Innovation
Irish Innovation: Evidence of science policy failure mounts
By Michael Hennigan, Finfacts founder and editor
Aug 14, 2013 - 7:26 AM

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Richard Bruton, enterprise minister, and John Herlihy, Google Ireland chief, Dublin, September 2012.

Irish Innovation: This was the year when Ireland was to meet the official goal of being recognised as a world-class knowledge economy by increasing science intensity to provide a base for both foreign-owned and indigenous firms to significantly expand science and technology sector jobs in the economy. However, despite the Government's band-aid efforts, the evidence of failure has been mounting in recent months.

Following total public spending on science of an inflation-adjusted €24bn over a decade [pdf], science competence at third level has improved as evidenced by the rise in research publication citations and the output of PhDs. However, the strategy of recent governments of putting science and innovation at the heart of enterprise policy has been a failure.

The level of commercialisation of third level research is poor; patent applications from both universities and business are at a 30-year low. Less than a third of foreign-owned firms supported by IDA Ireland, the public inward investment agency, do any R&D (research and development). Business R&D investment is at a low level that does not merit patent filings and for example, most of Google's Irish staff are in sales administration and localisation; the staff of Apple in Cork are mainly in administration while Microsoft's main focus in Dublin is localisation and its 3 overseas strategic R&D centres are in Israel, China and India. It was reported earlier this year that Apple was planning to open its third R&D centre in Israel.

The desire to see multinational firms moving up the value chain has not been realised while the small indigenous sector cannot alone power Ireland to be a leading world-class knowledge economy.

In September 2009, Brian Cowen, taoiseach (Irish prime minister), in a speech at the inaugural meeting of the Global Economic Forum, an Irish diaspora group, asked for help to create a "European Silicon Valley‟ in Ireland.

Six months later, the Innovation Taskforce's report [pdf] sketched a scenario where in a decade up to 215,000 science and technology jobs could be created that would enable Ireland to vault over Silicon Valley in Northern California.

It was a delusional goal as in the real world, Ireland would have to see an unprecedented level of firm creations and failures, without having significant local markets for their output. Besides, public sector demand is important and in Ireland that is likely to remain low for many years.

US Bureau of Labor Statistics (BLS) data suggests that 31% of a sample of firms in sectors across the economy, survived 7 years while the rate for the 'Information' sector was 31% in Year 5 of life and 25% at Year 7. A BLS study shows that of 2,600 high-tech firms that were founded in Silicon Valley in 2000, fewer than 1 in 5 were still in business in 2009.

With a third of the time past since the publication of the Innovation Taskforce's report, the number of full-time jobs in services and manufacturing added by Irish firms in information and communications technology (ICT) in the period 2007-2012 was 1,600 [pdf].

Israel is the only foreign example of the successful cloning of the Silicon Valley model.

Israel's research base dates back more than 60 years with the necessity to develop technologies in the semi-arid region for water and agriculture and also its defence needs. In the early 1990s, when the Soviet Union collapsed, the country became the beneficiary of possibly the largest movement in intellectual capital in a short time period, in history.

In Ireland, policy makers are obsessed with high-tech but high-growth firms are not typically in high-tech. There is also a misplaced hope put in the US venture capital model.

The simple fact is that there is no obvious jobs engine to replace peak foreign investment and the property bubble.

In September 2012, Richard Bruton, minister for jobs, enterprise and innovation, said: "As I have said before, our industrial policy must not just be aimed at attracting the next Google or Microsoft to Ireland - - we must strive to create the next Google or Microsoft here in Ireland."

NESTA (National Endowment for Science, Technology and the Arts), a UK science advocacy group, said in a report [pdf] in 2011 that a small minority of fast growing companies account for half of new jobs in the UK. It also said:

Some of the most startling high-growth businesses of the last decade have been technology companies, specifically internet companies. The allure of these businesses, and the goal of creating a British Google or Facebook, is an admirable one. But the Silicon Valley tech company is not representative of the majority of high-growth businesses.

NESTA’s analysis of growth companies from 2002 to 2010 shows that they are distributed across the economy, from mining to banking."

A report published in 2012 by the Kaufmann Foundation, America's leading entrepreneurship think-tank, said that state economic development programs, which traditionally target high-tech firms, may be missing 75% of high-growth companies.

"Our analysis of these fast-growing firms shows us that high-growth company founders can come from anywhere," said Dane Stangler, director of Research and Policy at the Kauffman Foundation. "Their firms can be found throughout the country and, rather than following the conventional expectation that high-growth companies are grouped into a narrow technology category, they represent exceptionally diverse industry segments. These findings offer important lessons for economic development leaders, such as to target firms that are high-growth rather than high-tech."

