Ireland loses the plot

Investing in the knowledge-based economy

Roy Green

With their narrow accounting focus on the budget deficit, have the Irish government, opposition parties and media commentators lost sight of the bigger picture?

Only three years ago, the government announced its commitment in the National Development Plan 2000-2006 to building a knowledge-based economy. This approach was later reaffirmed at the European Union's Lisbon Summit, which pledged to make Europe the "most dynamic and competitive knowledge-based economy in the world" by the year 2010.

The reasoning was clear and compelling. During the 1990s, Ireland was extraordinarily successful in attracting foreign direct investment in the key global growth sectors - and linking investors to local industry supply chains and the graduate labour market. As a result, Ireland experienced the highest rates of output, employment and productivity growth in the whole of the OECD. The Celtic tiger was truly roaring.

By the year 2000, over 40 per cent of Ireland's trade with the rest of the world was in research-intensive products and services - double the figure a decade earlier and eight times the OECD average. The problem, however, was that these products embodied research and technology generated not in Ireland but abroad. Despite robust trade surpluses, Ireland was running a huge technology deficit. According to the OECD's international comparative data, our emerging knowledge economy was a "technology-taker" rather than a "technology-maker".

This problem has now been compounded by a massive shift in the distribution of foreign investment in Europe towards the new accession states, particularly Hungary and the Czech Republic. Their success is based on a deliberate strategy of emulating the Irish model of low corporate tax rates, investment incentives and a flexible, high quality workforce, with the added attraction of much lower labour costs. Clearly, for Ireland to recapture and sustain competitive advantage in this context, a new model would have to be devised.

It was soon understood that the primary emphasis of any new model must be the development of world-class capabilities in research and innovation, enabling clusters of both Irish companies and local subsidiaries of multinationals to compete more effectively in the high value-added, knowledge-intensive sectors of the global economy. A promising start was made in the National Development Plan with its commitment to research funding of EUR2.5 billion.

"The vision of a knowledge-based economy in Ireland has not been entirely extinguished by this Budget, but it seems that the case must be made again - and again."