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News : Innovation Last Updated: Aug 19, 2013 - 7:11 AM

Irish Economy: Innovation, a failed enterprise policy and inconvenient facts for 2013
By Michael Hennigan, Finfacts founder and editor
Dec 20, 2012 - 6:09 AM

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Dr Bryan Roche (right), CEO, Raise Your IQ (NUI Maynooth), with Seán Sherlock, minister of state for research and innovation, and Deirdre Glenn, Enterprise Ireland director of manufacturing, engineering and energy commercialisation, at the Big Ideas Showcase in Dublin, November 28, 2012. Dr. Roche has developed an online training system based on relational frame training "that is proven to raise children's IQ." Can science be that certain? Credit: Gary O' Neill

Irish Economy & Innovation: 2013 is close at hand and it's hardly a 'man bites dog' story that the 2006 flagship enterprise policy target to be recognised as a 'world class knowledge economy' by next year has been already buried. The mainstream media and most tech journalists have acquiesced in the face of inconvenient facts and there hasn't been a whimper from the Oireachtas (parliament) to challenge the vested interests in both the public and private sectors.

Update Aug 2013: Irish Innovation: Evidence of science policy failure mounts

This is like another sequel to an old movie but it's too early for a version of 'The Last Remake of Beau Geste' (1977). Some of the current cast have changed but many of them also had bought the tale that the free lunch had been invented during the property bubble. The continuing absence of a media with a strong interest in forensic policy analyses - - and a broadcast media with journalists in command of relevant facts to zap ministerial waffle -- coupled with the prevalence of parish-pump politicians out of their depth, ensures little innovation in the script despite the economic crash.

Research separately done in the US and the UK in recent years shows that high growth firms are not typically in high tech. Besides, contrary to conventional wisdom, over the past decade or so in the US, the highest rate of entrepreneurial activity belongs to the 55-64 age group. The 20-34 age bracket, meanwhile, which is usually associated with big tech names such as Facebook and Google, has the lowest rate.

The typical US high tech firm founder is 39!

In September 2010, Batt O'Keeffe, then enterprise minister, announced that he would appoint the fourth innovation-related taskforce in as many years to advise on public funding research priorities. It was a tacit admission of failure in commercialising scientific research.

In May 2010, O'Keefe said he would "lead the drive" to create 117,000 net new Irish jobs in innovation over the following 10 years by implementing the March 2010 report of the Innovation Taskforce -  - it had imagined that Ireland could add in the range,117,000 - 235,000 STEM (science, technology, engineering, maths) jobs over a decade to vault over Silicon Valley in Northern California to become the world's premier high tech cluster in terms of total STEM jobs.

This was leprechaunic fantasy on a grand scale in a country with a tiny high tech market; constrained public procurement and foreign firms responsible for 90% of headline tradeable exports.

The O'Keefe taskforce reported last March and recommended 14 research priorities with an emphasis on commercialisation.

Since then, The Irish Times in particular has given extensive coverage to the issue and Dick Ahlstrom, the science editor, via editorials and platforms for academics seeking continuing public funding of basic research, has adopted a campaigning role, with no space for dissent. I emailed him with some information following the presentation of a paper on the issue of science policy at an economics conference in Galway last October. He did not reply. Apparently, inconvenient facts are not welcome.

Finfacts was the first media outlet to report the inconvenient fact that applications at the Irish Patents Office in 2011 had fallen to a 30-year low! 

Ahlstrom's most recent contribution was on December 10: 'State bent on deforming science foundation.'

My position is that 1) commercialisation of university research has never been the genesis of a jobs engine anywhere 2) There should be public funding of research and the output of STEM (science, technology, engineering, maths) graduates to meet market demand. However, the country cannot afford fantasies such as creating a European Silicon Valley or becoming a world leader in science.

Last month Steven J. Markovich, an American writer on science wrote: "societal gains from basic research breakthroughs can have broad commercial applications down the road. For instance, basic research for the laser, a technology involved in some 55,000 U.S. patents, was funded by the US Department of Defense. Government is heavily involved in basic research because it is better able to assume the risks and long investment periods associated with basic research–and ultimately more apt to reap the benefits. Basic research results are non-patentable, so while one firm cannot easily capture the benefits of basic research, the government will benefit if new insights ripple across the economy."

However, Ireland is not the United States and over the past half century, we have been unable to develop an indigenous sector that would sustain an advanced country standard of living. 

Even if annual Irish exports were cut by 40% to discount for the tax strategies of American multinationals, indigenous exporting firms, tourism and transport would only account for one fifth of the resultant total.

Despite the spin, only a third of foreign firms do research and development (R&D) in Ireland and some of those who do focus on localising their products by hiring Eastern Europeans. As for indigenous firms, a patent expert recently said that firms have been using the 25% R&D tax credit as a way of getting 'free money' without any real attempt to protect the R&D results through patenting or other IP (intellectual property) strategies.

