kpmg\'s innovation monitor 2012

$: KPMG\'s Innovation Monitor 2012$
Innovation Monitor

2012

Insights into Innovation & R&D in Ireland

kpmg.ie

ContentsExecutive summary 4

Putting the survey in context 6

Methodology & demographics 8

Survey findings & analysis 10

Conclusions & recommendations 24

About KPMG 25

Endnotes 26

I N N O VAT I O N M O N I T O R | 3

Contents Foreword

The good news is that Ireland is building its own reputation as an innovation hub in this highly competitive space. For example, Forbes magazine recently rated Dublin as one of the seven best cities in the world to start a business. The recent Global Entrepreneurship Monitor (GEM) report shows levels of entrepreneurship in Ireland often significantly higher than in many of our European neighbours and events such as The Dublin Web Summit help reinforce Ireland’s reputation as a place where the business of innovation gets done.

However the world doesn’t stand still. The intense competition for innovation focussed capital and labour means that Ireland must constantly review our approach to innovation. With this in mind, KPMG’s R&D Incentives Practice has produced Innovation Monitor 2012. Carried out by RedC Research, we hope it will become an annual review of Irish business attitudes towards innovation and related issues. In doing so, it should help business, government, academia and indeed all stakeholders in Ireland’s economic future understand some of the key drivers in this vital area.

In particular, we need to know what is working and what needs improvement or greater focus. The areas covered in the report range from business attitudes, incentives (including tax incentives and R&D tax credits) and linkages to our universities and related innovation centres. Importantly - we also need to know when something isn’t working or needs improvement so that we can move quickly to remedy or improve the situation.

Despite the immense challenges facing Irish business, we believe it vital that companies of every size take the time to see how they can be more innovative. Whilst this is often easier said than done the benefits are significant – particularly reducing costs, accessing incentives and financial support for research and development and making products and services more attractive to potential buyers.

Where innovation thrives jobs follow. Around the world, countries and cities which promote and encourage innovation do so because they know that it confers clear benefits in terms of employment and economic development. Some locations have become bywords for innovation – Silicon Valley for example stands out as a location where creativity and entrepreneurship thrive.

Terence O’Rourke

Managing Partner, KPMG in Ireland

4 | I N N O VAT I O N M O N I T O R

KPMG’s Innovation Monitor 2012 is based on data prepared by RedC Research from a representative sample of Irish business in autumn 2012. This unique piece of research reflects Irish industry’s opinion of the current innovation environment, both macro and micro, and our annual research will enable us to monitor opinion as Ireland steers towards national economic recovery.

One of the most striking revelations to come from the research is the disparity in views on innovation between large and small businesses in Ireland. While large companies on the whole are more positive about Ireland’s performance and optimistic for the future, smaller companies are more apprehensive. With limited financial resources and little access to credit, small companies are faced with challenging questions – to maintain the status quo and risk their competitiveness, or to pour their already limited resources into uncertain innovation projects. While incentives exist to take away some of the financial risk associated with innovation, our research shows that small companies find it more difficult to take advantage of them.

The findings of Innovation Monitor 2012 are outlined under the following headings:

How are we doing? Irish innovation

Two-thirds of our respondents feel the recession has made us more innovative. More than four in five businesses think Ireland is either more innovative or the same as other countries. As positive as these results are, we don’t seem to give ourselves much credit on the global scale – only 5% of our respondents think Ireland is the most innovation-friendly country in the world; the USA came in first place among 33% of respondents.

Room for improvement?

More than half of our respondents feel that the Government isn’t yet doing enough to nurture and help innovation in Irish business. The majority of those respondents feel that more financial incentives are needed; in fact, four of the top five suggestions relate to finance. Cutting red tape, easing the administrative burden on claiming the R&D tax credit and R&D grants, and encouraging banks to lend were some of the more common responses received.

The Irish Government’s Strategy for Science, Technology and Innovation 2006-2013 set out a vision to guide policies in the areas of research, development and innovation: “Ireland by 2013 will be internationally renowned for the excellence of its research, and will be to the forefront in generating and using knowledge for economic and social progress, within an innovation driven culture”.1 As 2013 fast approaches, KPMG’s R&D Incentives Practice was interested in establishing how close we are to achieving this vision, particularly from the perspective of Irish business.

summary

Executive


The innovators – who’s doing it and why

When it comes to making the decision to innovate, the most influential factor is the availability of qualified in-house personnel, according to almost three in five respondents. This is by far the most influential factor among large companies. Small and medium businesses, on the other hand, give almost as much weight to the availability of grant funding as qualified personnel. Two in three Irish businesses describe themselves as currently innovative, though small companies are more than twice as likely to be planning innovation projects as currently undertaking them.

