Friday, April 26, 2019

Irish Government as alchemists in innovation game

In the Middle Ages, alchemists searched for the philosopher’s stone to transmute or transform common metals to gold. However, despite failures, their work was the genesis of modern chemistry. Ireland will have failed twice — 2013 and 2020 — to meet innovation goals and with some help from our old friends the leprechauns, 3 significant global innovation rankings have given the country ranks of 10, 14 and 21 in the past year. However, the Irish Government is still at the level of the alchemists as any young knowledge economy startup that has international appeal and is funded by venture capital is inevitably acquired by a foreign company.

SEE: Ireland's underperforming indigenous exporting sector

IONA Technologies, an early 1990s spinout from Trinity College, did scaleup but was sold to an American company in 2008. Fleetmatics, another tech company, which was founded in Ireland, in 2004 and was sold in 2010 to US private equity groups for $68m was purchased by Verizon of the US for $2.4bn in 2016. While Elan, once the 20th most valuable drugs company in the world, was broken up and the residual was sold to an American company in 2013.

There has not been a significant new Irish knowledge-related scaleup in the past decade.

The Elan executives who had made a killing from the demise of an Irish company that had been founded by an American in Ireland in 1969, set up an investment fund called Malin and the Irish Government’s Ireland Strategic Investment Fund invested €50m!

Did anyone at the National Treasury Management Agency (NTMA) see the irony?

Finfacts reported in 2015 on research by Pegasus Capital, a Dublin-based corporate advisory group, which showed that about 215 Irish technology companies had been sold since 2000 for a combined €7.9bn. More than 300 shareholders and executives at the Irish technology companies had become millionaires over a period of 15 years from selling their businesses according to the research. For example, Colm Lyon and his wife Niamh sold Realex Payments, the online payments business he had launched in 2000, for €115m.

Today there’s lots of vapour and superlatives from the insiders and most tech journalists, about the potential of Dublin as a tech hub. Last year Leo Varadkar, taoiseach/ prime minister, agreed to head the announcement by Trinity College, Dublin’s oldest university, of a rebranding of an area of Dublin as an Innovation District, where mainly admin staff of Facebook, Twitter and Google are located.

No serious data has been published to support the project but lots of buzz words have been deployed and this month Trinity issued a video in which Martin D. Shanahan, CEO of IDA Ireland, the inward investment enterprise agency, and Julie Sinnamon, CEO of Enterprise Ireland, mainly supporting indigenous exporters, gave their imprimaturs.

Varadkar, Shanahan and Sinnamon have no idea how much this project will cost the taxpayer or if it makes sense.

After more than 50 years, Europe's oldest and still biggest tech cluster/ hub or innovation district, with Cambridge University at its core, had an employer firm total of 2,339  in 2017/2018 and 76% had less than 10 employees. Total employment was 61,766. 

Seven firms had 1,000+ employees, 2 of them in high tech manufacturing and the youngest of the 7 is 25 years old. In contrast, Ireland has no significant domestic anchor tech firms for a cluster.

SEE: Trinity College Dublin and its Innovation District dream

Innovation Ireland

"Innovation is a strong contender for the crown of business buzzword of the decade. The term has all it takes. It is ubiquitous, mysterious and, like its acolyte 'leadership,' it works alone and pairs well with many adjectives," Gianpiero Petriglieri, a professor of organizational behaviour at INSEAD, the French business school, wrote in a 2013 Wall Street Journal blog.

"Most companies say they're innovative in the hope they can somehow con investors into thinking there is growth when there isn't," said Clayton Christensen, a professor at Harvard Business School and the author of the celebrated 1997 book on disruptive technologies, 'The Innovator's Dilemma.'

The word innovation dates back to 1540 and it stems from the Latin innovatus: "to renew or change."

Innovation is simply the process of making inventions or discoveries useful for individuals, society and business.

The 3 main indices to measure innovation in 2018 were 1) The Global Innovation Index produced annually by INSEAD, the World Intellectual Property Organization and Cornell University. Ireland got the 10th rank in 2018 with the help of high services exports, intellectual property payments and outward investment (all related to tax avoidance) 2) the Bloomberg Innovation Index put Ireland at 14th rank and 3) the World Economic Forum’s Global Competitiveness Report 12th pillar has Ireland getting the 21st ranking.

In 2018 companies and institutions based in Ireland had 500 technology-related patents granted by the European Patent Office (EPO) compared with Switzerland's 4,452.

