Successive Irish governments have proclaimed loud and clear their commitment to creating a knowledge-based economy and the high levels of research and development (R&D) investment required to support it. Unfortunately, reality speaks louder than rhetoric and Ireland languishes at the foot of the European ranking for R&D spending.
Figures produced by Eurostat at the end of last year show Irish R&D spending to be less than 1 percent (0.78 percent) of GDP. To put this in context, the top spenders Sweden, Austria and Germany spend 3.39%, 3.19% and 3.17% respectively.
Proportionately, this is more than four times the level of Ireland. The EU average is 2.19%, almost three times that of Ireland. Ireland comes in a very modest 23rd place out of the 27 EU states.
This ranking can be used as a measure of the value a country places on R&D as a driver of innovation. Unfortunately, Ireland doesn’t seem to give it much importance. And it could have serious consequences for our economy and our society over the next decade.
Research and development drives innovation, and innovation drives the productivity needed to pay for high living standards such as living wages, good public services, and housing worth living in. If we are to be able to pay for the solutions to our housing crisis, fix our health service, fund our pensions and deal with climate change, we are going to have to increase our productivity.
This means that more people are in higher value-added jobs, using new technologies and innovations. This is what is meant by moving up the value chain and it requires increased expenditure on R&D.
Of course, politicians will rightly argue that GDP is a bad measure of the Irish economy due to the distorting effects of large multinationals here. However, even if we remove this distorting effect and use the modified measure of the size of the economy known as Adjusted Gross National Income (GNI), Ireland’s R&D spending only climbs around 1 %, somewhere between Lithuania and Croatia.
This still leaves us in the bottom third of the EU-27.
There are also those who argue that these measures only reflect inputs and do not calculate outputs. The inescapable fact is that the richest and most technologically advanced nations in the world invest the greatest proportion of their wealth in R&D and innovation. It is not a coincidence.
The need to address Ireland’s poor ranking is all the more urgent in light of recent developments in global tax reform. Multilateralism is making a comeback thanks to the change of administration in the United States. Coupled with the G7 consensus on a corporate tax rate of at least 15% globally, this presents challenges for Ireland on at least two fronts.
The first is the very real risk of a significant drop in corporate tax revenues. In a state where one-fifth of tax revenue comes from this source, this could have a serious impact. Comparison with the boom-era stamp duty is hard to avoid. We are increasingly using what could be one-time income for current expenses.
Estimates vary, but there seems to be broad agreement that the global minimum rate will lower our corporate tax by around 20 percent or well over $ 2 billion.
The other main risk will come from our less attraction for future FDI. Will the next Pfizer choose to locate in Ireland if its tax advantage is canceled or significantly reduced? Time will tell, but we can take steps to mitigate the risk.
Rich countries that invest in R&D have better jobs, higher taxes and increased productivity through their investment in the science base. They are producing more technologies that are attractive to both foreign and domestic investors. Ireland must follow suit if it is to anchor existing investments here and continue to attract new FDI.
R&D investments also support national start-ups in emerging fields such as AI, fintech, personalized medicine, etc.
The most alarming aspect of Ireland’s current lagging position in this critical area is the fact that this will come as no surprise to the government. As early as 2006, the national strategy for science, technology and innovation set an annual investment objective in R&D of 2.5% of the value of the economy within seven years.
This target was largely missed, but there were mitigating circumstances in the form of the global financial crisis. The commitment was reaffirmed in the 2015 Innovation 2020 strategy, which set 2020 as the date for reaching the 2.5% target. Little or no progress has been made.
The good news is that where the state leads, the private sector follows. For every € 1 that the government invests in public R&D, companies generally invest € 2. Currently, the state invests a little less than one billion euros per year in R&D. It is expected to triple that level of investment over the next decade. This would see total public and private investment rise to match that of Denmark, a world leader in innovation and a country similar in size to Ireland.
Innovation, new products and services, high value-added jobs, economic spending and the resulting taxes would be transformative for Ireland.
Our response to the pandemic, in our use of knowledge to deal with a serious threat, has shown that we can do it. After years of missed goals, now is the time for reality and rhetoric to rhyme.
Dr Graham Love is a partner of the Consulting Services practice at Mazars and focuses on providing consulting services to the higher education and healthcare sectors.