David Jacobson: The recent announcement that HP Inc is to shed almost 500 jobs as it closes its global print business in Kildare is a stark reminder of the role that Foreign Direct Investment (FDI) plays in Ireland.
Showing posts with label David Jacobson. Show all posts
Showing posts with label David Jacobson. Show all posts
Wednesday, 8 February 2017
Friday, 22 June 2012
Innovation value for money
David Jacobson: In yesterday’s Irish Times (Business and Technology supplement) there is a good-news story about Science Foundation Ireland’s (SFI’s) funding of research projects. To illustrate, to quote the headline, that SFI’s “value for money approach pays off”, the journalist JJ Worrall reports on interviews with Principal Investigators of three projects. This note is not aimed at rejecting the argument that there is value for money in these investments in research; rather I want to show that it may or may not be value for money. Many additional questions have to be answered before a firm conclusion can be arrived at.
Let us focus on just one of the projects to illustrate some of the problems. The project is “Employing Artificial Intelligence to Make Constraint Programming Easier to Use for Decision Making” to which €3.3 million was allocated. This grant funded the establishment of the 4C research centre at UCC. Evidence of success comes under four headings.
1. Job creation, where “about 50 4C staff had their work funded or co-funded by the grant”.
2. Spin-off companies, in this case Keelvar which produces web-based software for financial traders and ThinkSmart, the focus of which is “location analytics”.
3. Agglomeration effects, or knowledge spillovers, the argument being that the presence of the research in 4C has attracted others to co-locate. According to 4C, it has helped IDA to attract such companies as United Technologies and Quest Software to Cork. In addition business data analysis company EMC has set up its Research Europe lab in Cork, working in partnership with 4C.
4. Research output, which for this project includes “about two dozen inventions, …about eight intellectual property licences and two patent applications”.
Answers to the following questions, under the same headings, would help to sharpen the focus, determine whether there is indeed value for money and ultimately help to evaluate the state agencies involved in innovation, the innovation policies of the government, and the processes of implementation of the policies by the agencies.
1. How permanent are the jobs, or are they specifically linked to the length of the project funding? How many of the people filling the jobs are likely to stay in Ireland at the completion of the project? In many cases the bottleneck in research in Ireland has been not funding but qualified staff and as a result PhD students and post-docs were imported from elsewhere, only to return home when the projects ended.
2. There is a history in Ireland of advanced tech SMEs being bought out by multinationals, resulting in their relocation to the home base of those multinationals. A small number of entrepreneurial professors may get rich from this, but it may not add much to industrial development in Ireland. How likely is this, rather negative, scenario to be replicated in this case? One of the other projects discussed in the article, Metropolis, has already had a spin-off company, Kore Virtual Machines, bought out by multinational games company, Havok “for an undisclosed amount”.
3. Agglomeration effects are very difficult to measure. Nevertheless there are strong arguments, and much qualitative evidence, in their favour. The main question here is the extent to which, if at all, United Technologies and Quest were attracted to Cork as a result of the grant. It may be impossible to separate IDA efforts and material support from SFI grants in terms of their impact on location in Cork, but these are clearly factors in the assessment of the results of the research grant. Might some of the research have been done anyway? EMC already had an R&D centre in Cork in 2008, before 4C had achieved anything; might it have collaborated with UCC academics in its new Research Europe lab even without 4C?
4. The intellectual output of R&D frequently has no impact on productivity because much of it never gets implemented. It is quite likely that more important than the specific outputs from the research is the “how-to” learning that was obtained in the process of doing the research. It is such learning that enhances the innovative capacity of firms and entire national systems of innovation. Competitors producing “copy-cat” products or processes that manage not to contravene patents will not get ahead if the dynamic capability arising from the learning enables the original firm or research centre to create new applications, and even new markets.
Such questions focus both on the detailed and on the general impacts of SFI’s grants. They suggest a need for a detailed examination of Ireland’s system of innovation, from the top, including relevant government departments, innovation agencies, universities and R&D companies, to the wide-ranging effects of culture and education, including primary education, on originality and creativity. The three projects described in the article may well be value for money, but what would be the impact on innovativeness in Ireland in 15 years if SFI’s funding was spent in its entirety on programmes to enhance originality and creativity in national schools?
Let us focus on just one of the projects to illustrate some of the problems. The project is “Employing Artificial Intelligence to Make Constraint Programming Easier to Use for Decision Making” to which €3.3 million was allocated. This grant funded the establishment of the 4C research centre at UCC. Evidence of success comes under four headings.
1. Job creation, where “about 50 4C staff had their work funded or co-funded by the grant”.
2. Spin-off companies, in this case Keelvar which produces web-based software for financial traders and ThinkSmart, the focus of which is “location analytics”.
3. Agglomeration effects, or knowledge spillovers, the argument being that the presence of the research in 4C has attracted others to co-locate. According to 4C, it has helped IDA to attract such companies as United Technologies and Quest Software to Cork. In addition business data analysis company EMC has set up its Research Europe lab in Cork, working in partnership with 4C.
4. Research output, which for this project includes “about two dozen inventions, …about eight intellectual property licences and two patent applications”.
Answers to the following questions, under the same headings, would help to sharpen the focus, determine whether there is indeed value for money and ultimately help to evaluate the state agencies involved in innovation, the innovation policies of the government, and the processes of implementation of the policies by the agencies.
1. How permanent are the jobs, or are they specifically linked to the length of the project funding? How many of the people filling the jobs are likely to stay in Ireland at the completion of the project? In many cases the bottleneck in research in Ireland has been not funding but qualified staff and as a result PhD students and post-docs were imported from elsewhere, only to return home when the projects ended.
