Growing threats to investment in Ireland

27 Oct 2005

It has long been accepted that volume manufacturing has been lost to Asia but a new report suggests the trend chipping away at Ireland’s manufacturing edifice might be happening in research and development (R&D) as well. If this were the case, it would seriously threaten to dent the country’s aspirations to become a knowledge-based economy.

The United Nations Conference of Trade and Development (UNCTAD) World Investment Report 2005, published last month, finds a growing share of global R&D is going to developing countries at the expense of old world economies, especially smaller ones.

While the R&D expenditures of the foreign affiliates of multinationals climbed from an estimated US$30bn in 1993 to US$67bn in 2002, a growing chunk of this is being invested in developing countries. Firms based in the US, for example, carried out 10pc of their overseas R&D in developing countries in Asia in 2002, up from 3pc in 1994, and more than half the world’s top R&D spenders are already conducting R&D in China, India or Singapore.

More worrying from Ireland’s point of view was that only a small percentage of multinational companies surveyed saw Ireland as an attractive location for investment in R&D over the next five years. Ireland attracted just 1.5pc of responses, compared with, for example, China (61.8pc), US (41.2pc), India (29.4pc), Japan (14.7pc) and the UK (13.2pc). This is despite the fact that the survey also found Ireland topped the poll of R&D spending by foreign affiliates of multinationals between 1995 and 2003.

The response to the report has been mixed. Kathryn Raleigh, director of ICT Ireland, an IBEC-based lobby group for the technology sector, feels it merely confirms the “growing recognition that low-cost economies are now competing at all levels”. But Tony Boyle, chief executive of wireless systems firm Sigma Communications Group, one of Ireland’s most successful home-grown technology firms with a turnover of €108m and 400 employees, believes the report should cause alarm bells to ring. “It’s something we need to worry about. The real driver for our economy is R&D and innovation if we are going to generate long-term sustainable jobs.”

The irony is that Ireland has never attracted so much R&D investment as it has in the past few months. Back in March, Microsoft announced it would be creating 100 positions in a new R&D centre at its Sandyford campus focusing on core Windows design and development work. In July, five multinational R&D investments were simultaneously announced: Xilinx, Bristol-Myers Squibb, Pfizer, Citigroup and Genzyme are to invest a total of €53.25m into leading-edge R&D projects. Even Dell, box-shifter extraordinaire, got in on the act, announcing in August that it was to establish an engineering centre for communications and network products at its Limerick facility.

These are far from isolated examples. According to IDA Ireland, of the 1,022 multinational subsidiaries in Ireland, nearly a third are active in R&D.

Yet multinationals can be a fickle bunch and it doesn’t take much to persuade them to invest their money elsewhere. The key question is whether Ireland can continue to attract such investments in the future.

Raleigh is convinced it can but a number of actions need to be taken to ensure this happens – further cement the role of Science Foundation Ireland (SFI), which has played a big part in attracting major R&D projects; make it easier for intellectual property to be spun out from universities; and encourage greater collaboration between universities and industry to create the commercial bedrock of the knowledge-based economy.

Top of Raleigh’s list of priorities, though, is addressing the PhD famine in the country. “When a multinational thinks of investing in R&D in Ireland, the first thing it looks at is access to PhDs,” she points out.

William Harris, director-general of SFI, also picks up on this education theme. The worrying trend for him is what he sees as the more enlightened attitude of Asian countries to science and engineering.

“The educational system in terms of the focus on engineering, science and mathematics, in the Asian countries in particular, has become much stronger and more effective than it is in most of the western world. Education is the issue that’s sleeping in the bushes that people aren’t paying attention to.” Over time, this strength in science, engineering and mathematics will, he feels, put Asian countries in a very strong position vis-á-vis the western world.

Contrast this, he says, with the situation here where technical subjects have fallen out of favour in recent years, notably after the internet bubble burst in 2000. Harris feels a lot of students are turning their backs on technology careers even though a technical education, in his view, provides the “language of a modern industrial society”.

Harris reminds us that the bedrock of the current success of the US economy – still the world’s biggest, still the world’s most competitive – is the decades of investment in its research base that gave rise to the space programme, the computer industry and the internet. Universities were at the heart of this transformation and their role remains pivotal today. “Universities are ideas factories for the 21st Century,” observes Harris.

