Funding justified for ICT start-ups in Ireland? Part 3

Continued from Part 2

As for innovative in iHPSU, Irish patent level is low. In 2014, Ireland ranked 12th in Europe with a ratio of 126 per million. European Commission’s Joint Research Centre ranked Dublin as 16th among Europe as a top tech hub. Furthermore, data published last by GP Bullhound, a British investment bank, show that Ireland has only 1 (it’s an American company, Fleetmatics) one billion-dollar start-up (“unicorns”) since 2000 .The problems seem to be the limits on Irish local market, innovation, public spending and scaling due to lack of being able to learn without any domestic experience. As well as most global tech start-up exits have no venture capital funding.

Another trend seen similar to the pre-economic crisis is the wage inflation. The CSO reports that in the five years to Q2 2015 overall average hourly earnings decreased by 0.5% (€0.10) from €21.95 to €21.85. However, The largest percentage increase was recorded in the Information and communication sector (+15.9%) rising from €25.59 to €29.67. Labour productivity is no longer increasing while wage increases are threatening competitiveness for start-ups.

Global ICT service sector hype is delivering more and more Foreign Direct Investment (FDI) in Ireland. At the end of 2013, Ireland has a net FDI (asset) surplus of € 102 billion up from € 66 billion from the net position in 2012 .US firms have invested more than $ 277 billion here since 1990 making Ireland number one destination in the world.

However, the flow of direct investment into Ireland in 2013 was down € 35bn and direct investment abroad increased by €77bn than in 2012. Also, investment from Asia was down to a disinvestment of €1bn in 2013.Earnings of foreign-owned direct investment companies were down €3bn and the income earned abroad by investors in Ireland was unchanged since 2012. Equity invested amounted to €7bn while reinvesting earnings to €18bn and other capital amounted to €3bn . This suggests that there are few new investments with main companies reinvesting in the country or balancing books to help in avoiding US taxes as revealed by Apple’s hearing of a US Senate investigations committee. This ever-increasing international exposure of Irish tax regime makes start-ups be open to the same detrimental opinion. For them, even a small contraction in the global economics can lead to sliding dangerously to posting negative current account balance.

Moreover, according to a document on the development of a new science strategy very little is spent on research and development with 54% foreign-owned firms not being R&D active and only 13% of foreign-owned firms spending  €2m in 2012.Therefore, “The Minister for Finance announced the introduction of a KDB that will be in compliance with the OECD “modified nexus” model. The Irish KDB will be the first OECD-compliant intellectual property (IP) box regime in the world and is intended to offer certainty to taxpayers. The regime also aims to enhance Ireland’s popularity as an IP location, in conjunction with the 12.5% corporation tax rate, the R&D tax credit, and the IP amortization regime.

The KDB will provide for a 6.25% corporation tax rate to apply to the profits arising from research and development projects relating to certain patents and copyrighted software carried out by an Irish company”. Therefore, Irish economic strategy forward remains focussed on the ICT sector to deliver growth in the foreseeable future.

Overall, there is a need for balance in providing funds to disruptive tech start-ups for growing their investment while protecting their interest. The decisions should be based on sound evidence. There seems a trend by foreign direct investments to prevent financial assets lose their nominal values. The foreign investment seems to inflow less as well as the formation of new tech start-ups is not excessive.

Numerous multi-annual initiatives by government and other business lobbies are still focussed on providing tax incentives and funding to support ICT sector. Post –crisis thinking seems much like a property and construction boom with initiatives to fund and attract smaller and less established firms by various investors.

However, there seems to be a soft-landing for the ICT sector with slow growth with ample funding options available. There is over-enthusiastic support from the government which is leading to clusters to ICT enterprises with innovation as a major snag to justify all the investment. It entails new and higher risks as these investments with no physical assets, employs few workers and has no technology.

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