2. There is a history in Ireland of advanced tech SMEs being bought out by multinationals, resulting in their relocation to the home base of those multinationals. A small number of entrepreneurial professors may get rich from this, but it may not add much to industrial development in Ireland. How likely is this, rather negative, scenario to be replicated in this case? One of the other projects discussed in the article, Metropolis, has already had a spin-off company, Kore Virtual Machines, bought out by multinational games company, Havok “for an undisclosed amount”.
3. Agglomeration effects are very difficult to measure. Nevertheless there are strong arguments, and much qualitative evidence, in their favour. The main question here is the extent to which, if at all, United Technologies and Quest were attracted to Cork as a result of the grant. It may be impossible to separate IDA efforts and material support from SFI grants in terms of their impact on location in Cork, but these are clearly factors in the assessment of the results of the research grant. Might some of the research have been done anyway? EMC already had an R&D centre in Cork in 2008, before 4C had achieved anything; might it have collaborated with UCC academics in its new Research Europe lab even without 4C?
4. The intellectual output of R&D frequently has no impact on productivity because much of it never gets implemented. It is quite likely that more important than the specific outputs from the research is the “how-to” learning that was obtained in the process of doing the research. It is such learning that enhances the innovative capacity of firms and entire national systems of innovation. Competitors producing “copy-cat” products or processes that manage not to contravene patents will not get ahead if the dynamic capability arising from the learning enables the original firm or research centre to create new applications, and even new markets.
Such questions focus both on the detailed and on the general impacts of SFI’s grants. They suggest a need for a detailed examination of Ireland’s system of innovation, from the top, including relevant government departments, innovation agencies, universities and R&D companies, to the wide-ranging effects of culture and education, including primary education, on originality and creativity. The three projects described in the article may well be value for money, but what would be the impact on innovativeness in Ireland in 15 years if SFI’s funding was spent in its entirety on programmes to enhance originality and creativity in national schools?
Thursday, 14 June 2012
Innovation policy and perfomance in Ireland
Sinéad Pentony: TASC hosted its second lunchtime seminar yesterday. Professor David Jacobson examined the issue of innovation policy and performance in Ireland, which is based on work that David has been doing for TASC on the wider issue of industrial policy, which will be published in the coming months. The presentation included a critique of innovation policy and highlighted the fact that innovation is much more than R&D; that low R&D industries may be major users of results of R&D generated elsewhere; and that low R&D industries may also be innovators. The presentation also provides a very useful assessment of Ireland's performance as a researching country by examining the international evidence.
Tuesday, 14 February 2012
A taxing fable
David Jacobson: In Monday’s Irish Times business editor John McManus speculated about why there had not been more response from disgruntled, low-earning tax payers to the government tax-cut for the rich. This is the tax relief on 30 per cent of earnings between €75,000 and €500,000 of foreign employees of multinationals transferring to Ireland for the medium term. Among other explanations, he suggested “fatigue”, “restraint” and “social cohesion”. Here is the truth:
There is a religion in Ireland the main mantra of which is “12.5 per cent corporate profit tax rate”. The elaborate accoutrements of the religion involve doing anything that the multinationals require, or claim that they require, and avoiding anything that could be interpreted to be troubling them. The high priests of the religion are the IDA. Among the staunch upholders of the religion are tax advisers, who are paid far more than the state receives in tax from multinationals.
Now it came to pass that a tax adviser and an executive from a multinational were having lunch (not free, of course). They came up with the idea of getting more net pay for multinational executives and worked out a plan as to how to justify this to the high priests. “We can tell them that it will be narrow and focused, but will encourage more job creation” said the tax adviser. “But once the measure has been passed, we’ll find loopholes and other ways to extend it.”
They then proposed it to the high priests, who saw it in terms of zeal in support of what they propagate, and in turn decided to sell the idea to the state. There is apparent separation of church and state in Ireland, of course, but there is not a member of the government who would admit publicly to being even agnostic about, never mind against, the religion’s main mantra.
The government thus, naturally, accepted the proposal. It has been accepted by the instruments of the media, both those in favour and critical of government, because of the risks involved in contradicting the fundamental dogma of the religion. And the people of the state, with no leadership into alternative paths, have also gone along with it.
And that is the true story of why the low-earning tax payers of Ireland have accepted the proposal to cut taxes for the rich.
There is a religion in Ireland the main mantra of which is “12.5 per cent corporate profit tax rate”. The elaborate accoutrements of the religion involve doing anything that the multinationals require, or claim that they require, and avoiding anything that could be interpreted to be troubling them. The high priests of the religion are the IDA. Among the staunch upholders of the religion are tax advisers, who are paid far more than the state receives in tax from multinationals.
Now it came to pass that a tax adviser and an executive from a multinational were having lunch (not free, of course). They came up with the idea of getting more net pay for multinational executives and worked out a plan as to how to justify this to the high priests. “We can tell them that it will be narrow and focused, but will encourage more job creation” said the tax adviser. “But once the measure has been passed, we’ll find loopholes and other ways to extend it.”
They then proposed it to the high priests, who saw it in terms of zeal in support of what they propagate, and in turn decided to sell the idea to the state. There is apparent separation of church and state in Ireland, of course, but there is not a member of the government who would admit publicly to being even agnostic about, never mind against, the religion’s main mantra.
The government thus, naturally, accepted the proposal. It has been accepted by the instruments of the media, both those in favour and critical of government, because of the risks involved in contradicting the fundamental dogma of the religion. And the people of the state, with no leadership into alternative paths, have also gone along with it.
