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What’s the State of research and development?

Government initiatives like the R&D tax credit and the Knowledge Development Box are aimed at promoting R&D as a primary driver of economic growth. How do they perform?

Irish participation in Horizon 2020 is on course to meet the €1.25 billion target set by the Government. Photograph: iStock

Irish participation in Horizon 2020 is on course to meet the €1.25 billion target set by the Government. Photograph: iStock

 

The Government’s Innovation 2020 strategy has set a target for total investment in R&D in Ireland to reach 2 per cent of GDP by 2020. While some progress has been made towards that, total spend in 2018 reached just 1.05 per cent of GDP, despite State investment of €751 million on stimulating R&D activity that year. This outturn must be placed in the context of rapidly growing GDP, however, and total spend on R&D by companies in Ireland has been growing significantly in recent years.

Indeed, according to figures released by the CSO in April of this year, business expenditure in R&D increased by 31.5 per cent between 2014 and 2017. That contributed to an overall increase in combined public and private expenditure on R&D from €2.969 billion in 2014 to €3.396 billion in 2017.

While the increased spend is encouraging, the slow progress towards the Innovation 2020 target has led some to ask if Ireland is getting sufficient bang for its buck when it comes to the various supports offered for R&D activity. “I certainly think those supports are delivering for the taxpayer,” says KPMG partner Damien Flanagan. “Every time I look at the IDA newsletter, I see more R&D investment announcements and the research and development tax credit, capital allowance regime and other incentives play a big role in that.”

He refers to a review of the R&D tax credit currently being undertaken by the Department of Finance. “They sought submissions and we spoke to a large cohort of our clients before making ours,” he says. “Among the questions we asked was what would happen if the incentive wasn’t there. R&D wouldn’t go away overnight without it, but it would die on the vine. It would also make it less likely for companies to invest in Ireland.”

Flanagan points out that medtech companies are more likely to do manufacturing here if they already do R&D. “An R&D job might create two manufacturing jobs in two years’ time,” he says.

The story is not quite the same for the Knowledge Development Box, which provides for an effective tax rate of 6.25 per cent for income generated from intellectual property which has been developed here in Ireland. “It hasn’t quite kicked off,” says Flanagan. “It is more suited to indigenous companies who have developed all the IP in Ireland. That is much less likely to be the case for multinational companies.”

Lack of awareness

According to the KPMG Innovation Monitor report, published in June of this year, just 11 claims had been made under the scheme between its introduction in 2015 and the end of 2018. The report found a lack of awareness of the scheme among SMEs surveyed, with just 50 per cent of them being aware of the incentive. “Improved awareness might help the take-up,” Flanagan adds.

“Things can always be improved and there were a number of recommendations in the Innovation Monitor in relation to the R&D tax credit,” he continues. The report surveyed companies receiving R&D grants from Enterprise Ireland – but only 55 per cent of them are claiming the R&D tax credit as well.

Among those recommendations were enhancing the value of the tax credit to smaller companies by paying it over one year instead of three. This would entail no significant additional cost to the exchequer, other than the short-term cost of funds. In addition, a wider selection of costs – perhaps more closely matching those allowable for Enterprise Ireland grant aid – should be eligible for the tax credit. This would make the tax credit both more financially attractive and more readily understood.

That said, the tax credit is highly rated overall. “What we are hearing from our clients is that they are very happy with it, they understand the regime, and they do use it.”

Irish firms also benefit from the EU Horizon 2020 research and innovation programme. “There was a significant change in the current programme, and this was the introduction of the SME Instrument to help deep-tech small companies,” says Enterprise Ireland divisional manager for research and innovation Gearoid Mooney. “This offers one- to-one funding for companies to get technologies out to market. Enterprise Ireland can invest in these companies, but they face the constant challenge of getting proof of concept to attract the next round of investment. The SME Instrument helps with that and it has brought in more than €70 million in funding to Irish firms in the last three or four years.”

Overall, Irish participation in Horizon 2020 is on course to meet the €1.25 billion target set by the Government. In addition, the 2018 European Innovation Scoreboard shows our position in terms of innovation leadership continuing to progress, with Ireland in ninth position in 2017, up one on its 2015 ranking.

Direct supports

In terms of direct supports from Enterprise Ireland, Stephen Creaner, executive director of food, industrial, life sciences and innovation with the agency, points out its Agile Innovation Fund has been extended to apply to clients of Local Enterprise Boards. “We have also simplified the application process to make it more attractive,” he says. “We want to make engaging with us a fairly straightforward process.”

But the proof of any pudding is in the eating and Enterprise Ireland has some pretty compelling statistics which show that Ireland is indeed getting value for money from the range of R&D supports it provides. According to the agency’s 2018 annual business review, firms availing of Enterprise Ireland research, development and innovation (RD&I) supports over the past 10 years performed 2.74 times better in terms of export sales, 1.94 times in terms of turnover, and 1.13 times in terms of domestic sales than those which had not. The multiplier for employment performance was 1.72.

And the outturn was better still for companies which had availed of both collaboration support and RD&I supports. They performed 3.6 times better in exports, 2.44 times better for turnover, and 1.97 times better for employment.