Aptiv Technologies, the US software developer for the automotive industry became Irish for tax purposes in 2018 and was the lead "Irish" filer at the EPO with 207 applications in 2018. It was founded in Michigan in 1994; it is listed on the New York Stock Exchange and has about 150,000 employees. Its global headquarters was in Barbados before changing to the UK and then to Ireland.

Accenture, the consultancy, was the second biggest filer with 100 applications. Its global headquarters was in Bermuda before the switch to Ireland in 2009.

Alimentary Health Limited, which was founded in Cork in 1999 is the third biggest filer with 19 applications. It has about 40 employees.

The National University of Ireland Galway and the University of Limerick were 4th and 5th with 13 and 11 applications respectively.

The top 2 companies accounted for 38% of 2018 applications and the related work behind the patents was likely done outside Ireland.

In 2017 the ratio of business R&D spending (BERD) by foreign firms rose from 64% to 69%: the actual spend rocketed 34% from 2015 while the spend by Irish-owned firms grew by 6%. 

Total BERD spending was €2.8bn in 2017 and the Government allocated a research budget of €768.4m to public agencies, higher education, and business support.

The biggest 100 enterprises in terms of R&D spend accounted for almost €2.1bn, or 75%, of the total R&D expenditure in 2017. The foreign/ Irish breakdown was 82%/18%, with large Irish firms spending €378m.

EU Top 1000 R&D 2017     Global 2500
Firms

109 Kerry             €260m      439 

535 Glanbia          €27m        2306

564 Kingspan        €24m       2485

593 TrinityBiotech  €21m  

623 Paddy Power   €19m

Denmark has 25 firms in the Global 2500 and 31 in the EU Top 1000.

Kerry Group is the star and its main global research facility is located in Naas, County Kildare. Some of the data here contain some foreign costs but the main message here is the stark contrast with Denmark.

Novo Nordisk is the biggest R&D spender in Denmark and it began when two small companies founded in 1923 and 1925, started the production of insulin which had been discovered by a team of scientists in Canada in 1921.

Typically the leading European innovation countries such as Germany, Sweden, Denmark, Austria and Switzerland spend 3% or more of annual gross domestic product. The UK rate in 2017 was 1.7%.

Korea and Israel spend 4.5%.

The Irish rate based on the modified Gross National Income* (excluding some multinational distortions) was at 1.9% in 2017 compared with the EU target for Ireland in 2020 of 2.5% of gross national product (GNP).

The 2020 target could still be met thanks to tax avoidance!   

Thinking Outside the (Patent) Box: An Intellectual Property Approach to Combating International Tax Avoidance, Andrew Hwang of the Roosevelt Institute. 

Tax avoidance

Ireland gives a 25% tax credit on spending on research that costs the State up to €1bn in taxes foregone.  There is also an additional credit of 25% for the cost of a building or upgrading, where R&D is performed.

There is much opportunity for abuse including the span of R&D activities.  

The 2017 jump in foreign firm R&D spending by 34% on 2015 — the year of leprechaun economics — is more than a coincidence.

Simply the official data on R&D spending is likely fake.

According to the authors of a US paper on classification of R&D, "Our study highlights that managers have substantial discretion over the classification and reporting of R&D activities, and that they face incentives to classify indirect costs as R&D expenditures, i.e., engage in strategic R&D classification, to obtain tax benefits via the R&D tax credit."

Patenting is concentrated in the pharmaceutical and high tech sectors. Even among firms that conduct R&D in the UK, only 4% patent.

A Congressional Research Service report in 2017 noted, "Major American-based multinational corporations (such as Apple, Microsoft, and Google) are thought to have saved billions of dollars in income taxes by transferring ownership of patents they developed in the United States to subsidiaries in low-tax countries such as Ireland, Luxemburg, the Netherlands, and the United Kingdom."

The late Brian Lenihan, finance minister (2008-2011), abolished a tax exemption on patent income in 2010 citing a finding by the Commission on Taxation that the tax break did not result in improving the domestic climate for innovation. The minister told the Dáil:

"The tax exemption for patent income has been in place for over 30 years and has applied to income received by an individual or company from a qualifying patent subject, since 2008, to an annual limit of €5m. A tax exemption has also applied, subject to certain conditions, to distributions paid by companies from exempt patent income. These exemptions have been abolished with effect from 24 November 2010."

The Commission on Taxation had said that not only did the exemption not foster an increase in domestic R&D investment, but some companies had used it as a “tax avoidance device to remunerate employees.” 

In 2015 Michael Noonan, finance minister (2011-2016), reintroduced a patent tax break known as a patent box, that cut the tax on profits from R&D to 6.25% 

Ten companies had taken advantage of the so-called Knowledge Development Box by mid-2018. 

