Showing posts with label EU Innovation. Show all posts
Showing posts with label EU Innovation. Show all posts

Tuesday, February 7, 2017

7/2/17: There's Zero Growth in Irish Patentable Innovation & Research Outputs


In a recent post on Irish patents filings and applications with the EPO, I showed that:

  1. Irish R&D and innovation performance - as reflected by patents data - is hardly impressive, with the country ranking 14th in the sample of 50 countries as an origin for EPO Applications;
  2. There has been no material improvement in Irish standing in the data in recent years, compared to trends.
Some of the readers have taken me to task on the second point, despite the fact that my evidence (based on EPO data) shows no gains in Irish patenting activities with the EPO in terms of both applications and filings, and in comparative terms as a share of both in the total number of EPO applications and filings. 

So I took a different exercise, plotting a relationship between average levels of filings and applications (combined) across 2006-2008 period against the same for 2014-2015 data. 

Not surprisingly, Ireland comes smack in the middle of the distribution and right on the regression line, implying that:
  1. Ireland's patenting performance is to the upper range of the overall distribution of 50 countries, but it is at the bottom of this sub-group of top performing countries. In fact, Ireland's position is statistically indistinguishable from 'mediocre' or 'average' group of countries. 
  2. Ireland shows only tiny growth in applications between 2006-2008 period into 2014-2015 period (see Ireland's point position just slightly above 45 degree line), which is statistically indifferent from zero growth.
  3. Once we control for the factors that drive global trend in patents (blue regression line), Ireland shows no statistically identifiable growth (Ireland's point is bang on the regression line).
Yes, patents are not the only measure of innovation and R&D, but, being the core part of STEM-focused research, they are the main measure of innovation and R&D, because patents data omits only one form of innovation - that linked to software. Now, software innovation is important, and Ireland may or may not be doing well in this sub-sector, but STEM research is based not on software innovations, but on 'hard' patents. And Ireland does not brand itself as 'Software-only Innovation Hub'. In fact, Ireland spends (as a State and economy) more on STEM innovation than on software innovation, so the key focus on Irish policies is, once again, measurable via patents.

Until we get 2016 data to update the above analysis, I rest this topic discussion.

Sunday, February 5, 2017

5/2/17: European Patents and Ireland's 'Knowledge Economy' Myths

Irish policymakers are keen on promoting Ireland as a technology and R&D centre of excellence, often claiming the country is a ‘Knowledge Economy’, a ‘Data Island’, a ‘Europe’s Tech Capital’ and so on. While catchy, these tag lines are far from reality, and, in fact, represent an empirically dubious proposition. 

To establish this claim, consider the European Patent Office data on patent filings and approvals, with the latest data set covering the period of 2006-2015. 

As chart below clearly shows, Ireland is far from being a significant source of patent filing in Europe, despite the fact that many patents from Ireland are filed by the U.S. and other multinationals, including a score of foreign companies that choose to tax-invert into Ireland. The EPO data, in fact, fails to control for this distortion. Still, even with those companies filings counted as ‘Irish’ by origin, Ireland ranks 14th in a key metric of the rate of European Patent Applications per million of inhabitants. 


Worse, Irish rate of patent applications (119 per 1 million of inhabitants) is below the mean for the sub-sample of European states (including EU28 states and other countries within the EEA). Statistically, Irish rate of patent applications per inhabitant is not distinguishable from the rates filed by Italy and Slovenia, and is well below the rate recorded for France, Belgium, Austria, Germany, Denmark, Finland, Sweden and the Netherlands. Irish numbers are also statistically indistinguishable from the global average - the average that includes non-European states’ filings. It is worth noting that the data set includes other countries, that similar to Ireland serve as major tax optimnization locations for R&D and IP, e.g. Luxembourg and the Netherlands. However, even controlling for these states, Irish data does not shine beyond being average.

In absolute terms, Irish patent filings and applications with the EPO have trended up in 2006-2010 period, but have since flat-lined (on trend) for filings and declined (on trend) for applications. 


In addition to the chart above, combined filings and applications for EPO patents by Irish-origination stood at 1,325 in 2015, down on 1,364 in 2014 and down on 1,356 average for 2008-2011 period. While data can be interpreted in a number of ways, there is clearly no indication of an improving trend in either filings or applications over the recent years. This comes on foot of aggressive acceleration in tax inversions into Ireland in previous years - an acceleration that brought into Ireland a range of large R&D-intensive companies.

Consistent with the above, Ireland’s share of all European Patent Office filings and applications has declined, on trend, in recent years, as evidenced by data presented in the chart below:


As the chart above shows, Ireland accounts of just 0.266% of all EPO patent filings and 0.364% of all EPO patent applications. Separately reported data for patents approvals shows Irish share of all patents granted by EPO to be just 0.395%. The number is laughably negligible by Europe-wide standards and is massively out of line with Irish share of European GDP. However, these numbers are consistent with the simple fact, also highlighted by EPO data, that Ireland fails to register in the top tier of generators of patents in any of the sectors tracked by EPO. 