And that is the true story of why the low-earning tax payers of Ireland have accepted the proposal to cut taxes for the rich.
Tuesday, 19 April 2011
Integrating innovation drivers
David Jacobson: I have been banging on in a number of blogs over the years on the importance of innovation policy, and in particular on the incorporation of non-R&D-based innovation. Innovations can emerge from processes other than research, for example from practice and experience.
While it is entirely appropriate to encourage research and to support expenditure on R&D, expenditure on R&D is an input and what Ireland requires is an increase in innovation, which is the output. Even increases in patents are not outputs, except where those patents are actually implemented into product, process or organisational innovation.
The new government, in developing innovation policies, must be aware of this fundamental difference between R&D on one hand and innovation on the other. It is only with such awareness that Ireland will be able to focus available resources where they will have most impact on innovation, and on the improvement of the national system of innovation. An opportunity cost of providing additional funding for R&D, for example, may be support for programmes to encourage creativity among students at all levels, including the primary level.
Another such opportunity cost might be support for non-research-based, non-patentable innovations in existing companies or new start-ups. Providing all these supports - for creativity, non-research-based innovations, and R&D - is the optimum approach. The key to policy improvement is the integration of the drivers of innovation into a joined-up approach to the evolution of the national system of innovation.
This type of thinking is evident in my new book, Knowledge Transfer and Technology Diffusion, edited with Paul Robertson, just published (2011) by Edward Elgar Publishing.
This builds on the earlier book (2008), Innovation in Low-Tech Firms and Industries, edited with Hartmut Hirsch-Kreinsen also for Edward Elgar.
While it is entirely appropriate to encourage research and to support expenditure on R&D, expenditure on R&D is an input and what Ireland requires is an increase in innovation, which is the output. Even increases in patents are not outputs, except where those patents are actually implemented into product, process or organisational innovation.
The new government, in developing innovation policies, must be aware of this fundamental difference between R&D on one hand and innovation on the other. It is only with such awareness that Ireland will be able to focus available resources where they will have most impact on innovation, and on the improvement of the national system of innovation. An opportunity cost of providing additional funding for R&D, for example, may be support for programmes to encourage creativity among students at all levels, including the primary level.
Another such opportunity cost might be support for non-research-based, non-patentable innovations in existing companies or new start-ups. Providing all these supports - for creativity, non-research-based innovations, and R&D - is the optimum approach. The key to policy improvement is the integration of the drivers of innovation into a joined-up approach to the evolution of the national system of innovation.
This type of thinking is evident in my new book, Knowledge Transfer and Technology Diffusion, edited with Paul Robertson, just published (2011) by Edward Elgar Publishing.
This builds on the earlier book (2008), Innovation in Low-Tech Firms and Industries, edited with Hartmut Hirsch-Kreinsen also for Edward Elgar.
Friday, 25 March 2011
Innovation, rather than high-tech, is key
David Jacobson: In 1990, in a paper on MNCs in Ireland, I argued that the “completion of the single market” in 1992 would bring pressures on Ireland to increase its corporate profits tax rate and that we should begin to prepare for this. In 1993, in a paper with Sara Cantillon, I suggested that FDI into Ireland from the US was highly dependent on American IRS regulations.
Ever since, in various papers and presentations, I have taken the opportunity to express the view that Irish industrial policy was and is overly dependent on the encouragement of FDI. This is not to say that we should suddenly increase corporation tax rates nor that we should discourage inward FDI. However, the pressures from our major European partners to increase corporation tax – or to introduce a CCCTB (Common Consolidated Corporate Tax Base) – should not have come as a surprise, and the horror being expressed by policy makers and commentators alike at the prospect of having to alter this one – and apparently only – pillar of industrial policy is a reflection on the lack of understanding of the prerequisites for sustainable development.
The monofocal Irish industrial policy sees development as something like the following:
Low corporate taxes => inward FDI => increase in high-tech => increase in exports => growth
This expresses inadequate recognition of the importance of indigenous firms and of all activities other than high-tech ones. For some reason we continue in Ireland to extol the virtues of the so-called smart economy, when we continue to appear well below OECD averages in most of the indicators of advanced technology infrastructures. Moreover, firms in low and medium technology (LMT) sectors continue to account for the vast majority – in nearly all OECD countries – of employment and contribution to GDP. Innovation, not high-tech, is the key, and there is a great deal of evidence of innovation in LMT firms. In Ireland, firms like the Howth company Oceanpath in food processing, and Cork’s BCD Engineering, are in LMT sectors but are highly innovative and successful.
Rather than focussing on our hallowed 12.5 per cent we should acknowledge the complexities of development, work on the identification of differences in the policies required to support innovation in different sub-sectors, and balance the support we provide to FDI and high-tech, with some attention to indigenous firms and LMT.
Ever since, in various papers and presentations, I have taken the opportunity to express the view that Irish industrial policy was and is overly dependent on the encouragement of FDI. This is not to say that we should suddenly increase corporation tax rates nor that we should discourage inward FDI. However, the pressures from our major European partners to increase corporation tax – or to introduce a CCCTB (Common Consolidated Corporate Tax Base) – should not have come as a surprise, and the horror being expressed by policy makers and commentators alike at the prospect of having to alter this one – and apparently only – pillar of industrial policy is a reflection on the lack of understanding of the prerequisites for sustainable development.
