“Transforming Irish Industry…”

Michael Henning wrote an interesting posting just before last Christmas,  on the challenges of creating 160,000 new jobs in the Irish economy.

Naturally,  as a member of the Taoiseach’s Innovation Taskforce,  I was very intrigued by his analysis.   One of his observations,  almost in passing,  was that:

“Employment in companies assisted by Irish State enterprise agencies – - IDA Ireland, the foreign direct investment (FDI) promotion agency and agencies supporting indigenous enterprises in the tradable goods/services sectors: Enterprise Ireland, Shannon Development and Údarás na Gaeltachta – - in December 2008 was 1.4 per cent (3,981 jobs) higher than it was in 1999.”

To me,  this was quite startling:   after a decade of enterprise development and investment by the State,   the Department of Enterprise,  Trade and Employment  (DETE) has reputedly managed to create just a net increase of 3,981 jobs.

I decided to dig into the figures a little bit.   The IDA publishes its annual reports for the last decade on its web site.   Enterprise Ireland does not appear to have all its annual reports from the last decade online,   but using the excellent services of the Wayback Machine , it is fairly routine to extract them from the internet archives.   The 2009 reports of both organisations have yet to be published,  but I expect are imminent – and I’ll probably follow up with a further posting to update this one once both are published.

It was quite interesting in particular to compare the various annual reports of Enterprise Ireland.   For example,  until 2005 Enterprise Ireland appears to have routinely reported on both export sales, and total sales (ie export and domestic sales combined) of its client companies.   From 2006 onwards,  it appears only to report on export sales.   For the record,  export sales decreased from about 46% of all sales in 2000,  to only 41% by 2005.  I don’t know what the ratio is today — what proportion of the sales activity of Enterprise Ireland clients is export focussed…

A further slight issue I had in comparing the reports was that an annual report would usually report for both the year of the report itself,  and the prior year for comparison purposes.   But then,  taking two consecutive annual reports showed some – usually relatively minor – discrepancies on the figures for the year in common between the two reports.

Another interesting observation is how Enterprise Ireland routinely separated exports to the UK from the rest of European exports in its annual reports in the early part of the decade,   but more recently has tended to bundle the UK and Northern European exports together into a single combined figure.   In 2000,  exports to the UK by client companies were (explicitly) 44% of the exports for that year.   By 2008,  I deduce – it is not explicitly given,  as far as I can tell – exports to the UK were 47% of all exports,  although of course I stand to be corrected.  If true,  then Enterprise Ireland clients are more dependent on the UK for exports than they were at the start of the decade which (if true),  to me,  is a surprising trend.

Anyway,  let’s return to Michael Henning’s observation.  Here are the employment graphs:

In summary,   the graphs look pretty flat.

Here are the export numbers (in millions of euro) from the client companies (I don’t yet have the export figure for 2008 for the IDA):

The climb in exports from the IDA client companies is clearly impressive.   When taken in conjunction with the employment numbers,  it would appear that IDA client companies are showing increasing export productivity per employee.   This presumably shows higher value exports,  and a successful move up “the value chain”.

Interestingly,  the graph – to me at least – shows the dramatic difference between the multinational and indigenous sector in terms of export value add per employee…   Enterprise Ireland appears to have a long way to go in assisting its client companies scale and move up the export value chain.  It is interesting to speculate why the graphs diverge so much:  is it that Enterprise Ireland client companies are dominated by non export sales (since total sales are no longer published by Enterprise Ireland,  it is difficult to know the effect of this) ?  Is it because Enterprise Ireland clients are dominated by offerings which have lower value than those from the multinationals ?

Of course,  an even more interesting set of data would be the profits (rather than just export revenues) generated by the DETE client companies (from their operations in Ireland) – but I do not have that data.

Next I looked at the income of the two organisations,  as reported in the financial statements of their respective annual reports.   The income figures include subvention from the Government (ie the taxpayer) but also other incomes such as equity disposals (in the case of Enterprise Ireland) and asset (eg property) disposals.   The breakout of these figures are in the financial reports if you wish to examine them,  but here I just report the total incomes (in thousands of euro):

I think the trends in the income figures are particularly interested when correlated against the employment figures above….

It is also interesting to compare the income figures,  to the grant aid figures.   For example in 2008,  the IDA reports it had a total income of 186.8Meuro,  and issued grants to its client companies to the value of 76.6Meuro – 41% of its income.  In 2000,  the grants were apparently 53% of its income,  rising to 60% in 2002,  and declining as a percentage of income ever since.

For Enterprise Ireland,  as noted above in the graph,  income in 2008 was 362.5Meuro:   grant aid for company development (excluding the County Enterprise Boards and Business and Innovation Centres etc) was 80.5Meuro.  At 22% of income,  this is in fact the highest in the decade:  in 2000 it was just 13% of income.    Since 2002,  Enterprise Ireland has also separately reported its grant aid for science and technology commercialisation and uptake:  in 2008,  this was 99.5Meuro and thus 27% of income.   In the prior year,  it was 31%.

