Innovation, rather than high-tech, is key

David Jacobson25/03/2011

David Jacobson: In 1990, in a paper on MNCs in Ireland, I argued that the “completion of the single market” in 1992 would bring pressures on Ireland to increase its corporate profits tax rate and that we should begin to prepare for this. In 1993, in a paper with Sara Cantillon, I suggested that FDI into Ireland from the US was highly dependent on American IRS regulations.

Ever since, in various papers and presentations, I have taken the opportunity to express the view that Irish industrial policy was and is overly dependent on the encouragement of FDI. This is not to say that we should suddenly increase corporation tax rates nor that we should discourage inward FDI. However, the pressures from our major European partners to increase corporation tax – or to introduce a CCCTB (Common Consolidated Corporate Tax Base) – should not have come as a surprise, and the horror being expressed by policy makers and commentators alike at the prospect of having to alter this one – and apparently only – pillar of industrial policy is a reflection on the lack of understanding of the prerequisites for sustainable development.

The monofocal Irish industrial policy sees development as something like the following:
Low corporate taxes => inward FDI => increase in high-tech => increase in exports => growth

This expresses inadequate recognition of the importance of indigenous firms and of all activities other than high-tech ones. For some reason we continue in Ireland to extol the virtues of the so-called smart economy, when we continue to appear well below OECD averages in most of the indicators of advanced technology infrastructures. Moreover, firms in low and medium technology (LMT) sectors continue to account for the vast majority – in nearly all OECD countries – of employment and contribution to GDP. Innovation, not high-tech, is the key, and there is a great deal of evidence of innovation in LMT firms. In Ireland, firms like the Howth company Oceanpath in food processing, and Cork’s BCD Engineering, are in LMT sectors but are highly innovative and successful.

Rather than focussing on our hallowed 12.5 per cent we should acknowledge the complexities of development, work on the identification of differences in the policies required to support innovation in different sub-sectors, and balance the support we provide to FDI and high-tech, with some attention to indigenous firms and LMT.

Posted in: TaxationFiscal policyFiscal policy

Tagged with: corporationtaxfdiinnovation

Professor David Jacobson     @davidjacobson48

David Jacobson

David Jacobson is Emeritus Professor of Economics at Dublin City University Business School. He is the Chair of Commission on Industrial Policy in TASC since 2011. He has written and lectured on various aspects of industrial policy and political economy in Ireland. In the 1990s he was an independent member of the National Economic and Social Council. He has also worked in many other countries, most recently Cyprus and China.


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