Financing innovation – the R&D tax credit and grants

Financing is the most significant factor in the successful innovation process, with nearly 90% of Irish businesses feeling it is important. Large companies are more likely to be receiving grants and claiming the R&D tax credit than small companies. Rather worryingly, only one in five companies thinks there is sufficient information available on R&D and innovation funding. Anecdotal evidence suggests that a significant number of companies are still unclear as to the meaning of the R&D tax credit guidelines and as a result miss out on a potential claim. This has been reflected in our research, which has found that approximately 28% of those that don’t claim the credit could probably do so.

Collaboration for innovation

More than half of all businesses feel there isn’t enough information available for those wanting to collaborate with academic partners on an innovation project. Thus, less than one in six companies is currently doing so. Large companies are more than twice as likely to collaborate on an innovation project as a small company, most likely due to the time and resources required to locate a partner and manage the relationship.

The measure of success

When it comes to measuring the success of an innovation project, more than half of businesses use revenue growth as a key metric. This was a common answer across small, medium and large companies. Market share and project-dedicated return on investment were listed second and third respectively, with only 5% of respondents listing patents, a traditional metric for measurement of success.

We hope you find the survey results insightful; we welcome feedback on the findings and your suggestions for Innovation Monitor 2013.

“Two in three Irish businesses

describe themselves as currently innovative”

Putting the survey in

context Ireland’s performance

u Ireland ranks ninth out of a total of 141 countries in the 2012 Global Innovation Index, up four places from 2011.2

u According to the Innovation Union Scoreboard 2011, Ireland scores above the EU average for innovation performance, with relative strengths listed as: human resources; open, excellent and attractive research systems; and economic effects. The relative weaknesses are: finance and support; linkages and entrepreneurship; intellectual assets; and innovators.3

u Seventeen Irish companies are listed in the 2011 EU Industrial R&D Investment Scoreboard, a list of the top 1000 companies investing the largest sums in R&D in 2010.4

u As part of Europe 2020, the EU’s growth strategy for a smart, sustainable and inclusive economy, Ireland has committed to raising its combined public and private investment levels in R&D to 2.5% of GNP (2% of GDP). The latest available data shows the research intensity rate for 2010 at 2.16% of GNP (1.77% of GDP), unchanged from the 2009 figure.5

Business expenditure on R&D

According to the most recent figures available from Forfás, Irish businesses are continuing to invest in R&D in spite of recession as they continue to see the importance of bringing new and innovative ideas to the marketplace. It is also notable that while investment by foreign affiliates dropped slightly between 2009 and 2010, indigenous companies have actually increased their level of expenditure (e583m in 2010, up 3.6% from 2009), a positive sign for the future. Overall, business expenditure on R&D increased from e1.33bn in 2005 to e1.87bn in 2009, a 31% increase in real terms.6

The R&D tax credit

The research and development (R&D) tax credit was first introduced by the Finance Act 2004. It provides that any qualified company (or group of companies) with qualifying R&D activities is entitled to a tax credit valued at 25% of the expenditure incurred on these activities, in any given year, to the extent that it is incremental to expenditure on R&D activities in 2003 (the “base year”).

Figures released by the Department of Finance in June 2012 show a 101% increase in the number of companies claiming the R&D tax credit between 2008 and 2010, from 582 to 1,172. The level of incremental investment (i.e. above the 2003 base year) in R&D increased by 14% over the two years, from e729m in 2008 to e832m in 20107; this is a particularly impressive achievement considering the turbulent economic environment of that period.

KPMG’s Innovation Monitor 2012 has been designed to address some of the key elements of innovation in Irish business and how it is financed. The following facts may help place this research in context:


context

“Ireland ranks ninth out of 141 countries in the 2012

Global Innovation Index”



Methodology

The research for KPMG’s Innovation Monitor 2012 was conducted by RedC Research across a representative sample of Irish business.

u 200 telephone interviews were conducted in August and September 2012.

u The survey was conducted among businesses with at least 10 employees; quotas were placed on company size to ensure a nationally representative sample.

u Interviews were conducted with the Finance Director or a similar director/partner in the company with responsibility for finance.

