‘Moving up the value chain’ is the mantra of Ireland’s economic development policy but what does this mean in practice and how can Ireland maintain its competitive position in years to come?
The Irish economy has been the envy of the world for over a decade now. During that time, it has delivered growth rates well above the norm and created hundreds of thousands of jobs. It has attracted legions of migrant workers, from Poland to the Philippines. Yet success has come at a price. As demand for labour has risen so has its cost and this, coupled with cost increases in various inputs such as energy, has transformed Ireland from a low-cost production location to a medium-to-high-cost one. At the same time the massive productivity gains of the early years of the Celtic Tiger have moderated significantly. The combined effect has been to push Ireland down the competitiveness tables. The 2007 World Competitiveness Yearbook, published in May by Swiss business school IMD, shows that Ireland fell three places in the competitiveness ranking, from 11th to 14th.
The business community, particularly the multinationals, are clearly worried by Ireland’s eroding competitiveness. Terry Landers, head of government affairs at Microsoft, which has 1,200 employees in Ireland, notes that the investment landscape has changed dramatically since Microsoft put down roots here in 1981. According to Landers, costs have risen, skills are less plentiful and the global market for mobile direct investment has become much more competitive with the arrival of investment-hungry nations such as the former Eastern bloc countries, many of which have studied Ireland’s growth model and wrapped themselves in essentially the same policies of low-cost labour and low corporation tax.
Landers believes that the model that served Ireland well during the Eighties and Nineties has reached the end of its useful life. “We have to find a new model that works for Ireland,” he asserts.
To survive, Ireland will, he argues, have to increase the number of science and technology graduates, boost its national spending on R&D and become more internationally competitive. In short, Ireland needs to become more innovative: “We need to accelerate our investment in and adoption of the knowledge economy,” says Landers.
The Government would argue that this is exactly the course that has been taken since 1999 when the Foresight Report on Science & Technology recommended that the level of investment in scientific research be substantially increased, paving the way for the establishment of the Programme for Research in Third-Level Institutions (PRTLI) and Science Foundation Ireland.
But turbocharging third-level science is only part of the answer if Ireland wants to become a fully-fledged innovation-driven economy. Business, too, will need to recognise the importance of innovation and pour more money into R&D.
Professor Petra Ahrweiler, newly appointed professor of innovation and technology management at the National Institute of Technology Management, UCD Michael Smurfit School of Business, says that in a competitive marketplace, innovation is the key to survival.
“R&D and innovation affect a company’s long-term capacity to stay in the market, maintain and renew its products and services and ultimately create conditions for sustainable employment,” she observes.
Ahrweiler says the capacity of a company’s employees to adapt and change is what underpins innovation. “In today’s competitive environment, a firm can only improve its performance by exploiting its resources more creatively and intelligently than its competitors and the firm does that through its employees. To keep its competitive advantage, the firm must engage in lifelong learning.”
Irish businesses have a lot of catching up to do in terms of innovation. Ireland’s level of business expenditure in R&D (BERD) as a percentage of GDP is only 1.5pc compared with 1.9pc for the EU as a whole and 2.5pc-plus for the top-ranked countries such as Sweden, Finland, Japan and the US. However, the picture is not quite as gloomy as it looks, since the extraordinary growth of the Irish economy has masked the real spending increases that have taken place. In fact, BERD has nearly tripled in real terms in the past decade. Between 2005 and 2006 alone, it increased from €1.33bn to €1.56bn.
Backed by state enterprise development agencies, domestic and multinational businesses have been steadily ramping up R&D investment. The establishment of a new international R&D centre in Galway by data networking group Cisco is a good example of the type of investment the Government is trying to promote. It has already hired over 70 skilled graduates and this is projected to grow to 200 positions over the next three years for people at degree level and above, with a number of positions requiring Master and PhD qualifications.
On the face of it, the Cisco investment represents a major vote of confidence in Ireland’s enduring appeal as an investment location. According to Mike Galvin, chief of Cisco’s Irish operations, Galway was selected over India principally because of the pool of experienced, well-qualified engineers that was available and the level of support received from the IDA. Yet, the long-term skills outlook is one that worries him. “I suppose the concern for all companies that make this type of investment is: is it going to be sustainable in the long term given the apparent gap in the number of people and the skills of people coming out of third level in Ireland?”
