Secrets of the Celtic Tiger: Act Two

Ireland’s brilliant catch-up strategy of the 1990s offers important lessons for countries that want to build a modern technology-based economy. But Ireland is not growing complacent. It knows that a decade of steady and strong economic growth, high employment, and success in recruiting foreign investment hardly guarantees future results. Ireland is now supporting R&D activities designed to help it prosper not simply for years but for generations. This new effort might be instructive for the United States and other technology leaders.

Ireland’s growth in the 1990s was remarkable. From 1990 to 2003, its gross domestic product (GDP) more than tripled, from €36 billion to €138 billion, as did its GDP per capita, which rose from €10,400 to €35,200. During the same period, merchandise exports grew 4.5 times, from €18 billion to €81 billion. Meanwhile, Ireland’s debt as a percentage of GDP fell from 96 percent to 33 percent; the total labor force rose nearly 50 percent, to 1.9 million; and the rate of unemployment dropped from 12.9 percent to 4.8 percent. And inflation barely changed, from 3.4 percent to 3.5 percent.

Perhaps even more impressive was Ireland’s growth relative to the United States and the European Union (EU). Between 1994 and 2003, average annual real economic growth in the EU was just over 2 percent, in the United States just over 3 percent, and in Ireland 8 percent. Whereas Ireland’s income levels once stood at 60 percent of the EU average, they now stand at 135 percent of the average.

This rapid progress is no doubt due in part to the fact that Ireland had farther to travel than many other countries to become a 21st-century economic competitor. When the 1990s began, tourism and agriculture still dominated Ireland’s economy. All the while, however, Ireland possessed a combination of strengths that, it seems clear in retrospect, had long been ready to blossom once a more knowledge-based economic system began to emerge.

Four sources of growth

First among these attributes is Ireland’s excellent educational system. Though it is not perfect, and passionate debates continue about how the system can best serve Ireland’s changed society, it is in some respects a model. Today, 48 percent of the Irish population has attained college-level education, compared with less than 40 percent in countries such as the United Kingdom, United States, Spain, Belgium, and France, and less than 25 percent in Germany.

Ireland’s success in the 1990s, in fact, would not have been possible if the country had not taken a crucial step 40 years ago, when it began a concerted effort to increase educational participation rates and introduce programs that would match the abilities of students to the needs of a global economy and advanced, even high-tech, enterprises. At the same time, the country started making its already demanding K-16 education system more rigorous, creating links between industry and education and formalizing and supporting workplace education.

What happened thereafter is no coincidence. In the mid-1960s, fewer than 20,000 students were attending college in Ireland. By 1999, the number had risen sixfold, to 112,000. In 1984-1985, only 40 percent of 18-year-olds in Ireland were engaged in full-time education. Ten years later, the figure was 64 percent. During the first 5 years of the 1990s, the total number of students engaged in college-level programs grew by 51 percent. By 1995, Ireland had more students as a percentage of population with science-related qualifications than any of the other 30 countries in the Organization for Economic Cooperation and Development (OECD). A long-term commitment to education provided the foundation for the boom that followed.

Second, Ireland was ready to prosper when the knowledge-based economy emerged because of a combination of benefits it enjoyed as one of 15 members (the total is now 25) of the EU and as a nation with a historically strong cultural and political connection to the United States, where 40 million people trace some part of their heritage to Ireland. The EU made massive investments in Ireland, as the single-market system followed its plan of shifting a portion of EU contributions from richer members to those in need of development, on the principle that growing markets would benefit all members. This investment transformed infrastructure, including roads, ports, and communications, and gave overseas investors reason to look to Ireland as a haven of opportunity. Meanwhile, as an English-speaking country with a unique bond to the United States, Ireland was already an enticing marketplace for U.S. enterprises. When the technology age of the 1990s arrived in the United States, great opportunities existed for it to arrive in Ireland as well, especially given the country’s other advantages.

Third, a consistent political and public commitment to investment has existed in Ireland for decades. The country’s investment agency, IDA Ireland, for example, was established in 1969 and has played an important role in recruiting U.S. corporations. Today, there is hardly a leading U.S. manufacturer of computer software or hardware, pharmaceuticals, electronics, or medical equipment, among other knowledge-based businesses, without thriving operations in Ireland. IDA Ireland has meanwhile been able to develop relationships with overseas companies across the globe and has established offices in the United States and several other countries to serve clients and attract further investment.

Fourth, Ireland was shrewd enough to capitalize on these strengths by lowering corporate taxes. By 2003, Ireland’s corporate tax rate was 12.5 percent, covering both manufacturing and services (with a rate of 25 percent applying to passive income, such as that from dividends). This change, along with sustained efforts to reduce payroll and other business taxes, gave U.S. manufacturers operating in Ireland a financially competitive platform from which to serve the EU single market of 470 million people. In 1990, about 11,000 companies were exporting from Ireland. By 2002, the number had risen to 70,000.

What next?