The monofocal Irish industrial policy sees development as something like the following:
Low corporate taxes => inward FDI => increase in high-tech => increase in exports => growth
This expresses inadequate recognition of the importance of indigenous firms and of all activities other than high-tech ones. For some reason we continue in Ireland to extol the virtues of the so-called smart economy, when we continue to appear well below OECD averages in most of the indicators of advanced technology infrastructures. Moreover, firms in low and medium technology (LMT) sectors continue to account for the vast majority – in nearly all OECD countries – of employment and contribution to GDP. Innovation, not high-tech, is the key, and there is a great deal of evidence of innovation in LMT firms. In Ireland, firms like the Howth company Oceanpath in food processing, and Cork’s BCD Engineering, are in LMT sectors but are highly innovative and successful.
Rather than focussing on our hallowed 12.5 per cent we should acknowledge the complexities of development, work on the identification of differences in the policies required to support innovation in different sub-sectors, and balance the support we provide to FDI and high-tech, with some attention to indigenous firms and LMT.
Wednesday, 9 September 2009
Innovation and the smart economy
David Jacobson: Innovation is universally accepted as extremely important for economic competitiveness. However, there is frequently confusion as to what is meant by innovation. The word ‘innovation’ appears 114 times in the recent policy document on the Smart Economy (Building Ireland’s Smart Economy: A Framework for Sustainable Economic Renewal, December 2008); that’s an average of more than once for every page. Yet nowhere in the document is there a clear definition.
Focusing only on the Smart Economy document, there are a number of different meanings that could be attributed to ‘innovation’.
• It seems to be used as a synonym for ‘ideas’: “The Smart Economy combines the successful elements of the enterprise economy and the innovation or ‘ideas’ economy…”
• Innovation is also associated with research and commercialisation. The three together make up the ‘ecosystem’ of the Smart Economy. A ‘key objective… is to make Ireland an innovation and commercialisation hub of Europe’, that is, an attractive base for R&D intensive multinationals and for the incubation of Irish and other entrepreneurs. This it is hoped will generate economic development and quality, well-paid jobs. But what are the differences between research, innovation and commercialisation and how will the various policy instruments achieve these different results?
• Among the instruments is the ‘Innovation Fund – Ireland’. Its function is “to support early stage R&D-intensive SMEs”. This suggests that innovation is what is done by start-up businesses based on R&D.
• Another proposed instrument is the ‘Manufacturing Forum’. This will support an increasing focus in manufacturing on competitive advantage “through innovation, R&D and design”. So, in addition to undertaking R&D and design, our manufacturing firms must be innovative, whatever that is.
Elsewhere in the Smart Economy document, Ireland is said to be above average in innovative processes and products but behind in the “transformation of innovation into commercialisation”; the USA is said to be ahead in “innovation in terms of technology and services”; and Irish higher education is exhorted to produce more graduates “in key areas of Science, Engineering and Technology, while also nurturing an interest in innovation and setting up their own businesses”. Again, it is not clear what is meant by innovation.
Defining Innovation
Over the last 20 years or so, policy-focused economists in the Schumpeterian tradition have come to agree on a broad definition of innovation: an innovation is a new product, process or way of organising that is new to a place, or even to a particular firm, even though it may not be new to the world. Innovative firms are those that are good at creating, introducing or implementing such new products, processes or ways of organising. On the basis of this definition, how does innovation differ from R&D? R&D is generally a formal process, measured by the amount of money that goes into the department or unit that is undertaking either the attempt to find a new product or way of making a product (research) or, if one of those has already been found, fine-tuning it for use or for market (development). R&D is an input, innovation is an output. But, and this is frequently not understood by Science, Technology and Innovation (STI) policy makers, the output of R&D is not necessarily innovation; even more importantly, innovation can – and frequently does – come out of various activities other than R&D.
What activities other than R&D can create innovation? At the simplest level a worker in a factory might see a better way of doing whatever she does. An office employee might process documents more efficiently by noticing distinct groupings. If this better way is introduced it is an innovation. He is innovative; his company, if it can quickly and smoothly implement the change, is innovative. This also applies to changes in the way a service company operates. And innovative people, firms, regions and countries can also express their innovativeness in these ways. A firm, region or country can as a result be highly innovative without having high levels of R&D. This does not mean that we should ignore R&D. High levels of R&D can be associated – as in Sweden and Israel – with innovativeness. But some successful regions, like Emilia Romagna in Italy, are highly innovative with low levels of R&D.
What about commercialisation? This focuses on the process of bringing innovations to the market. It applies most directly to new products. Successful commercialisation is where, for example, a new product – or some new variation on an existing product – can be protected by a patent, then brought into production and marketed in such a way as to meet its target sales. But many product variations, processes of production and ways of organising are not amenable to patent or other protection. Let us take such innovations as Just-In-Time – very important since the early 1990s. Groups of firms capable of introducing JIT and deriving all the benefits of reduced inventory, significantly improved their competitiveness. They could not commercialise this innovation because it is generally available, unprotectable knowledge. In relation to such innovations, success for an economy comes from the absence of such protection, from the rapid diffusion of the new way of organising.
Another concept used in Smart Economy in association with innovation is entrepreneurship. There is nothing wrong with entrepreneurship, and we could do with a lot more of it in Ireland. But again, it is not the same as innovation. Many innovative activities can clearly take place in existing businesses and don’t need new start-ups in order to be implemented.
In response to the kind of thinking inherent in the Smart Economy, substantial funding has been allocated to universities and institutes of technology under the PRTLI (Programme for Research in Third Level Institutes). The McCarthy report is quite dismissive of this programme, questioning its results. It may have improved academics’ publications and universities’ ranking but, McCarthy asks, what about innovation and commercialisation.
This article shows that confusing misconceptions of innovation seem to pervade the government’s STI policy. Clarity will hopefully result in the development of new policy instruments better focused on achieving real innovation. It may also help to address the criticisms in the McCarthy report. Rather than adopting the short-termist strategy of removing funding for innovation, government should allocate the funding more appropriately to real innovation.