The Irish Government has invested $300m in US venture capital (VC) funds in recent years. However a planned $500m fund that was launched in the US in 2010 failed to generate sufficient interest from private investors.

The US VC  sector has had dismal returns over 20 years and 76% of US tech companies acquired in 2012 had not raised institutional investment (VC/PE -private equity) prior to acquisition.

The concentration of enterprise policy on high tech is also questionable when a young Irish high tech firm with potential is likely to be acquired by a bigger overseas firm before there is value added for the economy.

We point out in a box below that most high tech firms remain small. In the biotech sector, most firms never make a profit. In 2012, Ernst & Young classified 16 commercial leaders in the US and 8 in Europe [pdf]. The others typically are acquired or go bust.

As regards Irish data and outcomes, Frances Ruane, Economic and Social Research Institute (ESRI) director, has highlighted a tradition of policy making that lacks research evidence. This can be seen both in science and enterprise policy.

Last year Finfacts requested information from the Department of Jobs, Enterprise and Innovation on the number of rejections of claims for the self-assessed tax credit, since 2004. There was no information.

The Department also confirmed that despite more than a half century of public support for enterprise, longitudinal studies are not done to track development of firms overtime.

In its latest Economic Survey of Ireland, the Organisation of Economic Cooperation and Development (OECD) proposed that the Government should rigorously evaluate programmes, "shutting down those that are shown not to work, while expanding the most effective schemes. Given political-economy realities and resistance to change, sunset clauses attached to innovation and enterprise support programmes would help to enforce such a policy." It noted that "the government launched a review of the R&D tax credit, following an increase in its generosity overtime."

Distortions to data related to the dominant foreign-owned sector means that most international analyses of Irish issues are wrong. At home, the conflation of multinational and indigenous data in particular in relation to exports, is used to provide a better story than the reality e.g. Intel Ireland may be responsible for most Irish exports to China as Intel Israel is from Israel, but policy makers could not resist the fiction that there are many more players involved.

The European Commission has also been fooled by Irish data, and in September it selected Sweden, Germany, Ireland and Luxembourg as the EU member states getting the most out of innovation, according to a new proposed innovation indicator.

There were 492 Irish resident patent applications in 2012 down from 494 in 2011 and the lowest level since 434 applications were filed in 1982, according to World Intellectual Property Organisation (WIPO) data.

PCT (Patent Cooperation Treaty) patents makes it possible to seek patent protection for an invention simultaneously in each of a large number of countries by filing a single "international" patent application - - these applications from Irish residents fell from 428 in 2006 to 415 in 2011 and 392 in 2012.

European patents data from the European Patents Office on Irish resident applicants in 2012, show that the majority are in respect of foreign inventions and the filings from Ireland likely reflect tax strategies.

The European Commission told Finfacts that its benchmark year for patents was 2009 when patent applications at the Irish Patents Office were below the 2001 level.

The key data it used was a jump in computer services output and exports in 2012 by 15% but this data is unreliable as an indicator of activity in Ireland - - the main companies Microsoft, Google, Oracle and Facebook divert most of their revenues from other markets to Ireland for tax purposes.

The output and exports data are effectively fake. In 2012 the value was about €40bn of total services exports of €92bn.

As damning is the 2012 "EU Industrial R&D Scoreboard," which noted:

Three companies based in Ireland contributed 68% of that country's R&D investment: Seagate Technology (15.0%), Covidien (23.9%) and Accenture (31.2%)."

These 3 companies are only Irish because they have located their head offices in Ireland. Seagate spent $1bn on R&D in 2011 but not in Ireland. The figures in brackets are in respect of annual growth.

The Department of Jobs, Enterprise and Innovation was apparently glad to have the opportunity to mislead the public by publishing a report that suggested policy success when the reality was the opposite -- 'Ireland ranks in top 10 EU countries for R&D investment - EU Commission.'

The European Commission says its innovation indicator is a work-in-progress.

