We've still some distance to travel before we reach the knowledge economy...
Published 28/06/2015 | 02:30
The white heat of technology. The driving force of scientific progress. The embrace of innovation.
Science, technology and innovation are the motherhood and apple pie of economics - everyone supports them and nobody is against them. And that is the case for good reason.
Although economists still know surprisingly little about why some countries are rich and others poor, there is a broad consensus that technological advancement is a central element in increasing prosperity. That is because more efficient ways of doing things allow each one of us to produce more. And increasing productivity is the holy grail of economic development.
It fully stands to reason that developing products and processes that increase productivity is what every country wants, even if the evidence is somewhat mixed about its impact on growth. Japan, for instance, consistently generates the highest number of patents per head globally - a measure of innovation that is hard to beat - but its economic performance over a quarter of a century has been famously weak.
Having flagged the questions and uncertainties around how exactly innovation feeds into economic growth, let's park them and work on the assumption that, one way or another, finding new ways of doing things is good for growth.
Along with patenting at the output end, a good input measure of how advanced a country is technologically is the amount its companies spend on research and development (R&D). With the latest figures just published by the CSO, this is a good time to consider Ireland's performance over time and in comparison with peer countries.
Among the most striking facts to emerge is the resilience of R&D spending by firms in Ireland during the economic downturn. Though some forecasts signalled declines in the double-digits, the actual fall (between 2009 and 2011) turned out to be little more than a short-lived downward blip. Broadly speaking, companies which engage in R&D weathered the storm very well. The latest figures indicate that in excess of €2bn was spent by private companies on research in 2013 - a record high, as the first chart illustrates. The spend in 2013 amounted to a 30pc increase on pre-recession 2007 and almost double the level of a decade earlier.
Companies further told the CSO's 'Business Expenditure on Research and Development' survey that they planned a small rise for R&D in 2014. Overall, the trend appears to be one of solid growth.
Signs are even more positive on the employment front. Since 2007, the number of people employed to carry out R&D has grown by almost 11,000 to 25,000 people. That is, to be sure, only a small part of the overall workforce, but the rate of growth is little short of phenomenal.
It is all the more amazing when one considers that most of it took place in the teeth of Ireland's depression and the international great recession.
At first glance, the numbers and trends suggest that Ireland's much vaunted 'knowledge economy' is going at full steam. However, a closer look at the data may give reason for caution.
The first chart illustrates the dominance of foreign-owned companies that are based in Ireland. They accounted for two thirds of R&D expenditure in 2013 -and a few years ago, the OECD placed Ireland top of the table in terms of R&D expenditure generated by foreign affiliates.
Given the prominence of multinationals in Ireland, this is perhaps not a surprise. The IDA has specifically targeted FDI in the R&D sector for over a decade. The latter's work was helped by government which, for instance, introduced a 25pc tax-credit in 2004. The proposed 'Knowledge Development Box' in last October's budget is in the same vein.
But if there has been success in attracting R&D from abroad, the research record of indigenous companies is less good.
Of the positives, there has certainly been an improvement over the years. The ratio of spending between Irish- to foreign-owned enterprises has slowly narrowed, as the first chart shows. Indeed, most R&D active enterprises are actually Irish, and indigenous enterprises employed more research staff than foreign-owned firms (Irish-owned companies engaging in R&D tend to be SMEs and spend less than their larger foreign-owned counterparts).
The differentials raises the question of whether importing the majority of the country's innovation is the correct course for policy. It also highlights the under-discussed weakness in indigenous enterprise. Another basis for concern is Ireland's comparative performance. Business R&D spending as a percentage of GDP in Ireland remains below the EU average, as the second chart illustrates. In 2013, Ireland spent 1.16pc of GDP on R&D; the EU average was 1.28pc.
In Europe there is something of a north-south divide when it comes to innovation. As with so many economic and social indicators, the Nordics top the tables. Finland and Sweden each spend 2.8pc of GDP - more than double that of Ireland. Austria and Germany tend to invest heavily as well.
But head south and things change. At a mere 0.07pc, Cyprus has the lowest intensity. The leaders globally include Israel, Japan, South Korea and the United States.
Lower inputs usually means lower outputs. 2014 figures from the European Patent Office show that Ireland's application rate per million inhabitants was about average in the EU. So though not the worst in class, it was well behind the high spenders mentioned already and, for instance, a third of Finland's patenting rate.
The low levels of R&D investment among Irish-owned business is part historic. Ireland has fewer major home-grown multinationals that fuel R&D spending in a number of our European peers. Hopefully, the thousand-odd Irish SMEs currently doing R&D can fill this gap in the future.
There is no 'one size fits all' approach to achieving greater R&D intensity, and plenty of uncertainty around the best policies to encourage it.
But that has not deterred successive governments from investing in the area. Irish public spending on research was massively ramped up over a decade ago. Billions of euro of taxpayers' money has been spent. It is likely that the positive trends in indigenous R&D are at least in part attributable to this investment - but a comprehensive and transparent audit would be worth doing.
Sunday Indo Business