So,  in summary and if I have understood the figures correctly (once again,  I may have mis-understood them…), both the IDA and Enterprise are giving approximately half, or just under half,  of their own incomes out as grants to their client companies (and in the case of Enterprise Ireland,  to technology transfer activities).

I of course stand to be corrected on any of these figures,  and may be mis-interpreting some of the data in the various annual reports.   For me,  the most startling aspect is the employment figures,  as Michael Henning identified.

An American market strategist (and I’ve met a few of them in my time :-)) might use the word “leverage”.  A philanthropist might talk about a “virtuous circle”.  A mobile phone operator might talk about the “network effect”.   A social networking guru would talk about going “viral”.

Me,  I’m just an engineer.   And when in university,  I was taught about feedback loops.  For every milliamp you put into your amplifier circuit,   if you got just one out then you had a linear relationship – output grew in proportion to input.   If you increased the input by a milliamp but got no increase in output,  then you had an unresponsive amplifier!   No matter how much you put in,  the output stayed the same:  yuk.   If you increased the input by a milliamp and got more than one milliamp in an increase in output,  then you were in business!!

There’s little doubt that every job created by the DETE through its agencies and client companies,  creates indirect employment elsewhere in the economy.  In an earlier posting I discussed this effect in Silicon Valley,  and came up with a ratio of 0.625 — for every direct job,  0.625 indirect jobs are created.    If the same ratio were to apply in the Irish case,  then we could add factor of 0.625 to the figures in the employment graph to get a better indication of the jobs likely created.

But the basic problem is that the employment graphs are flat,  even if you do add a factor (like 0.625).   Rather than adding a constant factor to each job created,   we need a multiplicative effect instead.

How do we create a positive feedback loop,  leading to exponential growth ?   For every job that the DETE creates,   how can we orchestrate an environment that at least one further job is created in the same client company – or in similar export oriented companies ?   And for each such further new job,   yet another job is created;  and then because of that one,  yet further ones ?    The DETE grants should seed a positive feedback loop,  a multiplicative exponential effect rather than just flat additive:  how do we leverage the DETE investments,  how do we get a network effect,  how do we get the DETE to go viral ??..

These are issues that many of us on the Innovation Taskforce have been frankly struggling with.   I believe with the right commitment,  we may be able to offer a few catalysing actions…

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12 Responses to “Transforming Irish Industry…”

  1. Stuart Coulson says:

    Chris,

    Great, detailed work and really interesting.

    Not wanting to add to the concern, but a different interpretation of the increase in IDA-sponsored company export revenues could be that multi-nationals can indulge in (some) tax jurisdiction shopping and can therefore “import” revenues into Ireland. Such artificial “growth” is not as readily available to an indigenous company. I find that easier to believe than FDI-based employees almost doubling their productive over the decade?

    • chrisjhorn says:

      I wish I had data for profits from Irish operations, rather than just export revenues, for the IDA client base. It would also be intriguing to see the impact of transfer pricing tax arrangements for all IDA clients.

      I don’t know whether the Government/Dept. of Finance have these figures — I suspect they might be considered State secrets if they did, in terms of Ireland’s international competitiveness :-)

      Thanks for the comment Stuart
      best
      Chris

  2. Chris

    A fairly obvious difference between the IDA and EI is that the IDA start off with an existing exporting business and therefore Ireland tends to be a route through which their products and services are delivered.

    Enterprise Ireland on the other hand are dealing with indigenous companies who are not already exporting or are exporting from a very low base.

    There are no big global ideas that come out of Ireland. There are a lot of people with big ideas that have to leave Ireland to create a global business and then perhaps be encouraged to return with the support of the IDA.

    Giving 80m to 10,000 businesses will not deliver anything of significant returns in employment growth. However, pick an industry with global perspective, choose a management team with global expertise and experience and put 20% of each annual budget into 2 companies and let them build global businesses that will create employment and inward revenue.

    It is far better to achieve 50% of the impossible than 100% of the normal achievable targets.

    But then risk aversion is now the order of the day.

    • chrisjhorn says:

      To get some quick acceleration for the smart economy, the Innovation taskforce have been considering precisely the point you make Gerard — how can Ireland leverage successful high growth high tech companies with emerging export markets..

      I hesitate to agree that there are “no big global ideas that come out of Ireland” — I believe actually there are quite a few, – but not enough – and sometimes these big ideas have difficulty accessing appropriate risk capital..

      I also am not convinced it should be the role of the State to invest in scaling big global ideas — much better I think if private (international……) risk capital could be used: after all, these are the folks with the international business networks and rolodex (sorry, linked-in :-) portfolios..

