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Time to re-think enterprise policy

Posted on May 16, 2015 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

There is a view shared widely, North and South, that (i) the overall contribution of indigenous (or native) enterprises is underdeveloped, (ii) a large-scale reliance on foreign direct investment (especially in the case of the South), while welcome in itself, is not a sustainable long-term strategy, and (iii) something needs to be done about this even if it will take years to see the fruits of a long-term strategy. The recent Annual Donal Nevin lecture given by Professor Mariana Mazzucato marked an important contribution to a debate that needs to happen. Her message – based on many years of international empirical research and well summarised in her recent best-selling book, The Entrepreneurial State: Debunking Public vs Private Sector Myths – is that all actors including the state and its various agencies have an innovative role to play in generating new products and services to transform economies and societies.

This has implications not only for large countries with large-scale military budgets such as the USA where government research in research and development has been exceptionally important to much of what we take for granted in today’s world from smartphones to medical devices.  A small open economy such as both parts of Ireland (and the island as a whole) can learn from what regions and countries have been doing over many decades. By focussing on areas of strategic investment and cooperation many regions have seen the rise of new global enterprises and general purpose technologies which have transformed their position in the world.

A link to some highlights of the lecture by Professor Mazzucato is available below while the interview with Professor Mazzucato on The Business programme on RTE Radio 1 on 9 th May is available here (as of 18 May)

Professor Seán Ó Riai n, who chaired the recent Donal Nevin lecture, has written extensively on the potential for developing a stronger developmental network state harnessing the synergies of both public and private sectors.  He argues the Irish state played an essential role in developing the economy in the 1990s – especially in regards to the Irish high tech industry. Some of this role involved the fostering of local networks of learning and innovation helped by the use of decentralized state institutions which draw on local, national and global networks and relationships.

(The full lecture can be found here)

It should be recognised that, according to CSO business data, foreign owned enterprises accounted for 63% (or €2.3 billion) of all innovation-related expenditure in 2012. Of this €1.3 billion was for in-house R&D. Almost 34% of Irish owned enterprises reported innovation related expenditure in the reference period compared to 46% of foreign-owned enterprises. Innovation is strongly related to enterprise size as only one in three small enterprises (10-49 employees) reported spending on innovation, while two out of three large enterprises (250 employees or more) had such expenditure in 2012. As noted in recent publications of the EU Industrial Research and Development Investment Scoreboard, 17 companies based in Ireland are included in the global R&D ranking of 2,500 companies.

Many (though by no means all) domestic enterprises have lacked critical size, incentive or support to invest in upskilling, research, innovation and exporting.  In 2011, the top 50 enterprises in the Republic of Ireland accounted for 35% of total turnover; 41% of total gross value added; and 61% of total gross operating surplus (data provided by the CSO at the NERI Annual Labour Market Conference in May 2014). In the five-year period from 2005 to 2013, industrial production grew by 20% in firms classified by the CSO as ‘modern’ while it declined by 14% in ‘traditional’ firms over the same period. Just as productivity is lower in traditional and indigenous firms, so are wages. Linkages between multinational companies and domestic enterprises are weak as the bulk of inputs to multinationals is imported.

A major challenge for enterprises in Northern Ireland is a deficiency in leadership and management skills which are below the level in comparable companies in other developed economies. Data from DETI Management Matters indicate that ‘over half (52%) of the gap with US is due to structural factors such as firm size, ownership and skill levels’.  Productivity as measured by Gross Value Added per person employed is relatively low in sectors such as business services, finance and ICT. Northern Ireland remains much less export orientated than the Republic of Ireland. In terms of input and investment, total spending on R&D remains very low in Northern Ireland. Externally-owned enterprises account for 75% of R&D investment.

Gross Expenditure on Research and Development in various countries/regions as percentage of GDP, 2011.

 

Source: Eurostat and OECD

Business Enterprise Research and Development (BERD) remains low in local and small enterprises. One area where Northern Ireland does comparatively well, in UK terms, is in the number of spin-off companies from Higher Education Institutions where the rate is four times that of the UK average.  However, public agencies such as Invest Northern Ireland have been successful in helping thousands of enterprises to take off from aerospace to ICT to renewable energy.

The reasons for a relatively weak domestic enterprise sector in Northern Ireland are complex. The decline in traditional manufacturing, textile, shipbuilding and associated engineering firms in the post-war period was not accompanied by a sufficient growth in replacement enterprises. A combination of demographic and political factors was associated with a relative increase in the size of public administration. Long-term constraints and under-supply of export or enterprise expertise has been exacerbated by the credit crunch facing many small and medium-sized enterprises in recent times.  While there have been outstanding successes across Northern Ireland there is, still, a deficit by way of a strong enterprise sector that can lift Northern Ireland’s economy. 

An active and enabling State in support of domestic enterprise could incorporate the following elements in the case of the Republic of Ireland:

  • Expanded commercial activity of existing public enterprise companies in key areas such as broadband, water, social housing, transport and renewable energy with a target of public investment including exchequer and off-the-books investment equivalent to 5% of GDP by 2018.
  • Channelling of early stage venture capital to companies through a State Investment Bank with a target of 7% of GDP by 2020.
  • A new model of apprenticeship training expanded to include new skills and occupations and with a target for company investment 3% of total labour costs funded from an expanded model of social insurance.
  • A reappraisal of active labour market policies to incorporate aspects of a Nordic ‘flexi-secure’ pathway for retraining, income protection and work guarantee in exchange for mobility of labour across firms and sectors.
  • An increase in total research and development direct spending by Government, Business and other entities to 3% of GDP by 2018.
  • Future prospects for development of indigenous enterprises on both sides of the border could encompass sectors such as agri-food, energy renewables, education services, cloud-computing and construction (with the possibility of marketing retro-fitting and adaptation of buildings in global markets). Areas that will require particular attention include: supply chains, skills of employees and managers, organisational capacity, marketing, design and innovation.

 

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