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?

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.

Guest post by Suzanne Rosselet-McCauley and Adrian Devitt: Restoring sustainable competitiveness

Suzanne Rosselet-McCauley and Adrian Devitt: Competitiveness is one of the most abused terms in modern economics, meaning many different things to different people. Ireland, perceived during its Celtic Tiger years as a star performer in international competitiveness rankings, rose to a peak of 5th place in IMD’s World Competitiveness Yearbook (WCY) in 2000. Considered one of the world’s most prominent indices of global competitiveness, Ireland’s ranking began to fade during the years preceding the financial and economic crisis of 2008-2009.

In our research on national competitiveness, it has become apparent that there exist many different roads to competitiveness and that a “one-size-fits-all” recipe cannot be applied to all countries. It is not only a question of how “competitive” countries are, but rather how they are sustaining national competitive advantages and achieving greater prosperity for their populations, in terms of increasing living standards and human development (health, education, training). Researched by Forfás, the NCC’s Competitiveness Scorecard has reported on these factors over the past decade.

Unfortunately, the drive for competitiveness is often misunderstood as a win-lose battle between firms to gain market share or between nations for export dominance. But for any company or nation, narrowly looking at cost, price or export competiveness will not be enough to deeply impact sustainable profitability or economic development.

So what happened to Ireland’s competitiveness as the country’s ranking declined in the WCY year after year to an historical low of 24th last year? Clearly, as prices and wages climbed during the boom years, Ireland’s price and cost-competitiveness eroded. Infrastructure constraints also grew. But as the boom continued and as debt was built up and property prices skyrocketed, a sense of invulnerability seemed to take over during these “miracle years”. Since 2008, while Ireland’s competitiveness potential has improved as cost competitiveness improved and capacity constraints eased, indicators tracking current economic performance (e.g. unemployment, debt rates) continued to lower Ireland’s overall ranking.

This year, the tide appears to be turning and Ireland’s ranking has improved to 20th place (out of 59 countries). Over the past year, Ireland has benefited from booming exports and sustained inward investment, retaining its place as one of the most attractive locations for multinationals. The improved ranking is also testament to Ireland’s business-friendly environment, in terms of investment incentives, a competitive tax regime, a high availability of skilled workers who are also English speaking and IT competent. For example, in the IMD 2012 WCY, Ireland ranks:

• 1st for the availability of skilled labour
• 1st for the flexibility and adaptability of the population
• 1st for positive attitudes towards globalization
• 1st for investment incentives
• 1st for understanding the need for economic & social reform
• 2nd for a lack of discrimination towards foreign investors
• 2nd for lack of protectionism
• 3rd for patents in force

But what about the future? Will the global crisis be seen as an opportunity to move towards a more sustainable path of competitiveness? Notwithstanding the legacy of the property bubble, Ireland has significant strengths to build on. For example, a significant proportion of Ireland’s exports are classified as complex goods or services (i.e. high value added). The degree of complexity apparent in Ireland’s export profile differentiates Ireland from other peripheral EU economies. While it is essential for Irish competitiveness to continue to pursue cost efficiencies in all sectors of the economy, it is also vital to continue to develop the exporting capabilities of high value, complex sectors and their supply base. The key challenge is to strengthen the foundations for long-term sustainable growth and Ireland’s potential for future competitiveness.


To really get ahead, sustainable competitiveness must be the ultimate objective of a business or national development strategy. This implies the following:

• Improved performance in education, worker training, and retaining talent
• A long-term view towards business and capital investment
• Building innovative capacity by fostering an environment of creativity and knowledge transfer
• Spurring indigenous technology to develop domestic global brands
• Finding an equilibrium between economic gains and societal well-being

Building Ireland’s potential for future competitiveness will require addressing three major challenges: macro economic and fiscal stability, R&D and innovation, and infrastructure. First, a continuing focus on stabilising the banking system and public finances, thereby reducing volatility and uncertainty. It is only in a predictable environment that investors will take a long-term view and seek to improve productivity.

