Friday, November 12, 2021

Irish digital economy firms account for 1.4% of employment

The Organisation for Economic Cooperation and Development (OECD) has said that "since the mid-1990s, the average real wage has increased by over 50% in Ireland, compared with around 30% in the United States or the average OECD country." The 2018 OECD Economic Survey of Ireland noted that "the vast majority of innovation activities are undertaken in foreign-owned enterprises: research personnel account for less than 1% of the workforce in locally-owned firms ...80% of all patents granted in Ireland are filed by foreign-owned firms. As such, of primary importance for most Irish businesses is the extent to which new innovations are successfully integrated into their operations."

Irish-owned digital economy firms accounted for 1.4% of total employment in December 2020 while the foreign-owned firm rate was 5%.

Total 'Information, Communication & Computer Services' employment including temporary and part-time workers was at 131,600. High tech manufactured products in the 'Computer, electronic and optical products' category had an additional 34,000 employees, resulting in 156,600 or 6.4% of total employment.

The important sub-category 'Computer Programming' had only 1,900 employees in Irish-owned firms while there were 38,000 employed by foreign-owned firms in this area.

Simply, most Irish tech firms do not engage in writing, modifying, testing and supporting software.

In a recent post on Japan, I referred to the fears of the United States in the 1970s and 1980s of being overtaken by Japan's electronic business giants. However, they struggled from the 1990s because they did not give attention to software.

The Department of Enterprise, Trade and Employment has noted that foreign-owned agency client companies in the Dublin region accounted for 108,697 full-time jobs, up 5.0% on 2019 and up 85.5% over the decade.

Dublin holds the highest share of nationwide employment at 44.0%. For all regions, the highest level of employment over the decade was in 2020.

It may be surprising that direct expenditure by foreign and Irish firms was at a similar level in 2019.

Payroll was almost double in foreign firms. Companies could of course afford it thanks to massive profits shifting and Ireland was the most profitable location in the world for American firms in 2018!! Employment in the foreign enterprises was above the indigenous level.

Direct expenditure by foreign firms in the Irish economy amounted to €27.3bn in 2019, comprising €15.7bn on payroll, €3.6bn on materials produced in Ireland and €8.0bn on services purchased in Ireland.

In total, Irish-owned firms spent €26.9bn in the domestic economy in 2019, comprising: €8.7bn on the payroll; €12.2bn on Irish raw materials; €6.1bn on Irish services.

Excluding foreign-owned retail and other services, in 2020 foreign-owned exporters employed 269,200 in Ireland. Irish-owned exporters employed 216,700.

Total Irish employment in December 2020 was 2.445m according to the Central Statistics Office (CSO).

Measuring the digital economy

In 2020 the OECD said there are several ways to define and measure the digital economy, making it difficult to set effective policies.

In a report for the G20 Digital Economy Task Force (Group of 20: the top advanced and emerging economies), Roadmap toward a Common Framework for Measuring the Digital Economy, proposed a common definition and a tiered framework to help establish clear, comparable measures for policymaking:

"The Digital Economy incorporates all economic activity reliant on, or significantly enhanced by the use of digital inputs, including digital technologies, digital infrastructure, digital services and data. It refers to all producers and consumers, including government, that are utilising these digital inputs in their economic activities."

Also in 2020, the US Bureau of Economic Analysis (BEA) published a report on measuring the digital economy (DE) and it suggested that in 2018 it was the fourth biggest sector in the Gross Domestic Product (GDP).

It estimated the percentage at 9% and noted that the DE's real value-added grew at an average annual rate of 6.8% per year from 2006 to 2018, compared to 1.7% growth in the overall economy.

In 2018, the digital economy supported 8.8m jobs, which accounted for 5.7% of total US employment (154.7m total jobs).

According to research by the Asian Development Bank, the domestic digital economy is estimated at between 2% and 9% of GDP, based on a study of 16 economies across Asia and the Pacific, Europe, and North America.

The digitally dependent economy, calculated based on one set of digitally disrupted sectors and the identified digital sectors, ranges from 17% to 35% of GDP across the same economies.

The ADB says authors of the study Capturing the Digital Economy propose a simple and practical framework for measuring the digital economy. Using readily available national accounts data, this identifies an economy’s digital industries and calculates the gross domestic product (GDP) that is attributed to them, which is made up of the digital industries’ GDP and that of non-digital industries which enable them.