Methodology &

demographics

Company size(no of employees)

(Base: All Businesses – 200)

How Is Value Of Innovation Measured?

TurnoverLocation ofhead o�ce

25%

50%

6%

11%

34%

16%

22%

11%

87%

5%2%

5% 1%

Large(100+)

Medium(50-99)

Small(10-49)

25%

€50m+

€10m-€50m

€5m-€10m

€1m-€5m

€0-€1m

Rather not say

Ireland

Rest of EURest of EuropeNorth America

Rest of World

Analysis of sample




demographics


7%


NET +49

63 %

23 %

14 %

More innovative

The same

Less innovative

The recession has made Irish companies:

HOW ARE WE DOING? IRISH INNOVATION

Survey findings & 48

analysis

The impact of the recessionAccording to our research, almost two in three businesses feel that the recession has made Irish companies more innovative (63%). Their perspectives are based on fact – according to Forfás, Irish businesses spent around 31% more on R&D in real terms in 2009 (the most recent confirmed figures available) than they did in 2005. The estimates for 2010 show a slight decline of 1.9% on 2009 expenditure, though confirmed figures were unavailable at the time of publication.9

What is of particular interest is that large companies seem to be the most positive about the impact of the recession on innovation – only 6% feel we’re less innovative because of the recession, compared to 16% of small companies. This is a theme throughout this research, highlighting a difference between the optimism of large companies and the deep concerns of smaller businesses.

In 2008, as recession was taking hold of the Irish economy, the Irish Government published a five year plan: Building Ireland’s Smart Economy – A Framework for Sustainable Economic Renewal. Stressing the importance of innovation to Ireland’s recovery, the report stated that “general national welfare is highly dependent on the ability of a country to foster innovation and use that as a wealth building platform”8. Four very challenging years later, how well is Ireland fostering innovation?


“ Almost two in three businesses feel that the recession has made Irish companies more innovative”


7%


NET +10

29 %

52%

19 %

More innovative

The same

Less innovative

Relative to other countries, Irish companies are:

How does Ireland compare?The positivity continues when we asked how Irish business thinks we compare to our international competitors in terms of innovation. Despite the recession, over 80% of Irish businesses feel Ireland is either more innovative or the same as other countries.

Once again, large companies seem to be the most positive, with only 12% feeling Ireland is less innovative than others, compared to 23% of small companies.



“ More than four in five businesses feel Ireland is either more innovative or the same as other countries”



33%

56%

7%

USA

(Base: All Who Agree That The Government Is Not Doing Enough To Support Innovation – 110)


0 5 10 15 20 25 30 35

Germany

China

Republic of Ireland

United Kingdom

Japan

Sweden

South Korea

Don’t know

13 %12 %

5 %4 %4 %

2 %2 %

17 %NET Europe 28%

8 %Others

Others mentioned – each 1%

Australia

Canada

Denmark

France

Holland

India

Singapore

Switzerland

The most innovation-friendly country in the world is:



Who’s getting it right?While in a general sense our respondents are quite confident of Ireland’s place in the world, when it comes to naming the most innovation-friendly country in the world only 5% of respondents named Ireland. One in three (33%) Irish businesses feel that the USA is the most innovation-friendly country in the world. Germany was listed in second (13%), followed closely by China (12%).

Interestingly, Ireland actually ranks higher than the USA, Germany and China in the Global Innovation Index 2012, coming ninth ahead of their respective positions of 10th, 15th and 34th10. It is hardly surprising that the USA features so prominently in the minds of our respondents, considering Ireland’s business relationship with the American market: in 2011, three out of every four FDI projects coming to Ireland

originated from the US, and of the €700m invested in R&D projects, €500m of it originated in US firms.11

Perhaps even more influential, though, is the brand the USA has successfully built around innovation – technology companies like Apple, Microsoft, Google and Facebook have become household names, as have the names of their innovative founders. In a global KPMG survey examining technology innovation, American citizens accounted for seven of the top eight “emerging innovation visionaries”12.

What has become apparent is that while Irish businesses are positive about Ireland’s innovation performance, when it comes to pitting the country against international competitors we simply don’t give ourselves enough credit.


