Address by the Tánaiste and Minister for Enterprise, Trade and Employment, Ms. Mary Coughlan, T.D., at the “Creating the Smart Economy” session of the MacGill Summer School, Glenties, Co. Donegal on Monday, 20 July 2009

Check Against Delivery

Introduction

What a year it has been since last we gathered in Glenties. The dramatic change in the tone of our debate this week is heightened by a perception of ourselves that has altered significantly. We have been reminded that Ireland is a small vessel on the economic tides. This reality has been brought home to individuals and families across the country through jobs lost, income reduced or tiger-era certainty dashed. It is a difficult time for many.

Nothing that I or any of our speakers say here tonight can take from the immediacy of the difficulties affecting families where a mum or dad is struggling to find a new job. What I do want that family to understand however is that as Ireland steers through the current economic storm, she is navigating a determined course.

Course for Sustainable Growth

That course is a course which, if we hold with it, will create jobs and see Ireland achieve a sustainable level of economic growth in the medium term. However, it is a course that will not be without its pain in the short term. We have already experienced some of that and, as last week’s report of the Special Group chaired by Colm McCarthy has indicated, further difficult spending decision lie ahead for Government. There is a growing acceptance however that the need to stabilise our public finances, restore our competitive position and get our banks working again is a prerequisite to recovery. If we really want to realise the “Smart Economy”, the subject of our discussion tonight, we must work to overcome these hurdles. Only then will we have a solid foundation for investing in the knowledge, skills and creativity of people who will create the valuable processes, products and services of tomorrow.

Competitiveness

With this in mind, I do therefore want to say a few words tonight about one of those hurdles that falls firmly within my own remit - competitiveness.

Much of my own work over the past year has been centred on the drive to restore our competitive position. In certain ways it is the most difficult of the three hurdles to overcome and on which to achieve quick results. It requires a myriad of actions across government and across both the public and private sectors. Be in no doubt however that addressing Ireland’s cost competitiveness is of fundamental importance to recovering long term sustainable growth and is a foundation stone for the building of a smart economy.

To be successful, it is clear that we need all sectors of the economy to reboot to the new reality. In our exuberance over the last decade we lost sight of the importance of retaining a competitive cost position. We must recover this lost ground quickly and restore flexibility and adaptability to our small but internationally connected economy. The need for cost competitiveness is now more pressing than ever. Unfavourable exchange rates – particularly with two of our main training partners, Britain and the United States – add further urgency to the need to lower costs. Membership of the euro area means than an adjustment through exchange rate depreciation is not an option. Therefore, downward pressure on real wages and costs must be the main driver of cost competitiveness and future growth in Ireland. This adjustment is needed to bring our costs into line with those of our competitors. There is now, thankfully, plenty of evidence that it is starting to take place.

Inflation

First, the decline in Irish inflation reached minus 5.4% in the year to June 2009. It is the sharpest fall since the early 1930s. Inflation fell significantly across most goods and services groups in 2009. Input costs for manufacturing and services have witnessed several months of consecutive decline. The OECD has predicted mild deflation in Ireland for the next two years. This will maintain the current downward pressure on wages and prices. While the eurozone is also experiencing deflation, estimated to be the lowest for the region since 1953, the IMF belives that Irish prices should continue to decline at a pace greater than the rest of the eurozone. This in itself will help improve our competitiveness.

Labour Costs

Second, the Government has stepped in to exert downward pressures on prices and costs. Although it has been a painful adjustment, the reduction in unit labour costs, delivered through public pay reform, will strengthen our longer-term position. For most exporting companies, labour costs account for more than half their input costs. Significantly, the EU estimates that Irish unit labour costs will fall by 4% this year, compared with a 3% increase in the EU on average. This translates into a significant cost advantage for those Irish firms competing in the export market.

Competition Recommendations

Third, the Government has committed to implement the recommendations of the Competition Authority and tackle excessive costs in the non-traded sectors where they can best contribute to overall competitiveness. The IMF acknowledged the importance of Irish labour market flexibility in helping our competitiveness adjustment. It also suggested that competition policy should be used to support the process of price and wage adjustments.

Competition policy in a small open economy is relevant for all sectors of the economy but particularly the services and non-traded sector, since it is the non-traded sector is a key determinate of Ireland’s cost competitiveness. The Competition Authority has tended to focus its efforts, especially its advocacy efforts, on the non-traded sectors of the economy. The Authority has issued a number of reports in the past few years on non-traded sectors, including the areas of banking, utilities and professional services, such as engineers, architects, the legal profession, dentists and others. Implementation of the Authority’s recommendations is essential to remove competitiveness bottlenecks in the economy and to deliver better value and more innovation in those sectors.

It is my intention to submit a report to Government before the end of the year outlining the progress achieved on the implementation of these prioritised recommendations. Across Government there is already a concerted approach to eliminate structural rigidities and competition bottlenecks that have contributed to high costs. Just last month, for example, we confirmed our intention to ban upward-only rent reviews. My colleague, the Minister for Health and Children is also taking action to drive down health costs. These are examples of the cross-Government effort underway; an effort that must challenge vested interests across the sheltered economy.

