Irish Economy
Irish Jobs & Innovation: What should Ireland do? - Part 5
By Michael Hennigan, Finfacts founder and editor
Jun 23, 2014 - 7:32 AM

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IDA Ireland advertising campaign 2006: "The Irish Mind. An abundant supply of that rare commodity you'll need to bring your business to peak performance. The Irish. Creative. Imaginative. And flexible. Agile minds with a unique capacity to initiate and innovate without being directed. Always thinking on their feet. Adapting and improving. Generating new knowledge and new ideas. Working together to find new ways of getting things done. Better and faster.

This flexible attitude pervades the ecosystem. Nowhere else will you find such close, frequently informal, links between enterprise, education and research facilities and a pro-business government. Connected by a dynamic information infrastructure. In Ireland, everything works together"

Irish Jobs & Innovation: What should Ireland do to create sustainable jobs? This question needs the attention of policy makers who are spending too much time in what could be termed actionless actions.

When a minister says Ireland should strive to create the next Google or Microsoft then pray for a deliverance from fantasy - - ARM Holdings Plc, the UK's most successful high tech firm, has its technology in more than a billion devices sold but it has a payroll of less than 3,000 compared with Microsoft's 99,000.

Besides, a young Irish tech startup with potential would be acquired by a bigger overseas firm before the taxpayer would get a return on public support - - the giants acquire their most important technology and in the past eighteen months Apple has acquired about 25 companies, most of them small.

Again in the UK, the discovery of the so-called miracle material graphene in Manchester does not guarantee that the UK will make significant commercial gains from it.

Prof Richard Jones of the University of Sheffield wrote in a paper [pdf] published last year:

In 1979 the UK was one of the most research-intensive economies in the world. Now, amongst advanced industrial economies, it is one of the least...while in the UK’s R&D (research and development) intensity was declining, not only have the UK’s traditional competitors - - the USA, Japan, France and Germany - - maintained or increased their R&D intensity, but there have been dramatic increases in R&D spending from rapidly developing countries such as South Korea and China."

He added: "There has been much focus on the role of fast growing small and medium sized enterprises in driving innovation, but the reality is that private sector R&D is predominantly driven by the large firms with the resources and organisational structure to sustain such efforts. According to Hughes and Mina (2012), in 2009 only 3.5% of R&D in the UK was done by the independent SME sector. The largest 10 R&D spenders, on the other hand, between them accounted for 34% of the UK’s R&D."

The decline reflects both the contraction in manufacturing and the structure of equity markets with a bias towards short-term returns.

Alan Hughes, Margaret Thatcher professor of Enterprise Studies (Emeritus) at the Cambridge Judge Business School and Andrea Mina, lecturer in Economics of Innovation, Judge Business School, wrote in a report in 2012 that the UK had a dependency on R&D investment by foreign-owned firms - - less than, but similar to Ireland's:

The UK has by comparative international standards a relatively high share (over 40%) of its business enterprise R&D expenditure carried out by the subsidiaries of overseas firms. Moreover, the share of total business R&D expenditure in the UK funded from overseas sources (over 20% by 2009) increased substantially during the 1990s. It appears that the UK is a comparatively attractive location for funding and carrying out R&D activities. However, the share of overseas funding stopped rising after 2002. Moreover UK businesses have decreased the relative extent to which they fund R&D in the UK. In 2000 R&D expenditure funded in the UK by the UK business enterprise sector was approximately ten times as large as expenditure it funded overseas; by 2009 it was only five times as large. The ‘openness’ of UK R&D activity makes it relatively vulnerable to the strategic investment decisions of overseas funders of  UK R&D and of the parent companies of subsidiaries based in the UK as well as the decisions of the major UK based multinationals."

 

In Ireland foreign-owned firms mainly American are responsible for almost three-quarters of business R&D spending and less than one-third do research in Ireland while it's not at a significnt level compared with Israel which has had a focus on R&D for sixty years.