Others mentioned – each 1%

Australia

Canada

Denmark

France

Holland

India

Singapore

Switzerland


“ Irish businesses think the USA is the most innovation-friendly country in the world”

Innovation and the Irish Government Recently the Minister for Jobs, Enterprise and Innovation informed the Dáil that the Government “is focused on economic recovery by delivering improvements in competitiveness, ensuring companies have access to the finance they need to grow and by prioritising innovation as a key driver of success which will lead to jobs and export growth.”13

The fact that governments worldwide embrace the principles of innovation is not surprising. The aura of progressive modernity has great appeal and it is unlikely that being anti-innovation sits well in any manifesto. However, there is often a gap between what governments aspire to and how their actions are perceived by business and other stakeholders. This is particularly the case as governments worldwide grapple with spending constraints; in Ireland it appears no different.

When asked to rate the work being done by Government to help and nuture innovation in Irish companies, more than half of Irish businesses (55%) believe that the Irish Government could do more. This was strongly felt by small and medium enterprises in particular (57% and 60% respectively, compared to 46% of large companies).

ROOM FOR IMPROVEMENT?

}


7%


35 %

26 %

14 %

More innovative The same Less innovative


0 5 10 15 20 25 30 35

20 %

5 %

55 %

19 %

Agree strongly

Agree slightly

Neither

Disagree slightly

Disagree strongly

}

The Irish Government is not doing enough to help and nurture innovation in Irish companies

NET agree55%

NET disagree19%


“ The Government needs to do more to help and nurture innovation”



45 %

56%

7%

More �nancial incentives/grants



0 10 20 30 40 50

Address taxation issues

Training and employment programmes

More regulation of banks/more support from banks

Support the economy

Less red tape

More communication with businesses

Focus on domestic industry

Other

Don’t know

26 %18 %

15 %15 %

11 %6 %

5 %2%

7%

What would you like to see the Government do more of to support innovation in Irish companies?*

What more can be done?Of those that think the Government could do more, almost half (45%) said they would like to see more financial incentives – this was given as the top answer by small, medium and large companies. Rather unsurprisingly in a time of recession, four of the top 5 answers relate to finance. The following are some of the suggestions put forward by our respondents:

u “Assistance with grant aid – try to free up some finance. It’s exceptionally difficult to get financing these days.”

u “Make it easier to claim the R&D tax credit – the administrative burden on claiming is very high.”

u “They need to take note of the fact that smaller companies need help.”

u “Provide access to experts in fields of developing products.”

u “Just handing out money doesn’t create innovation. They should support new product planning and mentoring.”

(Base: All who agree that the government is not doing enough to support innovation – 110)(Base: All Businesses – 200)

*Respondents were invited to give one answer or more.



THE INNOVATORS – WHO’S DOING IT AND WHY

Innovation: a significant improvement of a good or service, or of a production or delivery method.14

Deciding to innovate When it comes to a company making the decision to innovate, the most influential factor is the availability of qualified in-house personnel (58%); this is particularly true for large companies, with two in three (66%) listing it as a key influence.

It’s unsurprising that the requirement for sufficiently qualified people in-house is a key influencer when it comes to something as intangible as innovation; after all it is people that innovate, not companies. This is one of the key reasons that the Government introduced the “key employee” reward mechanism in Budget 2012, whereby key employees who have been involved in R&D activities can effectively receive part of their

remuneration tax free via the R&D tax credit scheme. While the idea of rewarding the people that actually do the innovating is to be welcomed, particularly if it helps companies attract and retain them, in practice the scheme is not particularly effective.

As a company has to be tax paying to avail of the reward mechanism and the key employees cannot be directors or have a material interest in the company, this measure is likely to have greater relevance for multinationals rather than SMEs. Furthermore, investigations have shown that to benefit from the mechanism an employee would have to be earning a salary of approximately €70,000 per

annum, yet an average employee working in R&D earns approximately €45,000 – €55,000 per annum.15 In practice, therefore, it seems the scheme can only be of benefit to the most senior R&D staff in larger companies.

While the survey shows availability of qualified personnel was also of high importance to SMEs, equally important was grant funding – 56% and 54% of small and medium companies respectively said so. This supports the theme running throughout our research – SMEs need more funding if they are to innovate. With public finances already stretched, companies must look at alternative options to fund their innovation.

Major in�uence 5

4

3

2

No in�uence 1

Availability of quali�ed in-house

personnel

Grant funding

Availability of a collaborative partner

R&D tax credit

Venture capital funding

26 %

27 %

6 %

32 %

9 %

31%

21 %

9 %

22%

17 %

14%

22%

12 %

25 %

27%

20 %

25 %

11 %

17 %

27 %

16 %

21 %

15 %

15 %

33 %

To what degree would each of the following influence your company’s decision to invest in innovation projects?


