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Analysis/Comment Last Updated: Aug 23, 2010 - 8:24:15 PM


Irish Economy: Achieving economic success requires more than investing in creativity
By Michael Hennigan, Founder and Editor of Finfacts
Jun 5, 2009 - 6:16:58 AM

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The then Enterprise Minister Micheál Martin and Feargal Ó Móráin, Executive Director, Enterprise Ireland presenting Patricia Callan, Director of the Small Firms Association with an Innovation Voucher in July 2007. The marketing spiel was that Ireland as a nation showed itself to be innovative in 2007 when, as part of an innovation creation exercise, it became only the second country in the world to introduce Innovation Vouchers.

Last Monday, Ned Costello, chief executive of the Irish Universities Association, in an article in the Irish Times, titled Investing in creativity is way to achieve economic success, defended the €8.2 billion public spending programme, which has a goal, set in 2006, that Ireland will be recognised as a "world class knowledge economy" by 2013. The goal will not be met and the hired gun for a vested interest, spun a positive yarn, against a backdrop where the universities have not presented an objective assessment of the programme and an Oireachtas, which has been strikingly silent on the issue  - - either through non-interest, ignorance or both.

Critics do not argue with an objective that Ireland should have a research capability but the beneficiaries of the public funds as represented by Costello, serve what interest when they ignore the questions about a small economy with an over-reliance on university research and unimpressive targets as set out by Science Foundation Ireland?; the narrow focus on biotech and the high-tech sector; the inability of home-grown knowledge-based companies to achieve scalability; the failure of the Irish SME sector in general to develop an exporting capability; the lessons from the pathetic implementation of a broadband system compared with for example Denmark - - an example of an existing knowledge economy; the failure so far in developing R&D collaboration between Irish universities beyond a limited number with companies such as IBM.

During the Celtic Tiger period, the default mode for ministers was to brag about aspects of Ireland's success by conflating data on the US dominated foreign-owned sector with that of the much smaller indigenous sector.

Conceit is a dangerous affliction for policy makers and for example, claiming Ireland to be the be the biggest software exporter in the world, without having to give some credit to the giants of the US industry, is public relations spin, that can only have a limited shelf life.

In his article on investing in creativity as a way to achieve economic success, Ned Costello chief executive of the Irish Universities Association, a sectoral body representing seven universities, wrote about the growth of overall business R&D expenditure since 2001, but he did not address a pertinent issue - why the high hopes of the indigenous tech sector in the 1990s, have been unrealised. Last year, the biggest home-grown software company Iona Technologies was in a tailspin and had to be sold to a US company, of more recent vintage. Iona developed from research at Trinity College and €8.2 billion has been allocated in the National Development Plan 2007-2013 for science and technology, to both develop ventures like Iona and support multinationals.

While the universities have huge tax-funded resources currently available for research and the beneficiaries unsurprisingly are disinclined to bite the hands that feed them, the critics are not arguing that Ireland shouldn't have a research capability. However, massive public spending alone, will not achieve stated objectives.

More than 40 years ago, the British economists Charles Carter and Bruce Williams warned that “it is easy to impede [economic] growth by excessive research, by having too high a percentage of scientific manpower engaged in adding to the stock of knowledge and too small a percentage engaged in using it. This is the position in Britain today.”

Technological innovations, especially high-level ones, usually have limited economic or commercial importance unless complemented by lower-level innovations.

New know-how and products also require interconnected, non-technological innovations on a number of levels.

Techno-nationalists and techno-fetishists oversimplify innovation by equating it with discoveries announced in scientific journals and with patents for cutting-edge technologies developed in university or commercial research labs. Since they rarely distinguish between the different levels and kinds of know-how, they ignore the contributions of the other players—contributions that don’t generate publications or patents.

-  - Prof. Amar Bhidé: Where innovation creates value, from author of the The Venturesome Economy

In 2004, a survey of 184 high-technology businesses by UCC economists Declan Jordan and Eoin O'Leary, found that the greater the frequency of direct interaction with academics, the lower the probability of both product and process innovation. In 2007, they undertook a similar survey of nearly 200 small and medium enterprises in the southwest and southeast and found interaction with third-level institutes had no effect on innovation.

The authors say possible reasons for these disappointing results might be that academics are either not interested or not offered enough incentive to interact with business, and that businesses do not appreciate the level of expertise available in universities and institutes of technology.

It’s striking how little debate there has been in the Oireachtas or among academics, since 2006 on the goal for Ireland to be recognised as a “world-class knowledge economy,” by 2013.

Present at the March 11, 2009 launch of the UCD/TCD Innovation Alliance of Ireland's two biggest universities, were (l-r) Minister for Education & Science, Batt O'Keeffe, UCD President, Dr Hugh Brady, An Taoiseach, Brian Cowen, TCD Provost, Dr John Hegarty, Tánaiste, Mary Coughlan. Dr Hegarty said: “Both universities have established world standing and are national leaders in respect of PhD numbers and related outputs, such as patents and campus companies. Within this strategy our existing enterprise facilities will be part of an advanced wider national framework or ecosystem and our graduates will flourish within it. Combining that vision with our existing commitment, we know that something of true impact is possible in an international context. We believe there is an obligation to take a lead and to grow our existing strengths to create something that will add to the national capability at a time of need.”