Recent developments pointing to problems with the science strategy include:

  • In August an international study showed that the Irish units of many of the world's biggest companies in pharmaceuticals, biotech and high tech, do not value Irish academic research;
  • As for local firms, last June, the Irish Government announced a  €50m joint industry research project in University College Cork with participation from a number of companies including Kerry Group, one of Ireland's international successes in the food sector. The taxpayer is picking up at least 79% of the cost;
  • In July 2013, Seán Sherlock, minister for research and innovation, announced an increase in the target of the number of spinout companies from universities, greater than 3 years old, from 44 to 69 by 2017 adding about 75 jobs in 4 years and he raised the target number of firms engaged in R&D projects of 'significant scale' by 115 firms to 1,185 by 2017, from 1070 companies in 2011. Using the Department of Jobs, Enterprise and Innovation's own definition of 'significant R&D', which is a spend of over €2m annually; the total number of firms in the category (foreign and indigenous) was 132 in 2011. Mr Sherlock took a minimum spend of €100,000 which would hardly cover the total payroll costs of one researcher;
  • Also in July, Finfacts was the only media outlet to report that patent applications to the Irish Patents Office in 2012 for a second year were at the lowest since the early 1980s. Ministers Richard Bruton and Seán Sherlock tried to bury the bad news. With the exception of Finfacts, they succeeded;
  • The disclosure that the first audits of R&D tax credit claims since the scheme began in 2004 revealed that 26 of 32 company claims examined involved over-claiming or the claim being rejected, suggests that official business R&D data is exaggerated.
  • The sale of Elan, the oldest and biggest indigenous firm in the knowledge economy area, until it was reduced to an investment shell over the previous 18 months, is a direct broadside against the flagship enterprise policy. Elan was founded in Ireland in 1969 by Don Panoz, an American chemist;
  • According to a July 2013 study, the level of Irish entrepreneurship is low and falling.

In the indigenous sector, grants and tax credits have likely had an impact on process innovation in particular but at a low level.

In 2009, the Government announced a "radical partnership" between Trinity College and University College Dublin "to stimulate growth of a new national ecosystem for innovation - - up to 300 companies and thousands of Smart Economy-based jobs in ten years targeted." Jobs in the range of 30,000-75,000 were expected.

We would be in a sweet spot if we could only monetise aspirations.

Brendan Behan (1923-1964), the Irish writer, reputedly said: "The first item on the agenda of every Irish organisation is 'The Split,'" and true to form, the alliance appears to have got a quiet burial before turf battles hit the headlines.

While the public science budget amounted to €24bn in inflation-adjusted terms in the period 2002-2011, in 2012, the spending was budgeted at €2.4bn with about half spent on higher education science and engineering, and training. Meanwhile, business spent €1.9bn on R&D in 2011 with foreign firms accounting for 71%. The total was €1.1bn in 2003. As noted earlier in relation to tax credits, the 2011 data is suspect.

Full-time jobs in high-tech manufacturing (chemicals, computers, chips, medical devices) grew from 62,300 in 2003 to 63,200 in 2012 while services jobs in the computer and information sectors expanded from 55,000 to 64,900. This data isn't broken down by function. So keep in mind as highlighted above in respect of Google, that many of the jobs in high tech firms may not be science/ technology positions.

The genesis of the current strategy dates from 2004 when the Enterprise Strategy Group proposed the goal in its 'Ahead of the Curve' [pdf] report of:

  • "Building technological and applied research and development (R&D) capability, to support the development of high-value products and services."

The report said:

Investment in basic research is essential to further scientific advancement through new discovery as well as to enhance the country’s ability to absorb new technological developments from elsewhere. In particular, these investments will help to produce the skilled people necessary to build product development capacity in the enterprise base.

'Close-to-market’ and applied research capabilities must also be promoted, to facilitate greater synergy between those who generate knowledge and those who transform it into saleable products and services.As a small country, Ireland has limited resources and must therefore be selective and specific around the areas in which it chooses to focus and invest."

Ireland is mainly an entrepôt location for American firms, attracted by a favourable tax regime coupled with access to European markets and the flexibility of filling jobs where locals lack skills, with young staff covering a multiplicity of European languages, who would also have English as a second language.

Education of course is a factor as we're not in the textile trade competing with Bangladesh but few firms are in Ireland to hire senior researchers. They can hire good Irish researchers, for their units elsewhere. Up to 75% of Google's jobs in Dublin may be held by overseas nationals.

The indigenous sector is small and without American investment, Ireland would be closer to Belgrade than Berlin; Ireland currently has the same per capita consumption level as Italy's.

Only 7% of SMEs export and most employees in the domestic economy are working in traditional sectors; as was highlighted above, entrepreneurship is low and the number of firms per 1,000 population at 20, is half the European average. Local firms account for about 10% of tradeable exports and that level would only rise to 20% if tax-related impacts were discounted from exports by foreign firms.

