CISC Seminar Series – Tuesday 15 th November 2005

1. CISC Seminar Series – Tuesday 15th November 2005 A Look at Ireland's National Innovation System Dr Dimitrios Pontikakis, Thomas McDonnell, Will Geoghegan

2. Context • Innovation now occupies a central position in public policy • Rhetoric of “the knowledge economy” • The factors influencing innovative output are of great interest to national policy • Future economic growth will depend to a great degree on technological developments and Ireland’s ability to deliver them • Therefore, developing a successful and dynamic National Innovation System will be pivotal to maintaining Ireland’s current economic prosperity

3. National Innovative Capacity • The economy’s ability to communicate and assimilate existing innovations as well as to generate original ideas is often referred to as its National Innovative Capacity (NIC). • NIC is seen as a key determinant of sustainable development. • NIC is dependent on the presence or otherwise of dynamic STI actors and the suitability or otherwise of the prevailing institutional architecture • Systemic approaches highlight the importance of knowledge transmission mechanisms as a determinant of NIC. Such transmission mechanisms include • Inter-organisational linkages • Personnel mobility • Diffusion of Innovations

4. National Innovation Systems • A system of innovation comprises: (i) The institutions engaged in innovation related activities (ii) The environment in which these institutions operate And (iii) The linkages between these institutions • Technological change does not occur in a perfectly linear sequence, but through feedback loops within this system • It is the flows of technology and information among people, enterprises and institutions that are key to the innovative process • We look into Ireland’s NIS and explore the reasons for engaging in innovation and in collaborative innovation

5. The conceptual framework • National Innovative Capacity • Learning and Interaction • Systematic linkages • Incentives for engaging in innovation and collaborative innovation are not always the same • Institutions • Social technologies • STI actors and their roles • Technology users and Producers • Policy makers and Policy enactors • Technology Lobbyist

6. STI actors and their capacities

7. STI Actor Capacities

8. Supporting Institutions • Historical events • Consensus politics • Programme for National Recovery • Social Partnership • Tackling of state expenditure and borrowing • Tight fiscal policies • Privatisation • Low corporate tax regime

9. Supporting Institutions • Public administration apparatus • The Competition Authority • The Patents Office • Bureaucracy, corruption and red tape • The availability of financial capital for risky ventures • Structural changes and financial innovation • Increased demand for credit • Strengthened supervisory nature of financial instruments • Hindrances in Ireland’s financial system • Duopoly • Low levels of VC

10. Supporting Institutions • The education system • emphasise on science and engineering grads • 3rd level • Move from arts and humanities • Role of Institutes of Technology • Culture of education • Mobility of the Irish labour force • Historical mobility • Mobility of science and engineering professionals

11. Supporting Institutions • Entrepreneurial Base • GEM report • TEA • Important in light of high income and low unemployment • High Value added entrepreneurship vs lack of options • Multiplicity of very specific institutional aspects, conspiring with certain actor dynamics and an extremely favourable internationalisation of investment, trade and technology that facilitated the development of Ireland’s current innovation system.

12. Ireland’s Science Technology and Innovation (STI) Actors • The presence of social technologies (i.e. institutions) compatible with the needs of a successful NIS merely permit its development. • It is the actions of STI actors (for the most part economic) that have fuelled Ireland’s innovation system. • We identify these actors and, in line with our analytical framework, look into their current contributions and related incentives.

13. STI Actors: Roles, Contributions and Measures  Incentives?

14. STI Actors: Policy Makers • Major Roles: Provide DIRECTION and FUNDING • Who they are: Department of Enterprise, Trade and Employment; Department of Education and Science; also other government departments co-ordinated by the Inter-Departmental Committee (IDC) for Science, Technology and Innovation • Office of Science and Technology – Forfás: advisory roles, co-ordination of policy enactors

15. STI Actors: Policy Makers - Contributions • Funding Sources: Central Government / CSF • Forms: (i) direct STI funding (ii) R&D incentives • Education • R&D • Technical Services and Tech-Transfer • tax exemptions for expenses incurred in R&D • privileged depreciation rates for R&D capital • low tax on royalty profits

