Innovation
Irish Innovation: Israel as Startup Nation, why not Ireland? - Part 2
By Michael Hennigan, Finfacts founder and editor
Mar 17, 2014 - 7:12 AM

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The property bubble masked the poor level of Irish entrepreneurship. As more than €60bn was invested by the Irish in overseas commercial property in 2001-2007, less than €1bn was invested via venture capital in Irish business. Source: The Guardian. Enlarge image

Irish Innovation: Israel, known as the Startup Nation, is the only overseas model of the successful cloning of Silicon Valley in Northern California. It has some common features with Ireland - - significant diasporas in the United States and significant investment from US firms -- but also key differences.

In the book 'Startup Nation' (2009), authors Dan Senor and Saul Singer wrote that each year as Europe created 700 to 800 high-tech startups, Israel added 500. After the United States, Israel is by far the second largest generator of tech startups.

The authors noted that per-capita venture capital investments in Israel in 2008 were 2.5 times greater than in the US, more than 30 times greater than in Europe and 80 times greater than in China.

Finfacts 2014: Venture Capital 2013: US financing at $33bn; Europe $7.1bn; China $3.5bn; Israel $2.3bn

Israel is now the most likely place for people to start a tech firm: the country has an estimated 375 startups per million inhabitants versus nearly 190 in America.

Up to 220 R&D centres of multinational corporations employ over 50,000 Israelis.

Israel's research base dates back 60 years as it developed in a semi-arid region while also having to give attention to defence needs. In the early 1990s after the collapse of the Soviet Union, it benefited from an influx of 1m mainly educated immigrants.

Prof Daniel Isenberg of Babson College Business School has written that "developments in the 1990s were only the fruits of a process that had been fomenting for four decades. The bottom line is that it takes an entire entrepreneurship ecosystem to foment an entrepreneurial revolution."

IDA Ireland, the public inward investment agency, said in 2013 that only 28% of its client companies do any research and development (R&D).

Forfás, the Irish government's policy advisory agency, said in a report in 2004 that analysis of the profile of Irish-based companies engaged in patenting showed that none of the top 50 exporters were among the top ten foreign-owned patenting companies, and leading computer manufacturers were entirely absent. Only one of the top 15 pharmaceutical exporters (Abbot) appeared on the list.

A decade later, the situation hasn't changed: software development tends to be localisation and Apple and Google's combined payroll of over 5,000 is mainly involved in general and sales administration.

Only about half of the total employment of 87,000 in ICT (information and communication technologies) firms in Ireland is in so-called 'techie' or scientific positions.

Foreign firms account for almost three-quarters of business R&D and the indigenous sector remains small.

Full-time jobs in services and manufacturing added by Irish firms in information and communications technology (ICT) in the period 2007-2012 totalled 1,600 [pdf].

Full-time jobs in Irish State-agency assisted foreign-owned + indigenous firms 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.

Richard Bruton, minister for jobs, enterprise and innovation, said in 2012: "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."

In September 2009, Brian Cowen, then 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.

In March 2010, the Innovation Taskforce report [pdf], of a 28-strong group of mainly insiders, to meet Brain Cowen's delusional aspiration, dreamt of up to 215,000 science and technology jobs being added in a decade to vault over the original Silicon Valley to become the world's top tech cluster - - at end 2013, IDA Ireland client companies employed 161,000 - - 55 years after TK Whitaker's seminal 'Economic Development' report.

The flaws in the aspiration to become a European Silicon Valley or the location of an indigenous future Google or Microsoft were and are:

  • Typically, companies need to build up business experience and projects of reference in their domestic markets before credibly seeking to capture export markets. However as the public sector is usually an important source of business for ICT companies, the dead Celtic Tiger had no prospect of creating a domestic market for Irish tech startups;
  • Any startup seen by international suitors as having technology with potential would be acquired before there would be any scaling up that could benefit the Irish taxpayer. If the founders would be reluctant to sell, venture capital investors would certainly not reject an exit with having achieved a good return;
  • There have been a number of such cases in recent years and IPOs (initial public offerings) on the contracting Irish Stock Exchange are rare.

Back on Planet Earth, the oldest tech cluster in Europe is located in the area around Cambridge University in the UK, known as Silicon Fen.

After just over 50 years there are about 50,000 jobs in 1,400 high-tech firms in the cluster:

  • 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 employed more than 200 people.

The biggest success of the cluster is ARM Holdings, a chip designer whose technology has been in 50bn products shipped, from phones and tablets to smart sensors and servers.