      I think the key issue, as I mentioned at the end of the post, is whether it is possible to generate a positive feedback loop which is intelligently and insightfully seeded by the State…

      Something else which I’m struggling with here is whether it is wise/prudent to publish the details of our very best ideas: on the one hand, I really do want the Irish community to participate and comment and critique and ultimately buy-in to a strategy – on the other hand, we do not want to give competitor jurisdictions (for international entrepreneurship) our very best ideas……..

      Appreciate your time and comments Gerard
      best wishes
      Chris

  3. Chris,

    One of the reasons may be that we don’t have clusters in our SME sector, as they do in most developed countries. Europe recognises their importance to economic development and there is a group called the European Agency for Cluster Cooperation who are promoting this model.
    http://intercluster.eu/index.php?option=com_content&task=view&id=95&Itemid=163

    Most small Irish companies are stand alone and have very little contact with others. It’s a cultural thing – we’re very competative among ourselves. Whereas abroad, small companies tend to have a degree of interdependence, making it much easier for them to specialise and grow.

    • chrisjhorn says:

      Edward,

      What are your views on the Science Foundation Ireland (and Enterprise Ireland) Strategic Research Cluster programme – see eg http://bit.ly/bUD5UJ and http://bit.ly/ct5454 ? Also the Ent. Ire. innovation network programme see eg http://bit.ly/ddrJRY ?

      In the Innovation Taskforce work, we have some thoughts on further clustering opportunities, particularly in the convergence area and what we call “flagships” — more soon when we publish our work (in March I expect). But I am interested in any views and insights you may have on the current cluster initiatives…

      best wishes
      Chris

  4. Chris,

    More on Clusters from the Havard Business School.

    http://www.isc.hbs.edu/econ-clusters.htm

    “Clusters and the New Economics of Competition”
    Michael E. Porter
    Harvard Business Review
    November-December 1998
    This article explains how clusters foster high levels of productivity and innovation and lays out the implications for competitive strategy and economic policy. Economic geography in an era of global competition poses a paradox. In theory, location should no longer be a source of competitive advantage. Open global markets, rapid transportation, and high-speed communications should allow any company to source any thing from any place at any time. But in practice, location remains central to competition. Today’s economic map of the world is characterized by what Porter calls clusters: critical masses in one place of linked industries and institutions–from suppliers to universities to government agencies–that enjoy unusual competitive success in a particular field. The most famous examples are found in Silicon Valley and Hollywood, but clusters dot the world’s landscape. Porter explains how clusters affect competition in three broad ways: first, by increasing the productivity of companies based in the area; second, by driving the direction and pace of innovation; and third, by stimulating the formation of new businesses within the cluster. Geographic, cultural, and institutional proximity provides companies with special access, closer relationships, better information, powerful incentives, and other advantages that are difficult to tap from a distance. The more complex, knowledge-based, and dynamic the world economy becomes, the more this is true. Competitive advantage lies increasingly in local things–knowledge, relationships, and motivation–that distant rivals cannot replicate.

  5. johnnyryan says:

    Very interesting – thank you for posting this. Did anyone challenge your interpretation of these figures or are the OK as they are presented here?

    What do you make of Colm Lyon’s Internet Growth Alliance initiative? This is a way whereby the private sector and EI can support each other to work with start ups.

    By the way, is it not understandable that EI should cost more for its output?

  6. chrisjhorn says:

    Hi Johnny,

    I presented them in one of the Innovation Taskforce meetings, in presence of senior members of (what was) DETE and CEOs of Enterprise Ireland and IDA (and indeed SFI).

    No-one has yet challenged the figures, and I would of course be very glad to correct any that are wrong.

    I’m all for further involvement by Enterprise Ireland in start-ups in any sector, so the IGA gets my vote.

    Should Enterprise Ireland cost more for its output ? I don’t know…

    But in trying to argue for more investment into DETE/DETI at the expense of other areas of the economy, it is tough to do so if the agencies of DETE/DETI are not efficient…

    best
    Chris

    • johnnyryan says:

      Dear Chris,
      Thanks for replying. I agree – the IGA looks great.
      Judging by your figures it does look like there are questions to be answered about the agencies.
      Again, thanks for posting these data – very interesting.
      Johnny

  7. Hi Chris

    Thanks for the thought provoking analysis. I wonder if there may be a mis-calculation on the EI figures.

    If you exclude funding given to CEB and to science and technology programmes from the expenditure side (as you do) then there is a case for deducting it from the income side.

    Using published 2009 figures the EI ratio is then
    35%. Total income 441,963. Funding Provided to other agencies 140,536. Leaves income available of 310,427. Spend is 109,250. This gives ratio of 35%. The IDA ratio for 2009 is 53% (up from 41 %) in 2008.

    In addition, in EI there are also investments in shares and venture capital funds captitalised in the balance sheet. Total additions in 2009 are around 92m. About 58m of this is linked to the Enterprise Stablisation Fund. If this part is excluded and we were to assume that rest is investment by EI then the ratio for EI increases to 46%.

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