The inconvenient hard facts on hard science are: 1) applications at the Irish Patents Office in 2011 were at a 30-year low 2) Government data shows that jobs in high tech and the life sciences sectors have been static over the past decade 3) there has been an increase in science competence in the past decade as evidenced by journal data. However, a €23bn constant cost science budget (including STEM higher education costs) should show some improvement 4) any spinout company from research that shows potential, is likely to be acquired by a bigger foreign firm.

With long-term unemployment (12-months or more continuously) moving towards 200,000, ministers' misplaced faith in university research will only prolong the misery. 

Richard Bruton, the current enterprise and innovation minister, has revealed himself to be another conservative politician lacking the vision and courage to confront the challenges of these turbulent times. Talk is indeed cheap but at great cost.

The  article below summarises the paper that was presented in Galway.

SEE also: Irish Science Policy: 2020 replaces 2013 as target to be 'best country in...world for scientific research' - -  for links to paper and presentation

These are a number of other report links that seek to present a Reality Check:

Irish Economy: No growth in 2012; 6,500 direct jobs account for 52% of services exports (added in April 2013)

Irish apprenticeship system a shambles (added in April 2013)

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

Irish Economy: Actual Individual Consumption per capita in Ireland is at EU average along with Italy; Germany at 20% above and UK at 18% - - Irish GDP per capita is 29 % higher than the EU average but that statistic is misleading.

Irish Economy: Pharmaceutical patent cliff no growth threat; High exports have low impact

Irish Economy: Export growth insufficient to pull domestic economy out of recession

Irish Economy 2012: At least a third of value of Irish services exports is overstated

Dell remains Ireland's biggest manufacturing exporter despite closing Limerick plant

Irish Economy 2012: Only 50,000 Irish direct workers responsible for 69% of annual Irish exports

The 2006 official aspiration that Ireland would be recognised as a world-class knowledge economy by 2013 will not be realised. However, the more crucial issue for current public policy is that the placement of a narrow concept of innovation based on university research at the heart of Irish enterprise policy, has been misguided. The results to date have been dismal, in an economy facing high long-term unemployment for the foreseeable future.

The OECD (Organisation for Economic Cooperation and Development) says there is "little evidence of success" in the commercialisation of university research and licensing fee income for universities is insignificant as a ratio of research spending. It is less than 0.2% in Ireland.

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

Contrary to  a common misconception, high growth firms are not typically in the high tech and life sciences sectors, according to recent research in the US and UK; these sectors are not big generators of jobs and McKinsey Global Institute, a unit of the eponymous management consultancy firm, said in a 2010 report: "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.” For example, in Israel which is the only overseas location to successfully clone the US Silicon Valley tech cluster, only 5% of the labour force is in high tech jobs.

While the majority of patented inventions are never commercialised, innovation in a broad sense is what generates new products, new services, new businesses, and new jobs.

Successful innovation may require several inventions or be dependent on new ways to use existing technology coupled with design and ease of use. Money alone cannot create good innovation. The Wall Street Journal reports that in 2004-2007 - the years leading to Apple's first iPhone launch - Nokia's total research and development (R&D) spend was €17.1bn, compared with Apple's $2.5bn, in the same period.  

Success can range from basic research that ends with a new drug on the market to buying existing technology, to copying or adapting existing business models, which for example resulted in the success of Ryanair and Starbucks. Paddy Power Plc., the bookmaker, has gained enormously by adapting its selling model to the web, through buying-in technology not reinventing it.

A European Silicon Valley?

In September 2009, Brian Cowen, then taoiseach, 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. Three years later, 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."

US corporate giants such as Apple, Google, Microsoft and Facebook were not pioneers and there is no first-mover advantage in high tech; most firms in the sector remain small and the US has one big market that Europe lacks.

The two big flaws in the political aspirations are: 1) Ireland has a small market or none for the commercial output of research. It is difficult to develop export markets without home experience while public procurement will remain depressed for years; 2) a high tech startup with potential would inevitably be acquired by an overseas firm before scaling up in Ireland.

ARM, the UK computer chip designer, is Britain's most valuable tech company. It has 2,000 employees worldwide. Microsoft had 94,420 employees at the end of September - 56,934 in the US.

ARM operates in Europe's oldest tech cluster, the so-called Silicon Fen, in the area around Cambridge University. After 50 years, Silicon Fen hosts 48,000 high tech jobs in 1,400 firms, with 60% of firms employing up to 10 employees and 2.5% with over 200 employees.

The State science budget amounted to €23bn (at constant prices) in the period 2002-2011 according to Forfás, the policy advisory agency. This total includes the cost of producing third level STEM (science, technology, engineering and mathematics) graduates. The total budget in 1999 was €1.2bn.