Who’s innovating?More than four in five (82%) Irish businesses are either currently innovative or are planning to be so in the near future. The larger the company, the more likely it is to be currently innovative or planning to be so in the near future.

Interestingly, small firms are more than twice as likely to be planning innovative projects as to be currently undertaking them. While on the surface this could suggest that a wave of innovation among small firms could be on the horizon, planning to innovate and actually innovating are two very different things. As our research shows, there are a number of factors influencing a company’s decision to innovate – finance and qualified staff being top of the list. For smaller companies who are already preoccupied with accessing credit and dealing with resource constraints, it’s likely that a significant number of innovation projects are being placed on the back burner until the pressures of the recession ease.

As the European Commissioner for Research, Innovation and Science, Máire Geoghegan-Quinn, wrote in The Irish Times in June 2012, “either we innovate or die”16. A major concern should be that companies that are already struggling to survive, with too few resources to put innovation plans into practice, will fall behind in the innovation race and become less competitive as a result.

17%

65%

18%

Innovation Incidence – Irish Businesses

Not innovative/ not planning to innovate

Planning to innovate

Currently innovative


Government Support of Innovation in Ireland

Agree strongly

Agree slightly

Neither

The Irish government is

not doing enough to help

and nurture innovation in

Irish companies

36%

20%

26%


14%

5%

Disagree slightly

Disagree strongly

19%

55%}

}


“Small businesses are more than twice as likely to be

planning to innovate as to be currently innovating”

Major in�uence 5

4

3

2

No in�uence 1

Availability of quali�ed in-house

personnel

Grant funding

Availability of a collaborative partner

R&D tax credit

Venture capital funding

26 %

27 %

6 %

32 %

9 %

31%

21 %

9 %

22%

17 %

14%

22%

12 %

25 %

27%

20 %

25 %

11 %

17 %

27 %

16 %

21 %

15 %

15 %

33 %


FINANCING INNOVATION – GRANTS AND THE R&D TAX CREDIT

Access to fundingTwo in three companies (65%) feel that access to funding is “very important” to the successful completion of an innovation project, with an additional 22% viewing it as “somewhat important”. Keeping in line with our earlier results, the smaller the company the more importance it places on access to funding – 92% of small

companies deem it important.

7%


NET important 87%

65 %

22 %

8 %

Very important

The same Less innovative


5 %

Somewhat important

A little important

Not at all important

}

Importance of acess to funding for successful completion of innovation projects

R&D grantsWe’ve seen that the availability of grants is a key concern for Irish businesses considering innovation projects. Securing R&D grant funding is difficult, as suggested by the fact that only 15% of businesses have received a grant for an R&D/innovation project. Of those that are currently innovative (65%), only 17% have received a grant.

Large companies are almost three times as likely to have received a grant for their innovation projects as small companies (28% vs. 10%).

Has your company ever received a grant to conduct an R&D/innovation project?

Company Size Small Medium Large

Yes % 10 12 28

85%

15%

Incidence of Having Collaborated On An Innovation Project With Academic Partners

Yes

No


78%

22%

18% among those who are currently innovative

84%

16%

NoYes


Agree strongly

Agree slightly

Neither




Irish companies

36%

20%

26%


14%

5%

Disagree slightly

Disagree strongly

19%

55%}

}78%

22%

NoYes

17% among those that are currently innovative (65% of total base)





7%


NET positive rating20%

8 %

19%

23 %

4

3

2

No information 1

12 %

30 %

NET negativerating42%

A lot of information 5

Don’t know 8%

How would you rate the availability of information on R&D and innovation funding, including grants and tax incentives (on a scale of 1 – 5)?

Getting the right informationWhen asked to rate the availability of information relating to R&D and innovation funding, including R&D grants and R&D tax credits, 42% of companies feel there is not enough information available.

Only one in five (20%) gave a positive rating. These trends are fairly equal across all company sizes.

Regardless of whether a company is eligible for an R&D tax credit or an R&D grant or not, the ability to get informed one way or the other is essential to the successful implementation of such programmes. There is little point putting innovation incentives in place if companies don’t know what they are or how to qualify.