"Ireland has become the global technology hub of choice"

IDA Ireland, the inward investment agency, says "Ireland has become the global technology hub of choice when it comes to attracting the strategic business activities of ICT companies."

That would be something to celebrate if it was true! There are strengths and weaknesses, and Ireland will not become a leading high tech country.

The top foreign-owned ICT services companies in Ireland mainly focus on localisation, sales and customer support and shared services. Computer Facilities Management including Data Centres provide almost 15,000 jobs.

Research is not at a high level.

The Netherlands has become the world's second-biggest agri-food exporter through the application of technology. That's where Ireland has an opportunity.

In 2015 the Government introduced the Knowledge Development Box - a patent box - which was designed to attract R&D activities with an effective tax rate of 6.25%. It has been a flop.

Also in 2015, a government group noted that 13% of foreign-owned firms (107 firms), each spending over €2m, accounted for 88% of R&D spending in the foreign-owned sector in 2012.

Irish third-level institutions had 30 spinout companies in 2020. Last May a writer in the Financial Times said some universities are greedy and demand 25 to 50% equity. He said, "Of 116 venture capital-backed European unicorns, only four according to my research are university spinouts: Collibra, Exscientia, MindMaze, and Oxford Nanopore."

In the top global 2,500 R&D spenders Ireland has 4 indigenous firms including 2 banks. The Netherlands has 40; Denmark 34 and Israel 24.

Startups that can be old or new

European Startups is powered by / and supported by the European Commission.

Ireland has 4,347 verified startups, including non-tech firms dating back to 2010 and 150,000 employees.

The fact that most companies never grow can make the data unreliable.

In the past, the Irish Software Association (ISA) published data on indigenous tech companies. The ISA merged with an ICT unit of the lobby group Ibec and Technology Ireland was born. Today reliable data are scarce.

In distant times as well, the Irish Venture Capital Association (IVCA) used to produce reliable data on VC funding (the Irish Government provided about 40% of the total via VC firms).

Now the IVCA data include companies that are Irish for tax purposes (redomiciled firms) and the funding is in the United States.

Recently CBInsights named BrowserStack, which has opened an office in Dublin as one of 3 Irish unicorn firms (a private firm that has a valuation of at least $1bn) in their list of 842.

However, BrowserStack is an Indian cloud and mobile testing platform that was founded in Mumbai in 2011. It has about 600 employees!

LetsGetChecked, a health testing firm founded by Irishman Peter Foley in 2015, has raised more than $260m in the US for his very successful business that is mainly operating there.

Of course, such funding for the US market distorts Irish data.

Israel’s tech sector raised a total of $17.78bn in 575 deals in the first three-quarters of 2021 and US funding is mainly for investment in Israel.

Ireland and Belgium have the lowest employer birth rates in the OECD Area which for Ireland in 2017 was 4.2% and the death rate was 5.1%.

Eurostat has data on ICT firms with 1-4 employees and Ireland's estimates for 2017 and 2018 are 407 births/(235) deaths, and 407/(130). Who estimated that the number of deaths fell by over 100 in 2018?

Denmark's data are 897(134) and 772/(157).

Ireland's total for ICT employer firms (local and foreign-owned) is 7,520 [1-4 employees; 5,670; 5-9 employeees 704 and 10+ 1,150 firms]. Denmark's total is 9,680 [1-4 employees; 7,230; 5-9 employeees 975 and 10+ 1,482 firms]

The data show that most ICT firms stay in the 1-4 employee bracket which in 2018 was 20 times the net births for Ireland and 12 for Denmark.

What's important here is that Denmark has almost 30% more 10+ employee firms compared with Ireland.

Denmark's domestic firms account for two-thirds of goods and services exports and in 2021 at least 4 international innovation ratings have it in the top 10 in the world!

Ireland will continue to have some home-grown tech stars but the typical route for a VC-backed startup will continue to be an acquisition by a bigger foreign firm before a significant scaleup.

For example this year the successful Irish fintech Fenergo which was founded in 2009 by its chief executive Marc Murphy said that two private equity firms have bought a majority stake in the business.

Ireland did have two significant scaleups in the period 1969-2012. One became a biotech firm that was valued at more than €20bn in the period 1999-2001 and the other was among the world's 10 biggest software-only companies.