Controlled Costs and Energy

Fourth, we are working to control costs in administered sectors of the economy, such as local authority charges, as well as easing the administrative burden that regulations can create. I have now met several times with the county managers about actions local authorities can take to ease cost pressures on businesses. This is difficult at a time when local authority budgets are already under pressure, but the level at which local authority charges are set have a very real impact on the ability of local businesses to compete.

Energy costs represent one of the key issues where costs need to be managed. The recent trend of energy prices has been downward, with a 10% drop in electricity prices for residents and small and medium enterprises from 1 May, while gas prices have reduced by an average of 12%. These reductions will result in a further easing of cost pressures for businesses. The result has been that, according to the latest published Eurostat comparisons, smaller SMEs are paying 1% below the average EU 27 price, and approximately 60% of the ESB’s SME customers are in this category.

We are also seeing greater competition among energy suppliers, which is helping to drive down costs for SMEs and for larger energy users. We hope to be in a position to confirm further initiatives in the energy sector in the coming weeks that will assist in retaining jobs and maintaining lowers costs for our large energy users.

Sheltered Sectors

It is my view that we must never again allow costs to drift out of line with those of our competitors. We have learned a harsh lesson, but as a Government we have acted with resolve and will continue to take the necessary actions to restore our external competitiveness. There is more work to be done. There are certain sectors where competition and the chill winds of economic reality have yet to reach. Certain professions have yet to play their part and have yet to tell us how they will reduce their fees and charges. There is no place in an Ireland where the majority have to make painful choices for this level of economic conceit from any sector.

Skills and People

But Ireland’s competitive position is not all about costs. Productivity and the skills base of our people are key advantages. Last week I was again reminded of this, one of Ireland’s key competitive advantages. Grant Thornton ranked Ireland first out of thirty-six developed economies for access to skilled labour. Our focus on high skills, high educational attainment right through to fourth level is as relevant and necessary today as the investment in education which we made since the 1960s. It is also at the essence of the smart economy concept. People, their ideas and the environment we put in place to support them, as they work to transform those ideas into commercial successes, is, simpliciter, what the smart economy is about.

Investment to Date

The truth is that we were already well on the path creating a smart economy in Ireland. Or perhaps it may be better said that we had many different paths underway but all heading in that direction. While recent events have brought adversity, they have also brought opportunity. The need by Government to robustly address the economic challenge and set out clearly the medium term vision meant that from last summer we were working on, specifically, what that vision should be. That process culminated in the articulation of the smart economy, a vision that brings together in a new and more radically focused way the work underway in the enterprise economy, in our research institutions, and in the innovation or ideas space, together with work starting on the drive for commercialisation of our research and development spending outcomes, and in fledgling areas such as the green-tech and energy sectors.

The level of investment by Government in all of these areas in recent years defies the now over used sound bite that we “blew the boom”. A good example is the fact that expenditure on science, technology and innovation in my own Department’s vote is today nine times what it was in 2000.

That level of investment has and is being used to support enterprise-led research and innovation; to help build and expand Ireland’s third level research base; to promote the commercialisation of research outcomes; to strengthen collaboration between industry and the education sector; and to help small and medium enterprises to innovate. Its emphasis has been on building a stronger relationship between the science and enterprise systems, particularly in the application and commercialisation of research and development work.

Pervasive Innovation

While all of these initiatives remain essential, the smart economy logic urges us to go further. It firmly embraces the concept of innovation, not just in the science and enterprise research that we support, but in the way we approach problems and challenges across all sectors of our economy. Our ability to innovate and to develop new processes, products and services must become pervasive across all of our academic endeavours. The convergence of ideas from across disciplines must combine with the application of new technologies to deliver products and services that people both need and want.

Funding for Research

To deliver on the potential of the smart economy, and establish Ireland as an innovation and commercialisation hub in Europe, Government must send a clear signal to all stakeholders, and to those looking in from outside, that this is the direction we are taking. It is therefore time, I believe, that we consider whether Government funding for all research activities should be viewed through the same innovation prism. The delivery of all fourth level research funding through one body charged with an innovation-grounded mandate is something we must therefore consider. Given the resource challenges we face, and the level of funding we continue to ring-fence for research at the expense of other areas of public spending, research can no longer be for its own sake. It must produce real results in terms of generating new ideas, solving old problems, creating new intellectual property, spinning-off new businesses and ultimately, delivering new jobs. There must be a greater return on the taxpayers’ investment. A move of all relevant funding streams to one body so charged would, I believe, send out a clear signal that Ireland has taken a key strategic decision that research, development and innovation are going to drive, not only our path to recovery, but the economic progress of our people in the years ahead.

Stanford Example

Last April I had the opportunity to visit Stanford University in Silicon Valley, California, one of the world’s leading research and teaching campuses. Its approach to innovation, to multidisciplinary research and to engagement with industry has earned members of its academic staff the Nobel Prize on twenty-seven occasions since its founding. The University has spawned some 3,000 companies in high technology and other fields, resulting in the creation of tens of thousands of jobs. It is that type of innovation led environment that our drive for a smart economy must emulate in Ireland. There is no good reason why we cannot. While we are having some success – Ireland is ranked seventh out of thirty-two countries on the 2008 European Innovation scoreboard – the innovation gap is narrowing and Ireland must aim ambitiously, invest smartly and compete vigorously to remain and push ahead.