16. State Science and Technology (S&T) Expenditure, € (2004 prices) (Forfás, 2004)

17. Government Expenditure in R&D (GOVERD) – 1981 – 2002, million € (Forfás, 2004)

18. Sources: CSO (2005); Forfás (2004)

19. STI Actors: Policy Makers - Contributions • The quality of direction depends on the availability and quality of information • Information pertaining to Ireland’s current competences and future needs: Forfás compiles innovation statistics on a regular basis [R&D expenditure, CIS, ‘Hi-tech’ Trade, etc.], national technology foresight exercise (ICSTI, 1999) and future skills needs appraisals (EGFSN, 2004)

20. STI Actors: Policy Makers - Contributions • CSF Funding streamshave been channelled at closing the gap between the core and peripheral regions (Hayward, 1998). • Examples of regional-level policy makers: (i) Shannon Development Corporation: provides support structures, allocates funds to hi-tech start-ups and seeks positive measures to embed foreign multinationals within the regional economy (ii) Údarás na Gaeltachta : financial assistance towards technological advancement, including research grants, technology licensing grants and joint-venture incentives.

21. STI Actors: Policy Makers – Incentives? • The creation of jobs ranks high among the concerns of the electorate / innovation a target in itself; a ‘social good’ • Insofar as innovative activity is perceived to be central to economic matters (employment and sustainable growth, i.e. ‘prosperity’) then government support is assured. • The current interest in technology from policy makers at all levels is a reflection of the overall success of economic policy (Kane, 1999). • Yearley (1995) contends that technology policy and associated inputs suffered during the 1980s in the midst of austerity measures and frequent elections.

22. STI Actors: Policy Makers – Incentives? “…the only contributions towards wealth creation that science policy analysts could offer were long-term, far from guaranteed to succeed and disruptive in the short term” (Yearley, 1995: 188) • The yields of technology policy interventions are not realised immediately and, just like innovation itself, are fraught with uncertainty. • Given the inter-alia dependence between economic success and technological interventionism, the possibility that the future of technology policy may well be determined by broader economic concerns is not altogether removed.

23. STI Actors: Policy Enactors • Major role: influencing both the sectoral structure of industry in Ireland and the quality of the available inputs. Importantly, the habitual interaction policy enactors have with research performers has given them valuable experience of needs and a corresponding ability to customise solutions. • Who they are:Public sector organisations charged with micromanaging matters relating to innovation: IDA Ireland, Enterprise Ireland, IRCSET, SFI

24. STI Actors: Policy Enactors - Contributions • IDA Ireland’s aim: support and promotion of employment generating industry (recent focus on foreign industry) • set-up support and specific incentives for expansion, many of which are innovation-centred; • e.g. the R&D Capability Grant Scheme encourages MNEs to locate and expand their R&D functions within their Irish affiliates. The grant avails funds to cover both investment capital costs and current costs and overheads relating to innovative activity • Provides fiscal incentives for R&D activity in manufacturing and internationally traded services firms (Research Technology and Innovation Scheme), administering incentives for collaborative research (the Innovation Partnership Initiative) and drawing attention to tax breaks for localised intellectual property management. • In 2003 the IDA supported 1,054 companies providing employment to 128,993 individuals (or 6 per cent of the total labour force) (IDA, 2004b and OECD, 2004a).

25. STI Actors: Policy Enactors - Contributions • Enterprise Ireland’s activities focus on the encouragement of growth and the internationalisation of indigenous industry with a view to maintaining current employment levels. • A high degree of customisation to specific sectoral and regional needs and indeed to the requirements of firms of varying sizes is also prevalent in EI’s schemes. • The various research councils too, armed with substantial financial backing are emerging as potent policy enactors: Irish Research Council for Science, Engineering and Technology (IRCSET) caters for the human resource needs; Science Foundation Ireland (SFI), supports ‘basic’ science • Liagouras et al (2003) in a study of the Greek National Innovation System found that the importation of policies from the EU core countries with little consideration for the application context was to blame for a number of failed innovation-related initiatives.Liagouras (2003) et al conclude that the lack of context-specific information limited inability of respective ministries to customise innovation policy.