“Only one in five companies think there is sufficient

information available on R&D and innovation funding”

}

}



The R&D tax creditThe R&D tax credit gives companies the opportunity to claim 25% of their R&D expenditure as cash or a tax credit to reduce their corporation tax liability17.Yet only one in six companies (16%) takes advantage of this incentive.

Who’s claiming the R&D tax credit?Small companies are least likely to claim the credit – almost twice as many large companies have claimed as small companies. This is consistent with findings in previous KPMG surveys into the R&D tax credit regime, Take a Closer Look, from 2009 to 201118. The 2011 Tax Strategy Group papers, recently released by the Department of Finance, also noted the low rate of claims among smaller companies, stating: “While Ireland’s R&D tax credit regime is well understood by larger scale enterprises with significant in-house R&D resources, take up among smaller companies continues to be low”.19

At first glance this would appear somewhat contradictory – 87% of small companies believe access to finance is important to the successful completion of an innovation project, yet only 16% of them are claiming the R&D tax credit. However, when we explore the reasons given for not claiming the R&D tax credit, the picture becomes a little clearer.

Has your company claimed the R&D tax credit since its introduction in 2004?


Yes % 14 10 26

84%

16%

NoYes


Agree strongly

Agree slightly

Neither




Irish companies

36%

20%

26%


14%

5%

Disagree slightly

Disagree strongly

19%

55%}

}78%

22%

NoYes

84%

16%

NoYes


Agree strongly

Agree slightly

Neither




Irish companies

36%

20%

26%


14%

5%

Disagree slightly

Disagree strongly

19%

55%}

}78%

22%

NoYes

Claiming for outsourced R&D activities

Of those that have claimed the R&D tax credit, just over one in five (22%) of them have claimed for outsourced R&D activities. For claims prior to the 1st of January 2012, companies were limited in how much of their outsourced R&D they could include in their R&D tax credit claim – 10% of the company’s overall R&D spend for work outsourced to a third party; 5% to a third level institution. Changes introduced in Finance Act 2012 have enabled companies to claim the greater of these current percentage limits or E100,000, improving the potential benefit for small companies in particular, who tend to outsource a significant amount of R&D. It will be interesting to compare this result in the future once the new rules are applied.

84%

16%

NoYes


Agree strongly

Agree slightly

Neither




Irish companies

36%

20%

26%


14%

5%

Disagree slightly

Disagree strongly

19%

55%}

}78%

22%

NoYes

Claimed the R&D tax credit for outsourced R&D activities

84%

16%

NoYes


Agree strongly

Agree slightly

Neither




Irish companies

36%

20%

26%


14%

5%

Disagree slightly

Disagree strongly

19%

55%}

}78%

22%

NoYes

(Base: All who have ever claimed R&D tax credit – 32*)



46% of those that haven’t claimed the credit advised that they were not conducting R&D – yet 62% of these companies are currently innovative! As qualifying R&D is frequently found in product and process innovation, this could imply that up to 28% of those that haven’t claimed the credit could in fact do so.20

Similarly, almost a quarter (23%) of respondents that haven’t claimed the credit advised that they were not eligible or that it wasn’t relevant. When we examined the responses, it seems that companies are still unclear about the credit. For example, one respondent stated “we haven’t had any corporation tax liability for three or four years”.

Companies with little or no corporation tax liability can in fact receive the credit as a cash refund, subject to certain conditions. Another respondent noted they weren’t a manufacturing company, “so it wouldn’t suit”. While qualifying R&D is frequently found in the manufacturing sector, it is also found in other sectors, for example, software, engineering, agribusiness, financial services and biotechnology, and in a wide variety of activities. We always recommend that companies check their eligibility with an R&D tax credit specialist before making any decisions on whether or not to claim.

Earlier KPMG surveys have told a similar story. According to Take a Closer Look

2011/12, a KPMG study of the R&D tax credit regime in Ireland, 63% of respondents felt that Government should provide more guidance and support for companies wishing to claim the R&D tax credit. Furthermore, 48% of companies said they would give the credit more consideration if there was greater certainty of a claim being accepted by Revenue.21 This reinforces the importance of the recently announced innitiative under the Governments 2012 Action Plan for Jobs, which aims to attract more companies to avail of the R&D tax credit for the first time22. This is far too valuable an incentive to be left to chance, and, as our Take a Closer Look survey highlighted, more certainty is likely to lead to increased investment in R&D by Irish companies.


