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News : Irish Last Updated: Mar 11, 2010 - 6:39:05 AM

Innovation Ireland Taskforce: Yet another 120,000 jobs plucked from the air by insiders?; In UK 2,900 high-tech companies in business since 1991 have only 40,000 jobs
By Michael Hennigan, Founder and Editor of Finfacts
Mar 10, 2010 - 7:07:42 AM

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The taskforce on innovation in Ireland that was established by Taoiseach Brian Cowen in June 2009, is reported to have projected that almost 120,000 new jobs could be created by the end of the decade, if Ireland transforms itself into an innovation centre, according to a report to be published on Thursday. However, a reality check is necessary as this body is dominated by insiders, who have form in plucking jobs figures from the air to justify spending by receptive politicians. Meanwhile, Bart Clarysse, professor of Entrepreneurship, at Imperial College London, said in 2009 that in the UK there are over 2,900 of high-tech companies that have been in business since 1991. Despite spending over £2.5 billion, they are responsible for only 40,000 jobs.

The Irish Times reports today that the final draft report from the taskforce -- seen by the newspaper - - warns that a “sea change in attitudes towards innovation and enterprise is...required.” The report backs the introduction of bonus CAO points for maths in the Leaving Cert in order to boost student interest. It also proposes major investment in upgrading broadband capability. And it backs changes to the bankruptcy laws.

It also commits the Government to investing at least 3 per cent of GDP (gross domestic product) in research and development until 2020. The Government had made no firm commitment to research spending beyond 2013.

Improving the quality of education and the output of science and maths students would be a good thing as is public investment in research, currently at about €1bn annually. However, using the international target of 3 per cent of GDP is questionable, when the Irish tradable goods and services sector is dominated by multinationals. The overreliance on university research is also a foolish strategy for a small country like Ireland.

Professor Seamus Grimes of the Centre for Innovation & Structural Change, NUI Galway, who has worked in China, the world's biggest growing market, has pointed out that despite the rapid growth in foreign R&D centres in China, many investments are modest.

UCC economists Declan Jordan and Eoin O'Leary, have published research in recent years, which questioned the overreliance on university-led innovation. For example, the aspiration to develop a world class food industry will not become reality in a university laboratory.

We pointed out last June that the 28-strong Innovation Taskforce was dominated by insiders: senior civil servants, university presidents and managers at the State enterprise agencies - - membership here.

Dr. Chris Horn, co-founder of Iona Technologies is a member of the group and while he no doubt provided a useful contribution, it is interesting generally how the poor experience of the great Irish tech hopes of the 1990s, has apparently had little impact on policy making.

Struggling Iona was acquired by a US firm in 2008 and this year, foreign exchange software company, Cognotec, collapsed.

Nevertheless, 120,000 new jobs can now be projected without having access to credible  data.

Last year, Enterprise Ireland told Finfacts that the survival rate for spin-outs from public research over  a 10-year period was 90 per cent  - - to achieve this, companies have to remain with a very small payroll and limited ambition.

The US survival rate at the ten year stage is less than 30 per cent - - this report also highlights that US start-ups initially are more dependent on bank credit rather than venture capital.

Bureau of Labor statistics in 2006 showed that the information technology sector had the lowest 2- and 4-year survival rates, 63 per cent and 38 per cent respectively; and this trend continued with the information sector having the lowest 6-year survival rates at 28 per cent and the lowest 7-year survival rate at 25 per cent.

So we are to believe that as many new jobs can be created in the decade as the total of jobs in IDA Ireland supported companies in 2010 and that is presumably not allowing for a survival rate of say 25 per cent.

So what is the experience in Europe?

In Switzerland, only half of start-up firms survive their first five years of business with many failures attributed to lack of market knowledge or unrealistic expectations.

A study undertaken by the Swiss Federal Institute of Technology (ETH), one of the world's top 30 universities, shows that out of 130 university spin-offs from 1998-2007 only eight (6.2 per cent) had a trade sale exit and one (0.8 per cent) an IPO exit. Two thirds of these exits were by VC-backed spin-offs, including the one IPO case.

ETH Zurich’s 130 spin-offs incorporated since 1998 had by December 2007 created 918 jobs. On average, every spin-off has therefore created 7.1 jobs if spin-offs that went out of business are included, or 7.98 jobs if only the ‘surviving’ 115 spin-offs are included.

Bart Clarysse, professor of Entrepreneurship, at Imperial College London,  in a public lecture in February 2009, exploded the myths surrounding the economic importance of high-technology start ups to the Europe.

"People think of the big names like Microsoft, Apple, HP, Intel and Xerox as once being new tech-start-ups," said Professor Clarysse at the lecture. "Yet most of these highly successful companies did not develop their own ideas. Typically they took existing technologies, developed by pioneering - - and sometimes financially unviable - - companies. They bought other businesses to help them succeed and appear credible."

Real technology start-ups tend to grow slowly, have a poor survival rate and contribute little to the wider economy in economic terms. Compared to the US, European start-up performance is poor. In Europe, after seven operational years these new firms comprise, on average, 18.5 employees with revenues of £250,000 and a mere 36% likelihood of surviving beyond 10 years.

In the UK there are over 2,900 of these companies that have been in business since 1991. Despite spending over £2.5 billion, they are responsible for only 40,000 jobs. "They don't become the new Microsoft," said Professor Clarysse,"They just stay micro."

Professor Clarysse said that policy efforts should not be solely aimed at encouraging start-ups and nurturing technology transfer from universities. Ideally, concentrated funds between £2 - 4 million would be made available for companies that are potential purchase targets, usually by a large customer via a trade sale. These trade sales can realise high values, even when a start up has little or no revenue. Big sale prices are achieved when the new firm's business model is set up for sale from the beginning.  This is contrary to conventional business thinking and methods.

Science policy should support the development of large companies in the UK that are able to acquire smaller firms and then be sold on to an overseas interest. This would generate the most significant benefit and cash flow into a national economy. It is quite different to the current volume approach of raising numerous companies, many of which will never have a significant economic impact.

Further challenging the norms, Professor Clarysse suggested that many start-ups fail because they reach the market too soon. "There are no first mover advantages in high-tech," he said. "In fact it's a disadvantage as single firms cannot reduce the time required to move from product launch to a take off in sales, some 14.2 years on average. So it's better to join a market late."

Prof. Clarysse's presentation.

SEE also: Finfacts article, March 09, 2010; Irish Economy: Political spin, jobs and IDA Ireland

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