Focusing only on the Smart Economy document, there are a number of different meanings that could be attributed to ‘innovation’.
• It seems to be used as a synonym for ‘ideas’: “The Smart Economy combines the successful elements of the enterprise economy and the innovation or ‘ideas’ economy…”
• Innovation is also associated with research and commercialisation. The three together make up the ‘ecosystem’ of the Smart Economy. A ‘key objective… is to make Ireland an innovation and commercialisation hub of Europe’, that is, an attractive base for R&D intensive multinationals and for the incubation of Irish and other entrepreneurs. This it is hoped will generate economic development and quality, well-paid jobs. But what are the differences between research, innovation and commercialisation and how will the various policy instruments achieve these different results?
• Among the instruments is the ‘Innovation Fund – Ireland’. Its function is “to support early stage R&D-intensive SMEs”. This suggests that innovation is what is done by start-up businesses based on R&D.
• Another proposed instrument is the ‘Manufacturing Forum’. This will support an increasing focus in manufacturing on competitive advantage “through innovation, R&D and design”. So, in addition to undertaking R&D and design, our manufacturing firms must be innovative, whatever that is.
Elsewhere in the Smart Economy document, Ireland is said to be above average in innovative processes and products but behind in the “transformation of innovation into commercialisation”; the USA is said to be ahead in “innovation in terms of technology and services”; and Irish higher education is exhorted to produce more graduates “in key areas of Science, Engineering and Technology, while also nurturing an interest in innovation and setting up their own businesses”. Again, it is not clear what is meant by innovation.
Defining Innovation
Over the last 20 years or so, policy-focused economists in the Schumpeterian tradition have come to agree on a broad definition of innovation: an innovation is a new product, process or way of organising that is new to a place, or even to a particular firm, even though it may not be new to the world. Innovative firms are those that are good at creating, introducing or implementing such new products, processes or ways of organising. On the basis of this definition, how does innovation differ from R&D? R&D is generally a formal process, measured by the amount of money that goes into the department or unit that is undertaking either the attempt to find a new product or way of making a product (research) or, if one of those has already been found, fine-tuning it for use or for market (development). R&D is an input, innovation is an output. But, and this is frequently not understood by Science, Technology and Innovation (STI) policy makers, the output of R&D is not necessarily innovation; even more importantly, innovation can – and frequently does – come out of various activities other than R&D.
What activities other than R&D can create innovation? At the simplest level a worker in a factory might see a better way of doing whatever she does. An office employee might process documents more efficiently by noticing distinct groupings. If this better way is introduced it is an innovation. He is innovative; his company, if it can quickly and smoothly implement the change, is innovative. This also applies to changes in the way a service company operates. And innovative people, firms, regions and countries can also express their innovativeness in these ways. A firm, region or country can as a result be highly innovative without having high levels of R&D. This does not mean that we should ignore R&D. High levels of R&D can be associated – as in Sweden and Israel – with innovativeness. But some successful regions, like Emilia Romagna in Italy, are highly innovative with low levels of R&D.
What about commercialisation? This focuses on the process of bringing innovations to the market. It applies most directly to new products. Successful commercialisation is where, for example, a new product – or some new variation on an existing product – can be protected by a patent, then brought into production and marketed in such a way as to meet its target sales. But many product variations, processes of production and ways of organising are not amenable to patent or other protection. Let us take such innovations as Just-In-Time – very important since the early 1990s. Groups of firms capable of introducing JIT and deriving all the benefits of reduced inventory, significantly improved their competitiveness. They could not commercialise this innovation because it is generally available, unprotectable knowledge. In relation to such innovations, success for an economy comes from the absence of such protection, from the rapid diffusion of the new way of organising.
Another concept used in Smart Economy in association with innovation is entrepreneurship. There is nothing wrong with entrepreneurship, and we could do with a lot more of it in Ireland. But again, it is not the same as innovation. Many innovative activities can clearly take place in existing businesses and don’t need new start-ups in order to be implemented.
In response to the kind of thinking inherent in the Smart Economy, substantial funding has been allocated to universities and institutes of technology under the PRTLI (Programme for Research in Third Level Institutes). The McCarthy report is quite dismissive of this programme, questioning its results. It may have improved academics’ publications and universities’ ranking but, McCarthy asks, what about innovation and commercialisation.
This article shows that confusing misconceptions of innovation seem to pervade the government’s STI policy. Clarity will hopefully result in the development of new policy instruments better focused on achieving real innovation. It may also help to address the criticisms in the McCarthy report. Rather than adopting the short-termist strategy of removing funding for innovation, government should allocate the funding more appropriately to real innovation.
Friday, 4 September 2009
Jacobson on innovation
"Building Ireland’s Smart Economy calls for Ireland to become an innovation hub for Europe, attracting RD-intensive multinationals and innovative start-up businesses. It aims to do this by encouraging RD in companies, providing capital for new ventures and funding for research projects in universities. However, none of these things alone will engender the diffusion of creativity throughout society that is the bedrock of innovative economies. More attention may have to be paid to education at all levels, including in the national schools". That's the conclusion David Jacobson comes to in this piece for today's Irish Times Innovation supplement.
Friday, 17 July 2009
Report is expression of a paradox
David Jacobson: Rather than discuss the details of the report, I’d like to make four more general points about the situation.
First, the report itself is an expression of a ridiculous paradox. In the context of a crisis arising from the fact that markets did not work and were inadequately regulated by the state, the job of recommending cuts has been given to a neoclassical economist. Like others of his ilk, he believes in markets and this underlies his proposals. Surely a strategy for the way forward should focus on radical new ways of generating output in the economy in such a way as to support the people who live in this country.
