Government must foster innovation to beat recession

 

OPINION:IRELAND’S RETURN to economic growth is stymied by the uncertainty in Europe, but while we await growth in our major trading partners’ economies, we must continue to enhance our productivity and competitiveness. International evidence indicates that innovation is a key driver of productivity, competitiveness and sustainable long-term growth.

While the economic crisis has made it more difficult for enterprises to sustain investment in innovation, it also presents the opportunity for innovation-intensive enterprises to strengthen competitive advantage and reinforce market positions.

Economic restructuring in downturns also provides new business opportunities for innovative start-ups.

International evidence reviewed in a recent Economic and Social Research Institute paper finds that enterprises that innovate are more productive. Innovation is linked to raised productivity through higher revenue generated by improved goods and services and efficiency gains when improved processes are introduced.

However, several factors, “market and systemic failures”, mean that enterprises tend to underinvest in innovation.

Individual enterprises don’t take into account the wider social benefits that flow from innovation investment and they face uncertainty about whether innovations will succeed.

They can find it hard to get finance because potential investors are even less sure of the prospects for success, and such benefits as improved knowledge or skills are intangible and cannot be sold or used as collateral to borrow. And co-ordination or networking between organisations can fail.

These factors are magnified in small enterprises that require external funding, in start-up enterprises with no credit record, and those in the high-tech sector where innovation is essential for survival.

Not surprisingly, the reviewed international evidence finds that investment in innovation is undertaken most likely by larger enterprises, those that export, have formal protection of intellectual property, and that receive public funding.

This latter evidence is particularly important from a policy perspective.

Ireland’s prosperity depends on returning to export-led growth. While multinational enterprises dominate export sales, sustainable growth requires that domestic enterprises, 90 per cent of Ireland’s manufacturing enterprises, export more. To do so they need to innovate more.

The ESRI’s research, using data from the Community Innovation Survey, finds that productivity in Irish-owned enterprises is linked to the implementation of new processes and methods of organisation.

However, it appears that they are less successful at product innovation, a source of concern. Research suggests that product innovation is important for expanding into new markets and generating new jobs.

While innovation is done by enterprises themselves, evidence shows that government can enable and foster it.

At present, innovation in domestic enterprises is incentivised through research and development tax credits and programmes operated primarily by Enterprise Ireland.

Employment in enterprises with fewer than than 50 employees accounts for 91 per cent of employment in Irish-owned enterprises, compared with 35 per cent of employment in foreign-owned enterprises.

The current crisis has disproportionately increased the challenges for these small enterprises in raising funds to innovate. This difficulty and the market failures recognised internationally point to the need for continued Government support.

The international and national evidence suggests some key policy messages.

First, the Government should incentivise Irish-owned enterprises by addressing the factors that lead to underinvestment in innovation. To that end, policy should take particular account of differences across enterprises, especially in their capacity to absorb new knowledge. And policy should strengthen links between the enterprise and research communities here and between the latter and the global innovation system.

The Government could also foster domestic demand for innovation through well-designed public procurement policies, regulations and standards.

Second, given fiscal constraints, it should make sure that money spent on innovation, both in business and higher education, is well-spent. This means collecting more robust measures of outputs and outcomes, and undertaking more rigorous independent evaluations of the policy effectiveness.

Third, it should continue to remember the lesson from the Culliton Report almost two decades ago – ensuring that overall economic policy creates an environment in which innovation is fostered. Fiscal, competition, labour market and education policies must all work to support enterprise growth and innovation.

And, since sustainable growth and competing successfully internationally are so important, it is time for innovation policy to be mainstreamed by the Government.