ARM is the UK's biggest high tech success but its global employment at end 2013 was just over 2,800.

In a 2003 paper, 'Public Policy, Locational Choice and the Innovation Capability of High-tech Firms: A Comparison Between Israel and Ireland,' [Word doc] the authors Amnon Frenke, Daniel Shefer and Stephen Roper summarise the contrasting paths taken by Ireland and Israel:

In Ireland, low corporation tax rates and an openness to large-scale inward investment have been accompanied by relatively low levels of support for business R&D. In Israel by contrast, a strategic desire to strengthen the countries indigenous technological capability, and a geo-political situation which until recently discouraged large-scale foreign direct investment, has been accompanied by higher levels of automatic R&D grants. Comparative analysis of the characteristics of hi-tech plants in Israel and Ireland highlights the impact of these contrasting policy regimes. Although high-tech plants in both countries are relatively young, mostly established since the second half of the eighties, and rely to a very considerable extent on external markets for exporting their products there are few other similarities. High-tech plants in Ireland are large and established mostly by foreign investors. They concentrate primarily on production and undertake relatively little in-plant R&D. By comparison, Israeli high-tech plants tend to be smaller, have much higher levels of R&D activity, and were mostly established by local investors. These contrasts are consistent with the orientation of the policy regimes of the two countries. In Ireland, capital grants and the availability of low corporate tax rates seem to have attracted plants in the exploitation phase of the international electronics value-chain. In Israel, high levels of guaranteed support for R&D have attracted investment in more research-driven sectors where R&D expenditure is highest."

Irish business demography

The Central Statistics Office (CSO) reported last June that the number of Irish enterprises fell 12.6% in 2008-2011 to 189,000, employing 1.22m in the business economy.

The CSO said that over 30% of all enterprises that were active during 2011 began trading in the period 2006 – 2011 inclusive. These enterprises accounted for nearly 10% of persons engaged in the private business economy in 2011. The one year survival rate (enterprises which have survived one year to reference year, e.g. enterprise was born in 2010 and was still in operation in 2011) for enterprises to 2011 had decreased since 2007, highlighting the difficulties of staying in business over the period. Of the 16,696 enterprises which were enterprise births in 2006, 10,188 or 61% had survived to reference year 2011.

The second highest rate of births was 10.62% in sector Information and Communication (1,068 enterprises) to total 10,300 with 67,300 employed at end 2011, covering foreign-owned and indigenous firms at 5.5% of the workforce sample.

The number of firm deaths in the category was 1,008 in 2010.

In Q4 2013 the CSO revised the Dec 2011 employment level to 78,000 and employment at end 2013 was down 700 to 82,500.

The revised 2011 category employment level amounted to 4.2% of total numbers at work.

Professional, scientific and technical activities had 115,000 employed at end 2013.

Importance of startups

The level of Irish entrepreneurship is poor, a reality that was masked during the property boom.

A report [pdf] for the Irish Government last January said that "the pipeline of new entrepreneurs starting up businesses is too small and has fallen in recent years. Too few people in Ireland are motivated by entrepreneurship to view it as a personal career option. The rate of those setting up new businesses is very low."

It added that the 2012 Global Entrepreneurship Monitor Report shows that the rate of early stage entrepreneurship in Ireland is 6.1%, compared to the OECD average at 8.2%. The rate of early stage entrepreneurs in the US (12.8%) is over twice that of Ireland and the rate in the UK is also considerably higher (9.0%). The rate of those aspiring to be entrepreneurs in Ireland is 8%, just over half of the OECD average of 14.4%. Less than half of people in Ireland perceive an entrepreneurial career to be attractive, at 45%, less than the OECD average of 56%. The perception of entrepreneurial opportunities within the next six months in Ireland, at 26%, is lower than the OECD average of 33%.

Beyond just high tech, US research shows that startups in genera are very important for the US economy.

Research by economists using Census Bureau data and at the Kauffman Foundation, America's leading entrepreneurship think-tank, shows that in most years over three decades all net new job creation has come from new businesses less than one year old.

New businesses created an average of 3m new jobs annually, while existing firms of any age, type or size, in aggregate, lost a net average of about 1m jobs each year, as some businesses fail and others become more efficient and/or are acquired. Were it not for new businesses, there would be no net new job creation in most years.

In 2010, 394,000 startups created 2.3m jobs while over the same period from March 2009 to March 2010, the net job creation from all US private sector firms was -1.8m jobs. Without the contribution of business startups, the net employment loss would have been substantially greater.

