|Tony Owens, founder of Shibumi Consulting, responded to the points raised in the article:
My ‘standing’ in doing so is as an Irish R&D microbusiness owner/operator (3 FTE’s) since 2006 and as a past director of New Morning IP, whom you quote in your article. My background is 30 years of inventive engineering, product development and patent analytics, mostly in Ireland/UK. We work with a mixture of companies from microbusinesses to MNC’s each year on innovation and IP projects, across many sectors, and our views about the credit reflect this. We contribute a number of inventions annually to our clients annually, some for patenting some not. For transparency, our own firm also benefits substantially from the credit each year.
Your main thesis is that the burgeoning R&D credit since 2004 appears not to correlate with a corresponding increase in observable innovation, and you also describe the credit being treated by many state agencies, tax advisors and participating companies as a grant. I agree with the latter observation, which I have observed directly at a seminar on the credit hosted by the IRDG (one of the state-supported ‘glove puppet’ not-for-profit enterprises). I disagree with the points you adduce in support of your main thesis however, and some of them indicate a misunderstanding of how/where patenting is used and of available alternatives to patenting. Taking your points in order:
1. “While patent quality can differ, it is bizarre to ignore the patent data when making a case for an R&D tax credit: Irish resident patenting not suggestive of 'world class knowledge economy'.” In an Irish public policy development context, the power of patent data to inform is largely ignored. Why then highlight the tax credit administration as “ignor[ing] the patent data” when no other aspect of enterprise policy development is subject to this?
2. The Forfas 2004 observations about large exporters: The structure of Irish exports ten years ago was not dominated by services exports as it is today and engineered product exports (medical devices and pharma formulations) were more prominent. However, the common factor then and today was the dominance in export statistics of implanted FDI ‘factories’, whether of products or services, with no significant product/service development capability (encompassing R&D and other activities too such as market research and IP management). These more knowledge-intensive activities are commonly carried out in the US, UK, India, Israel and elsewhere. It is hardly surprising therefore that few FDI firms are prolific patenters.
3. The points made about the food industry: There is little scope for patenting as a means of IP protection in the food industry. Patents are for protecting technical inventions but are rarely suitable for protecting valuable formulations or recipes. (One reason for this is the problems of observability of infringement) They are the wrong asset class for defending the proprietary know-how, brands, livery and designs that dominate the food sector, and whose development the tax credit has facilitated. While patenting is entirely appropriate in the world of food process machinery, there are very few Irish firms actually operating in the field of food and drinks industry technology development.
4. Re your point about there being only 2-3 patent applications per year from state- funded R&D performers: This is explained by the fact that there are very few of them left. My own research in 2012 showed that most state R&D labs have been either disbanded or integrated into Irish universities; all of whom are financially dependent on the state, and whose business strategies are therefore largely state- controlled. Irish publicly-funded research is administered or controlled by a small number of funding agencies and spent almost exclusively to support the staff of a handful of academic institutions. These collectively file between 50-100 patent families (inventions) annually at present. It should be noted however that there has been little commercial return on this portfolio of state-controlled IP, either directly (licencing income from commercial entities practicing the patents) or indirectly (e.g. an international reputation for prolific inventive output in any technological domain). The Irish public R&D system is still almost unique in Europe by being largely academic-led rather than industry led. I am quite sure this is a major reason why most of the 2000 or so patent families in the national patent portfolio are not practiced and have never been licenced.
5. “The situation hasn’t changed…”. What is known is that there has been an explosion in uptake of the credit. Whether patenting or innovation output has changed or not as a direct result, is unknown in the absence of detailed research. Considering no detailed research has been published or commissioned, your comment appears to be an opinion. My own opinion based on on-the-ground engagement with companies who claim the credit, is that:
a. R&D intensity is gradually increasing in Ireland among SME’s;
b. Patent output from the state sector (academic patenting) is steady and substantial but remains mostly irrelevant to innovation; c. The recent focus of science and enterprise-promoting agencies on supporting cloud computing startups (a domain not based on any hard technology or science) will not result in patents, nor should it in most cases.; d. Patenting by Irish-domiciled companies is still dominated by Accenture and similar IT outsourcers, many of whom like to file in Ireland for tax structuring reasons. FDI filings may be expected to dwindle, given the ongoing hiatus in US software/business methods/financial patenting.
e. Patenting by indigenous Irish businesses is generally inconsistent, of poor quality, motivated by local competitive or funding considerations and reflects the impoverished nature of the sector. In this regard it is comparable with what is seen in Chinese patenting. There are positive signs however, for example, the fall in Irish utility patent publications, which suggests greater export focus and/or more patenting sophistication.
f. A small cadre of genuinely commercial Irish R&D performers exists, in response to unmet local Irish needs and the irrelevance of most state R&D performers (universities) in the minds of Irish businesses. Many of these are R&D tax credit claimants. The IP output of such firms is generally assigned to their clients, demonstrating the limitations of patents and registered designs as proxies for innovation. Would you argue that such firms should not qualify for the credit because they must assign their inventions to the clients who commission them, and therefore have few or no patents of their own?
g. The 2013 Finance Act introduced a measure to allow the financial sponsors of R&D work to claim most or all of the available R&D credit in multi-party projects (most are), breaking the principle that the credit should stay with the R&D performer. This was a negative step I feel, and a clear example of discrimination against small indigenous R&D consulting companies in favour of the sponsoring entities who contract their services due to lacking adequate R&D capability of their own.
Your comments attributed to New Morning IP concerning the absence of a link between the tax credit and patenting activity are familiar to me, but are polemical rather than credible:
a) No detailed research has ever been published in Ireland into whether such a link exists;
b) There is no clear-cut evidence that increased patenting leads to more productive or successful innovation, in a timescale of a few years. To imply that the tax credit is a poor value-for-money tax expenditure because the patenting output of Irish resident businesses is not rising substantially is not well-founded;
c) The suggestion that the tax credit is ineffective unless it correlates with more and/or better patenting or IP strategies is questionable (e.g. where the R&D performer and the R&D exploiter are different businesses as is very often the case), and in any case IP strategies are frequently not observable.
In conclusion, patents are important principally to firms engaged in a technological field in a sustainable way. Looking at the Irish business landscape, there is little such activity. Rather than attacking the R&D tax credit per se, I think it might be constructive to limit access to it to firms who:
1. Actually perform R&D themselves, whether for their own consumption or as a profession;
2. Are committed to R&D across at least one product development cycle (implies at least three years activity);
3. Even if not producing patent-grade technology are required to be systematic and to not ‘reinvent the wheel’;
4. Are committed to reinvestment in growing their technological capability The present Irish system has started moving away from these principles with the 2013 and 2014 Finance Acts. That is very much to be regretted, as the R&D credit risks being tarred with the same brush as other aspects of our tax code which have the effect of encouraging or attracting insubstantial businesses mainly concerned with tax optimisation to establish in Ireland.