Meanwhile, the Irish apprenticeship system for young people is the worst in Western Europe:

Burton pushes EU Youth Guarantee; Irish apprenticeship system a shambles

Ireland's headline R&D spending is at 2% of GNP (gross national product; until recently, GNP was a more reliable metric than GDP). In 2012, research and development expenditure represented 3.6 % of Finland's gross domestic product (GDP) and that of public research funding was around 1%. Ireland's public R&D is about 0.7% compared with a EU28 average of 0.8%.

Given the structure of the economy dominated by foreign firms, it's foolish to aspire to Finnish ratios.

Basic research

Basic or blue-sky research which may never have a commercial application but could have societal benefits is important but how much can Ireland afford?

Defence and NASA spending on the Apollo moon mission were key factors in the development of Silicon Valley. Federal dollars were also spent on health research.

By 1978, federal and non-federal spending (mainly business) were level for the first time since 1945 at 1.06% of GDP each. The federal level is now at about one-third.

Four-fifths of the world's R&D is concentrated in just 10 countries and the US National Science Foundation says that US R&D expenditures are currently 40% greater than the total for all of the EU27 countries together while the pace of real annual growth over the past 10 years in China remains exceptionally high at just above 19%.

Dick Ahlstrom, The Irish Times science editor, recently wrote that Ireland needs a new science strategy and said in a piece that has a touch of religious zeal:

It is a commonplace in military history, where generals ask for much but soldiers deliver more to win the day against the odds, where wars are won or lost on a soldier’s belief in the mission. John F Kennedy inspired a generation of engineers and scientists when he placed before them the possibility of landing a human on the moon inside a decade. Complete madness no doubt, but it was done because people were given a goal beyond their grasp but they still accomplished the challenge."

Ahlstrom added that Seán Sherlock said work will resume by the end of the summer on a new strategy. "It is vital that this document does not simply become a recitation of existing short-term goals and ambitions but includes some clear sense of vision of where we are going with the research investment and where we eventually want to be. This means thinking a decade at least or better two decades down the road in order for it to help the research community deliver on its potential."

A 20-year vision from Mr Sherlock? There isn't even a credible jobs strategy for 5 years.

In November 2010, the Irish Government established a new taskforce under the chairmanship of Jim O'Hara, a former general manager of Intel Ireland, a unit of the US computer chip giant.

The group was asked to identify areas of research that would yield the best return for taxpayers‟ investment in research and, ultimately, to create high-quality jobs. Fourteen specific areas of "greatest opportunity" were proposed in March 2012.

O'Hara said:

The 14 areas we recommend stand up well in terms of the potential for economic impact including jobs. However, it is as much about how money gets spent in this area. We recommend a stage-gate process that will require researchers to demonstrate the economic relevance of their work as well as its scientific excellence if they are to get funding under the priority areas. Our other recommendations will also help to move to a more needs driven approach.”

While basic or curiosity research is important, Irish and European science lobbies are pressurising governments to give funding priority to it even though innovation does not necessarily follow from science.

However, the counter  argument is that US basic research has focused on specific missions: for example landing a man on the moon or in respect of health funding, on remedies for particular diseases. The Department of Energy funded research on fracking over 30 years.

Louis Pasteur (1822-1895), one of Europe's greatest scientists, had the goal of improving public health.

A study published last year said that most innovation arises from the use of existing knowledge and the most successful commercial innovators are not the pioneers. Think of Apple, Microsoft, Google, Samsung and Facebook.

Advances in technology are not necessarily science-driven and the airplane and transistor are cited as technologies where the science followed. Historically, science does not breed technology. It's usually the reverse.

Science Foundation Ireland could meet its goal of Ireland being a big name in science by 2020 but the impact on innovation could be very limited.

The challenges

McKinsey Global Institute said a 2010 report [pdf]: "While many policy makers see innovative technologies as the answer to the challenge of job creation, our analysis indicates that governments are likely to be disappointed in such hopes.”

Europe would love to have consumer electronics champions but with the demise of Nokia it has none that are significant employers.

According to the Joint Research Centre (JRC) of the European Commission, over 50% of all US firms in the Top 1,000 global R&D spenders in 2009 were founded after 1975, in Europe the figure was 18% and in Japan below 2%.

Ireland aspires to be a knowledge economy but this goal is likely to remain elusive.

The common conservative mindset reflected in the lack of interest in reform endures, despite a brutal recession for a minority of the population.

Process is boring; accountability is patchy; there is an addiction to spin and neither ministers nor senior civil servants appear to have the managerial competence or interest to push through for example changes in costly but poorly structured job activation programs or even devise a credible job strategy that would require an unvarnished assessment of the challenges.

