A year-long independent review of Australia's research and development sector, led by Tesla chair Robyn Denholm, issued the warning on Tuesday along with 20 recommendations.
They include establishing a central body to co-ordinate research and development efforts, reversing Australia's decline in research grants, and introducing tax credits to encourage homegrown manufacturing.
The report comes after Australia's investment in research and development dropped to 1.69 per cent of its gross domestic product – significantly lower than global leaders such as South Korea and the US.
The independent review conducted 49 roundtable consultations, collected 785 submissions, and released six issue papers into Australia's research industry.
Its final report, called Ambitious Australia, found the nation had long relied on its natural resources and agricultural industry, and had failed to fully invest in building a system of innovation.
It recommended the federal government establish a National Innovation Council to co-ordinate research and development, and to consolidate studies into six areas of national importance.
The fields ranged from energy and the environment, technology, and resources, to agriculture and food, health and medical, and defence.
A National Strategy Advisory Council should be assigned to each area and act as an intermediary between the government, industry and the research sector.
Other recommendations included boosting grant schemes to globally competitive levels, greater support for university training in high-demand fields, and a range of tax reforms to simplify existing programs and extend credits for local manufacturing efforts based on Australian research.
"There will be stakeholders who are not happy with the changes," the report noted.
"But Australia can no longer respond by keeping the status quo and just adding more funding to a broken system."
Strengthening Australia's research industry could secure the nation's prosperity and deliver higher wages and more opportunities in cities and regional areas, review chair Robyn Denholm said.
"We can't run a 21st-century economy on an outdated and fragmented (research, development and innovation) system," she said.
"We are calling on the government to back in the report and action the plan."
If introduced, the reforms could help Australian firms overcome hurdles to transforming research into products, incoming Tech Council of Australia chief executive Kate Cornick said.
"These reforms will help start-ups, scale-ups and established firms alike turn ideas into commercial success," she said.
"What we need now is co-ordinated investment and action."
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