Ireland's high global innovation ranking is a fiction: Part 2

Ireland's high global innovation ranking is a fiction that likely deludes policy makers and the recent revision of Irish 2015 GDP (gross domestic product) growth to 26% will further distort future rankings.

China joins the ranks of the world’s 25 most-innovative economies, while Switzerland, Sweden, the United Kingdom, the United States of America, Finland, Singapore, Ireland, Denmark and Germany lead the 2016 rankings of 128 nations in the Global Innovation Index (GII), released last Monday by Cornell University, INSEAD and the World Intellectual Property Organization (WIPO).

Dissenters like ourselves during the bubble mania a decade ago were often accused of "talking down the economy" and while it's nice to see Ireland among the leading innovation nations of the world, it does not serve the public interest if the high ranking mainly results from massive distortions in Ireland's national statistics.

The GII 2016 is calculated as the average of two sub-indices. The Innovation Input Sub-Index gauges elements of the national economy which embody innovative activities grouped in five pillars: (1) Institutions, (2) Human capital and research, (3) Infrastructure, (4) Market sophistication, and (5) Business sophistication. The Innovation Output Sub-Index captures actual evidence of innovation results, divided in two pillars: (6) Knowledge and technology outputs and (7) Creative outputs.

The Irish country profile is on Page 228 and the rankings were as follows: (1) Institutions 12, (2) Human capital and research 20, (3) Infrastructure 19, (4) Market sophistication 19, and (5) Business sophistication 8. (6) Knowledge and technology outputs 3 and (7) Creative outputs 10.

The distortions are mainly in categories 5, 6, and 7: IP (intellectual property)/ royalty transactions, which include profit shifting to tax havens in response to invoices from Irish shell companies typically charging billions of dollars in royalty fees; FDI net inflows/ net outflows — inflows boosted by so-called trapped cash in holding companies, outflows that reflect American tax inversions where headquarters/ tax domicile is moved to Ireland; growth rate of PPP$ GDP/worker — GDP growth exaggerated; high- & medium-high-tech manufactures, % — boosted by profit shifting and booking of the output of foreign MNC group pharmaceutical firms (so-called contract manufacturing) in Ireland; ICT services exports, % total trade — mostly reflecting Double Irish transactions: Microsoft booking 25% of global revenues in Ireland; Google booking more than 40% and Facebook booking about 50%; venture capital deals/billion PPP$ GDP — including funds raised overseas by foreign projects that have registered an Irish company.

US research firm International Data Corporation (IDC) estimated in 2013 that there were 46,000 tech professionals working in the broad Irish ICT (information, communications, telecoms) sector — almost half the sector total, meaning that the other half were working in administration positions.

A world class knowledge economy?

Ireland hosts significant operations of some of the world's biggest companies in their sectors but the majority of foreign-owned exporting affiliates do not spend any funds on research and development while the big multinational (MNC) exporters and indigenous firms do not engage in research that merits filing for patents.

Four key weaknesses in the Irish knowledge economy are:

1) Low adult skills in the workforce despite a high level of young tertiary graduates;

2) A poor patenting record;

3) A poor record of scaleups of knowledge economy startups;

4) Very low business (MNC + local firm) support for public research.

While OECD data show that in 2014 the ratio of the Irish 25-34 year old population with a tertiary education was 50.8% compared with 28.4% in Germany, 46% in Sweden and 42.1% in Denmark, the Paris-based think-tank for 34 mainly advanced country governments, said last September in its biennial Economic Survey of Ireland:

OECD Survey of Adult Skills (PIAAC) signals that despite improvements in recent years, Irish adults’ skill level is significantly below the OECD average, and in the bottom quintile, both in numeracy and literacy skills. This relatively poor performance is partly explained by those aged 45 to 65, who on average have relatively low levels of educational attainment. However, according to PIAAC, younger people in Ireland also compared unfavourably with their peers in other OECD countries. The percentage of younger adults scoring at higher proficiency levels is low in Ireland in international comparison.