Second, the McCarthy report provides a huge range of possible cuts. The selection of which ones are to be implemented will be done politically. This again calls for political economy in the analysis of the report.
Third, given the short-termism of political perspectives – with a time horizon of about as long as the period between elections! – the cuts selected will be those resisted by the weak. Arguably politicians are influenced by their key supporters, the powerful and the rich. To the extent that this is so, the cuts implemented will be those in the interests of the powerful and the rich.
Fourth, consideration of the report will have to be balanced with the forthcoming report of the Commission on Taxation. In the end the choice of what to do will have to balance an increase in taxation with a reduction in government expenditure.
First, the report itself is an expression of a ridiculous paradox. In the context of a crisis arising from the fact that markets did not work and were inadequately regulated by the state, the job of recommending cuts has been given to a neoclassical economist. Like others of his ilk, he believes in markets and this underlies his proposals. Surely a strategy for the way forward should focus on radical new ways of generating output in the economy in such a way as to support the people who live in this country.
Second, the McCarthy report provides a huge range of possible cuts. The selection of which ones are to be implemented will be done politically. This again calls for political economy in the analysis of the report.
Third, given the short-termism of political perspectives – with a time horizon of about as long as the period between elections! – the cuts selected will be those resisted by the weak. Arguably politicians are influenced by their key supporters, the powerful and the rich. To the extent that this is so, the cuts implemented will be those in the interests of the powerful and the rich.
Fourth, consideration of the report will have to be balanced with the forthcoming report of the Commission on Taxation. In the end the choice of what to do will have to balance an increase in taxation with a reduction in government expenditure.
Tuesday, 23 June 2009
Irish Industrial Policy: Strategic Obsessions
David Jacobson: Since the end of the 1950s industrial policy has evolved around two main objectives, the encouragement of foreign direct investment and the development of high tech industries. Both of these objectives have become obsessive, to the detriment of the long term stability and advancement of the Irish economy. This is not to say that policies and programmes aimed at supporting these twin aims are inappropriate; however, concentrating too intensely on them, without adequately realising that there are substantial opportunity costs, may have harmed the long term prospects of the economy and may be partly why Ireland is now in such deep economic crisis.
Counter-factual analysis is fraught with dangers but it is reasonable to ask what the consequences would have been if even 20 percent of the total cost of encouraging foreign direct investment (FDI) had been spent, instead, on various ways of incentivising the development of indigenous firms. The usual answer to this kind of statement is that we tried – and failed – to encourage indigenous industrialisation during the 1930s, 1940s and 1950s. This answer is spurious for at least two reasons. First, there were some successes, and developments that laid the foundations for modern infrastructure. Second, the industrial policy of that period was extremely weak. There was no logic, for example, in supporting large numbers of car assemblers when the minimum efficient scale would have made it difficult for even one assembler to survive on the basis of domestic demand. Somehow, we’ve forgotten both the successes and the weaknesses of our 1930s-1950s version of Import Substituting Industrialisation and seem to believe that it is a waste of time, money and effort to encourage Irish firms. The star of Irish industrial policy has been the IDA; Enterprise Ireland does not have the same caché. Sectors dominated by indigenous firms are treated as second-class corporate citizens.
As the recently-appointed chair of the Print and Packaging Forum (http://printpackforum.wordpress.com/) I have been made sharply aware of the disadvantages under which this so-called low-tech, indigenous sector labours in the context of the current industrial policy regime.
The Forum (through its Director, Gerry Andrews) has been struggling to achieve parity for Irish firms with foreign suppliers in relation to VAT and procurement. In addition, excellent – cost neutral – ideas for training programmes to upgrade skills of sector workers on three-day weeks have been proposed. The printpackforum website provides evidence of the months and years of knocking on doors, of approaches to Ministers, of presentations to the Joint Oireachtas Committee on Enterprise, Trade and Employment that it takes before any changes in public policy are achieved. The changes requested are not irrational, protectionist retrogressing to the failed policies of the1930s; they are reasonable adjustments to reduce the discrimination against indigenous firms.
The demands of the Forum – representing some 17,000 workers – are met by delays, inflexibility, and inertia. What would happen if a multinational, considering establishing a subsidiary in Ireland to employ only 500 workers, made the same demands? It would be responded to by Government departments, the Revenue Commissioners, FÁS and the IDA, with alacrity, agility, flexibility and dynamism.
Given that the USA is going to make transfer pricing more difficult, given the ongoing pressures within the EU to harmonise corporate profit tax rates, and given increasing competition for mobile capital from Eastern Europe, Ireland’s attractiveness as a location for FDI is waning. We should level the playing field for indigenous firms now, before it’s too late.
Counter-factual analysis is fraught with dangers but it is reasonable to ask what the consequences would have been if even 20 percent of the total cost of encouraging foreign direct investment (FDI) had been spent, instead, on various ways of incentivising the development of indigenous firms. The usual answer to this kind of statement is that we tried – and failed – to encourage indigenous industrialisation during the 1930s, 1940s and 1950s. This answer is spurious for at least two reasons. First, there were some successes, and developments that laid the foundations for modern infrastructure. Second, the industrial policy of that period was extremely weak. There was no logic, for example, in supporting large numbers of car assemblers when the minimum efficient scale would have made it difficult for even one assembler to survive on the basis of domestic demand. Somehow, we’ve forgotten both the successes and the weaknesses of our 1930s-1950s version of Import Substituting Industrialisation and seem to believe that it is a waste of time, money and effort to encourage Irish firms. The star of Irish industrial policy has been the IDA; Enterprise Ireland does not have the same caché. Sectors dominated by indigenous firms are treated as second-class corporate citizens.
