Greece, Ireland, Portugal: More growth via innovation
Comment of the Day

January 27 2012

Commentary by Eoin Treacy

Greece, Ireland, Portugal: More growth via innovation

This report by Antje Stobbe and Peter Pawlicki for Deutsche Bank may be of interest to subscribers. It is posted without further comment but here is a section comparing Taiwan, Israel and Ireland:
Where can economic policy be focused in order to boost productivity and GDP growth? One option might be to improve the conditions for innovation and encourage the establishment of rapidly growing, innovative companies from high-tech sectors in order to raise the share of high-tech exports. Examples of such strategies are to be found in Taiwan, Israel – and Ireland itself.

Taiwan, Israel and Ireland have benefited from the booming global growth of the IT sector. At completely different junctures, the countries positioned themselves in world markets: Taiwan as a manufacturer of IT hardware components, Israel as an R&D and/or service centre, and Ireland as the European production centre of multinational companies.

Their governments actively pursued policies to attract business: they offered financial incentives, for example in export zones (Taiwan) or in the shape of low (zero) corporate taxes for foreign investors (Ireland, Israel). Further-more, they developed technology parks and encouraged the formation of clusters (Israel, Taiwan).

Foreign direct investment played a major role: for example, in the 1990s Ireland attracted foreign companies from the IT and pharmaceuticals sectors and thus laid the foundation of its economic upswing (see chart 9). Israel, in turn, is home to a large number of research facilities affiliated with international IT companies. Taiwan, by contrast, focused on international networking and integrated its domestic industry into international supply chains. This facilitated the technology transfer.

Exports performed a key function in all these countries: Ireland served as a location for US companies which in turn exported to other EU countries. Israel has also strongly geared its IT sector to export business. In 2006, e.g., 72% of the IT goods and services produced in Israel were sold abroad.

As a consequence of their incentive policies the countries have often developed very one-sided large sectors which can make them vulnerable to structural changes or cyclical swings. For example, the ICT sector in Taiwan generates 34% of that country's manufacturing output (2009).7 In Israel it accounts for roughly 11% of GDP and around 30% of exports (2009).8

One major challenge for all these countries is to generate spill-over effects for the domestic economy and create scope for broader-based growth. Even though critics in Israel continue to point to the risks of a dual economy, attempts have nonetheless been successful in establishing an entrepreneurial mindset around the IT sector. Some helpful aspects in this context were programmes to develop technology centres and incubators as well as funding to support the venture capital market. By contrast, in Ireland there are still major differences between the sectors dominated by FDI and those of the domestic economy.

In all three countries, high public spending on education, currently totalling about 5-6% of GDP, provides underpinning for economic development.
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