In summary, Ireland is far from being a powerhouse for R&D and knowledge economy activities as measured by a key research output measured by European authorities. 


Thursday, April 3, 2014

3/4/3014: Tax or Not: Sunday Times, March 9, 2014


This is unedited version of my Sunday Times article from March 9, 2014


Speaking at last week's Fine Gael Ard Fheis, Minister for Finance, Michael Noonan, T.D. noted that "As a Government, we know that there are further opportunities in the years ahead for us to build upon the initiatives that have worked.  It is in this vein that …I will consider the introduction of targeted tax reductions that have a demonstrable effect on employment growth."

With these words, Minister Noonan finally set to rest the debates as to the Government intentions with respect to core policies for 2015 and thereafter. Whether you like his prior policies or not, he makes a good point: Ireland needs a tax-focused policy intervention. And we need an intervention that simultaneously addresses the declines in after-tax household incomes endured during the current crisis, and does not trigger rapid wage inflation and jobs destruction that can be associated with centralised wage bargaining. The window for an effective intervention is now, in part because as recent evidence shows, fiscal policy effectiveness is greater at the time of near-zero interest rates. But beyond an intervention, Ireland needs a longer-term reform of taxation system.


In general, any economic policy can be judged on the basis of two core questions. Firstly, does the policy offer the most effective means for achieving the stated objective? Secondly, is the policy feasible in economic and political terms?

Reducing income tax burden for lower and middle class earners yields an affirmative answer to all three of the above questions. No other alternative proposed to-date – a cut in VAT rate, a reduction in property tax burden, or an increase in public spending on core services to alleviate cost pressures on families – fits the bill.


Starting from the top, cutting income-related taxes in the current environment makes perfect sense from the point of view of economics.

The three stumbling blocks on our path to the recovery are anaemic domestic consumption, high burden of household debts, and collapsed domestic investment. All of them are interlinked, and all relate to low after-tax disposable incomes. But the last two further reinforce each other. High levels of household debt currently impede restart of domestic investment by both households and firms. They also act as partial constraints on our banks ability to lend. Meanwhile, low domestic investment implies depressed household incomes and high unemployment. In other words, reducing private debt and simultaneously increasing domestic investment should be a core priority for the Government.

On the other side of the national accounts equation, stimulating private consumption offers a weak alternative to the above measures. Due to high imports content of our average consumption basket most of the discretionary spending by Irish households goes to stimulate foreign exporters into Ireland. And it is this discretionary imports-linked spending, as opposed to consumption of non-discretionary goods and services, that has taken a major hit during the Great Recession. Beyond this, higher domestic consumption will do little to raise our SMEs exporting potential, in contrast with increased investment.

Take a quick look at the top-line figures from the national accounts. Based on data from Q1 1997 through Q3 2013, cumulative decline in personal consumption of goods and services over the current crisis amounts to roughly EUR5 billion, when compared against the already sky-high 2004-2008 trend. For gross fixed capital formation - a proxy for investment and capital spending - the cumulative shortfall is EUR50 billion against the 2000-2004 trend, which excludes peak of the asset bubble period of 2005-2007. Put differently, compared to peak, private consumption was down 12 percent in 2013 (based on Q1-Q3 data), while gross investment was down 65 percent. If in 2013 our personal consumption is likely to have returned to the levels last seen around 2005-2006, our investment will be running closer to the levels last witnessed in 1997-1998.

More significantly, lending to Irish non-financial, non-property SMEs has fallen 6.2 percent year-on-year at the end of 2013, as compared to 5 percent for the same period of 2012, according to the latest data from the Central Bank. Meanwhile, value of retail sales was down only 0.1 percent in 2013, according to CSO. Things are getting worse, not better, in terms of productive investment.

It is, therefore, patently clear that an optimal policy to support domestic growth in the economy should target increases in the disposable income of households and incentivise investment and savings ahead of stimulating consumption. It is also clear that such increases should be distributed across as broad of the segment of working population as possible.

To achieve this, the Government can reduce the burden of personal income taxation.

Alternatively it can attempt to target a reduction in the cost of provision of non-discretionary services, such as childcare, health, basic transport and education. In fact, the main arguments against lower taxes advanced by the Irish Trade Unions and other Social Partners are based on the idea that such costs reduction is possible were the state to invest taxpayers funds in further development of these services as well as provide subsidies to supply them to the broad public.

Alas, in practice, Irish public sector is woefully poor at delivering value-for-money. Since 2007 through 2013, inflation in our health services outpaced the general price increases across the economy by a factor of 5 to 1, in transport sector by 3 to 1 and in our education by 12 to 1. Pumping more money into provision of public services might be a good idea when it comes to achieving some social objectives. It is certainly a great idea if we want to stimulate public sector employment and pay, as well as returns to various consultancies and state advisers. But it is not a good policy for helping households to pay down their debts, increase their savings, investment and/or consumption.