See commentary here 'Low Skills Of The Irish Workforce' by John Martin, an Irishman who is former Director for Employment, Labour and Social Affairs at OECD.

Public training agencies have had an unimpressive record for decades.

MNCs accounted for 65% of Business Expenditure on Research and Development (BERD) in 2013 according to the Central Statistics Office (CSO). The largest 100 enterprises in terms of R&D spend accounted for over €1.4bn, or 70%, of the total R&D expenditure in 2013. Of these top 100 enterprises, 80% of the spend can be attributed to foreign owned enterprises.

A report published by the Joint Research Centre (JRC) of the European Commission last month states that Irish research and development activity is largely carried out by foreign multinationals and there have been limited spillovers to SMEs.

The JRC says patenting in Ireland is low compared to innovation leaders and "a small number of firms are responsible for the majority of patent applications. Approximately 0.2% of firms in Ireland account for 77% of applications between 1999- 2013."

In Part 3 of this series we will separately analyse the patenting record.

Research published in 2015 showed that more than 300 shareholders and executives at Irish tech firms had become millionaires over the previous 15 years through selling their businesses mainly to overseas firms, according to a new report on mergers and acquisitions in the IT sector. However, there had been no significant scaleups (“Competitive advantage doesn’t go to the nations that focus on creating companies, it goes to nations that focus on scaling companies”) despite the commercialisation of research being the flagship enterprise policy.

Elan, the once commonly referred to 'Irish drugs firm,' that was the most valuable Irish public company in 2001, by 2013 was reduced to a shell operation and was sold off in that year to an American firm.

Elan was the biggest indigenous supporter of university research and also in 2013 Finfacts reported on Times Higher Education research which showed that Irish academics got an average of just over €6,000 (£5,200; $8,300) from business, meaning Irish-based researchers were valued as much as ten times less than top-ranking countries.

Ireland was the last of 30 countries ranked, after Portugal.

Last month's JRC report said:

The weakness of the Irish R&I (research and investment) system in terms of low degree of collaboration between business-academia has been recurrently highlighted in recent years. The Enterprise 2025 background report points out that despite some progress being made, there is still evidence of the considerable challenge faced in stimulating increased interaction and collaboration between SMEs and the range of research infrastructures available throughout the country. [ ]

Looking at the input side, the level of business enterprise funding of public R&D as a percentage of GDP was 0.007% in 2013 (Eurostat data), one of the lowest in the EU-28 and much lower than the EU average of 0.05% (2012). This value is even more striking if compared with innovation leaders like Germany (0.114%) or Finland (0.065%) or other strong innovators like the Netherlands (0.088%) or Belgium (0.072%). Another figure provided by OECD shows that the percentage of HERD (higher education R&D) funded by indigenous industry has dropped from in 5.3% in 2000 to a very low 1.6% in 2013.

The Survey of R&D in the Higher Education Sector 2012/2013 24 notes that in terms of sources of funding of expenditure on R&D by the higher education sector, Irish and foreign business provided €13m and €9m respectively in 2012, cumulatively accounting for 3.4% of total HERD. Moreover, as already pointed out in Challenge 1, Irish indigenous companies show a lower rate of collaboration with academia compared to foreign MNC. In terms of business-academia collaboration outputs, the level of public-private scientific co-publications per million population is also relatively low: Ireland ranks 12th in the EU with 34 publications against an EU average of 53.

Both the UK and Ireland depend on foreign-owned firms for the majority of BERD spending (54% vs. 65%) and according to the CSO, Ireland's ratio to GDP was 1.2% in 2013 compared with the UK's 1.1%; Finland's 2.6%; Sweden's 2.2%; Denmark's 2% and Germany's 1.9%.

In 2013 total R&D spending as a ratio GDP was at 3.3% in both Finland and Sweden (Sweden's GDP was rising while Finland's was slightly declining); 3.1% in Denmark; 1.6% in the UK; 2.8% in Germany; 2.7% in the US and 1.7% in Ireland.

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