Our economic success is more precarious than we realise - a higher corporate tax rate may be the answer, writes Roy Green
Can Ireland sustain the momentum of its remarkable and much admired economic transformation into the next decade of the 21st century? Or are the foundations of this success too narrow and precarious to respond effectively to changing patterns of global competition?
These are the questions asked not only by policy-makers, but also increasingly by the higher education sector as Ireland embarks on its next transition - from a low cost magnet for foreign investment in Europe's evolving single market to a more self-confident and diversified knowledge-based economy, where competitive advantage has its source in research and innovation.
However, they are also the very questions being asked by other countries seeking to emulate Ireland's success, including the new EU states from Poland to the Slovak Republic, and rapidly developing regional economies such as Bangalore and Shanghai.
These economies, with their highly skilled workforces, will not for long be satisfied with offshore manufacturing and the back-office operations of western firms.
On the face of it, Ireland's growth performance appears robust. Having survived the international downturn in far better shape than most other economies, Ireland is once again posting high growth rates in productivity and employment - a simultaneous feat matched in the euro zone only by Finland.
A major factor in this performance for both countries is the comparatively high proportion of R&D-intensive exports, which in Ireland's case amounts to more than four times the OECD average.
But this is where the similarity ends. Whereas much of the R&D content in Finland's exports is locally sourced, generating "spill-over" effects across its national system of innovation, Ireland's R&D-intensive exports embody technology largely originating in the home base of the multinational companies which have sited operations here.
No one would doubt that the scale and quality of foreign direct investment (FDI) attracted to Ireland over the last decade is a huge achievement for a small, historically marginalised economy, with Singapore possibly the closest modern parallel. This investment, along with European Union infrastructure support, has played a key role in driving Ireland's growth.
The problem, according to recent OECD data on the "technology balance of payments", is that Ireland has become a technology taker rather than a technology maker.
Further evidence is provided by Ireland's poor overall R&D performance, though it may be acknowledged that performance varies considerably across firms and sectors.
Compared with the EU's ambitious but not unrealistic "Lisbon target", which called for an R&D spend of 3 per cent of Gross Domestic Product by 2010, Ireland could manage only 1.12 per cent by 2003 - the latest figure available.
The EU 15 as a whole did little better with 1.99 per cent, while the US achieved 2.76 per cent and Finland managed 3.51 per cent.
Clearly, R&D expenditure is no more than a proxy for performance, as it may be well or badly focused, but on all the measures we have for both the FDI and indigenous sectors, Ireland's performance falls substantially short of any ambition to create a knowledge-based economy.
Indeed, disaggregating business and Government spending on R&D, it is possible to calculate that the Government's R&D spend must increase by a net additional €1 billion per year to reach the EU 15 average, let alone the Lisbon target.
To its credit, the Government has commenced the process of building Ireland's research and innovation capacity, with the Programme for Research in third-level institutions, Science Foundation Ireland, Irish Research Council for the Humanities & Social Sciences, Irish Research Council for Science, Engineering & Technology, Health Research Board, Enterprise Ireland funding schemes and, most recently, the appointment of a Chief Science Adviser.
However, three major challenges remain. First, as recommended in the OECD's review of Irish higher education, greater policy coherence is required across the myriad Government departments and agencies concerned with research funding and performance.
Second, again following the OECD recommendations, immediate action must be taken to address the serious infrastructure deficit in Ireland's higher education institutions, which hardly figure in the recent world rankings.
While it makes strategic sense for Irish universities to specialise and collaborate in key areas to achieve critical mass, as Prof Jim Browne argued in these pages recently, there is still a resources gap which must be bridged. A recent report by the Royal Irish Academy estimated the required additional investment at €450 million a year.
Third, even with substantially increased funding for research and infrastructure, there is a further challenge - effective intellectual property protection and the development of world best practice in technology transfer and commercialisation, to link research to the market.
Again there is scope for collaboration among Irish universities and the establishment of "shared services" facilities, possibly on an all-island basis. Once it is accepted and understood that Ireland's future competitiveness and prosperity depends on building national innovation capacity, the question remains who will pay for it?
This may be answered by identifying the beneficiaries - graduates, business and the community - which suggests that costs should be shared. With student fees off the agenda, a significant contribution will have to be found from taxpayer funds. More controversially, business should also be asked to contribute a greater share. For example, an increase in the corporate tax rate from 12.5 per cent to 17.5 per cent would generate an additional €730 million for what might be titled an "Innovation Ireland" fund.
This will give a new impetus to Ireland's emerging knowledge-based economy, whose corporate tax rate would still be lower than Poland and the Slovak Republic. And it will provide recognition that research is not a "free good".
Prof Roy Green is dean of commerce and incoming vice-president for research at the National University of Ireland, Galway