Innovation
Handbook of Service Innovation: Ireland moving up the value chain?
By Michael Hennigan, Finfacts founder and editor
May 26, 2015 - 9:12 AM

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Earlier this year Springer, the German publishing group, published The Handbook of Service Innovation, an 858-page compendium of "research contributions, practical examples and implementations, and select cases across several growth service industries including some failed service innovation attempts." It includes an examination of developments in Ireland where economists in the last decade lauded the switch from manufacturing to services as evidence of "moving up the value chain."

The Handbook says: "With services creating most of the wealth and employment in most emergent and advanced economies, fostering and managing service innovation exhibits unique challenges. This is particularly true if productivity improvement in services is to keep up with the long-lasting productivity improvement in manufacturing. These challenges pose new and interesting phenomena and call for new perspectives to be brought into focus. Service innovation is not limited to the service innovative process itself, but also involves our subtle responses and unspoken practices that accommodate, facilitate, and accelerate it."

While services have a dominant role in modern advances economies and manufacturing sectors have shrunk, the OECD's Science, Technology and R&D Statistics show that manufacturers are responsible for about 70% of all commercial R&D in the United States compared with a range of 85% to 90% in Germany, Japan, Korea, and China. However, in the UK service companies account for three-fifths of all business R&D spending.

A 2012 Brookings paper said that US "domestic company R&D spending is 3.6% of domestic manufacturing sales, compared to 2.4% of domestic nonmanufacturing sales. Among manufacturing industries, R&D intensity is highest in the computer and electronics industries and pharmaceuticals. It also exceeds the non-manufacturing average in machinery, aerospace, motor vehicles/trailers/parts, and electrical equipment/appliances/components but is below the non-manufacturing average in all other manufacturing industries. Engineers are an essential input into technological innovation. In 2010, manufacturing employed 35.2% of all engineers, compared with only 8.9% of all workers."

Organisation for Economic Co-operation and Development data also show the importance of services for manufacturing with service-sector value added as a percentage of total value added in manufactured exports (2009) ranging from 38% in Italy, 37% in France and Germany and 25% in the US and China.

Ireland

Seamus Grimes, emeritus professor of geography, at the Whitaker Institute for Innovation and Societal Change, National University of Ireland Galway and a frequent visitor to East China Normal University, Shanghai, from where he tracks China's indigenous sectors, and Dr. Patrick Collins, an economic geographer who has published in areas of regional development, the Information Society, and the impact of telecommunications provision, in their paper "Innovative Strategies in Servicing International Markets from Ireland" they explore the innovative evolution of Ireland's internationally traded services sector in the context of the increased significance of servicing international markets by foreign companies in Ireland.

"Grimes and Collins highlight in this chapter how innovative tax policies, together with innovative managerial practices such as transfer pricing, have enabled multinational subsidiaries in Ireland to evolve their operation more globally, as well as remain profitable in a relatively high-cost location."

The authors make use of company case studies of major internationally traded services (ITS) investments in Ireland to identify some of the innovative strategies being adopted by subsidiaries as they seek to remain competitive both within Ireland and also within their corporations.

The paper concludes:

The growth in Ireland's internationally traded services sector in software, business services, financial and insurance services and in royalty and license fees reflects considerable innovation by multinational subsidiaries in Ireland involved in servicing international markets. Over time the management of multinational subsidiaries in Ireland have evolved their range of functions, through offshoring and outsourcing less sophisticated activities to more competitive locations in the emerging regions and replacing them with more sophisticated functions. Competition from emerging regions have forced Irish subsidiaries to develop more innovative models of servicing international markets in order to ensure the sustainability of their investments. These more innovative servicing models are also responding to the need for multinationals to become more global in their operations, with more internationalised production networks giving rise to the need for the internationalisation of servicing.

The development of more internationalised servicing models by multinational companies in Ireland has been strongly supported by an innovative policy environment by the Irish state and its development agencies. A wide range of policies have been employed to ensure that Ireland continues to be a profitable location for globalising business operations during the current period of economic crisis and increased global competition for investment. Accepting the reality that Ireland's competitiveness as a location for inward investment is no longer primarily related to manufacturing policy development has been particularly focused on persuading international investors of Ireland's attractiveness as an emerging market servicing hub."

The Finfacts view is that the Irish economists' mantra of "moving up the value chain" never lived up to the expectations:

  • Government data for state enterprise assisted foreign-owned firms show that services jobs rose from 62,000 in 2004 to 80,000 in 2013 while Manufacturing and Other Industry Jobs fell from 106,000 to 92,000. There was an overall 12% growth in the size of the workforce in the period;
  • International Data Corporation (IDC) estimated in 2013 for Forfás / EGFSN (Expert Group for Future Skills Needs) that there were 46,000 tech professionals working in the broad ICT (information, communications, telecoms) sector in 2013 — almost half the sector total and 2% of the overall workforce — and there were 25,000 in the rest of the economy. This reflects the fact that jobs in the services operations of companies such as Apple and Google are mainly in administration;
  • US FDI data for Ireland is flawed by tax avoidance: US study on FDI into Ireland flawed; Ambassador says "incredible"
  • According to public data, foreign-owned firms accounted for 66.6% of total R&D expenditure in 2012. Ireland's enterprise R&D expenditure is dominated by a relatively small number of firms. Around 300 firms account for almost 70% of total R&D expenditure in 2012; 13% of foreign-owned firms (107 firms), each spending over €2m, account for 88% of R&D spending in the foreign-owned sector in 2012. A large proportion of foreign-owned firms (54%) are not R&D active;
  • The Irish patent record is poor: here and here;
  • The inclusion of mainly US companies that become Irish for tax purposes massively distorts innovation indicators;
  • Both merchandise and services export data are massively distorted. The big exporters are not innovators in Ireland: see here - Irish Export Performance: Myths and reality - Ireland is a poor exporter

UK and Irish business R&D heavily reliant on foreign-owned firms — why business innovation is low in the UK and Ireland

Sales of Irish tech firms create 300 millionaires in 15 years and no scaleups

In summary, the growth in services did not result in a significant rise in what enterprise ministers used to call "high quality jobs"; foreign-owned firms availed of tax breaks but did not locate significant R&D projects in Ireland and with the indigenous exporting sector unable to grow rapidly, Ireland is as dependent on American foreign investment as it was two decades ago while the Chinese have yet to deliver: China-Ireland: Economic relationship on a slow burn


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