As the recently-appointed chair of the Print and Packaging Forum (http://printpackforum.wordpress.com/) I have been made sharply aware of the disadvantages under which this so-called low-tech, indigenous sector labours in the context of the current industrial policy regime.
The Forum (through its Director, Gerry Andrews) has been struggling to achieve parity for Irish firms with foreign suppliers in relation to VAT and procurement. In addition, excellent – cost neutral – ideas for training programmes to upgrade skills of sector workers on three-day weeks have been proposed. The printpackforum website provides evidence of the months and years of knocking on doors, of approaches to Ministers, of presentations to the Joint Oireachtas Committee on Enterprise, Trade and Employment that it takes before any changes in public policy are achieved. The changes requested are not irrational, protectionist retrogressing to the failed policies of the1930s; they are reasonable adjustments to reduce the discrimination against indigenous firms.
The demands of the Forum – representing some 17,000 workers – are met by delays, inflexibility, and inertia. What would happen if a multinational, considering establishing a subsidiary in Ireland to employ only 500 workers, made the same demands? It would be responded to by Government departments, the Revenue Commissioners, FÁS and the IDA, with alacrity, agility, flexibility and dynamism.
Given that the USA is going to make transfer pricing more difficult, given the ongoing pressures within the EU to harmonise corporate profit tax rates, and given increasing competition for mobile capital from Eastern Europe, Ireland’s attractiveness as a location for FDI is waning. We should level the playing field for indigenous firms now, before it’s too late.
Friday, 10 April 2009
Who is Lawrence Summers?
David Jacobson: A New York Times article on 3rd April reveals that Lawrence H. Summers, top economic advisor to Obama, earned millions of dollars last year for his contribution to a hedge fund and for speeches given at events organised by Wall Street companies that received crisis bailouts from the US government.
Despite the fact that he must now be very rich if he’s getting money like that, Summers considers himself to be on the left in the spectrum of American politics. He calls for greater diversity in academia, for example, to help liberalism. "As someone who is a strong Democrat and is a liberal, and does not think that we have won the argument with the country over the last 40 years, rather to the contrary, it makes me wonder whether if you do not engage in intense dialogue with those whom you disagree with in substantial number whether your own arguments will be sharpened and honed to maximum effect," Summers said.
Actually this is an argument that seems to be based on the view that there is some kind of market for ideas, where competition will improve performance. The argument is that there is too great a prevalence of left-leaning people in academia and more from the right would increase competition and force those on the left to improve. This is specious; economics is far from dominated by the left and, in any case, there is little evidence that there is enough in common between left and right in economics for competition between them to have any effect at all.
Summers has been, to say the least, controversial in recent years. He was forced to resign from his presidency of Harvard for a number of reasons, including a speech he made suggesting that genetic differences between men and women explained why there were fewer female than male scientists, and his apparent support for Andrei Shleifer, a “star” economist who invested in Russian shares while advising the Russian government on privatisation. Shleifer, though stripped of the honour of a named chair, remains at Harvard as a full professor of economics (and he and Summers remain friends). Shleifer is one of the most cited economists in the world but his practical work – for example in advising on the establishment of a stock market in Russia – has been less than praiseworthy. His own money has been invested wisely though; one estimate of his wealth puts it at a billion dollars.
Following a case taken by the US government in response to Shleifer’s Russian activities, Harvard – still with Summers as president – made a settlement in 2005 of over $25 million. Shleifer and others (including his wife) involved in his investments in Russia in the 1990s, all also had to make payments totalling a more modest sum of less than $5 million.
With all this controversy surrounding Summers, one can’t help wondering why Obama would choose him as an advisor. It may well be something to do with the fact that there are so few prominent economists who would publically declare themselves to be on the left!
Despite the fact that he must now be very rich if he’s getting money like that, Summers considers himself to be on the left in the spectrum of American politics. He calls for greater diversity in academia, for example, to help liberalism. "As someone who is a strong Democrat and is a liberal, and does not think that we have won the argument with the country over the last 40 years, rather to the contrary, it makes me wonder whether if you do not engage in intense dialogue with those whom you disagree with in substantial number whether your own arguments will be sharpened and honed to maximum effect," Summers said.
Actually this is an argument that seems to be based on the view that there is some kind of market for ideas, where competition will improve performance. The argument is that there is too great a prevalence of left-leaning people in academia and more from the right would increase competition and force those on the left to improve. This is specious; economics is far from dominated by the left and, in any case, there is little evidence that there is enough in common between left and right in economics for competition between them to have any effect at all.
Summers has been, to say the least, controversial in recent years. He was forced to resign from his presidency of Harvard for a number of reasons, including a speech he made suggesting that genetic differences between men and women explained why there were fewer female than male scientists, and his apparent support for Andrei Shleifer, a “star” economist who invested in Russian shares while advising the Russian government on privatisation. Shleifer, though stripped of the honour of a named chair, remains at Harvard as a full professor of economics (and he and Summers remain friends). Shleifer is one of the most cited economists in the world but his practical work – for example in advising on the establishment of a stock market in Russia – has been less than praiseworthy. His own money has been invested wisely though; one estimate of his wealth puts it at a billion dollars.
Following a case taken by the US government in response to Shleifer’s Russian activities, Harvard – still with Summers as president – made a settlement in 2005 of over $25 million. Shleifer and others (including his wife) involved in his investments in Russia in the 1990s, all also had to make payments totalling a more modest sum of less than $5 million.