26. STI Actors: Policy Enactors – Incentives? • While, the level of diversity hints at the recognition technology policy enjoys and enables context-specific customisation of policy, it also creates scope for principal agent and other problems. • Hilliard and Green (2004) found that technology policy is strongly departmental and is characterised by the absence of cross-cutting approaches to governance. According to Hilliard and Green (2004) policy makers at different levels can have a varying understanding of priorities; they produce evidence pointing to ‘shortermism’, ‘ministerial influence’ and ‘competing rationalities’.

27. STI Actors: Technology Producers • Major roles: generate new-to-world, new-to-market innovations, train human resources • Who they are: (highly heterogeneous) Private Industry Academia Universities Research Centres

28. STI Actors: Technology Producers - Contributions

30. STI Actors: Technology Producers – Contributions: Qualitative Aspects • MNEs account for the majority of BERD. • The average foreign-owned company spends substantially more, per employee, on R&D activities than the average Irish-owned company. Barry (2005) calculates that in 2001 Irish-owned firms spent €1,272 per employee on R&D while the same figure amounted to €3,773 for foreign firms • According to Forfás (2005) in 2003, foreign firms managed to register 365 patents, representing 48 per cent of the Irish total.

31. STI Actors: Technology Producers – Contributions(Patents Office, 2004; USPTO; 2005)

32. STI Actors: Technology Producers – Contributions • Universities and research centres are also major contributors to Ireland’s NIS. • as the de facto organisations for basic (as opposed to applied) scientific research they push forward the boundaries of the scientific fields underlying technological development; on the other hand, they act as hubs for the distribution of tacit knowledge by both training the science and engineering workforce (along with the Institutes of Technology) and by availing their stock of knowledge, expertise and research infrastructures to industry and government. • High rate of growth in scientific publication output (527 in 1998; 647 in 2002); increasing numbers of higher education researchers / Nevertheless, Ireland compares unfavourably with its EU counterparts outperforming only the other cohesion countries (Greece, Spain and Portugal) and Italy. • Among those aged 20-29, Ireland has the highest proportion of graduates in mathematics, science and technology (23 per cent) in the whole of the EU (CEC, 2004a:39).

33. STI Actors: Technology Producers – Contributions(OECD, 2004)

34. STI Actors: Technology Producers – Contributions: Qualitative Aspects •  Technology production is driven by demand located outside of Ireland. •  Technology producers exhibit a preference towards product innovations. • Results from the Community Innovation Survey (CIS) show that roughly four-fifths (81 per cent, as opposed to 59 per cent EU15 average) of all BERD in Ireland is directed at the development of product innovations with the remaining devoted to research on process innovations (Forfás, 2005: 41; CEC, 2005: 83). • The emphasis on product innovations hints at demand-pull innovation, directly motivated by sales.Exports of such weightless goods as electronics and pharmaceuticals accounted for over 70 per cent of Ireland’s total merchandise exports in 2003 (Forfás, 2004d)

35. Exports of selected ‘hi-tech’ products(OECD, 2004)

36. STI Actors: Technology Producers – Incentives (innovation) • Industry: Profit Seeking In the case of Ireland sales of exportable commodities motivate product innovation • It is therefore plausible that the sustainability of these sales may condition the willingness of Irish industry (both domestic and foreign) to innovate.

37. STI Actors: Technology Producers – Incentives (collaborative innovation) • In engaging in collaboration, organisational heterogeneity is a major influence. • Both the potential for and the likely outcome of collaboration appear to depend on the position of the collaborating firms along the supply chain, whether they are competitors, as well as their ownership (Irish or foreign). • Competitor and supplier cooperation typically results in incremental process innovations, while university-industry cooperation in R&D is more likely to result in readily marketable product innovations (Belderbos, Carree and Lokshin, 2004; based on Dutch firm data). • In that respect, the demonstrable preference of Irish technology producers for product innovations points to university-industry collaborations as their path of choice.