Current employment in these firms is lower than it was 13 years ago and with the growth of robotics in manufacturing (at least 250,00 industrial robots in use in Japan, more than anywhere else in the world), the age of the big manufacturing plant is ending.

Last week the Irish Government announced that PayPal will add 400 jobs in Dundalk by 2018 bringing its payroll to 2,900 jobs.

It's good to get these jobs but the majority will be foreign hires because of limited language skills and

Patrick Honohan, governor of Ireland’s central bank, said in a speech in 2010 that:

One hoped-for element of the policy of encouraging foreign-owned firms is the inward transfer of technology and business know-how including to locally controlled firms. As the decades passed, this transfer does seem to have happened to an increasing extent. But the reliance on foreign-owned firms has lasted a long time. Irish-owned companies have grown and prospered over the past half-century, and the most pessimistic of prognostications have not materialised. Nevertheless, this systemic dependence on foreign capital and know-how has skewed Irish development. In the interests of robust diversification, most Irish economists observers would hope for a greater convergence towards normality in this aspect of Irish economic development, with a stronger emergence of innovative Irish companies alongside those steered from abroad."

The narrow focus of enterprise policy on high tech startups and university research has been a failure when innovation for a small economy can best be deployed by its application when a tradition of research is lacking.

Finfacts: Imbalance in focus on tech and non-tech entrepreneurship in Ireland & elsewhere - Part 1

The recent success in the US of Dubliner Oisín Hanrahan, co-founder of Handybook, an online/smartphone app service for hiring approved home service professionals such as cleaners, plumbers, and other services, is an example of the successful application of technology.

The company recently raised funding of $22m.

Another example is an entrepreneurial "epiphany" which triggered phenomenal success in tweaking an old business model.

It's one of the biggest parts of innovation and in November 2011 in The New Yorker, Malcolm Gladwell in a piece on another entrepreneur of accomplishment, Steve Jobs, wrote that one of the great puzzles of the industrial revolution is why it began in England. Why not France, or Germany? Many reasons have been offered. Britain had plentiful supplies of coal, for instance. It had a good patent system in place. It had relatively high labour costs, which encouraged the search for labor-saving innovations.

A 2011 paper [pdf] by the economists Ralf Meisenzahl and Joel Mokyr focus on a different explanation: the role of Britain’s human-capital advantage - - in particular, on a group they call “tweakers.” They believe that Britain dominated the industrial revolution because it had a far larger population of skilled engineers and artisans than its competitors: resourceful and creative men who took the signature inventions of the industrial age and tweaked them - - refined and perfected them, and made them work.

The OECD government think-tank has said that remarkably more than two-thirds of product innovators are not engaged in R&D in New Zealand and the United States and more than 90% in Chile and Brazil.

According to Fortune magazine, in the early 1980s, Howard Schultz, a native of Brooklyn, New York, learned that a lot of the coffee equipment for a company he then worked for, was being sold to an unremarkable retailer in Seattle's Pike Place Market called Starbucks Coffee, Tea and Spices. Starbucks had been around since 1971 and had four stores. Coffee purists loved its whole fresh Arabica beans, sold in little bags. Schultz was restless and intrigued -- and ventured west to pay a visit. A violinist was playing Mozart by the door. After courting Starbucks' founders for months, in 1982, at 29, he joined Starbucks as head of marketing.

Fortune says Schultz then had what he calls his entrepreneurial "epiphany." The following year, at a trade show in Italy, he discovered the small espresso bars all through Milan and Verona. He watched the flamboyant baristas grind the beans, pull the shots of espresso, foam the milk. It was "great theater," he thought. Here was a Continental subculture that Americans knew nothing of -- a "third place" between a person's job and a person's home.

Schultz was intrigued that Italy -- a country with a fifth of the US population -- had 200,000 of these cafés.

Gaggia SpA is the best known Italian manufacturer of coffee machines for professional and household use.