The promoters talked of a potential to create 30,000 new jobs and some 300 new businesses within a decade. There was the vision of creating a new Nokia in Ireland and talk of an enterprise corridor linking the two universities - - traversing some of the most expensive real estate in Europe. It was reported that some in the merger discussions were anxious to claim that up to 75,000 jobs could be created before some wiser counsels intervened.

As for Nokia, the company originated far from a university lab and it sold toilet paper in Ireland, before mobile phones.

Last month, the government think-tank for 30 mainly developed countries, the OECD, published its December 2008 broadband rankings, which put this goal in context. Ireland fell one rank in the league table of broadband penetration for the 30 mainly developed member countries of the organisation. Ireland ranked 21st at the end of 2008 with 20.57 subscribers per 100 inhabitants compared with 37.2 in Denmark, the top ranked country. In the 2006 Programme for International Student Assessment (PISA), the triennial world-wide test of 15-year-old school children's scholastic performance in science, reading and mathematics, Finland and New Zealand were in the lead for science excellence with Ireland achieving a 19th ranking. In Japan, Finland and Austria, more than one in three students from disadvantaged backgrounds become top performers. In many other countries, by contrast, social barriers to excellence in education remain very high.

In April, the Economist Intelligence Unit published its Innovation Index, which analyses the innovation performance of 82 economies. It is based on countries’ innovation output, as measured by the number of patents granted by the patent offices of the US, European Union and Japan, and various innovation inputs, such as R&D as a percentage of GDP, the quality of local research and broadband penetration.

Japan, Switzerland and Finland are ranked 1st, 2nd and 3rd respectively. The US is in 4th place and Ireland gets a 19th rank. In the forecast to 2013, Ireland gets an overall 20th ranking and a top ranking for the expected innovation environment - - access to finance for firms, conditions for entrepreneurship and economic and political stability.

The US can afford longterm to invest in basic research, but is it the right strategy for a small country?

President Obama announced last month that he would seek to push total US R&D spending to 3 per cent of gross domestic product, up from the current 2.7 per cent. According to the US National Science Foundation, several states have R&D intensities of more than 4 per cent. Massachusetts, a state with an economy larger than Sweden's and approximately twice the size of Israel's, has reported an R&D intensity at or above 5 per cent since 2001

In 2006, Israel lead the world with spending of 4.7 per cent of its GDP on R&D, followed by Sweden (3.7 per cent), Japan (3.4 per cent), Finland (3.4 per cent), and South Korea (3.0 per cent in 2005). Ireland's percentage was 1.35 per cent in 2006. US firms dominate Ireland's manufacturing sector and most products are designed elsewhere. That situation will continue for the foreseeable future.

Ned Costello says the number of papers produced in the EU increased by 25 per cent since the 1990s, whereas Irish research output grew by 200 per cent. However, Professor Amar Bhidé of the Columbia Business School, argues in his recently published book The Venturesome Economy, that the development and effective use of innovations requires multilevel, multifaceted advances and he asks: Why has the US maintained (or possibly expanded) its productivity and per capita income lead while the EU and Japan have increased their shares of PhDs, scientific articles etc.?

Professor Danny Breznitz of the Georgia Tech, an innovation expert, who has advised the Irish government and State enterprise agencies, said in 2007 that Irish businesses lack the confidence to become world business leaders. He said Ireland was not creating enough new businesses, and when new businesses are set up, the financial supports are not there to keep them innovating. Professor Breznitz said he feared that Irish research is too narrowly focussed on biotech and the ICT (information and communications technology) sector. If a country wants sustained economic growth it has to focus on innovation, not only on the research side but on the commercialisation and the growth of productivity, he said.

Professor Bhidé said in his book, that the US venture capital-backed businesses he studied, use different people and procedures than the typical lab doing high-level research: they employ a much smaller proportion of PhDs in their technical staff, and their overall workforces contain a larger proportion of managers and sales and marketing staff - - people who are close to users.

The current Irish science and technology strategy, has a target for the number of Indigenous Companies with meaningful R&D activity (>€100,000) to increase from 462 in 2003 to 1,050; the number of Indigenous Companies performing significant R&D (>€2m) should rise from 21 to 100.

The huge ramp-up in spending will of course provide some impressive data on the numbers of researchers hired and PhDs produced by the universities, but Costello provides no useful data to track progress on meeting economic targets.

State agency Science Foundation Ireland, in its 2009-2013 strategy document Powering the Smart Economy, says that it will attempt to push patent filings up to 500, from 250, over the next five years. It also expects to see 1,000 invention disclosures, 40 money-earning technology licences and 30 start-ups based on local research discoveries.

30 start-ups in five years, with a typical survival rate of 20 per cent, will however power very little.

So, should another set of vested interests be allowed determine the agenda for the Irish economy?

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