The Sustainable Governance Indicators (SGI) 2011 study of 31 OECD countries by the Bertelsmann Foundation, shows, Sweden, Norway, Finland, New Zealand and Denmark heading the Status Index, which examines states’ reform needs in terms of the quality of democracy and performance in policy fields.

Ireland is a mid-point, 22nd for education and 28th for policy implementation.

The OECD in a tribute to the Finnish school system said [pdf];

No other country has so little variation in outcomes between schools, and the gap within schools between the top and bottom-achieving students is extraordinarily modest as well...it is hard to imagine how an information and knowledge-based economy could have grown up so quickly in the 1990s if the Finnish schools hadn’t already been producing graduates with the kind of flexibility and openness to innovation that industry was demanding. The development of these kinds of qualities is at least as much a function of the culture and climate of schools as of the formal curriculum."

So success in the 14 priority areas identified by Jim O'Hara' taskforce, requires a lot more than ministerial spin or public money.

Besides, the obsession with high tech when Ireland had 478,000 on the Live Register or in publicly funded job activation programs, in August, is foolish.

A priority in food could be worthwhile but then there are more Irish farmers over 80 than under 35!

Irish farmers hugely dependent on EU welfare after 40 years

Irish Science Policy: 2020 replaces 2013 as target to be 'best country in...world for scientific research' - - including access to paper that was presented at an economics conference in October 2012.

Irish Economy: Innovation, a failed enterprise policy and inconvenient facts for 2013

Irish Economy: Sustainable growth dependent on foreign firms since 1990; Now FDI has peaked

Nanotechnology discovery in UK...far from plain sailing
Last June scientists at the University of Manchester reported on a breakthrough in research on the magnetic properties of a material called graphene.

Russian-born scientists Andre Geim and Kostya Novoselov had isolated the one atom thick carbon layer at Manchester in 2004 and they shared a Nobel Prize win in 2010.

Prof Geim wrote in the FT on patents in 2012:

"When in 2004 my University of Manchester colleagues and I discovered graphene, a material one carbon atom thick with extraordinary industrial potential, I set about trying to patent it.

When I approached a representative of a multinational electronics company, I received a put-down that I recall whenever I am asked about patents. “If after 10 years we find graphene is really as good as it promises, we will put a hundred patent lawyers on it to write a hundred patents a day, and you will spend the rest of your life, and the gross domestic product of your little island, suing us.”

As an executive from his main competitor told me this year: “He did not need to be rude but unfortunately this is how it works.” By then I knew enough about patents to appreciate the original advice. While I was outraged by its tone, it did save the taxpayer a lot of money in costs.

One forecast says the graphene industry will be worth £300bn by 2022. It’s as hard as diamond but stretches like rubber.

Among the 200 most prolific nanotechnology patent owners, UK has 4 compared with 63 in the US, 54 in China, 21 in South Korea and 23 in Japan. The FT says this disparity between academic output and patents is known as “the European Paradox”. The continent is good at producing cutting-edge scientific research, but is not so good at turning it into marketable products.

Clusters and  spinouts
The indigenous Irish tech sector has 10,000 jobs in a workforce of 2.1m, working in over 700 firms, with average jobs at 14 per firm. Almost 40% of firms have between 1 and 10 jobs.

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.

After the acquisition of Autonomy by Hewlett-Packard in 2011, only two high tech firms remained in the FTSE 100 -- the ranking of the biggest firms on the London Stock Exchange.

ARM plc is the most successful company to develop in the cluster and is the UK's biggest high tech firm. In 1990, Advanced RISC Machines (ARM) spun out of Acorn and Apple's collaboration efforts with a charter to create a new microprocessor standard.

ARM has only 2,400 staff as it licenses its technology to overseas producers that make chips that are used in more than 95% of the world's mobile phones.

Only about 1,000 of ARM's payroll are based in the UK.

In contrast, Intel had 105,000 employees at the end of 2012 with 49,700 in the US; 8,800 in Malaysia; 8,400 in China; 7,000 in Israel; 4,100 in India and 2,600 in Ireland and Costa Rica.

Spinouts

The Organisation for Economic Cooperation and Development (OECD) says the international evidence of success in commercialising university research is patchy. Simply, meeting market needs is incidental.

In the US licensing fees amount to 4% of third level research spending; it is over 1% in Europe and less than €1m annually in Ireland,

About 30 spinout companies emerge from research in Ireland annually with early stage employment of 3-4 people on average.

The Irish Government says survival is in the range of 80 to 90%, even up to a period of 10 years.

Apart from the odd spinout with potential that is acquired by an overseas firm, the survival rate suggests firms remain at a micro level.

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