POLICY:The government urgently wants irish firms to increase innovation, but first it must decide what it needs to do to drive change

THE LESSON IS SIMPLE: IRISH firms must find new ways of doing old things, new ways to find new streams of revenue, and new ways to break out of the domestic market and into the world at large.

Equally, the Government must break old habits, embrace competition, spur, as it is doing, the growth of PhD numbers, and carry out root-and-branch reform of the education system.

For some, innovation means costly research and development, something remote from their lives, something more properly left to multinationals. It does not, it is not, and it should not be.

In Forfás chief executive Martin Cronin's view, Irish companies, those making products and, most importantly, those selling services, should think along the lines of Ryanair or Dell.

"They were two companies who went into businesses dominated by major players without new technologies and who both succeeded in becoming leaders in their fields.

"Ryanair found ways to get you from A to B at a much lower cost, while Dell found ways to get a computer to your home at a lower cost and tailored to your own particular needs.

"There are lots of ways to innovate. It isn't just about R&D," Cronin says, and he applauds the changes that have taken place in the last few years.

Since 2001, the Government's Science Foundation Ireland has helped to fund research and development in universities, spending hundreds of millions already.

The spending has helped to "embed" multinationals in Ireland, such as Wyeth, Lucent, Bell, Alcatel and GlaxoSmithKline, drawing them into cooperation with third-level institutions.

Equally, it has spawned Irish start-ups, such as Opsona Therapeutics and Cellix from Trinity College, Dublin, and more are in the pipeline from TCD and other universities.

"Opsona had the biggest first round of venture-capital funding ever. They have gone on to do a very successful venture with Wyeth," says Trinity's dean of research, David Lloyd.

"Another company, Cellix, developed when a physicist and a medic came together to get Science Foundation Ireland funding for research in magnetics to mimic blood flow," he adds.

However, the situation elsewhere is much patchier, though the seeds of change have been sown, particularly with dairy companies, such as Glanbia, beginning to spend significant sums on research.

Just 21 Irish companies are currently spending more than €2 million annually on research - a figure that Enterprise Ireland wants to multiply by four within the next three years.

But this is not enough, warns Hewlett-Packard Ireland's managing director, Martin Murphy: "Ireland Inc is complacent and is relying on our current success. We need to drive a high-performance culture." Long-established Irish firms that are performing comfortably, as many are in the current climate, are far less successful or even interested in learning the new lexicon of business.

New start-up Irish-owned firms, often headed by Irish-born management drawn from US multi-nationals, are not the problem. By their very nature, they are innovative. "The older type of company won't survive. They will gradually fade away. But the eyes of some guys glaze over when you talk to them like that," says one State official.

For the last three years, Enterprise Ireland has worked hard to bring the message to Irish firms, meeting with varying degrees of response. Often, the mindset is, why change something that is going fine?

In particular, traditional companies are conservative in their dealings with staff, reluctant to invest seriously in training and development, and, God forbid, avoid sharing information with workers. Faced with such a culture, the State now offers innovation "vouchers", worth €5,000 each, for Irish firms to buy in expertise from third-level institutions. Some 400 vouchers were offered, 200 have already been taken up, and the quota will easily be filled by the end of the year, says the Department of Enterprise, Trade and Employment.

Now it intends to go further, and to this end Taoiseach Bertie Ahern appointed a Minister of State with Special Responsibility for Innovation Policy at the Department of Enterprise, Trade and Employment - the man in the hot seat is Cork East TD, Michael Ahern.

However, the winds of reform must blow through all government departments, not just Enterprise, Trade and Employment on Kildare Street, which needs to make the regulatory burden more efficient, if not lighter. In particular, the more rigid Department of Education and Science in Marlborough Street across the Liffey must adapt far beyond the reforms currently mooted by Minister Mary Hanafin.

Ray Farrelly is the head of research and development policy at the Irish Business and Employers Confederation (Ibec). He points to the work of educationalist Sir Ken Robinson: "He believes that education is failing us because it has not changed in 200 years. The old idea of learning by rote kills creativity and breaking education down into subjects has had its time. We should be encouraging creativity in our children.

"Kids are innovative by their very nature, but it is kicked out of them. It is all to do with conformity. If we took a more thematic approach we would be better off. Children have inquisitive minds anyway," he says.

Already, some academics, such as University College, Dublin's Moore McDowell, have complained loudly about the declining literacy skills of the "text-speak generation" students entering third-level.

The point is taken by the Department of Enterprise, Trade and Employment, which accepts that entrepreneurship and science need to be more strongly emphasised.

Some of this is beginning to happen. Science Foundation Ireland already demands that universities link up with schools to encourage interest.

The Centre for Telecommunications Value-Chain Research (CTVR) at Trinity produced an animated series called The Resistors!, pushing the message that "science is fun".

Set in the near future in a post-apocalyptic Ireland, called "Cybernia", the plot follows four child characters who battle to defeat an evil junta of hackers. The series was broadcast on TG4 and "was very successful", says TCD's David Lloyd.

But so far, most attention is being directed at research and development into new manufacturing, or software products. Senior officials accept that the focus must be broadened.

Fergal O'Morain, director of applied research commercialisation at Enterprise Ireland, says the concept of "service innovation" is even less understood that innovation.

"Service innovation, what does it mean? Applying software that can do the job is one example of it. The question is to get existing manufacturers to have a service component.

"That is an interesting challenge for us. We think it is extremely important. And can we get service companies that are currently focusing only on the domestic market to consider exporting?" he says.

The problem of getting service companies to innovate is not unique to Ireland, says Ibec's Ray Farrelly, pointing to a recent European Commission paper.

"One problem is that the emphasis has been on product development, using tax credits and R&D. But 60 per cent of our exports are coming from services now, and we do not have anything in place for services," says Farrelly. "We are not alone in this one. The European Commission is trying to look at this area as well. So far, one financial-services company has qualified for a 20 per cent tax credit, after it proved that its invention was substantially different from anything that had gone before. Others are expected by the year's end."

Given Ireland's sharp increase in wealth in recent years, start-up companies find it easier to attract venture capital than they used to, but more could be done.

A €30 million seed-capital fund, jointly run by Enterprise Ireland and AIB, may offer one route ahead, but tax breaks, even modest ones, would also help to encourage investors: "A super Business Expansion Scheme, if you like," says one official, who declined to be named.

Given that business can only develop and thrive by winning contracts, the Government, which is still the biggest single spender in the economy, is to look at the way it doles out its budget, a variety of sources have told The Irish Times.

Currently, the public-procurement system operated by the Department of Finance is a model of honesty and probity, but small companies struggle.

Transparent and unbiased, and forever in search of value-for-money for the taxpayer, the system often offers bundled contracts, which make life easier for administrators, but more difficult for SMEs.

The French make efforts to bias their system towards smaller companies, while the Irish approach is to make sure that nothing goes wrong, or that nothing is seen to be improper. While improper conduct should not, obviously, be tolerated or encouraged, some consideration could be given to structuring or weighting contracts here.

"If you are pristine pure with very clear rules and you follow them exclusively, then it does make it extremely difficult for small companies to get in," says one senior civil servant.

"If you take the view that developing small companies is in the long-term interests of the State, then you have to encourage them. That is very time consuming and you can see why public contracts are bundled. There is a common complaint from small companies that they find it easier to sell to state systems abroad, rather than [trying to sell to the Irish Government]."

In recent years, Taoiseach Bertie Ahern has led a trade mission of Irish SMEs every January to far-flung places, from Saudi Arabia to China, in search of business: "We could do with one here," adds the civil servant.