I used my thinking in this post as the basis for the presentation I gave to the Innovation Taskforce on Monday 14th last. Concurrently Cliff Taylor of the Sunday Business Post contacted me asking me to do a piece as a follow up to my participation in a breakfast panel briefing at the Irish Taxation Institute: a version of the post below appears here in the paper.
In November 1956 Taoiseach John A. Costello, aided by his Finance Minister Gerard Sweetman and young Secretary of the Department of Finance TK Whitaker, introduced Export Profits Tax Relief as the forerunner of our low corporation tax regime. The EPTR allowed a 50% remission on profits earned from increased export sales. Then in 1958, the IDA was given authorisation under the new Fianna Fail led Government led by Taoiseach Eamon de Valera to encourage foreign direct investment. Manufactured exports, which had been stagnant, grew by 18% in 1957, doubling by 1960; and employment once again to grow from 1957.
At a gross level, the essence of our enterprise policy for over fifty years has been to quietly admit that there is little domestic capital for investment and job creation; therefore to attract foreign direct investment, particularly from the United States, to create jobs here primarily in the manufacturing sector; to provide a cost competitive environment for energy, water supplies, freight logistics, communications and business administration; to ensure that we have a pool of talented, technically literate labour to operate the manufacturing plants, and to drive towards attracting high value manufacturing; and then use a relatively low corporate tax regime to both attract further overseas investment, and also to underpin social solidarity with the weaker members of our society.
In this decade, our enterprise policy has been side-tracked by a temporary but damaging property bubble, arguably augmented by a public sector bubble. Craig Barrett, retired Chair of Intel Corporation, noted at the Government’s Global Irish Economic Forum in September 2009 that of all the various reasons which Intel came to Leixlip in 1989 only one – corporate tax – remains attractive today. Last week, our Minister of Finance Brian Lenihan noted in his 2009 Budget that “unless we regain our competitive edge, we will be unable to return to the tried and tested strategy of export-led growth that ushered in the boom in the early 1990s”.
But will restoring our competitive edge, and in particular the total costs of doing business in Ireland, be sufficient ? If our wage costs are reduced towards those of the decade-ago, export-led, original Celtic Tiger, then can we relax and watch while our tax coffers replenish, full employment returns and Ireland re-emerges as a Celtic Phoenix from the ashes of our recent temporary little distractions ? We have relied on the multinational sector, particularly from the United States, as the foundation of our economic growth. However the United States is now in recession, with unemployment rates only marginally less than our own: jobs desperately need to be re-created at home for US citizens. Homes are being re-possessed, public services are under dangerous pressure, and US politicians of all hues are expected to deliver immediate solutions. Further of course, the current strength of the Euro against both the US dollar and the UK Sterling makes it even more challenging to restore our cost competitiveness relative to our hitherto two most important trading partners.
In addition, there has been a quiet global economic transition which I believe we are only beginning to realise here in Ireland. During the twin digressions of our property and public sector bubbles, the world has moved on. China in particular has been quietly and but firmly acquiring control of many of the planet’s critical raw resources for manufacturing including bauxite, fluorspar, silicon metal, coke, magnesium and zinc. These materials are now available more cheaply to Chinese manufacturers than their US and European competitors, and China is discouraging export of these raw materials out of China. The USA perhaps has been pre-occupied by its “war on terror” over the last decade, whilst China has simultaneously had a policy of active engagement with many governments world-wide to foster trade, economic development, and to acquire both raw materials and friendly export markets for China.
The world has moved on. Karl Fisch, a high school administrator in Colorado, in 2007 produced one of the now top viewed Youtube videos “Shift Happens” – take a look if you haven’t seen it. His answer to his quiz on naming the richest country, with the largest military, highest standard of living, centre of world business, and centre of world innovation is very telling. The top ten jobs next year probably did not exist a decade ago: we are preparing students for jobs that don’t yet exist which use technologies which haven’t yet been invented to solve problems we don’t yet know are problems. Shift happens.
These topics have been pre-occupying many of us who are members of the Government’s Innovation Taskforce. We hope to be in a position to report to the Cabinet, and the nation at large, in the near future. We have run an open process, having received more than a hundred submissions from the public, and which we in turn have published (with the permission of the author concerned). There has been active blogging on the work, and an active twitter stream on topics of interest.
Ireland has much going for it in comparison to alternative jurisdictions, for enterprise activity and innovation. We speak the international language of business (and as Fisch notes that China will soon become the number one English speaking country in the world); we are in the Eurozone; we have our natural resources, and not least our relatively under-used electromagnetic spectrum; we have a heritage of creativity and exploration in our arts, literature and science; and we are widely recognised as ingenious, lateral thinkers and frequently out-wit the opposition. We are fortunate in not only having many multinationals operating here, but having a range from different market sectors: in turn this creates opportunities for convergent collaboration across sectors, in ways which might be difficult within their home jurisdictions. We are a relatively small market, which creates the opportunity for market trials and experimentation in Ireland before the expense of addressing global markets. We have an international diaspora, several times larger than the combined Israeli and Indian diasporas.
In a world which has shifted around us in the last decade, what should our new enterprise model be ? Fifty years after 1956, there is still relatively little domestic capital for investment and job creation; and we therefore should continue to attract foreign direct investment as best as we can, despite the shift happening from the West to the East. However, what would it take for us to go further? Can we now attract foreign risk capital, as well as foreign manufacturing capital ? Risk capital can be attracted to Ireland if we can create a culture of innovation, in which new ventures and companies grow rapidly and bring leading offerings to the global market. These can be new products, new services, new processes and/or new designs, and any combination of these. Rapid growth not only creates jobs, but also creates experience in global markets which can be fed back into new cycles of start-ups and into exploiting new technology waves. A pool of young dynamic and innovative firms creates the environment from which larger global champions can sustainably emerge, by acquiring competence, technology and the expertise of successful early market trials.
I do not believe our current enterprise trajectory is going to continue to work. We need to create many more sustainable jobs in our economy, and we can no longer rely on the strength of economies such as the US and the UK to drive our own growth. Whilst still nurturing foreign direct investment, we need to augment our thinking and enterprise strategy: we need to create an inflection point in our enterprise innovation, and drive to a revised model of growth.