Innovation matters

Business, Technology | Wed 10 Jul | Author – Business & Finance Anna Scally

Ireland’s attractiveness as a location for innovation is widely heralded and we are seen worldwide as a hub for tech business, writes Anna Scally, tax partner with KPMG.

The most recent Global Entrepreneurship Monitor (GEM) report shows that a greater proportion of Irish entrepreneurs work in medium or high technology sectors (11%) compared with an OECD average of 7.3% and an EU average of 7.9%. Meanwhile, a recent Manpower survey shows Ireland as the least difficult European market in which to find talent.

Thus, there is lots of good news for those looking at Ireland as a tech-friendly inward investment location. The clustering effect of our social networking, gaming, apps and cloud sectors is impressive. However, we need to stay close to emerging and current issues to maintain our appeal and to understand the context in which the tech sector operates.

KPMG global research entitled ‘Mobilising Innovation’ highlights some key trends. The backdrop to such change is the inexorable move to a new cycle of convergence and consumer connectivity driven in particular by cloud computing and the mobile web, and countries that were never part of the technology innovation map are gaining high and rapid profile. Household US names, many of whom have invested in Ireland, are being joined as global players by companies from China and Russia. Not surprisingly there is also major interest in where the new tech hotspots will be. Our research indicates that the global tech sector sees the US remaining as the world’s technology leader, but China and South Korea for example, are investing at a level that will drive the spread of such hotspots.

For a small country, Ireland continues to make an impact. We account for a significant level of all inward investment in Europe. The American Chamber of Commerce in Ireland notes that investment from the US in Ireland has grown five fold in the past decade and is now worth $190bn; more than the US has invested in the four BRIC nations combined.

Competition

The intense competition for innovation focused capital and labour means that Ireland must constantly review its approach to innovation. With this in mind, last autumn KPMG’s R&D Incentives Practice produced Innovation Monitor. Carried out by RedC Research it assesses Irish business attitudes to innovation.

Large companies are more positive about Ireland’s performance and optimistic for the future whilst smaller companies are more apprehensive. With limited financial resources and little access to credit, small companies are faced with a choice of maintaining the status quo and risking their competitiveness, or putting limited resources into uncertain innovation projects. While incentives exist to take away some of the financial risk associated with innovation, our research shows that small companies find it more difficult to take advantage of them.

In addition, two-thirds of our respondents feel the recession has made us more innovative. More than four in five businesses think Ireland is either more innovative or the same as other countries. However, more than half of those surveyed believe that the Government isn’t doing enough to encourage innovation. The majority of those respondents feel that more financial incentives are needed; in fact, four of the top five suggestions relate to finance. Cutting red tape, easing the administrative burden on claiming the R&D tax credit and R&D grants, and encouraging bank lending were amongst the common responses received.

Meanwhile two in three Irish businesses describe themselves as currently innovative, though small companies are more than twice as likely to be planning innovation projects as currently undertaking them.

Finance

Financing is the most significant factor in driving innovation with nearly 90% of Irish businesses feeling it is important. Large companies are more likely to be receiving grants and claiming the R&D tax credit than small companies. Somewhat disturbingly, only one in five companies say there is sufficient information available on R&D and innovation funding. We believe many companies are still unclear as to the meaning of a number of the R&D tax credit guidelines and thus miss out on a potential claim. Our research has found that approximately 28% of those that don’t claim the credit could probably do so.

In my view, the role of people in realising our innovation potential cannot be underestimated. Research from Forbes reaffirms that diversity in the workforce is a key driver of innovation. Thus, we need to encourage mobile talent to view us as a worthwhile career destination.

Unsurprisingly, personal tax rates are a key factor in this equation. Very high taxes on high earners in a small peripheral economy run the risk of talented and ambitious individuals deciding against choosing Ireland.

Ahead of the budget on October 15th, we need to be aware of our relative competitive position. Research such as that just released by the ESRI, shows just how quickly Irish-based employees start paying relatively high rates of tax. The National Competitiveness Council measured the impact of labour tax changes from 2008 to 2012. In its view, the drop in net pay caused by higher taxes over the period means Ireland does not have the option of increasing labour taxes when competing for mobile talent with highly valued skills. With a lot of good news to tell about Ireland, we need to continue working hard to maintain our appeal.