Ireland now accounts for roughly one-quarter of all U.S. foreign direct investment (FDI) in Europe, including almost one-third of all FDI in pharmaceuticals and health care. Nine of the world’s top 10 drug companies have plants in Ireland. One-third of all personal computers sold in Europe are manufactured in Ireland, and OECD data indicate that the country is the world’s biggest software exporter, ahead of the United States. These statistics become even more impressive when one realizes that Ireland’s population is just over four million, about the same as Brooklyn’s.

But Ireland knows that 10 to 15 years of growth, however important, must be seen only as a beginning. Its political and business leaders well remember the days of economic stagnation and relative poverty, and they are not ready to relax. In fact, across all government departments, there is an impressive commitment to policies, programs, and investments designed to make Ireland an enduring knowledge society. The investments include support for R&D in scientific and engineering areas that capitalize on the same conditions that benefited the country in the past decade: a strong educational system, aggressive economic strategies, partnerships with nations rich in knowledge-based businesses, and, above all, highly skilled talent.

With this philosophy, the Irish government established Science Foundation Ireland (SFI) in 2000 as part of the National Development Plan 2000–2006 (NDP). This investment followed a year-long study by a group of business, education, and government leaders appointed by the prime minister and deputy prime minister. The group’s job was to examine how an infusion of government funding could best improve Ireland’s long-term competitiveness and growth. To their credit, the leadership saw the promise in what the group’s report described.

The NDP funding that is focused on research, technological development, and innovation programs will total approximately €1 billion by 2006, a considerable sum for a country of Ireland’s size. SFI’s portion totals €635 million, or approximately $820 million, and SFI’s investment does not have to stand alone. To the contrary, 18 months before SFI came into being, the government began building R&D infrastructure and it continues to do so. Through the Higher Education Authority, Ireland has already committed almost €600 million to creating new labs and research space. As a result, SFI has been able to be aggressive in helping higher-education institutions recruit researchers to build programs in these facilities.

SFI’s ultimate goal is to foster an R&D culture by investing in superb individual researchers and their teams. We want them to uncover ideas that attract grants and inspire patents. We want them to recruit and train academic scientists and engineers from home and abroad and to explore daring ideas as well as ideas that can lead to knowledge-based businesses, create jobs, and generate exports. Perhaps most important, we want them to help inspire Irish students to pursue careers in science and engineering.

Importing ideas

The model for SFI, not surprisingly, is the U.S. National Science Foundation (NSF). Ireland recognized the contribution that NSF has made to U.S. science, economic growth, and talent development, among other areas. Because Ireland cannot afford the comprehensive scope of NSF, the Irish government has to target research investments in areas with the most likely scientific and economic impact, and where the country already has concentrated skills and industrial interest, such as computers, electronics, pharmaceuticals, and medical equipment. SFI’s initial mission was therefore to support world-class research programs in science and engineering fields that underpin biotechnology and information and communications technology. The SFI mission recently expanded to include the newest areas of science and engineering. This expanded mission will help Ireland build the talent needed for the long term and respond even better to creativity.

We also interpret our mission broadly. Our selection process lets innovation and imagination earn grants, using international experts to judge proposals and the likelihood of success. To their credit, SFI’s international board has insisted that we not make selections based on an averaging of reviewer scores, but instead aim to invest in performance and excellence and take risks. We follow the NSF model by having technical staff make final grant decisions based on the outside review, rather than having reviewers’ scores dictate the result. This approach helps address all questions before final rankings and ensures the accountability of the technical staff, an essential feature of the NSF system.

We also share with teams whose proposals we deny a summary of the weaknesses that the experts found in the submissions. This feedback loop has generated successful proposals from rejected ones and, in so doing, created stronger research measured against an objective standard. It is worth noting that as common as such practices might be in the United States, they seem uncommon in European research programs.

In the biotechnology areas, we are interested in work in a range of fields, from DNA chips to drug delivery, from biosensors to bioremediation. At the same time, we have particular interest in research that draws on special capabilities in Ireland’s academic and industrial system. We currently give special emphasis to agri-food, cell cycle control, enabling technologies, medical biotechnology/ biopharmaceuticals/therapeutics, microbiology, and neuro/developmental biology. But we are determined to stay open to the best ideas of the best researchers.

The same is true for our grants in information and communications technology (ICT). We take ICT to include broadband, wireless, and mobile transmission; parallel processing systems; engineering for reliability of data transfer; wearable sensors; computer modeling; distributed networking; computer-based training; nanoscale assembly; and human language understanding. Our specific focus is currently on the following areas:

• Novel adaptive technologies for distributed networking of people, machines and sensors, and other devices.
• Software engineering for improved reliability, security, and predictability of all software-based systems.
• Machine learning and semantic web technologies and image processing to extract information from massive data sets, and enabling adaptive systems and significant applications for the future.
• Nanotechnology breakthroughs in device design and information processing.

In both ICT and biotech, what drives us to specific areas is the sense that they will produce the greatest prospects for technological and economic development in the next few decades. But as the goals of researchers evolve, so will the proposals that get our attention. We also are open to, and actually encourage, proposals that recognize that the next major leaps could occur in areas where ICT and biotechnology overlap, in what is sometimes called digital genetics.

