When Professor Graeme Clark and his team of researchers began working to create the bionic ear, people said they were insane.

The scientific and medical community didn't believe it could be done.

"We were told we were crazy, that we shouldn't be applying this type of technology to deaf ears," says Professor Robert Shepherd.

"Well, we've proved them wrong."

Forty years on, the Australian invention has helped 200,000 people in 100 countries to hear and Australian researchers are now looking at ways to apply medical bionics to eye and brain function.

Medical bionics aims to replace or enhance impaired bodily functions using electronic devices.

The new Bionics Institute, which replaces the Bionic Ear Institute established by Prof Clark in 1986, will focus its research on bionic hearing, bionic vision and neurobionics.

The world-first institute, to be headed by Prof Shepherd, will research the development of neural prostheses to treat central nervous system disorders such as epilepsy as well as depression and obsessive compulsive disorder.

The institute plans to conduct basic clinical trials for a bionic eye by the end of next year, Prof Shepherd said.

Federal Minister for Innovation Kim Carr said the centre would be a building block for a better world.

"Some may ask why is it, that we spend such large sums of money on particle accelerators or on telescopes in the desert or on the world's best bionics institute," Mr Carr said at the Institute's launch in Melbourne on Friday.

"We are in the business of changing the way people live and centres like this make that possible, they nurture creativity, they incubate skills and ideas, they take technology of today, they expand it, they build upon it and they take that technology beyond the dreams of its creators.

"We cannot imagine what you will create, we set no limits on your ambitions."

Prime Minister Julia Gillard said the institute would maintain Australia's role as a world leader in the field of medical bionics.