The company was founded in 1948 by Achille Gaggia, the man to whom we are indebted for the success of espresso coffee all over the world: it was he who on September 5th 1938 filed patent no. 365726 for the first espresso machine and the brand was purchased in 1999 by the Saeco International Group, which is itself a subsidiary of Philips, the Dutch group.

There was a scene in an episode of the American Mafia family TV series The Sopranos, where two of the characters end up in a coffee shop.

"Espresso! cappuccino!" one of them exclaims. "We invented this shit!"

They happened to have been in a Starbucks.

In 1987, Starbucks' owners decided to sell - - and Schultz raised $3.8m from investors to buy it.

Read the Fortune article.

So innovation is a lot broader than what can come from a laboratory test tube.

What Ireland needs is an end to the spin that is pervasive and toxic to developing realistic responses to real world challenges.

Whether it was Brian Cowen as taoiseach in 2009 asking delegates at a diaspora conference for help in build a European Silicon Valley or Richard Bruton, one of four teachers to have charge of the enterprise department since 1997 (the fifth incumbent was a social worker - these are noble professions and we can all be naïfs in areas of work we have no direct experience in as these five ministers were in dealing with business), saying in September 2012 "we must strive to create the next Google or Microsoft here in Ireland" - - the missing ingredient was the market.

To succeed in export markets, it is usually necessary to have experience in the home market.

In Ireland the public sector and banks are key consumers of IT services but that changed with the crash of 2008.

Richard Bruton's Department told Finfacts in 2012: "Minister Bruton and the Department of Jobs are unashamedly ambitious for the potential of scientific research in Ireland to support economic growth and job-creation in Ireland."

Hardly reassuring when the minister banks on faith not evidence?

Food and drink is our area of indigenous strength but the trade balance is rapidly diminishing -- see here on potential.

In 2013 food and drinks exports of €10bn accounted for 5.7% of total Irish headline exports.

The craziest Irish jobs aspiration was in the 2010 report [pdf] produced by the 28-person Innovation Taskforce:

The Taskforce believe that the implementation of the recommendations in the Report, supported by a favourable economic context, has the potential to contribute to net job creation in high-tech firms of the order of between 117,000 and 215,000 between now and 2020. This excludes the creation of additional jobs through the multiplier effect (i.e. every job created will have spin off job creation through increased company and individual expenditure on goods and services)...Were Ireland to achieve levels of employment in high-tech firms comparable with Silicon Valley, the numbers would increase substantially. More realistically, Ireland might aspire to be a leader in Europe and aim to have 15% of employment concentrated in high-tech firms. This would result in almost 346,000 people being employed in high-tech firms by 2020 – a net increase of 215,000 jobs over the period."

To match Silicon Valley in terms of tech jobs in an economy with a tiny indigenous research base and with less than 30% of foreign firms doing even meaningful research, was fanciful enough but to expect an unprecedented level of new firm creation given that 70 to 90% do not survive beyond their seventh birthday, was nuts.

The oldest high tech cluster in Europe is the so-called Silicon Fen in Cambridgeshire, England, which developed more than 50 years ago in the area around Cambridge University. It has over 50,000 jobs in 1,500 firms, with average employment at 35.

The Financial Times said in 2006 that a comparison between Cambridgeshire and Santa Clara County in Northern California showed that, for the same geographic size, economic output in Silicon Fen was six times smaller and average earnings less than a third of Silicon Valley.

  • 40% of firms are micro and employ 1-5 people;
  • 20% of firms are micro and employ 6-10 people;
  • Only about 2.5% of firms employ more than 200 people.

Declining regular work; Rising low-paid freelancing in Ireland & elsewhere - Part 1

Knowledge workers in Ireland; Low-paid manufacturing grafters in China? - Part 2

The rich today work longer hours than the poor - Part 3

The Uber app economy and disruptive innovation - Part 4

Oisín Hanrahan, co-founder of Handybook, October 2013


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