Fintan O’Toole: Ireland is poor at innovation, but a world-class producer of complacency and self-satisfaction

Last week, I stirred some outrage by uttering heresy: the indigenous Irish economy has a problem with innovation. In a piece about Tony O’Reilly, I compared Ireland, in this regard, unfavourably with Denmark. The apparently widespread belief that this is ridiculous suggests we don’t just have a problem with innovation – we have a problem with complacency.

It would be absurd to suggest that there are no innovative indigenous Irish companies. But it’s the big picture that matters. We can get it from the Global Innovation Index, produced annually by a United Nations agency, the World Intellectual Property Organisation. It aims to “reveal the most innovative economies in the world, ranking the innovation performance of around 132 economies”.

Ireland is 22nd, which is mediocre for a young, open, highly educated, wealthy country with relatively massive inward investment from many of the world’s most advanced companies. What’s more worrying is that Ireland’s ranking has dropped rapidly in recent years.

Ireland is especially weak in the area I was trying to draw attention to last week: the creation of international brands. We rank 37th on “global brand value”, 38th on the creation of patents for new products and a miserable 64th on industrial designs. On the export of cultural and creative services as a percentage of total trade – an area where we imagine ourselves to be world-beaters because we have Jessie Buckley, Cillian Murphy, Andrew Scott and Saoirse Ronan – we rank 45th.

Another index is the European Innovation Scoreboard, produced by the European Commission and confined to EU member states. All the leading countries – Denmark (which is first), Sweden, Finland, the Netherlands and Belgium – are relatively small countries. Ireland is not in this first rank. It scores above the EU average, but its performance has been improving at a significantly slower rate than the countries below it.

On some key markers of innovation – patent, trademark and design applications – Ireland’s position has been declining rapidly and we are now way below the EU average. The gap between Ireland and the best performers such as Denmark is widening, while the gap between Ireland and the average performers is narrowing.

Some of these indicators may be unfair to Ireland, since they use GDP figures for purposes of comparison – and Irish GDP is partly fictional. On the other hand, though, Ireland’s rankings are greatly boosted by the activities here of multinational corporations. As the National Competitiveness Council puts it, the figures “point to the significant contribution of large foreign-owned multinationals in Ireland, and a reliance on the activities of the multinational sector”. It seems safe to suggest that if we were measuring only indigenous companies, these rankings would look much worse.

A third measure we might use is the European Digital Social Innovation Index, also produced under EU auspices. This index focuses on cities rather than countries. And again, it’s not great news. The top five cities are London, Amsterdam, Copenhagen, Stockholm and Paris – three of them being the capitals of relatively small countries. Dublin ranks 18th.

Why does this matter? Because if innovation is concentrated too much in multinational companies, you get two economies – and, in very rough terms, two societies. In the cutting-edge world of the leading multinationals (the Pfizers, Googles, Boston Scientifics and Apples), there are high productivity and high wages. In the indigenous economy, if there’s less innovation, there’s lower productivity and lower wages.

A recent study by the Nevin Economic Research Institute shows us just how low that productivity really is. It reveals that the average “value-added per hour worked” by employees in Irish-owned companies between 2017 and 2019 was €28. This ranks Ireland last among a group of nine comparably small, open, advanced economies in Europe behind Luxembourg, Denmark, Norway, Belgium, Austria, Netherlands, Finland and Sweden.

Previous research has shown that, in manufacturing, value-added per employee in foreign-owned firms is 10 times that of Irish-owned firms. In software and computing, foreign firms are 8.5 times more productive. These gaps are not narrowing – they’re growing. A decade ago, overall productivity in foreign firms was three times that in domestic companies – now it’s more than five times.

Over the past 20 years, labour productivity among foreign companies in Ireland jumped fourfold, whereas domestic labour productivity grew by just 30 per cent. In 2020, foreign firms outspent domestic firms on R&D by four-to-one.

None of this has to do with a lack of Irish entrepreneurial spirit. It’s not about the failure of lone geniuses to have eureka moments in the bath. It’s not caused by the lack of work ethic. It’s about the collective environment from which innovative and sustainable companies emerge.

It’s about Ireland’s physical infrastructure which, as we all know, is relatively poor. It’s about how indigenous companies struggle to get funding – Ireland ranks 93rd in the world for domestic credit extended to the private sector. It’s about business and public sector investment in research and development – on both of which measures Ireland compares poorly with its European peers.

But maybe, underneath all of this, it’s also about complacency. Ireland’s vast success in the attraction of world-leading companies from the US underpins the public finances, creates high-wage employment and sustains a boomtime atmosphere. The scale of a handful of indigenous companies – Ryanair, CRH, Smurfit Kappa, Kingspan and so on – generates a feeling that we’re as good as the best of them.

But we’re not. Think, for example, of a vital area of enterprise for Ireland: offshore wind energy. The Arklow Bank that went into operation 20 years ago was not just one of the largest such developments in Europe. It also had the world’s first three-megawatt wind turbine. And since then? Nothing. Not a single offshore wind farm has been developed in Irish waters. Innovation was gone with the wind.

The Government’s Impact 2030 – Research and Innovation Strategy sets a target of doubling spending on R&D. That sounds great, except that, even if it’s achieved, we would, in 2030, still be below the current average for OECD countries. We will, though, remain world-class producers of self-satisfaction.