Australia's artificial intelligence sector has experienced explosive growth, with the number of AI companies nearly tripling since 2023 and patent applications quadrupling over the past decade, according to a new government report.

The 2025 AI Ecosystem Report, produced by the National Artificial Intelligence Centre (NAIC) and CSIRO, identifies 1,533 Australian companies actively developing or adopting AI technologies - a dramatic increase from previous assessments that reflects both genuine growth and improved data collection methods.

"This report tells a story of a rapidly expanding AI ecosystem," said the report's authors. "We're seeing increasing demand for AI-skilled workers, more companies, and greater intensity of R&D activity across the nation."

The NAIC has also launched an AI Directory, aiming to help government and industry easily find and connect with companies that possess local AI capabilities.

The report reveals that Australia's AI activity is concentrated in 25 distinct geographical clusters, with Melbourne's central business district emerging as the nation's largest AI hub, hosting 188 companies. Sydney follows with multiple clusters totalling 184 companies across its CBD, while Brisbane (114 companies), Adelaide (51), and Perth (85 across three clusters) round out the major centres.

Notably, the clustering extends beyond capital cities, with emerging hubs on Queensland's Gold Coast and Sunshine Coast, as well as Newcastle in New South Wales.

The ecosystem is dominated by small enterprises, with 85% of private AI companies employing fewer than 50 staff. Among the 1,121 private companies identified, 110 were founded in just the past two years, highlighting the sector's entrepreneurial energy.

"We're seeing a dual-track structure where startups drive innovation while larger corporations power adoption," the report notes, with public companies primarily focused on implementing AI to enhance existing operations rather than developing new AI technologies.

Research Strength, Commercial Gap

While the findings paint an optimistic picture of growth, they also reveal a concerning imbalance between research output and commercial success. Despite producing 1.88% of global AI research publications, Australia accounts for only 0.18% of global AI patents - a ratio of nearly 23 research papers for every patent.

"This highlights a significant disconnect between research activity and commercial outcomes," the report warns, suggesting structural barriers prevent Australia from capitalizing on its research strengths.

The job market reflects the sector's expansion, with AI-related skills requirements growing from 0.2% of job postings in 2015 to 0.9% in 2024. However, hiring remains highly concentrated, with just 100 companies accounting for 58% of all AI job postings, and two-thirds of positions located in inner metropolitan areas.

Interestingly, employers increasingly seek both technical capabilities and broader skills like communication and leadership, indicating that successful AI implementation requires diverse talent beyond pure technical expertise.

Playing to Strengths

The report identifies a distinctive Australian approach to AI development that builds on existing industrial capabilities rather than attempting to compete directly with global tech giants. Australia shows particular specialization in applying AI to traditional strengths like construction, mining, chemical manufacturing, and agriculture.

Perth's AI cluster, for example, shows pronounced specialization in resource-sector applications, with 59% of companies focused on energy, raw materials and utilities—directly supporting Western Australia's mining heritage.

Despite the positive growth metrics, stakeholder interviews revealed significant cultural barriers to further development. Industry leaders called for enhanced innovation culture, stronger leadership, and improved AI literacy across all levels of society.

"Currently, up-and-coming innovators are struggling with uncertainties about how to proceed, and grappling with knowing their ideas could receive more support outside of Australia," the report notes, highlighting concerns about talent retention.

While Australia maintains steady growth in AI activity, its global market share has declined as other nations accelerate their own AI development. The country received $0.7 billion in private AI investment in 2024, ranking 20th globally, while the United States attracted $166.4 billion.

The report concludes that Australia's strategic advantage lies not in competing with global AI giants on general-purpose technologies, but in leading the world in AI applications tailored to its economic strengths and societal values.

Download the full report here.