Second, Ireland’s companies need to constantly upgrade and innovate to stay ahead. This requires a continued focus on R&D by boosting expenditure and supporting the transfer of people and knowledge between research and academic institutions and the private sector, as well as the dissemination of this knowledge into innovative goods and services.

And the third bottleneck for sustaining competitiveness is infrastructure. Not only continued investment in basic, physical and digital infrastructure, where Ireland has made good progress, but also addressing the constraints in financial infrastructure, for example by improving access to credit, venture capital for start-ups, and supporting entrepreneurship and small- and medium-sized enterprises.

Lastly, while attempting to tackle the above challenges, it is important not to neglect the country’s social infrastructure in terms of education, healthcare and pensions, while ensuring that the benefits of growth are shared equitably across the population.

If the improved IMD ranking is any indication of Ireland’s comeback, then the competitiveness horizon looks brighter. Having improved four places to 20th – the strongest improvement in a decade - potential exists to improve further. There is also evidence that the Irish have a strong capacity to adapt to difficult and troubling times, as seen in the high rankings (1st) for “understanding the need for economic and social reform” and for the population’s “flexibility and adaptability”. A difficult road still lies ahead but Ireland possesses many of the prerequisites for competitiveness that will help ensure a better future for the next generation.
Authors: Dr. Suzanne Rosselet-McCauley, IMD Fellow, former co-author of the IMD World Competitiveness Yearbook, IMD. Adrian Devitt, Head of the Economic Analysis and Competitiveness, Forfás

Guest post by Martin O'Dea: Economics for technological acceleration

Martin O'Dea lectures in Management and Human Resource Management at the Dublin Business School: The internet was a revolution that saw massive investment followed by the seemingly inevitable crash and the eventual rebalancing in monetary value of a central technology that can greatly benefit our lives, keeping us informed, connected and allowing us to see the world as our market.

The fact that technologies don’t forget what they learn or, indeed, don’t need anything other than the smallest amount of time to download what another piece of hardware has acquired, added to the fact that scientists in their lab coats keep finding ways to push the speed and efficiency of how they can compute to levels of unimaginable speed and accuracy mean that technology does not just grow its impact and potential; it accelerates.

What economic impact of 3D printing, cloud computing, nanotechnology and simulated realities? What impact of the fact that these developments may be surpassed within months of actualisation, what impact of the fact that that very process may speed up? Perhaps more relevant again, what impact of appropriately functioning robots in the workplaces? Robotics was like many arenas of technology, unrealistically thought to change the world in the 1980s – the vast complexity in the simple things that humans do and would need to be replicated (like sidestepping an opening door) were not accounted for; and many people assumed that robots were a thing that was not quite a thing of the past.

There are many companies in Japan and elsewhere that are over 30 years into development and would beg to differ, again it is important to bear in mind – if you teach one robot to do something, you, effectively and instantaneously, teach them all. Do you believe that when a point is reached (and all evidence now sees this as within reach inside a decade) that robots can carry out the work involved in a fast food restaurant that McDonalds will continue to pay people instead of buying robots? It is said that you can only approach the future with the psychology of the past; but should we add the economics of the past to that as well. Certainly this means unemployment to those currently employed in McDonalds, but, it is really missing the picture if we do not see the continuous societal benefit of developing technologies, and we cannot find economics that will stop us hurting from our progress.

There is a debate as to whether there will ever be a post-scarcity society. The idea of standing before a Star Trek ‘Replicator’ type device has often been the root of young jokes as teenagers imagined conjuring up cigarettes and alcohol from these manipulators of matter; however can I suggest that people look at 3D printing via the recent announcement to begin to grapple with the concept of a future of post-scarcity. I am inclined to align myself with the argument that the value will be acquired by the desirability in the future, and so like oxygen (abundant and free) there will be many things that are now monetised that will not be so soon – and this, of course will greatly help humanity; however, I feel that whether it is leisure/physical space/certain resources/information there will be future monetised objects and perhaps while we could all print some clothing only leading designers of 3D printed items will charge money for theirs etc.