With all this controversy surrounding Summers, one can’t help wondering why Obama would choose him as an advisor. It may well be something to do with the fact that there are so few prominent economists who would publically declare themselves to be on the left!
Wednesday, 18 March 2009
Auditors: one of the guilty parties?
David Jacobson: As the crisis progresses (or should that be ‘regresses’?), analyses of its aetiology will no doubt develop in their complexity and, one hopes, will contribute to knowledge and, ultimately, to solutions. There is certainly a growing willingness to attribute blame. Here are some examples plucked from reports in a variety of newspapers and other media.
1. It’s the government’s fault. Policy continued to encourage investment in property development long after it was clear that demand – especially in commercial property – was collapsing.
2. It’s the banks’ fault. They gave loans inappropriately despite the warnings that they should cut back.
3. It’s the regulator’s fault because his office didn’t regulate enough – the light touch approach to regulation in Ireland was inappropriate because it enabled financial service companies to do what turned out to be against their own interests.
4. It’s the auditors’ fault because they approved the accounts of the banks when they should not have done so.
5. It’s the major property developers’ fault because they borrowed money and continued to build long after they should have cut back, given the impending collapse in the property market.
6. It’s the fault of financial markets which are inherently inefficient, under-estimating risk in the upswing, and over-estimating risk in the downswing of the cycle.
7. It’s the fault of the “golden circle”, including top bankers, property developers and perhaps politicians and officials, who were all too greedy, and continued to gamble with what turned out to be public money.
Support for each of these propositions can be found – as well as for a number of others. They could, together, all be correct. And each of them could be developed in interesting ways that link to economic theory, or critiques thereof.
Let us take number 4, for example. The current rules and regulations in relation to auditing can be argued to be seriously defective. One of the theories of economics that has gained a huge amount of support from those who believe in markets is agency theory. In short, this theory argues that people act in their own interest, usually pecuniary. It focuses on contracts and suggests that contracts should be formulated in such a way as to meet the interests of the contracting parties. For example, managers of companies should be contracted to act in the interests of the shareholder – they should act, in other words, to maximize profits rather than their own salaries or perks.
Now consider auditors. Their interest is in obtaining their audit fees. To obtain increasing numbers of clients who will pay them audit fees, they need to act in such a way as to keep their clients happy. Keeping clients happy may not be in the public interest, however. But the client, not the public, pays for the audit. As Jim Stewart (2006) has suggested, if auditing is done correctly, proving that the accounts of a company accurately reflect all the salient details of the business, then the output of the audit can be considered to be a public good. In contrast, perhaps bad auditing is a private good?
This analysis leads to the conclusion that 4 above could be true, and that, moreover, nothing about it should surprise us. A better way of organising and providing the public good of audit output would be to create a greater distance between the companies and the auditors. If it is a public good, the public should pay for it. Perhaps companies could be taxed enough so that the additional taxes could pay for the auditing service.
Ref: Stewart, J. (2006) “Auditing as a Public Good and the Regulation of Auditing”, Journal of Corporate Law Studies, Vol. 6, No. 2, pp.329-359.
Sunday, 22 February 2009
Demand (for solutions) will generate supply - in long term
David Jacobson: I can’t help wondering why the people whose theories are responsible for the current crisis continue to be listened to by those trying to find solutions. In general terms traditional economics – the dominant economic paradigm – is more or less the only economics taught in economics departments in Ireland. In relation to micro-economics – the economics of firms as suppliers and people as consumers – this is called Neoclassical Economics. In relation to macro-economics – the economics of GNP, of interest rates, fiscal policy and unemployment – this is the New Classical Economics. Sub-disciplines in economics, like International Finance, use both micro and macro. The primary argument underlying financial markets in the period leading up to the current collapse has been that markets work, and that they work best when “unimpeded” – by which is meant unregulated. Left to their own devices, the argument went, markets will reach “equilibrium”, which is the position closest to the optimum interest of the buyers and sellers.
All this of course ignores the extent to which markets are made by key players. Think of the answers to the following questions: Who sets the rules? Who monitors and inspects to ensure that the rules are followed? Do those rules in any case favour some players? How closely are the rules followed in practice? What happens to those who do not follow the rules? What are the social consequences of great wealth in the hands of the few who successfully manipulated the rules, without prosecution? If the trust necessary for the successful operation of a banking system has broken down, how can it be rebuilt?
Only to a very small extent are these questions addressed by those working within the dominant economic paradigm. But it is just such questions that need to be answered before we can achieve a modicum of stability in the future. Either economists are going to have to look beyond the parameters of their training, or others, from other disciplines, will suggest answers. This is one case where the demand (for solutions) will successfully generate supply, at least in the long run!
Professor David Jacobson teaches at DCU
All this of course ignores the extent to which markets are made by key players. Think of the answers to the following questions: Who sets the rules? Who monitors and inspects to ensure that the rules are followed? Do those rules in any case favour some players? How closely are the rules followed in practice? What happens to those who do not follow the rules? What are the social consequences of great wealth in the hands of the few who successfully manipulated the rules, without prosecution? If the trust necessary for the successful operation of a banking system has broken down, how can it be rebuilt?
Only to a very small extent are these questions addressed by those working within the dominant economic paradigm. But it is just such questions that need to be answered before we can achieve a modicum of stability in the future. Either economists are going to have to look beyond the parameters of their training, or others, from other disciplines, will suggest answers. This is one case where the demand (for solutions) will successfully generate supply, at least in the long run!
Professor David Jacobson teaches at DCU
Subscribe to:
Posts (Atom)