We support research aggressively. Our portfolio includes professorships that range up to €2.5 million over 5 years to help attract outstanding scientists and engineers from outside the country to Irish universities and institutes of technology, and principal investigator grants that are normally worth at least €250,000 per year over 3 or 4 years for researchers who are working in or will work in Ireland. We are now funding 450 projects through grants totaling €450 million. These projects include more than 1,190 individuals, research teams, centers, and visiting researchers from Australia, Belgium, Canada, England, Germany, Japan, Russia, Scotland, Slovakia, South Africa, Switzerland, and the United States.

This funding includes the Centers for Science, Engineering, and Technology (CSET) program, which connects researchers in academia and industry through grants worth as much as €20 million over 5 years and may be renewed for an additional term of up to 5 years. The idea is to fund centers that can exploit opportunities for discovery and innovation as no smaller research project can, link academic and industry researchers in promising ways, generate products of value in the marketplace, and contribute to the public’s interest in science and technology. These centers give Ireland another recruitment tool, again building on the relationships it has established around the world. Already, the CSETs have led to research partnerships in Ireland with Bell Labs, HP, Intel, Medtronic, and Proctor & Gamble.

As such work suggests, SFI has special obligations as Ireland’s first extended national commitment to a public R&D enterprise. The foundation must prove itself a reliable partner with the other sectors crucial to this enterprise, notably related government enterprises, the education system, and the industrial and business sectors. We engage with these sectors constantly, including by having their representatives on review committees, and, as with the CSET program, offering grants that can both draw interest among researchers and help in industrial R&D recruitment. Our board also includes leaders from every sector, both within and outside Ireland, and has been pivotal in determining the emphasis and structure of our programs.

The foundation’s work is not occurring in a vacuum, either. Investments in the science and technology infrastructure are continuing, and the government last year established the position of national science adviser. This adviser will report to a cabinet-level committee dedicated to science. At the highest levels of Ireland’s government, there is a deep conviction that R&D are crucial to the country’s future.

Europe’s next step?

Ireland’s early results have not gone unnoticed by its neighbors. Intrigued by what Ireland and SFI have begun, the European Commission asked me to lead an expert group in evaluating a potential EU-wide research-funding scheme. The program would pit researchers in Europe against one another for certain EU grants, using competition to drive up the value and number of ideas, patents, and products. The report, Frontier Research: The European Challenge, was published in April 2005. It places considerable weight on the value of independent outside expert review teams and the importance of having technical staff make final grant decisions. As in SFI, this process will allow for appropriate follow-up on issues raised by technical experts and, in principle, encourage more risk-taking. Europe has never tried a pan-national competitive approach before, or widely employed this decision model, so it will be interesting to see whether the EU can apply the NSF approach across multiple countries with a common interest in challenging U.S. R&D dominance.

Obviously, though, Europe is not the only country chasing the United States, as Ireland is not the only country using an NSF prototype to guide its research investments. Other nations also have seen how research can become the basis for a competitive knowledge-based system, innovation, and growth. Indeed, watching Ireland imitate what is best in the U.S. system might be a helpful reminder to U.S. policy-makers to preserve and strengthen their own government efforts that have contributed so much to its economic success.

Readers of this magazine know that higher education in India and China is advancing at a stunning pace (“Asian Countries Strengthen Their Research,” Issues, Summer 2004). In 1999, U.S. universities awarded 220,000 bachelor’s degrees in science and engineering. China awarded 322,000, and India awarded 251,000. Just two decades ago, these countries awarded barely a fraction of such degrees. China’s college enrollment grew by two-thirds between 1995 and 2000. India’s increased by more than a third between 1996 and 2002, to 8.8 million.

In 2003, the United States lost its status as the world’s leading recipient of foreign direct investment. The new leader is China—a worrisome sign of how the market now judges future opportunity.

At the same time, U.S. struggles in education—the basis of any society’s innovation culture—continue. It is remarkable to consider that at present rates, only 18 out of every 100 U.S. ninth-graders will graduate in 10 years with either a bachelor’s or an associate’s degree. Can any country afford to continue squandering such talent?

In a January 2005 study of U.S. education and competitiveness, the Business–Higher Education Forum—an organization of top executives from U.S. businesses, colleges, universities, and foundations—observed, “[T]he United States is losing its edge in innovation and is watching the erosion of its capacity to create new scientific and technological breakthroughs. Increased global competition, lackluster performance in mathematics and science education, and a lack of national focus on renewing its science and technology infrastructure have created a new economic and technological vulnerability as serious as any military or terrorist threat.”

Ireland, I believe, appreciates the new severity of competition. Its recent experience with innovation and growth built on education has given it reason not to slip backward. It has begun to believe the potential truth of what Juan Enriquez of Harvard University wrote at the start of this decade, “The future belongs to small populations who build empires of the mind.”

Ireland is acting as if it knows that empires of the mind emerge from the commitment to science and engineering that R&D requires, that powerful R&D starts with talent, and that a successful education system allows talent to flourish. The United States showed countries such as Ireland, among many others, the power of these connections. Other large and growing countries are now applying this lesson. I hope that the United States does not forget it.