Galvin believes the Irish economy could suffer badly if the skills issue isn’t resolved. The situation is particularly acute in the technology sector, he argues. “In our industry there’s no doubt we have a skills problem. It’s not only a question of whether we have enough graduates but are we teaching people the right skills that are relevant to the marketplace?”
A company that is similarly reliant on having access to highly skilled engineers is Balbriggan-based RedMere Technology. RedMere is a good example of the type of export-oriented high-tech start-up of which the Government would like to see more. Established in 2004, it is a privately held fabless semiconductor company targeting the mainstream consumer electronics market. All the design and production management of its chipset is handled by an R&D team of engineers in Dublin and Cork with physical production outsourced to Taiwan. The company has raised just over US$15m in venture capital funding to date and expects to close a further significant funding round in Q1 2008.
One of RedMere’s striking features is that most of the management team, including CEO Peter Smyth, had previously worked in another Irish tech start-up, Parthus (now owned by US firm Ceva). “We’d all have been around the block a few times and between us have the skills and experience needed for RedMere to be successful in a global market,” says Smyth, who thinks that the spinning off of managerial talent to form new businesses is one of the things Ireland needs to get better at if it is to be a really significant force in the technology world.
As a semiconductor developer, RedMere’s intellectual property (IP) is the most important asset the company has, other than people. But Smyth argues that clever IP alone will not guarantee success. He firmly believes that to be successful, RedMere – and indeed Irish high-tech start-ups in general – needs to ‘own the customer’ as well as the technology. This essentially means dealing directly with the end customer rather than licensing out the technology.
“Licensing IP can be useful but essentially what you’re doing is enabling another company to control the greater margin in the value chain. If you’re delivering the devices yourself you drive better value in the organisation because you are controlling more of the value chain end to end,” says Smyth.
The Ciscos and RedMeres will not be the only types of companies fuelling Ireland’s growth in years to come. The fact is that some of Ireland’s potentially biggest employers in the next 20 years are companies we haven’t heard of or perhaps don’t even exist today. Anyone who doubts this should take a close look at Google. Ten years ago the online search giant didn’t even exist. In 2003, it chose Ireland as its European hub and started an aggressive hiring programme. Today, less than four years later, the headcount has reached 1,300, representing over 10pc of Google’s global workforce.
The interesting thing about Google, though, is not the number of people it employs but the jobs they do. In the company, the traditional demarcation between job types seems to blur somewhat. While the company’s Irish operation has approximately 200 employees working in conventional technical roles and a further 200 in what are described as admin-type positions, the rest of its workforce – some 900 staff – work in ‘online’. This revolves around helping Google’s customers – the advertisers who provide the bulk of its revenues – optimise their web presence and it comprises a mixture of sales, marketing and R&D elements.
“A huge part of what we do is basically customer R&D. If we see that a particular product is going really well in the Turkish market, for example, we might decide to reconfigure it so that it can be rolled out in 17 countries eight days later. So the Google model is about flexibility and speed,” says John Herlihy(pictured), head of online sales and operations for EMEA.
For Ireland to be successful in the future, it will clearly need to continue to attract companies such as Google and keep them here. So what made Ireland attractive to Google in the first place – apart from the obvious lure of low corporation tax? According to Herlihy, Ireland’s recently acquired ‘melting pot’ character was a key factor.
“I think of Ireland as the Ellis Island of the 21st century. NUI Maynooth did a survey recently and there were 167 languages spoken in Dublin. This is important because we’re in global services and in such a business if there are places in the world where you can solve business problems that apply to hundreds of different cultures and you can do it in one location at scale, then that’s an incredible competitive advantage. That’s the advantage Dublin has … [Google] wouldn’t be here if it weren’t for the immigrants; that’s more important to us than the tax rate.”
As Ireland continues its journey towards becoming a knowledge-based society, the lesson Google teaches us is that while some growth opportunities are predictable and can be planned for, others will come out of nowhere and take us almost completely by surprise. The key to survival, therefore, is to expect the unexpected.
By Brian Skelly
This story appeared as the cover story of the July/August 2007 edition of Knowledge Ireland magazine, which is in stores now. For more information go to http://www.knowledgeireland.ie
