Keeping bureaucracy out of State supports

Knowledge-sector businesses are Ireland's best bet in delivering jobs - but are we missing the mark in how we support them, asks Neil Pope

MAYBE THE dramatic slowdown in the construction sector is not the Armageddon people fear. Maybe it could create a range of opportunities for other key sectors, including indigenous knowledge-based businesses, to flourish.

There are strong arguments that an overactive construction sector has drained investment funds from other more sustainable uses, developed overdependence for funding within Government (eg stamp duty, VAT and capital gains taxes), and did not have the staying power to deliver lasting benefits to the wider society.

Minister for Health Mary Harney has said that, if the construction sector is excluded, the economy continues to grow at a healthy 4 per cent per annum.

Knowledge-based businesses are our best bet to create sustainable employment to help fill the gaps being left by the contraction in the traditional sectors.

However, a report on Ireland's innovation performance from 1991 to 2005 - included with the Economic and Social Research Institute's latest quarterly economic commentary - reveals that process innovation is now lower than in 1998 and new product innovation is only slightly higher than in 1995.

How have we been supporting knowledge-based businesses in Ireland? We have adopted a "European" approach. This has been successful in attracting investment from multinationals, with high levels of State agency intervention in the selection of markets (ie software), geography (ie where in Ireland), human capital (eg promoting increased numbers of PhD graduates), and the choice of individual companies to back.

With this comes a bureaucracy which may not be delivering what we need it to achieve for a vibrant indigenous knowledge business sector. There is ample evidence to suggest that entrepreneur-led knowledge businesses have tended to flourish where state supports are simple and for the most non-interventionist.

The US and Israel remain beacons for a non-interventionist approach, which has created the climate for successful knowledge business sectors to flourish.

Although they may commit massive funding to research and development via their defence budgets, this spending has had little impact on the development of their knowledge business sectors. But their tax policies, access to private funding and "hands-off" approach to state supports have had major positive effects.

Developments in Silicon Valley in the 1980s had little to do with the money spent on the "Star Wars" SDI fiasco, but a lot to do with US president Ronald Reagan's liberal taxation policies, which gave incentives to private investment and helped create an $8 billion venture capital pool available to entrepreneurs.

Few high-potential start-ups in Ireland have received new venture capital funding in the past year. In just the first three months of 2008, high-tech companies in Israel raised $617 million (€400 million) in venture capital funding - the highest in seven years. In Ireland, €60 million was raised during the same period.

It is important to note that this came mostly from private investors - not institutional venture capital. The Israeli model is one of low state involvement in venture capital funding, not the approach being adopted in Ireland. Israel has 70 Nasdaq-listed high-tech companies - Ireland has six.

The Israeli model also has lower levels of bureaucracy in accessing state support and good access to US capital funding, which comes with a US approach to investing in human capital, ultimately leading to increased company performance and growth.

Ireland has changed a lot. We have the confidence to build globally successful brands and businesses in key sectors, including food and construction. We have developed a pool of serially active knowledge-sector entrepreneurs.

We have an Irish diaspora of internationally experienced business leaders who have left their mark on many of the most successful companies in the sector, including Intel, Cisco and Apple.

To attract the best management talent, we must be prepared to reward them at levels at least equivalent to what they can achieve internationally. Irish-owned knowledge-sector businesses are being outgunned in attracting this talent.

This is a fundamental part of the business philosophy of the Googles, Intels and Microsofts, which translates into significantly higher productivity. Multinationals in Ireland deliver four times the export productivity of our homegrown information communication technology businesses.

The transition of businesses from start-up phase to professional management is a key milestone on the road to long-term success. Founder transition is one of the biggest hurdles for any fledgling organisation and there are no formulaic solutions. However, more than two-thirds of venture capital-backed businesses in the US replace their founding chief executives. Our State policy needs to support handing over the baton.

The current slowdown is increasing the appetite for business innovation. Ireland is uniquely positioned to exploit these opportunities with a solid foundation of entrepreneurs, a wider knowledge-sector diaspora and funding from investors returning to trading businesses from property.

The clear lesson for the Government from successful entrepreneur-led knowledge sectors elsewhere is that, outside of their tax policies, less is usually more.

• Neil Pope is a director of who42, a management consultancy which works with clients in the knowledge economy in the areas of organisational structure, equity funding and human capital