Costs that originated overseas have likely been transferred to Ireland.

A European Commission study with a base year of 2015 concluded “that in the majority of cases, the existence of a patent box regime incentivises multinationals to shift the location of their patents without a corresponding growth in the number of inventors or a relocation of R&D activities. We find that the size of the tax advantage is negatively correlated with the local R&D. This suggests that the effects of patent boxes are mainly of a tax nature.”

Startup Nation

'Start-up Nation: The Story of Israel's Economic Miracle' is a 2009 book by Dan Senor and Saul Singer about the rise of high tech in Israel.

There have been significant achievements but also a lesson for Ireland — cool startups do have a benefit but they do not make a balanced economy.

Ruti Levy of the newspaper Haaretz wrote last January on the annual report of the Israeli Innovation Authority: [The tale of two nations is the gist of a report released on Monday by the government’s Innovation Authority. The annual report, summing up Israel’s achievements and challenges, not only cites the failure of technology to reach ordinary Israelis, it even questions whether Israel is Startup Nation at all. The fact is 77% of the country’s startups are based in the greater Tel Aviv area.

“Most people in Israel do not feel that they are living in a ‘technological’ country when they are on their way to work, when dealing with bureaucracy, or when shopping at chain stores. This is more than just a feeling – substantial sectors in Israel, such as transportation, commerce, construction, education, and public services, are still lagging behind other Western countries,” it says.]

About 8% of Israeli employment is in the tech sector and Meirav Arlosoroff, Levy's colleague at Haaretz wrote, "It’s hard to admit, but Israel is a superpower of mediocrity, and that includes almost all of us (probably with the exception of a few people in high-tech and the sciences).

A startup is a business that is in the first year of its life but the term is often used for older firms.

The employer startup rate is low in Ireland and recent reliable data on tech startups is not available.

TechIreland, an Irish non-profit, cites 2,364 companies; 413 multinationals; 206 hubs; and 277 investors.

A ‘tech hub’ is a physical space – a city, a suburb or just a suite of offices – which has developed to help technology startup companies succeed.

The chart on top shows that in 2016 Ireland had the second-lowest employer startup birth rate among mainly advanced Organisation of Economic Cooperation and Development (OECD) countries.

The overall Irish employer firm birth rate was 0.9% with ICT (Information and Communication) at 1.7% compared with 5% for ICT in Latvia; 4.5% in the UK; 2.5% in Austria and 1.9% in France.             

In the 3 years 2016-2018, in local and foreign companies, ICT firms added 2,800 Irish nationals compared with 8,300 foreign nationals.

In 2013 the US company International Data Corporation (IDC) estimated that half the jobs in ICT in Ireland were at administration level.

Few Irish tech companies are in the ranks of Europe's fastest growing companies.

SEE: Few Irish firms in FT 1000 & Inc. 5000 Europe lists of fastest-growing companies

Published Irish venture capital data include foreign companies that are "Irish" for tax purposes.  

Conclusion

There were 111 active spin-out firms reported at the end of 2017 that were at least three years post-incorporation. Of these, 93 were from the University sector (84%) with 14 coming from the Institutes of Technology sector (12%).  Most remain micro companies with less 9 or less employees (39% have 5 or fewer employees, 22% have between 6 and 10). Knowledge Transfer Ireland says, "This figure was derived from a variety of public data sources. Some are growing, however, and four companies now have over 50 employees. As a group, the active spin-out companies currently provide employment for at least 960 people."

Business (both foreign and local) has a poor record in funding Irish university research. The Government has established joint research centres but it's too early to assess their impact.

In 2006 the Government set out a plan that Ireland would be recognised as "a world-class knowledge economy by 2013."    

In 2016 the Government published a new plan with the goal that Ireland would become a "Global Innovation Leader" by 2020.

There has been lots of action but Ireland's indigenous sector is in the shadow of the global giants that operate in Ireland. Kerry Group is a rare jewel.

Tiny Estonia has produced 4 $1bn unicorns: Skype, Playtech, TransferWise and Taxify and it doesn't have an R&D tax credit.

An Innovation District in Dublin would be built on quicksand while innovation in the agri-foods and drinks sector may be the best bet for Ireland.

In 2013 Enda Kenny, taoiseach/ prime minister, boasted that Ireland had become the new "Digital Capital of the World" and if that had to have any substance it had to relate to Dublin, Ireland's capital city, as a significant global tech hub or cluster. The claim was bullshit then as it would be now. 

What is the point of public funding startups if they can never scaleup as venture capitalists, of course, would never reject a lucrative exit? 

Commercialisation is the key test and Switzerland is the champion!