Cooperation

The Government’s Innovation Task Force, which met for the first time last week, will play an important role in identifying additional practical steps that need to be taken by Government and by stakeholders in delivering this ambitious agenda. In that context, initiatives such as the Innovation Alliance announced by UCD and TCD and the Líonra initiative between NUIG and certain Institutes of Technology are welcome developments. Such an emerging culture of cooperation between institutions is a positive indication that we are moving in the right direction. Increasing cooperation between industry and our research institutions is also evident and our funding streams have played a key role in incentivising this type collaboration.

Commercialisation

The biggest challenge remains commercialisation and the spin out of new businesses from our campuses. While it is a well-worn cliché, it is a fact that today’s innovative ideas and fledgling businesses are the global corporations of the future. In my role as Minister for Enterprise, Trade and Employment, I want to take every possible step to foster a healthy entrepreneurial and commercialisation culture, both among the on and off-campus innovators across this island. It is why I established an Enterprise Feedback Group, whose terms of reference include an overview of the commercialisation of public investment in research and development. It is one of the reasons I continue to prioritise supports such as the Commercialisation Fund, the Innovation Voucher Scheme and the Innovation Growth Fund. Incentivising a nexus between research, innovation, the market and consumers’ needs and wants is key to the development of strong and successful future enterprises.

Scale and Growth

Venture capital to drive growth and scale will also have an increasing role to play. We have seen progress in this regard over the past year, with several new funds up and running. Start up businesses in the smart economy will need access to more venture capital however and that is why the Government has made provision in the smart economy framework for up to €500 million to be provided through “Innovation Fund Ireland”, to support early stage research and development intensive small and medium enterprises.

With supports such as these therefore the intention is that from innovative thinking, new business can grow, create jobs and achieve scale at home. From there their ambitions, goals and targets must grow and reach abroad. We have had some great recent successes with Irish business achieving success abroad in the construction, software, financial services and, in particular, the food and beverage sectors. This is the ultimate aim of so much of our investment in homegrown Irish businesses. We need to grow more international success stories out of Ireland and, to focus our efforts in Government in this regard, we must set ourselves ambitious targets.

FDI

Foreign direct investment will continue to play a central role in the development of the Irish economy, and is critical to the establishment of a smart economy. Ireland continues to be one of the most attractive locations for global companies investing in Europe. The quality of such investments is also of the highest standard, reflecting the remarkable evolution of the business ecosystem in Ireland as international competition and Irish economic conditions have developed. Investments in the past year, such as those by Intel, Cook Medical, Cisco, Boston Scientific and Hewlett Packard are clear evidence of this evolution. Just as implementing the correct combination of policies drove the development of the IFSC, Ireland is now also fast becoming an international hub for a new generation of ICT companies involved in cutting edge software development, the provision of on-line services and e-commerce. Globally recognised names such as Google, Yahoo, E-bay, Amazon, and Facebook have made Ireland their home away from home.

The dynamism such names and the calibre of people they bring to our shores send out a clear signal that Ireland is a vibrant place to do business, to generate ideas and to be successful both professionally and personally. Key to their decisions to locate here has been our pro-enterprise policies, our low corporate tax base and our ability to attract a world-class and multi-lingual talent pool. Just today, for example, I announced the establishment by AMPAC, one of Europe’s leading companies in the design and manufacture of mission critical structural components for the European space industry, of its European headquarters in Dublin. It is also notable that several FDI companies have established not just their European headquarters here in Ireland, but have located a headquarters for their entire Europe, Middle East and Africa operations here. It demonstrates that with the right set of policies in place, Ireland can win not just on the European stage but also at the global level.

Aligning Policy and Funding

Continued foreign direct investment wins and the development of Ireland as a natural home for innovative research and development intensive multinationals is essential as we build Ireland’s reputation as an attractive incubation environment for the best entrepreneurs in Europe and beyond. Aligning the right set of policy choices with an across-Government results-driven funding model in that space can, I believe, leverage the best possible outcome for the next phase of our economic development in terms of delivering quality and well paid jobs. Given our track record and the speed with which we are all adapting to the renewed economic landscape, I am confident that creating a smart economy in Ireland will prove to be a smart choice.

Conclusion

Ninety-two years ago, almost to the day, the New York Times published a striking tribute to the genius of Patrick MacGill. Introducing its readers to MacGill’s prose, the paper said of his works “Children of the Dead End” and “The Rat Pit” that they were unlike other vivid pictures of deprivation, because “they had in them the lights as well as the shadows of life”. Ireland today is far from the Ireland of MacGill’s childhood, yet as we face up to challenging times, it is important that we look for the “lights” among the economic “shadows” cast around us. The opportunity to reset Ireland’s competitive position and to reposition Ireland’s economy as a smart economy are two of those “lights” and have the potential to illuminate the future trajectory of this small but vibrant island nation.

Thank you.

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