Analyst warns sluggish Irish R&D investment levels stalling  recovery

Barrie Dowsett, CEO of UK-based Myriad Associates, notes that Ireland currently caps its tax credits relative to a company's PAYE contributions, delivered in instalments over three years.

The approach in the UK, France, Canada and others is to give the company 100% of the tax credits within weeks rather than years; their models also create no link between the tax credits and PAYE.

Irish tax credits, by being aligned to PAYE, are effectively being used to incentivise employment. The Irish model has its benefits, of course, but could be one of the factors contributing to Ireland falling behind as others sharpen their focus on incentivising R&D investment to help accelerate economic recovery.

“Instead of capping tax credits to PAYE contributions, why not pay three times the value of PAYE? They should also pay it up front rather than in three yearly instalments,” said Barrie Dowsett of Myriad, a specialist advisor on tax credits and grants to companies in the UK and Ireland.

“Ireland should also consider doubling the value of the €500m Destructive Technology Innovation Fund, which funded 27 projects with €75m in 2018 and 16 projects with €65m in 2019. That fund was very well received. I would double that budget.

“The next funding call is due in autumn 2020 at the earliest; that could perhaps be brought forward. Enterprise Ireland is a very innovative, active and supportive government agency, with a crucial role to play in recovery.” Mr Dowsett says Irish-based companies have been very successful in the past three years in accessing funds via Horizon 2020 and its SME Instrument, the EU's 'Fast-track to Innovation' support for R&D projects.

However, from 2021, the EU is replacing this with two new funds, Horizon Europe and the new EIC accelerator. The first monies from these funds won't reach companies until the end of Q1 2021.

Ireland is at risk of slipping behind other rebounding economies

In the interim, R&D investment in Ireland is at risk of slipping behind other rebounding economies. Some private sector investors are proving hesitant, watching both Covid and Brexit impacts as they emerge. Unemployment is generally on the rise, and yet some sectors like IT are thriving. States have a key role to play in bridging the gap between any restoration of confidence and the late Q1 2021 boost from Horizon funds rolling out.

“With Horizon 2020, Irish SMEs punched above their weight for the past few years. They are still receiving that grant funding. But there is less appetite among investors to exploit new IT innovations and provide the funding to take them to market,” said Mr Dowsett. “Investment is slower at present. People are preserving their cash in case they need it to support their existing business portfolios.

“The EU has been piloting the new EIC accelerator. They've been experimenting with a grant of around 70% of the project's value, with the rest coming from an equity investment from the European Investment Bank.

“That hybrid of grants and equity will hopefully help ease the pressure which private investors are hesitant. But how do you bridge the gap until that money rolls out in late Q1 2021? That is an important question for Ireland.” Mr Dowsett draws attention to a recent slip in Ireland's R&D intensity rate compared to other key EU states. You get the R&D intensity rate by dividing a country's total R&D expenditure by its output to give a percentage.

According to recent Eurostat figures, the European average stood at just over 2%. Prior to Covid-19, Ireland floated between the 1.3% and 1.5% mark.

Investment in R&D rose by 3.6% across Ireland in 2019 versus 2018, but still remained lower than the European average prior to Covid-19’s impact. Figures published by the Department of Business, Enterprise and Innovation show that Government investment in research and development amounted to €808.1m last year, up from €765.7m in 2018.

These trends can be seen in a recent table produced by Eurostat, which shows the Gross Domestic Expenditure on R&D (GERD), which is expressed as a percentage of GDP. The Eurostat table goes right back to 1990.

In terms of governmental gross expenditure on R&D, Ireland is in the lower half of the EU, though there are countries spending less. Under the Lisbon Agreement, Irish state investment in R&D should have reached 3% of GDP by 2020.

Before Covid-19, Ireland was spending about 1.3 to 1.5% of GDP on research and development. This compares with England at 1.71%, Scotland at 1.63% and Wales at 1.2%.

“All European countries have been affected by their various takes on lockdown and social distancing, so what effect this has on the European R&D landscape in the short and long-term remains to be seen,” said Mr Dowsett.

“It is notable that up until COVID-19 struck, Ireland’s GDP was rising significantly. However, without a corresponding increase in R&D expenditure, the country is at strong risk of falling behind as the world starts to recover from the pandemic.” The stats, however, did show that Ireland was thriving when it came to R&D expenditure undertaken in the business enterprise sector. The largest amounts were as follows: Slovenia (75%), Hungary (73%), Ireland and Sweden (both 71%), Bulgaria and Austria (both 70%), Germany (69%), Belgium and the UK (both 68%).

“Ireland is still a big draw for innovative business,” Mr Dowsett said. “Having said all this, a large number of Ireland’s competitor countries offer similar R&D assistance programmes and there is a mutual desire to collaborate.

“Ireland also has a sound reputation for being a culturally, politically, and financially stable place to do business with an effective education system, and a skilled workforce.

“Compared with many other EU countries, Ireland is also seen to have a progressive tax system and access to venture capital. It is also home to some large, highly innovative companies across a breadth of sectors.”