38. STI Actors: Technology Producers – Incentives (collaborative innovation) • According to Roper (2004) Irish host MNEs tend to have few local suppliers and work on a collaborative basis with only a fraction of those. Whereas fiscal incentives appear to have worked on kick-starting innovation among MNEs they have so far had limited impact on influencing collaborative behaviour. • Cross-country research has shown that the propensity to collaborate is linked with the ownership structure (majority/minority) of local subsidiaries and affiliates (Louri, Loufir and Papanastassiou, 2003). • MNEs need a good reason for risking the loss of a technological lead; typically, it is the threat of exclusion from vital foreign markets that forces MNEs into joint ventures permissive of innovative collaboration. • To the extent that the Irish tax regime allows control over transfer pricing, it arguably encourages majority ownership.

39. STI Actors: Technology Producers - Incentives • Academia: Peer recognition Research contracts (i.e. an academic ‘profit’ motive) • High dependence on public funding (80%) Forfás, 2004b). The relative dependence of university research on private funding was lower in the year 2000 than in any other year in the previous two decades. • Absence of a formal research assessment exercise • Absence of reward structures (pecuniary or others) for the commercialisation of research (CEC, 2004b)

40. STI Actors: Technology Producers - Incentives • The pace of innovation is not conditioned only by incentives but also by the availability of technological opportunities. (Schmookler, 1954). • The relatively young age of the basic scientific disciplines underpinning Ireland’s two major sectoral clusters could account, in part, for the rapid pace of growth in innovative activity. • The continuation of strong BERD growth will depend on diversification in burgeoning technological fields.

41. STI Actors: Technology Users Foreign Markets (exports) • Who they are: ‘Contribution’ of Foreign Markets • According to the IDA (2004b), in 2002 exports represented 93 per cent of all MNE sales, a figure that was also similar for the three preceding years. • Görg and Ruane (2000) argue that the decisions of US-originating firms to locate in Ireland can be explained for the most part by Ireland’s proximity to key EU markets. They point to the fact that almost half of US investment in Ireland is in the ‘weightless’ electrical and electronic equipment sector. By contrast, Görg and Ruane (2000) show that US investment is lowest in transport equipment, the products of which include anything but weightless motor vehicles and their parts. Domestic Market (diffusion)

42. STI Actors: Technology Users ‘Contribution’ of Domestic Markets • The current rise of the services sector and its innovation-intensive nature offer some reassurance for continued growth in domestic demand for technological products. • Comprehensive, region- and sector-level data on the diffusion of general purpose technologies (GPTs) is currently lacking.

43. STI Actors: Technology Lobbyists • Who they are: STI actors who implicitly (as a by-product of other actions) or explicitly (by exerting pressure) interact with institution-shapers and provide crucial information for institutional change. • Irish universities influence research policy and associated grants through formal and informal means. • A particular channel for such lobbying is via the various calls and proposals for PRTLI and other competitive research funding streams.

44. STI Actors: Technology Lobbyists • Formal associations of interest groups lobbying along regional, sectoral, scale or technological lines are also common. Examples include the Regional Assemblies, the Chambers of Commerce and The Irish Small and Medium Enterprises Association (ISME) • The various policy enactors (IDA Ireland, Enterprise Ireland, Science Foundation Ireland etc.) are important lobbyists too. Their day to day dealings with STI actors means that they represent a locus for the accumulation of context-specific experience. • These bodies actively influence the efficient customisation of policy through formal arrangements for reporting and their presence in relevant consultation committees. • Importantly, to the extent that policy-initiated national objectives are aligned with the pragmatic needs of STI actors, experience of such needs allows for a convergence of rationales.

45. STI Actors: Roles, Contributions and Measures  Incentives?

46. Future Plans • Use the above to construct testable hypotheses • Collect further data, particularly on the diffusion of GPTs (RIPE, Forfás) • Inform a firm-level innovation survey (innovation-index project) • Follow-up quantitative paper, with normalised, time-series indicators, illustrating the evolution of the Irish NIS over time.

47. Questions