden's progress has been spectacular. Adelaide-made Commodore and Caprice cars are exported to the Middle East where they are the number one selling car and the United States. The Caprice itself is manufactured in Shanghai and sold as a Buick in China.

In fact Commodore was created from the ground up for global markets and a number of North American cars are to be based on its engineering unperpinnings. Soon to go into production are Melbourne-engineered vehicles including a new Chevrolet Camaro supercar.

Skills and innovation ensure our role in a world awash with cheap labour.

It is fashionable to think that China and India, with their massive populations, are emerging as a pair of ‘ultimate competitors’ which will knock Australia for six economically.

But that is not how things are turning out, despite China’s great strengths in manufacturing and India’s in information technology services. In both cases rising labour costs and shortages of highly skilled labour show there are limits to their competitiveness that offer opportunity for Australia. High level managers and knowledge workers in Chinese manufacturing and Indian services companies cost just about as much to employ as they do in Australia. The Chinese and Indian advantages remain in lower level, repetitious work which itself has to be directed and guided by more skilled professionals.

The focus of innovation changes, but how many of our businesses have moved on?

It comes as a surprise the first time you are driving along in a new car and the dashboard lights come on by themselves, or the windscreen wipers start up, or the car helps you turn that tricky corner. But the greater level of intelligence of our cars shown in these autonomous systems is just the outward manifestation of the latest model of innovation.

When the Model T ruled, the average car was a marvel of the era of mechanical engineering. Japanese cars first got traction when they offered the goodies of the electronics era in the form of the push button radio and two speed wipers.

Today we take for granted the engineering and the electronics and are deep into the era where software is the key to the customer experience and value adding.

Software accounts for a greater and greater proportion of value in today’s products. In a car it works with us when we apply the brakes, helps us maintain the right line and stay level when driving through a corner, and controls myriad systems from air conditioning to valve timing.