While the investments made by SFI and other funding bodies in building research infrastructure and research teams are a hugely important part of Ireland’s mission to transform itself into a knowledge-based economy, of equal importance, Harris feels, is having schools that can teach science in an exciting, hands-on way and that have the facilities they need to do this.

As for the report, Harris feels it would be wrong to read too much into it. What it points to, he believes, is simply that multinationals are taking a more balanced view of R&D investment. “The reality is that there’s a whole new R&D model being developed by major corporations. It used to be centralised research laboratories but now it’s become more distributed I think, with the objective of taking advantage of the talent wherever it is located. And brains are not concentrated in the western world.”

That this is how multinationals of today are thinking was confirmed by no less a figure than Steve Ballmer during a visit to Dublin earlier this month, during which the Microsoft CEO noted: “One of the issues [with R&D] is capacity and how big we can get. Talent is scarce and that’s why we’ve expanded our efforts recruiting and bringing people from one country or another. The truth is India and China are cost-effective, and the No 1 and No 2 pool of computer graduates in the world is China and India; No 3 is the US.”

Martin Cronin, chief executive of industrial policy think-tank Forfás, believes that Ireland faces the twin challenge of getting its education and research infrastructure up to speed while retaining its relative competitiveness, which has been slipping in recent years. “There is no crisis but we have moved up the cost league and we have to focus on our relative competitive position and not allow it to deteriorate.”

Cronin believes it is a mistake to think that simply by becoming a knowledge economy our competitive worries are over. “Moving up the value chain is not an answer on its own. The competition is just as tough at the high end. India has a billion people – it’s very easy for them to find 50,000 or 100,000 highly skilled engineers. We cannot do that.”

He argues that, rather like when it successfully positioned itself as a high-quality manufacturing location in the Sixties and Seventies, Ireland’s current shift up the value chain has to focus on areas where we can pack a punch. “We can’t take on China and India but we can carve out niches in narrower markets or concentrate on areas where we have a high degree of expertise,” he says, citing the overlapping area of medical devices and ICT as a potentially rewarding area of focus.

Given his own company’s area of expertise, it is no surprise that Boyle feels engineering and product design roles are the ones that are most important if Ireland is to become an innovation hub. “If the Government was to provide a subvention for 20 design engineers, this could lead to the creation of thousands of jobs.”

For this reason, the fall in the number of electrical engineering undergraduates in recent years is of great concern to him and he predicts a shortage in four of five years’ time.

Boyle also believes it should be easier for young innovative firms to establish themselves. A pet project of his is to create a wireless cluster in Dublin that would offer support to young mobile technology firms to help them develop links with mobile operators on the one hand and big technology platform developers on the other – something that is generally extremely difficult for an emerging company to do.

He also feels there is a need to cut the amount of regulation in the telecoms area and that the R&D tax credits should be available to companies that have already invested in R&D – such as his own – as well as those making incremental investments. All these actions would help foster a dynamic wireless research sector, he believes.

On the issue of Ireland’s high-cost base, Boyle comments: “I don’t think cost is a key issue. It’s experience, it’s skillsets, it’s having the right attitude that matters. We have the right raw ingredients but we need to keep producing more engineers.”

From the indigenous firm engaging in R&D to the multinational, Xilinx is a US-based semiconductor maker with a large presence in Ireland. For several years, the company has done product development in its Dublin facility but now it is taking a step further. Today, Xilinx Labs will open its first research facility outside the US market and Dublin has been chosen as the site for that €7.5m investment that will lead to the creation of up to 20 senior research positions.

Paul McCambridge, managing director of Xilinx Europe, is a firm believer that to be successful, a research project must have access to the right skills certainly but also customers with whom to collaborate. “If Ireland Inc had a global research leader in one or two fields and I was a company operating in those fields, there would be big pressure on me to do some research in Ireland, especially if I had an important European customer there.”

Similar to Boyle, McCambridge believes cost is not what primarily dictates where research money goes. If Ireland fails to attract R&D projects, it won’t be because of its high cost base but because it doesn’t have the skillsets multinationals are looking for. “My concern would not be Asia because of cost but Asia because of the quality and calibre of its researchers,” he says.

The UNCTAD report was a timely reminder that the growing economies of Asia represent a huge competitive threat to the developed world, not only in manufacturing but in research too. While the combination of low-cost and plentiful skills might seem like something we cannot compete with, there are many who believe that, despite our higher costs, we are still in the game so long as we, too, can excel.

As Harris puts it: “It doesn’t matter how big we are; it matters how good we are.”

By Brian Skelly