However, researchers say that US entrepreneurship has been declining in recent decades.

Source: Kauffman Foundation

A briefing note [pdf] says the US startup rate of firms has declined from as high as 12% to 13% (as a percentage of all firms) in the 1980s to 7% or 8% in recent years. The data also shows that there has been no discernible trend in the average size of a new firm falling from 7 to 8 per firm to 4 to 5 workers in the past decade.

A consequence of this drop in the pace of business startups is that the share of activity accounted for by young firms (defined here as firms aged five or less) has steadily declined over time. In addition, consistent with the patterns for startups, there has been acceleration in the decline of activity accounted for by young firms in recent years.

Figure 3 (above) shows the percent of young firms, their employment, and their job creation as a share of the total number of firms, economy-wide employment, and overall job creation.

From the early 1980s, the share of young firms has declined from close to 50% to less than 35% in 2010. This decline reflects both a long-run secular decline and accelerated decline in the recent recession. Figure 3 also shows an accompanying decline in the share of employment and share of job creation accounted for by young firms. The share of job creation from young firms has fallen from above 40% in the 1980s to around 30% in recent years. The share of employment accounted for by young firms has fallen from more than 20% in the 1980s to as low as 12% in 2010.

Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University, says as fewer jobs are being destroyed by the closure of existing businesses, fewer jobs are being created from the founding of new ones.

The US continues to have a startup culture that is unmatched elsewhere.

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 just 2%.

SEE Finfacts report:Nokia, Europe and Japan's old companies versus US young champions

US firms thus invest more in R&D than their competitors in Europe and Japan also on account of their youth and their smaller size.

Venture capital: Myth and reality

According to Kauffman Foundation less than 1% of US companies have raised capital from VCs, and the VC industry is contracting. But less venture capital does not mean less startup capital since non-VC sources of funding, such as angel capital, are growing.

A Kauffman study confirms a persistent pattern of inflated early returns in funds that may be used to raise subsequent funds and shows the poor historical performance of funds with more than $500m in committed capital.

The Irish Government has invested $300m in US venture capital (VC) funds in recent years and there has been mainly silence on the performances.

Besides, contrary to conventional wisdom, research suggests that about 75% of all venture-backed technology startups will fail.

In fact, failure rates are at historic highs, according to a study from the Harvard Business School. Researchers looked at data from 1990 to 2007, applying a broad definition of failure.

According to Shikhar Ghosh, a senior lecturer at the school, the ongoing study defined failure not only as declaring bankruptcy or going out of business -- but also not returning one dollar for every dollar invested.

Conclusion

I could politely say that it's foolish...but the more apt term is crazy, to put high tech and university research at the heart of public enterprise policy.

At the same time continuous innovation for firms is very important and it has been an important ingredient of the success of Germany's 'Mittelstand' - - small and medium size enterprises.

A key question to address is the poor performance of the indigenous sector in the past half century, despite the lowest corporate and social security taxes in Western Europe.

'Export Performance and Competitiveness of the Irish Economy,' Central Bank of Ireland Quarterly Bulletin 3 2005 - - According to the 2004 official report 'Ahead of the Curve', produced by the Enterprise Strategy Group: "Over the period 1990-2002, exports by agency-assisted indigenous enterprise grew in nominal terms at 5.5% per annum (versus 15.9% for foreign-owned companies). When inflation is taken into account, the real growth in both sales and exports was negligible."

While hourly pay is higher than the UK's, it is competitive with developed European countries.

By all means, push firms to move to the global technology frontier by mainly buying-in technology. However, focusing on fundamental innovation while being ignorant of the reasons for the low export intensity, is akin to putting a brass knocker on a barn door.

Source: Forfás

The Department of Jobs, Enterprise, and Innovation told Finfacts in 2012 that Enterprise Ireland it does not commission longitudinal studies of client firms that would track them over a number of years - - it's strange that the 'experts' wouldn't be keen on learning from actual real-world examples of success and failure over several years.

The Irish Government has spent an inflation-adjusted €24bn on its science policy in a decade: science/engineering higher education; business grants and research institutes.

The failure to meet the 2006 target that Ireland would be recognised as a "world-class knowledge economy" by 2013 was replaced with the aspiration "in which Ireland in 2020 is the best country in the world for scientific research excellence and impact."

