Friday, 25 March 2011

Innovation, rather than high-tech, is key

David Jacobson: In 1990, in a paper on MNCs in Ireland, I argued that the “completion of the single market” in 1992 would bring pressures on Ireland to increase its corporate profits tax rate and that we should begin to prepare for this. In 1993, in a paper with Sara Cantillon, I suggested that FDI into Ireland from the US was highly dependent on American IRS regulations.

Ever since, in various papers and presentations, I have taken the opportunity to express the view that Irish industrial policy was and is overly dependent on the encouragement of FDI. This is not to say that we should suddenly increase corporation tax rates nor that we should discourage inward FDI. However, the pressures from our major European partners to increase corporation tax – or to introduce a CCCTB (Common Consolidated Corporate Tax Base) – should not have come as a surprise, and the horror being expressed by policy makers and commentators alike at the prospect of having to alter this one – and apparently only – pillar of industrial policy is a reflection on the lack of understanding of the prerequisites for sustainable development.

The monofocal Irish industrial policy sees development as something like the following:
Low corporate taxes => inward FDI => increase in high-tech => increase in exports => growth

This expresses inadequate recognition of the importance of indigenous firms and of all activities other than high-tech ones. For some reason we continue in Ireland to extol the virtues of the so-called smart economy, when we continue to appear well below OECD averages in most of the indicators of advanced technology infrastructures. Moreover, firms in low and medium technology (LMT) sectors continue to account for the vast majority – in nearly all OECD countries – of employment and contribution to GDP. Innovation, not high-tech, is the key, and there is a great deal of evidence of innovation in LMT firms. In Ireland, firms like the Howth company Oceanpath in food processing, and Cork’s BCD Engineering, are in LMT sectors but are highly innovative and successful.

Rather than focussing on our hallowed 12.5 per cent we should acknowledge the complexities of development, work on the identification of differences in the policies required to support innovation in different sub-sectors, and balance the support we provide to FDI and high-tech, with some attention to indigenous firms and LMT.


paul sweeney said...

A timely intervention. The mainstream press is not serving us well on this topic. In essence it seem that it not taking “anti-national” views on this subject. Peter Sutherland and others called the rate the “cornerstone of our industrial policy,” in the FT recently, though he was much more sophisticated in an interview with me some years ago. Yet 60% of companies here do not pay any tax, because they are not making sufficient profits or the principle take the money out (legitimately) as fees etc. So the rate is largely irrelevant to them.

What is most surprising is how many commentators including even Michael Noonan and Fintan O Toole have quoted the PWC study which appears to show that the effective rate is France is only 8% compared to Ireland’s which is supposedly at 11.9%. But this study (on the ease of paying tax in different countries) is not based on real data, but on a hypothetical company employing 60 people. Thus, it based not on all companies in France or Ireland but only on the rate for a small company. In France the top rate for small companies is only 15% so the effective rate would be less than that maximum. Here a small company pays 0% for the first three years so the effective rate is 0 too, not 11.9% for those companies! Then I include or exclude the 60% of companies which do not pay CT in Ireland! So the data can be manipulated!

Furthermore, I suspect that the 11.9% is based on taxable profits, ie after capital allowances and other deductions. And the nominal rate for certain kinds of income is 25%. So…

The effective rate for US firms in Ireland in 2008 was 4.2% according the USD Bureau of Economic Analysis. (How come we don’t do serious tax analysis here? I think I know the answer!). I believe this rate may be closer to the real effective rate in Ireland.

Robert Sweeney said...


As I'm sure you know, the argument goes is that higher tech industries have greater scope for productivity growth. How much more efficient can you get a running a newsagents for example?. In relation to Irish industrial policy, what policies do you advocate? Peadar Kirby highlighted on this blog a while back that research funded by the Irish state is essentially a €1bn a year subsidy to multinationals. Indeed much research undertaken in Irish universities seems to focus on things such as semiconductors, advanced materials, and biotechnology. Perhaps a greater emphasis on things like renewable energy is more likely to positively impact the Irish economy?

Shoe said...

Forgive me for what seems like an obvious or foolish comment, but doesn't corporation tax only apply to companies who actually make a profit? Therefore a company considering Ireland which is not yet profitable has nothing to gain whatsoever from the tax rate.

Secondly, doesn't it entirely depend on what the US decides to do about such repatriation of profit for tax purposes over the next few years? That in one fell swoop would wipe out Ireland's competitive advantage there.

David Jacobson said...

Thanks for the good points made by Paul, Robert and Shoe, all reinforcing my views that:
1) Irish industrial policy - despite some shift towards the development of indigenous firms in response to the many inustrial development reports - remains over-dependent on low corporate taxes to attract MNCs; and
2) Our economic development policies focus to far too great an extent on high-tech and R&D rather than on innovation at all levels.

In relation to high-tech and productivity growth, the point is that advanced technologies, for example in ICT, can improve productivity in all firms - even newsagents. It must be remembered that high-tech constitutes only 10 per cent of employment in most OECD countries and that the MARKET for high-tech products is primarily the rest of the economy, employing the other 90 per cent. High-tech and Low-and-Medium Tech (LMT) are highly interdependent.