In 2010, 20,483 full-time equivalent researchers and support staff were employed in Ireland: 12,104 in business and 8,289 in higher education and public bodies.

Public spending has boosted science competence. However, while business spending on R&D has increased, aided by a 25% tax credit that is claimed via self assessment, patenting evidence shows that foreign-owned firms do little significant research in Ireland.

Business spending data should be treated with caution as R&D gives companies a lot of latitude, boosted by the tax credit, which had 1,172 claims in 2010, up from under 200 in 2004.

Only about a third of foreign-owned firms spend on R&D while they are responsible for more than two-thirds of overall R&D business spending. In 2010, of the ranking of the top 1,000 companies by R&D spending in the EU27, only 11 Irish indigenous companies were ranked  compared with 52 Finnish companies. Glanbia, Ireland's biggest dairy processor, spent €14m or 0.6% of revenues on R&D while Bank of Ireland classified €35m as R&D spending to rank at 374 in Europe and at 18 among 33 banks in the rankings.

The one thousandth firm in the rankings had a spend of €4.5m

Forfás reported in respect of 2009/2010, that only 48 indigenous companies and 84 foreign-owned companies had annual R&D spending of over €2m.

Other data show that: 1) employment in the Irish high tech and life sciences firms was static in the period  2002-2011; 2) applications filed at the Irish Patents Office in 2011 were at the lowest since 1982 while no big exporter was among the top 10 Irish resident applicants at the European Patent Office in 2011, a situation unchanged from a decade before; 3) there are about 30 spinout companies from public research each year with typically 3-4 employees at the early stage; 4) the European Commission classifies Ireland as an "innovation follower" and the main international rankings of innovation and competitiveness give Ireland double-digit rankings.

For example, IMD's annual World Competitiveness Yearbook 2012 gave Ireland a 20th ranking compared with 7th in 2001.

The old model of globalisation where 'knowledge' work is done in the West while low-pay manufacturing is dominant in countries such as China, is increasingly redundant.

Long-term unemployment close to 200,000

Ireland has a small indigenous international trading sector, a farming sector that lacks dynamism because of CAP welfare, while behind the spin, foreign firms are in Ireland, not to primarily do significant research but to take advantage of the tax regime and the base for the European market.

In contrast, modern Israel's genesis was in a semi-arid region where it had to be innovative to survive; it developed a strong defence research capability and when it became the beneficiary of one of the greatest migrations of human intellectual capital in history in a short time period, after the collapse of the Soviet Union, it was able to develop a sustainable tech sector with the assistance of its diaspora in the US and US multinationals.

The Irish science strategy will never be a jobs engine. However, political leaders in three governments have given primacy to faith over evidence; vested interests in the universities and the private sector have been beneficiaries of public spending largesse through boom and bust; the Oireachtas has implicitly declared its inability to hold the beneficiaries of the public spending to account, while some of the journalists covering the sector tend to be boosters rather than objective observers.

Public funding of science is important but the obsession with high tech is crowding out other sectors of opportunity. While the output of STEM graduates is also important to meet demand, it's not necessary in an international market for PhDs, to have a wide number of areas covered.

Applied research should focus on the areas where Ireland has advantages: food, drink and marine products. An example of a vibrant cluster is the Napa Valley wine growing region in California. Opportunities are not just in high tech. A UCD study found that in 2009, the venture capital industry only supported 9,000 jobs in Ireland.

We need a big increase in startups across all sectors with a broad vision of innovation. Manufacturing startups are for example located at the so-called Silicon Roundabout tech cluster in London’s East End.   

A new enterprise policy is required, coupled with reforms, to make a reality of the Taoiseach’s aspiration to make Ireland “the best small country in the world to do business in.”

The World Bank’s ‘Doing Business 2013’ ease of doing business rankings has Ireland at 15th rank and Singapore at the top.

The challenges are immense, in particular creating up to 200,000 new sustainable jobs in coming years. The number of long term claimants (12 months or more continuous claims) on the Live Register is almost 200,000, according to the Central Statistics Office.

Total full-time permanent employment in the internationally tradeable goods and services sectors in December 2011 was 284,000 compared with 320,000 in 2000. There were 143,000 employed in the foreign-owned export sector in 2011 - down from 166,000 in 2000.

Meanwhile, the labour force (including the unemployed) grew from 1.7 million to 2.1 million.

Michael Hennigan is editor of the financial website Finfacts (www.finfacts.ie).He made a presentation at the October annual conference of the Dublin Economics Workshop on the official goal set in 2006, for Ireland to be recognised as a world-class knowledge economy by 2013. The related paper can be accessed here: bit.ly/PhXDVZ

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