Innovation
Irish Software Industry Report: Plea for public help but nobody wants to pay
By Michael Hennigan, Finfacts founder and editor
Jul 15, 2014 - 8:00 AM

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Irish Software Industry Report: On Monday a report on skills shortages and other challenges in the software sector coincided with the latest Budget 2015 submissions for government welfare from two business lobby groups.

A study of the Irish software industry [pdf] by Lero -­ the Irish Software Engineering Research Centre, the Kemmy Business School, University of Limerick, and the Centre for Science, Technology & Innovation Policy (CSTI), University of Cambridge, says the 108 Irish and foreign-owned firms who took part in the study grew their staff by 39%, while overseas firms increased their headcount by 23%.

“The Irish software industry has the potential to be one of the core engines of Irish economic growth, high income employment and exports but we need to address a number of critical issues including a skills shortage,” said Prof Brian Fitzgerald, chief scientist at Lero while Prof Helena Lenihan of the Kemmy Business School at the University of Limerick added that the shortage of suitably qualified Irish candidates has encouraged companies down the route of inward immigration.

“Currently somewhere between 40% and 55% of jobs are filled in this manner. These immigrants make a major contribution to Ireland but more attractive tax jurisdictions may attract them home. It would be a real missed opportunity if the success of the Irish software industry had more employment significance for Eastern Europe than for Ireland,” she said.

The Irish Software Association told Finfacts last month that there are about 10,000 employed in indigenous high tech firms and while the application of technology and continuous innovation are crucial for all sectors of the economy - - Starbucks did not evolve from a laboratory- - we do not accept Prof Fitzgerald's argument that the software industry has the potential to be one of the core engines of Irish economic growth.

Almost two-thirds of the 108-firm sample are Irish-owned firms with 5 or less employees while half the foreign-owned firms have 33 or less employees.

The tech sector is highly subsidised in Ireland with the national science budget spending in a decade at an inflation-adjusted €24bn; Enterprise Ireland's cost per job is €13,000 and there are a raft of incentives with very low social security taxes; the Government provides 40% of venture capital funding.

The cost of launching a tech startup has fallen significantly in recent times triggering more entries and an estimated failure rate in the US of up to 90%.

Of course a micro firm would struggle to attract staff and develop overseas business.

Another Reality Check is that most surviving tech startups remain with less than 10 employees.

Bart Clarysse, professor of entrepreneurship, at Imperial College London Business School, in a public lecture in February 2009, exploded the myths surrounding the economic importance of high-technology startups to the Europe.

"People think of the big names like Microsoft, Apple, HP, Intel and Xerox as once being new tech-startups," said Prof 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 startups tend to grow slowly, have a poor survival rate and contribute little to the wider economy in economic terms. Compared to the US, European startup 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.

Increasingly the exit for venture capital is a sale to a big company before the taxpayer gets a return.

The huge flaw in the Innovation Taskforce report of 2010, which said that up to 215,000 science and technology jobs could be added in the Irish economy in a decade, was the absence of a local market for young firms, in particular when the IT sector's biggest customer, the public sector, remains cash-strapped - - this  makes developing export markets a bigger challenge.

International Data Corporation (IDC) estimated in 2013 that there were 46,000 tech professionals working in the broad ICT sector [pdf] - - 2% of the workforce- - and 25,000 in the rest of the economy.

There should be attention to meeting broad demand in the educational system - - as there should be with the poorly managed apprenticeship system and other training needs across the economy.

Let us also keep in mind that neither the foreign-owned or indigenous sector do research in Ireland that merits much patenting.

In 2013 Irish resident patent applications to the European Patent Office (EPO), which provides protection in 38 states, were at 548 down from 593 in 2012 and 712 in 2008.

The ratio per million inhabitants of EPO applications in 2013 was 115 in Ireland; the EU28 average was 129; the leaders were Switzerland (non-EU) 832; Sweden 402; Finland 360; Denmark 347; Netherlands 347 and Germany 328.

Patent Cooperation Treaty (PCT: 148 countries in 2013) patent applications were at 435 in 2013, compared with 390 in 2012 and 481 in 2008 Skype was the top PCT filer in 2012 and 3 universities were among the top 9 filers from Ireland – no significant exporter was among them.

Who should pay?

Also on Monday the Chambers Ireland and the Small Firms Association lobby groups called for cuts in business taxes to boost job creation.

With the lowest corporate and social security taxes in Western Europe and no obligation to provide an occupational pension, why has the performance of the indigenous sector been dismal for decades?

In 2011 the Government introduced a VAT rate of 9% for tourism and restaurant services and a lower employer PRSI (pay-related social insurance) rate of 4.25% for workers earning up to €356 per week.

The capital gains tax (CGT) had been reduced from 40% to 20% in the late 1990s and it rose to 33% during the recession.

The SFA wants to have a 10% CGT rate for entrepreneurs and AJ Noonan, the SFA chairman, " is calling for a 20% rate of CGT across the board, which is a critical driver of growth. History has shown that a lower rate substantially boosts the overall tax take, so the Exchequer will also benefit substantially."

This is a repeat of the dodgy assertion that was often made during the bubble -- let's have annual credit growth of 30% and it may well work again!

Both Chambers Ireland and the SFA want the return to the 8.5% PRSI rate in 2014, reversed and the former wants to "give certainty on the 9% VAT rate in the hospitality sector which supports the national hospitality and tourism industries."  

In addition, Chambers Ireland wants the 80% windfall tax on rezoned land axed with any gains falling under CGT tax rules. "This will facilitate much needed residential development in areas where there is pent up demand and stimulate the construction sector."

There is no call for reform of the corrupt land rezoning system that is a huge stealth tax and makes land artificially scarce in a country that is 4% urbanised

Ibec has the same agenda of lower income taxes as well with a big rise in education and capital spending - - that could be off-balance sheet.

So the hands are out for help but somebody else must pay -- or maybe not because like the good old times, it could all be self financing. 


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