Which brings us to the questions of economic and political feasibility of tax reforms.

This week, the Finance Minister confirmed that he will "try to begin the process of making the income tax code more jobs friendly" starting with Budget 2015. Most likely, the next Budget will consider moving the threshold for application of the upper marginal tax rate, currently set at EUR32,800. Minister Noonan described this threshold as being "totally out of line with the practice effectively all over the world, but particularly in Europe." And he's got the point. Across a sample of twenty-one advanced economies, including Ireland, the average effective upper marginal tax rate, inclusive of core social security taxes, currently stands at around 44.4 percent. In Ireland, according to KPMG, the comparable upper marginal tax rate is 48 percent. But an average income threshold at which the upper marginal tax rate kicks in is EUR136,691 in the advanced economies, or more than four times higher than in Ireland.

Widening the band at which the upper marginal tax rate applies to double the current Irish average earnings will mean raising the threshold to EUR71,500 per person per annum. This should be our policy target over the long-term, through 2019-2020.

However, given current income tax revenues dynamics delivering this target today will trigger significant fall-offs in income tax revenues. Data through February 2014, admittedly a very early indicator, shows effectively flat income tax receipts, despite large increases in employment in recent months. In other words, brining our upper rate threshold closer to being in line with the advanced economies average is, for now, a non-starter from fiscal sustainability point of view.

But gradually, over 2015-2016, increasing the 20% tax rate band to around EUR38,000-40,000 should be fiscally feasible, assuming the economy continues to improve as currently projected. This will leave those at or below the average earnings outside the upper marginal tax rate. But it will also provide relief to all those earning above average wages. In other words, widening the lower rate band will generate a broadly-based measure, with likely support amongst the voters.

At the same time, it will also yield significant gains in economic stimulus terms. At the lower end of the targeted band, such a measure would be financially equivalent to a tax rebate of around double the average residential property tax bill.

More importantly, widening the lower tax band will provide for an effective stimulus to the economy compared to all of the above measures. The reason for this is that unlike property tax and VAT, income taxes create economic disincentives to supplying more work effort in the market place. This effect is most pronounced for second earners, self-employed, sole traders and small business owners – all of whom represent core pool of potential entrepreneurs and future employers.

In addition, reducing income taxes, as opposed to consumption and property taxes provides both financial and behavioural support for investment, and savings for ordinary families. A number of studies of consumer behaviour show that savings achieved from the reductions in consumption taxes are commonly rolled up into higher consumption. On the other hand, higher after-tax labour incomes are associated with greater savings, investment and/or faster debt pay-downs.


Beyond widening the standard rate band, the Government can do little at the moment to stimulate disposable income of the households. Yet, in the longer term, we face the need for a more comprehensive and deeper reform of our tax system. Critical objective of such reform is to achieve a new system for funding the state that relies less on income tax and more on direct user-fees charges for goods and services supplied to consumers, plus taxes on less productive forms of capital, such as land, property and speculative assets. Changes in the underlying drivers for growth in the Irish economy will also necessitate tightening of corporate and income tax loopholes. This should lead to increased reliance by the state on corporate tax revenues, while freeing some room for the reduction in tax rates. In targeting these, the Government should focus on the upper marginal tax rate itself.

Designed with care and delivered with caution, such reforms can put Irish economy on the path of higher growth well anchored in the underlying fundamentals of our society: indigenous entrepreneurship, domestic investment and skills-rich workforce.





Box-out:

This week, the EU Commission published its 2014 Innovation Union Scorecard showing comparative assessment of the research and innovation performance across the EU. The good news is that Irish rankings in the area of innovation have improved from 10th to 9th over the last twelve months - not a mean task given our tight economic conditions and scarcity of funds across the economy. The bad news is that we are still ranked as 'innovation follower' and that our performance is still weak when it comes to developing a thriving innovation culture in the SME sector. As experience from the UK shows, just a couple of simple changes to Ireland's tax codes can help us enhance the incentives for SMEs to develop a more active innovation and research culture. We need to reform our employee share ownership structures to make it easier for smaller companies and entrepreneurs to attract key research personnel and promote innovation within enterprise. For example, in Ireland, employees securing an equity stake in the business employing them currently face an immediate tax liability, irrespective of the fact that they receive zero financial gain from the shares until these as sold. This applies also to smaller start-up ventures, particularly the Universities-based research labs. Thus, a researcher working in Ireland's high potential start-up or a research lab can face a tax liability on owning the right to a yet-to-be-completed research they are carrying out. This is not the case across the Irish Sea and in the Northern Ireland. In 2012-2013, the UK Government adopted 28 new policies aimed at promoting various forms of Employee Financial Involvement (EFI) in the companies that employ them. The UK has allocated £50 million through 2016 to promote public awareness of the EFI schemes and is actively working on reducing the administrative burden for companies and employees relating to EFI. It is a high time we in Ireland have followed our neighbours lead, lest we are content with remaining an 'innovation follower' in the EU for years to come.