The common use of the "world-class" tag in Ireland has made it a bullshit term, which was vividly illustrated by an Irish Times report on Oct 10, 2010 on a rebranding of the discredited public training agency, titled: "Fás board to agree plan for new 'world-class' skills body" - - bog-standard would have been an improvement!

According to the Government about 30 spinout companies from universities were established annually in recent years with 3-4 employees at early stage and annual university licensing income is less than €1m.

Commercialisation is incidental to university research and spinouts rarely have significant success.

Technology licensing income is generally at low single digits as a percentage of research spending even for the world's top universities.

Most US universities lose money on their transfer technology activities.

According to a recent Brookings Institution paper, in 2012, a year very much in line with the ten-year trends in this sector, the top 5% of earners (8 universities) took 50% of the total licensing income of the university system; and the top 10% (16 universities) took 70%, nearly three-quarters of the system’s income.

Entrepreneurs and private investors can dream but it gets a bit dodgy when ministers have no interest in evidence

The Department of Jobs, Enterprise and Innovation told Finfacts last December:

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. In recent years we have improved our ratings for basic research to the point where we are now very competitive internationally - the challenge now is to achieve greater returns in terms of commercial outcomes and jobs from this research."

In several of the recent collaboration projects with private business, the taxpayer is taking most of the cost -- the costs used in the split are not on a commercial basis, excluding a charge of public facilities - - and how serious is a project where as many as 1) 30 or  2) 45 companies are involved, with different stakes and contributions? It implies that not one single company can either afford sole participation or has enough confidence in the research to merit the investment.

In a Sunday Independent interview published last February, Craig Barrett, ex-Intel CEO, was asked could Ireland attract the really valuable Google and Twitter type R&D and innovation functions as well as supplying hewers of wood and drawers of water?

"No," Barrett replied. "I think to a degree it's a matter of numbers. You can have an Intel invested here as a creator of jobs but it's primarily a manufacturing investment."

Those are good paying jobs and I think the Irish are very happy to have them and Intel is happy to be here. Intel also has engineering applications here with 300 employed in Shannon. But that's small compared to the engineering base it has in Santa Clara or Portland or Arizona, for example, and that's just a matter of numbers.

"The multinationals are going to go where the resources are. And the bulk of resources are not in Ireland because it's a small country of four or five million people. Look at it on the positive side, at least they're putting their HQs here."

Richard Bruton, as jobs minister, is the chief propagandist for the Government as all jobs announcements cross his desk and he attends many related photo opportunities. Bruton seldom says anything of consequence on policy while the enterprise agency chiefs rarely depart from a parroting of official positions.

The Government itself issued a medium term strategy for 2014-2020 last December but it was effectively an aspirational brochure.

Coupled with an Oireachtas (parliament) where members steer clear of issues like innovation that may show them to be out-of-their-depth, and cheerleading tech journalists, the cocktail inevitably results in a state of confused chassis.

So Mr Bruton could announce last month that 122 tech startups will create 1,850 jobs in 3 years - - without providing an iota of evidence for the forecast.

The OECD (Organisation for Economic Co-operation and Development) said in its Economic Survey of Ireland in September 2013:

  • "Reflecting significant uncertainties about the effectiveness of various innovation policy tools, independently and regularly evaluate all actions in this area, strengthen programmes with proven higher returns, and wind down the others. To promote effective evaluation, ensure all innovation and enterprise supports have sunset clauses;
  • The number of programmes and agencies multiplied during the period of booming growth. There are now over 170 separate budget lines, sometimes for very small amounts of money, and 11 major funding agencies involved in disbursing the Science Budget, although it is small by international standards. This fragmentation raises overheads, risks duplication and hampers resource reallocation. Gains would be achieved by consolidating funding into a drastically smaller number of agencies, with one group dealing with science and basic research, and another with applied research and innovation. This should be coupled with a high-level co-ordination committee to prevent gaps or duplication."

Six months later, wonder how much attention is being given to this unsexy matter when there is so much more eye-catching propaganda to process?

Irish Innovation: Startup fever and Ireland's dumb enterprise policy - Part 1

How official spin and distortion works - in short-term

Irish Innovation: Evidence of science policy failure mounts - - including US and UK research on high growth firms

Irish Medium-Term Economic Strategy 2014-2020: Innovation and entrepreneurs? - - Part 3

Davos 2014: Copying Silicon Valley no jobs engine solution for Europe

Irish Innovation: US research debunks policy makers' myths in Ireland

Irish Innovation: Craig Barrett says triple R&D spending; Public welfare?


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