Our economic future lies with innovative exporters

Ministers speak of creating a ‘new Nokia in Ireland’ yet should we be so focused on one company? writes Chris Horn

A SEVERE economic recession. Unemployment rising from 2 per cent to over 15 per cent. Government debt rising from modest levels to over 60 per cent of GDP and approaching international lending limits.

Uncontrolled deregulation of financial markets, and a rapid increase in foreign borrowing leading to an overheated domestic economy. Public sector becoming an anchor to the economy, including unemployment and welfare costs, due to collapsing tax revenues.

Then, high inflation pushing up interest rates. Further, the collapse of the most important neighbouring market wiping out 15 per cent of foreign trade. Traditional industries are left with less competitive technologies, and without access to their traditional export market.

The resulting recession caused a drop in Finland’s real GDP of more than 10 per cent from 1991 to 1993. Yet today, Finland is admired for the strength of its economy and social policies. How did Finland recover from its devastating recession, in part due to the loss of its important export market in Russia?

The Finnish story is well documented in Finland as a Knowledge Economy, published by the World Bank Institute.

A primary strategic response by the Finnish government and parliament of the time was heavy investment in research and development. Increasing investment in RD required political wisdom and courage when an easier path might have been to focus on short-term employment rather than invest in a longer-term strategy. Today, RD investment has increasingly been by the private sector, rather than by the state: now only about 30 per cent of RD is publicly funded. Nokia has emerged as a global multinational and (2003 figures) accounts for about 25 per cent of the national RD investment, 3.7 per cent of GDP and 20 per cent of total exports.

But there is a portfolio of national champions, such as Stora Enso (second largest pulp and paper manufacturer in world), Neste Oil and others.

Nevertheless, Finland faces challenges as a small country in sustaining its strong economy. The Finnish government has recently decided to focus its publicly-funded RD efforts on a very few sectors and clusters, rather than a broad competence base, and so remain internationally competitive.

In Ireland, we face our own economic challenges. Most commentators appear to believe that Colm McCarthy and his colleagues in “An Bord Snip Nua” have undertaken a comprehensive analysis of savings which can be made across the State’s unsustainable expenditures. However, while the report tells us where we can cut back, it has not told us where we could focus our investment for recovery. In all the hubris and grappling for position after the publication of the McCarthy report, I have been surprised by the absence of public discussion on just how we now expect to drive growth in our economy.

Do we expect that the construction industry will again become a major driver? Do we expect multinational manufacturing will be the long-term basis for our recovery?

What should now be, what can now be, the engine for growth in the economy to create sustainable jobs, and to generate tax revenues to meet our national debt burden, whilst still helping our more vulnerable sectors of society?

Our national strategy to sustainably nurture enterprise is critical for the future of Ireland.

The Finns, at a desperate time in their economic history, chose state investment in RD as their strategy for recovery. The Irish State has increasingly invested in RD since 2000, yet McCarthy’s report makes surprising reading. McCarthy disturbingly observes that our public investment in RD has not had a compelling impact on economic activity. The report postulates that 20 per cent of our PhD graduates may be finding employment overseas, and most others are apparently finding employment in the State sector.

There is considerable scope to reduce the very large overheads in the enterprise agencies of the State, thus rationalising them and making them more efficient.

Expenditure and staffing levels in the agencies have increased in five years, but with no obvious increase in outputs – how much of every euro of State support for enterprise actually instead goes in overheads? State investment in RD may have somewhat displaced private sector funding of RD.

If we are going to continue State aid for RD, for innovation and for enterprise, are we now going to become more focused as the Finnish government has decided for its strategy? What policy changes can we introduce which will accelerate private investment in innovation and RD ahead of the public investment by the State, as has happened in Finland?

What would it take for us to create an inflection point, so that we have many, many more export-oriented innovative companies and start-ups? How do we strongly foster recycling of talent and finance across start-ups and spin-outs, creating a virtuous circle of enterprise, as in silicon valley?

Ministers Coughlan and Ryan and others have recently been proclaiming the need to create a “new Nokia in Ireland”. While the sentiment is honourable and there are some guidelines from the Finnish experience, I am unsure whether we want 20 per cent of our total exports to be dependent on a single indigenous company as Finland has been with Nokia. Instead, I believe we should be focused on creating a culture and environment of a very large number of innovative, export-led companies at the heart of our new economy.

Chris Horn is co-founder of Iona Technologies and a member of the Government’s recently-appointed innovation task force