Dr. Tom McDonnell:

The OECD has pointed out that Ireland is over-reliant on tax expenditures with regard to supports for research and development. Research and development is the classic example of an area where it is appropriate to have a tax expenditure. It is almost the textbook case. Research and development will be under-produced by the market because it will not be able to reap all the benefits. Its uncertainty of production means that it is inherently risky and so forth. There is an economic rationale for having a research and development tax credit or supports of some fiscal nature. The question is: what is the appropriate balance? The vast amount of the credit is used by multinationals.

The Deputy pointed to productivity issues in the domestic sector. We also have to be careful not to compare the domestic sector to US multinationals. They are the superstar firms, have economies of scale, are often monopolist, and their levels of productivity are not the appropriate bar. The appropriate bar is what is happening in other European countries. There are some areas, such as construction, where Ireland seems to do quite poorly for various reasons that are not always necessarily clear.

For the vast majority of firms, they are not very much ever going to be innovative because of the nature of the sector they are in. The scope is just not there. In certain sectors, such as manufacturing, there is always scope for research, development, innovation, improvement of the routinisation, and so forth. With services, that is much more difficult. As Ireland and other western economies have become more services-dependent, and will continue to be so, that would mean that productivity gains in countries that are at the technological cutting-edge will decline over the next few decades, all other things being equal.

The question is to ask how best to address this. The commission talks about various ways of doing this. One way is to try to keep particular people within firms. “Keep” was the focus there. It is also about how firms are linked up to the innovation system. From a Schumpeterian churn perspective, the focus should be on firms which, in many cases, do not even exist yet.

There should be a focus on the higher level sector and looking at high-potential start-up firms, rather than existing firms, which tend not be particularly innovative. If they have been around for a long time, they are set in their ways and have their business model. They do not tend to be the source of much innovation over time, at least not to particularly significant areas. It is about the types of firms and supports that are focused on. Tax credits may have a role. Are they correctly designed at present? Perhaps not. Are they administratively complex? They probably are. It is not clear how SMEs would be given that surety. Revenue cannot do that; that is not its role. Revenue is probably the only one who could give surety and it cannot do so. It will always be an issue. How best to reform is not clear, but it is clear that there is considerable deadweight. We seem to be overaligned, compared to other countries. Direct subsidies, which are inherently more transparent and may carry less deadweight, might be a better way to re-prioritise how we deal with entrepreneurial supports.