Monday 17 December 2018

Globalisation won't help if Irish industry doesn't help itself

Michael Jackson, managing partner, Matheson; Anne O’Leary, CEO, Vodafone Ireland; Danny McCoy, CEO, Ibec; and Conor McClafferty, partner, MERC Partners, launch the Ibec Business Leaders Conference 2018 which takes place at the Convention Centre Dublin on March 27. Photo: Gary O’ Neill
Michael Jackson, managing partner, Matheson; Anne O’Leary, CEO, Vodafone Ireland; Danny McCoy, CEO, Ibec; and Conor McClafferty, partner, MERC Partners, launch the Ibec Business Leaders Conference 2018 which takes place at the Convention Centre Dublin on March 27. Photo: Gary O’ Neill

Ciarán Heavey and Patrick Gibbons

In many ways, the growing chasm in productivity between domestic small and medium enterprises (SMEs) and the Irish arms of multinational corporations (MNCs), reported by the OECD, is not a surprise.

MNCs have long accrued a "human capital dividend" in attracting and retaining talent.

Compared to SMEs they have the scale and financial wherewithal to invest in assets and other capabilities such as ongoing development and on-the-job learning that accelerate productivity gains.

What is most startling about the OECD's commentary is that it seems little progress has been made in the last decade in closing the productivity gap.

Why is this happening and what does it tell us about frequently touted positive spill-over effects of FDI?

And is a lack of access to the most talented managerial talent a barrier to closing this gap?

For one, it suggests that the mere presence of MNCs doesn't automatically translate into broader productivity gains. The transfer of knowledge, especially specialised knowledge that is hard to codify and communicate, doesn't occur by osmosis.

If SMEs are to profit from the superior knowledge and technologies of MNCs, they must first increase their own capacity to absorb and assimilate new knowledge through investing in R&D, participating in collaborative R&D projects and focusing on continuous improvement.

We know from Harvard Business School Professor Michael Porter that the odds of successful knowledge transfer, and accordant gains for innovation, are greatest where agglomeration effects are present - scale advantages that accrue where SMEs and MNCs, in close proximity, are bound together in dense networks.

While building clusters in areas such as ICT, medical devices and software has long been a policy imperative, bridging the productivity divide calls for more than encouragement and incentives.

It requires a cluster-level strategy for scaling and deepening linkages among businesses, and carefully orchestrating opportunities to create shared value for SMEs and MNCs alike.

Moreover, it warrants investing in cluster-level management structures and systems to ensure that potential spill-overs and synergies are realised, and that the cluster stays fresh in light of evolving economic and competitive conditions.

For individual SMEs, the more vexing implication is whether managerial expertise (or lack of it) is a barrier to the absorption and development of new ideas and technologies, as suggested by Angel Gurria, OECD general secretary.

Ongoing managerial development and education and lifelong learning increases receptivity to new ideas and should be encouraged.

We also know from companies like Amazon and Google, that innovations are spawned from the seeds of small, sometimes unplanned, experiments throughout the company.

In his 2015 letter to shareholders, Jeff Bezos, CEO of Amazon, regaled how it is successful at innovation because it is willing to suffer a string of failed experiments.

Especially at a time when technological advances enable firms to gain productivity advantages irrespective of scale or scope, SMEs need to leverage their natural agility to outmanoeuvre their larger rivals in responding to opportunities emerging in the digitally-driven competitive landscape.

Above all, successfully developing and commercialising new technologies and innovations requires that management teams are open to new ideas and willing to redirect coveted resources towards the most promising ideas and experiments.

So, perhaps the solution is to pay more attention to how SMEs are managed.

According to a recent survey by McKinsey, only 8pc of companies surveyed believed their business models would remain economically viable if their industry continues to digitise. Research published by the UCD Michael Smurfit School last year indicates some reticence among managers to invest in digital capabilities.

SMEs may not win the war of attrition that exists in managerial labour markets, but they can increase their odds by developing their management capabilities to become more ambidextrous - exploiting their business models while exploring options for reinventing those models for new, alternative technological futures.

Ciaran Heavey (Associate Professor, UCD Smurfit School) and Patrick Gibbons (Jefferson Smurfit Professor of Strategic Management, UCD Smurfit School)

Irish Independent

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