I would like to pose a simple concept for economists' comment in light of the above. If there will be, and in many ways already are, essential and desirable and abundant free products could we not realign our monetisation system to represent that with more social benefit. Could we not use two separate currencies? One currency would be used for a wide range of product/services that are seen as necessities.

Every household would have access to a large purchasing power within these categories, including much of welfares payments etc. and have a large universal wage that would allow each person sufficient funds to be adequately supplied with these items. Those that earn more may take some of their payment in the second –non-essential – currency. Most likely the ‘luxury’ items will take a mixture of currencies as one could buy non-essential currency with the essential currency. However, certain products/services being made widely available while maintaining the competitive motivations of the market economy and competitive labour markets could be achieved in this model – while we ease towards a society where perhaps the house with the beach will remain sought after but very many things become universally available.

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.

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.

Report of the Innovation Taskforce

An Saoi: I read the Report of the Innovation Taskforce and wept. The Government’s big idea is per Brian Cowan’s piece in Saturday’s Irish Times “We are open for business as a global innovation hub”. I would more accurately describe it as “We are (still) open for business as a global hub of tax planning & scamming”.

There are some reasonable proposals in the document. But when you cut through the waffle, many of the proposals are designed to move Ireland from a low corporate tax environment to a no corporate tax environment, in the hope we get a few jobs as our reward. In Germany or any other sane country a task force with such a remit would be stuffed full of engineers and scientists. Not so in Ireland.

I am a sucker for word searches. It gives you a feel for the document. In this report, the word “tax” is mentioned 127 times, the word “food” eight times and the words “manufacture” or “manufacturing” just 24 times. When “tax” pops up you will always find those three letters “FDI” are not far behind and sure enough they are there 35 times.

Therefore this is a report which pays lip service to Irish SMEs, barely mentions the Public Sector, and almost all of the serious proposals are in relation to tax scamming for multi-nationals. But there are four direct representatives of multi-nationals on the taskforce.

The nub of the Report is contained in Appendix Six, which sets out six tax proposals, which have little to do with the development of innovation in Ireland. I ask for your forgiveness in advance because I am now going to talk tax.

The first proposal relates to IP (intellectual property) and is about “the competitiveness of our tax regime for internationally mobile IP rich businesses.” This is basically a proposal to weaken Section 291A further. This enables multi-nationals to take profits from high tax jurisdictions and move them to a low tax location such as Ireland. You can write off 80% of the “cost” of the IP, i.e. reducing your effective tax rate from 12.5% to 2.5%, before of course deducting any other expenses. Outside of accountancy and legal firms, I can see no jobs here as the real activities will be outside of Ireland.

Proposal number two is in relation to tax credits for R & D, covered by Sections 766 & 766A. This enables a company to deduct the cost of R & D, and also to get an additional tax credit of 25% of the cost incurred. They suggest that the amount of outsourcing be increased and in relation to many SMEs this would make sense. However, again the main concern is multi-nationals “For example, for pharmaceutical companies, clinical trials must be outsourced and they are a significant part of the R&D cost.“ This work would also not be done in Ireland.

Proposal number three is in relation to “Carried Interest”, which is basically a method of senior managers in venture capital firms earning loads and paying no tax.

Proposal number four is in relation to the pooling of foreign tax credits. Credit for foreign tax is specific to that income source, e.g. tax withheld on Spanish income can only be offset against profits from your activities in Spain. The problem arises that the withholding tax payable in some countries exceeds the Irish tax payable on the Irish measure of income. The taskforce want pooling, i.e. you can claim your excess Spanish tax against, say, your profits from Germany. This proposal runs counter to all normal treatment to avoid double taxation.

Proposal number five in relation to withholding tax on payments is just another sop to multi-nationals.

The final proposal is in relation to Patent Income Exemptions, which the 3rd Commission on Taxation, which has recently reported suggested should be terminated. They of course feel it should be retained.

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.

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.