Élan became the first Irish company to list on the New York Stock Exchange in 1990 and IONA Technologies was listed on the Nasdaq exchange at the start of 1997.

Both firms no longer exist.

Élan was founded in Ireland in 1969 as a drug-delivery business, by American chemist Don Panoz (1935-2018), to facilitate the development of the technology behind the nicotine patch. It became a public limited company in January 1984. It had about 600 employees in Athlone, Ireland.

By mid-2001, with the prospect of blockbuster drugs for Crohn's disease and multiple sclerosis (MS), Élan's share price rose to $61 in New York, making the company Ireland's most valuable firm. In December 2001, Élan's market capitalisation in Dublin accounted for about 20% of the total market value.

2002 was an “annus horribilis” for the company when a massive accounting fraud was discovered. It involved 55 joint ventures with holdings of less than 20% in each to enable it to dress up the published accounts. The share price tumbled by 95%.

A banker became CEO and cleared out the thieves while Tysabri was relaunched in July 2006 for the treatment of MS, with certain restrictions.

The company began asset stripping and in 2013 it was sold to Perrigo, a US generic drug manufacturer.

IONA Technologies, an Irish software company, was founded as a spinout from Trinity College in 1991.

Its products connected systems and applications by creating a network of services. However, even though the company responded to the threat of the Internet by producing enterprise portals, it wasn't enough.

It was sold for $162m to a US drug firm in 2008. At its peak in 2000, the company was worth $1.75bn and had an annual turnover above $100m.

Co-founder Dr Chris Horn returned as chief executive in 2003. IONA's net losses were reduced from $369m in 2002 to $44.2m in that year.

The Dublin office lost 60 people from its 180-strong workforce in 2003.

Israel vs Ireland

Israel spends more than 4% of GDP on research and development (the highest in the OECD). The military imperative required investment in research in the early period and after the collapse of the Soviet Empire more than 700,000 Russian Jews migrated to Israel. There were a lot of scientists in the exodus.

In contrast, Ireland only began to give attention to science in recent times.

There are 46 listings (and fewer companies) on the Irish Stock Exchange. There are no Irish tech firms while in 2021 alone over 40 tech firms have listed on the Tel Aviv Stock Exchange (TASE). The TASE has more than 500 total listings.

The New York Nasdaq exchange is dominated by high tech and biotech firms. It has 14 Irish listings ─ there are only 3 born in Ireland firms: Ryanair, ICON and Trinity Biotech. Israel has 107 companies on Nasdaq.

Israel is a powerhouse in high tech for a country with a population of 9m.

According to the Israeli Innovation Authority, the high tech sector employed 10% of the national workforce in 2020. In 2018 the ratio was 8.7% and workers in the technology sector paid 24% of the total income tax collected.

High tech's share of all Israeli exports stood at 43% in 2020 and the sector accounted for 15% of GDP. Fundraising for 2020 is likely to exceed $20bn while the number of new startups being established in Israel has fallen from approximately 1,400 in 2014 to about 850 in 2019, and it is estimated that only 520 new startups were established in Israel during 2020.

Sparks Consulting Group found that Israel's technology industry relies on 20,000 talented people who are responsible for the sector's technological, economic and competitive value on the international market, according to a study ...commissioned by Israel's Business Roundtable for the conference of the 100 most senior CEOs in the Israeli economy.

The study found that, in 2020, Israeli tech had 335,000 employees, of whom 50% were tech staff and the other half support staff in marketing, finance, human resources etc. According to Sparks, the success of the sector depended on a small group of about 6% of total employees or just over 20,000 people."

Multinational firms have about 380 R&D Centres in Israel.

CBInsigths has reported that Israel had 50 unicorn firms (a unicorn is a private company with a valuation of at least $1bn) in September 2021 ─ the number fell because of public stock exchange listings.

Nevertheless, despite the superlatives, neither Israel nor Ireland is in the top tier of advanced countries.

Beyond tech in Israel, Israeli Arabs account for 20% of the population and the ultra-Orthodox population accounts for 12% of the total. These groups are at a much lower economic level compared with the people in high tech.

Ireland is at 19th ranking for the average household net adjusted disposable income per capita among 31 OECD advanced countries. Israel has a 21st ranking.