Smart Economy Policy Lacks Ambition by Dr. Eoin O' Leary, Lecturer in Economics, UCC
27 Nov 2009
The problem with the Irish government’s smart economy policy is that it lacks ambition according to Dr Eoin O’Leary, Economics Department, UCC. Its objective is to target high-technology sectors and source innovation by commercializing science and technology developed in universities in order to boost competitiveness and ultimately national prosperity. This policy is fundamentally flawed in assuming that a government or its agencies can decide on the sectors and businesses in which Ireland will be competitive and that academics can play a central role in business innovation.
The main difficulty facing policymakers is that an innovation driven economy requires a different policy mind-set than the one that delivered the ‘Celtic Tiger’ In that hugely successful era the prevailing mind-set could be characterised as was one of active intervention. By far the most important policy was low corporation tax which made Ireland a tax haven for multi-nationals. Through the efforts of IDA Ireland so-called high-technology sectors and businesses were targeted and inducements offered to locate in Ireland. In this way a pipe-line of foreign direct investment was established by Ireland Inc which thrived in the 1990s.
Industrialization by invitation was a policy to fast-track Irish economic development through state intervention. The idea was to embed the multi-nationals in the local economy with the result that clusters of indigenous businesses would appear around them. By having access to frontier technology in these businesses the Irish workforce would up-skill with some going on to found their own businesses. In the mists of the domestically driven boom and bust of the last fifteen years, it may be difficult to reach an objective assessment of the success of this strategy.
There is no doubt that the foreign-owned sector was hugely effective in delivering thousands of jobs and considerable wealth in the last thirty years. However, there are strong concerns about the failure of multi-nationals to be embedded. A successful strategy would result in resilient clusters, in which as businesses close down, including the multi-nationals themselves, new start-ups emerge organically to replace them. Typically, this is not what has happened when companies such as Dell in Limerick close down. Instead, there is a clamour for politician’s and state agencies to set up taskforces to look for replacement industries. As a result the IDA pipeline is as relevant now as it ever was. If the strategy was to be deemed a long run success there would now be no need for a pipeline. Indeed in these circumstances state intervention might not be required as flourishing entrepreneurial activity as a response to market opportunities might materialize.
The problem is that the dominant policy mind-set overlooks the possibility that the strongest businesses are those that flourish without, or in some circumstances in spite of, government assistance. The case of Ryanair which is one of our most successful businesses springs to mind. The finding in international research that greater government support lowers the chances of business survival is completely anathema to this way of thinking. Instead of using the transparent and objective method of the market to test the viability of new ventures, we resort to expert committees to recommend sectors and businesses for government support. It is obvious that businesses who survive the challenges of the market are a safer bet as sources of wealth creation than those emerge as a result of the deliberations by committees of public servants and leading businesses persons who are not risking their own money.
The result has been the increasing politicization of the market process where only the so-called ‘smart’, ‘high-technology’ or ‘knowledge-based’ businesses need apply. The fact that the Green party’s membership of the coalition government has changed the ‘smart economy’ rhetoric to that of a ‘green smart economy’ is testimony to the superficiality of enterprise policy thinking. The effect is likely to be a waste of increasingly scarce tax-payers money on initiatives of doubtful value but also, and perhaps more damagingly, discrimination against existing and potential entrepreneurs in wealth creating sectors not favoured by government.
Paradoxically, the smart economy policy lacks ambition. Instead of facilitating the organic emergence of innovative businesses in any sector or location we seek to corral innovation into particular businesses, sectors or indeed places. Instead of running with the market our inherited mind-set is to engineer it. Our centralized government with its over-specialized institutional structure and its support of sectional interests is ill-equipped to support truly innovative businesses that emerge sporadically in diverse sectors throughout our country. It seeks to control rather than to be responsive to genuinely wealth creating businesses. A critical mass of these businesses represents our nation’s greatest chance of surviving these challenging times.
Realistically the smart economy strategy is nothing other than ‘more of the same’. The only game in town is, as it has been for the last four decades, to remain attractive to multi-nationals. The IDA pipeline is as relevant now as it ever was. Without our low corporation tax would multinationals want to conduct R&D here? Our primary objective seems to be to raise spending on R&D to the EU benchmark of 3% of GDP. This strategy of imitation cannot deliver long-term prosperity. Genuine strategy would result in Irish-based businesses positioning themselves in markets and niches where they have unique competitive advantages that are difficult to imitate. These strategies can only be developed from the bottom-up. Efforts by Ireland Inc. to engineer successful long-term strategies from the top-down are not likely to succeed.
Dr O’Leary specialises in economic growth, innovation and regional economics
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