46%

56%

7%

Not conducting R&D



0 10 20 30 40 50

23 %14 %

4 %4 %

2 %1 %

8 %

Do not know/ understand application procedures

Have not heard of R&D Tax Credit

Too busy with other activities

Too much e�ort required to claim

Outsource R&D to a third party

Large base year for R&D Tax Credit purposes

Don’t know

Not eligible/not relevant

7 %

Reasons for not claiming R&D tax credit*:

If they aren’t claiming, why not?

(Base: All who have ever claimed R&D tax credit – 32*)



Collaborating with academiaCollaboration between industry and academia is essential in bridging the gap between innovation and commercialisation, a topic at the forefront of Government’s innovation strategy.23 Yet less than one in six companies (16%) has collaborated with a partner such as a Centre for Science and Engineering Technology or an Applied Research Centre on an innovation project – 18% among those who are currently innovative.

Ireland’s lack of collaboration was highlighted as one of our key areas for improvement was collaboration.

Large companies are more than twice as likely to collaborate as a small company (29% vs. 13%). This is most likely due to the fact that finding a collaboration partner and successfully managing the relationship takes time and resources, something small firms often have in short supply.

Where to go to collaborate?Furthermore, the perception is that there simply isn’t enough information available for companies wanting to collaborate with universities on innovation projects (knowing who to approach, which university would be most suitable, etc). More than half of all businesses (52%) feel that there isn’t enough information – this applies across the board to small, medium and large companies. This has a great impact on levels of innovation when considering the fact that almost 40% of companies say that the availability of a collaborative partner has an influence on their decision to innovate.24

The links between academia and industry are clearly not as strong as they could be. Fostering open innovation and collaboration between academia and industry requires two-way communication and education – if companies don’t know where to go to find the relevant information, they need to be informed. This issue is currently being championed by many of the academic bodies across the country, so it will be interesting to see if there is any improvement in next year’s results.

COLLABORATION FOR INNOVATION

84% 16%

NoYes


Agree strongly

Agree slightly

Neither




Irish companies

36%

20%

26%


14%

5%

Disagree slightly

Disagree strongly

19%

55%}

}78%

22%

NoYes

18% among those that are currently innovating (65% of the total base)

Has your company ever collaborated on an innovation project with an academic partner?

84%

16%

NoYes


Agree strongly

Agree slightly

Neither




Irish companies

36%

20%

26%


14%

5%

Disagree slightly

Disagree strongly

19%

55%}

}78%

22%

NoYes


Yes % 13 16 29


7%



4 %

25%

27%

4

3

2

No information 1

8 %

26 %



Don’t know 10 %

7%



4 %

25%

27%

4

3

2

No information 1

8 %

26 %



Don’t know 10 %

How would you rate the availability of information on collaboration with an academic partner on an innovation project (on a scale of 1 – 5)?

}

}



“Revenue growth is the most important metric in measuring

the success of innovation”

Measuring the value of innovation

More than half (56%) of Irish businesses use revenue growth to measure the value of innovation – this was the most important metric for small, medium and large businesses. Market share was listed second, followed closely by project-dedicated return on investment. Only 5% of respondents listed the number of patents as a metric. These results are consistent with KPMG’s Mobilizing Innovation Survey 2012, a study of 668 global technology leaders.25

Market share is significantly more important to large businesses than small businesses, with 38% of large companies listing it as a key metric compared to 21% of small companies.

56% 27% 25% 5%7%

Revenue growth Market share Project dedicated return-on-investment calculations

Number of patentsDon’t know

How would your company measure the value of innovation to the business?*

THE MEASURE OF SUCCESS




Conclusions &

recommendations

Throughout this research, finance is consistently mentioned as one of the key drivers of innovation, in particular by smaller companies. A frequently underutilised source of finance for innovation is the R&D tax credit, an incentive that can enable companies to receive up to 25% of their R&D costs back as a tax credit or, in some cases, cash. Yet, for a variety of reasons, the incentive is consistently underutilised by companies. This is currently being addressed by the Government as part of the Action Plan for Jobs, with Enterprise Ireland and IDA Ireland undertaking a project to attract 100 companies to avail of the R&D tax credit regime for the first time.28 The following recommendations relating to the R&D tax credit regime may help guide this initiative:

uA key finding of our research was the fact that small companies are significantly more likely to be planning innovation as opposed to being currently engaged in innovation. The challenge for Government is to encourage these companies to take the leap from planning to doing. One way in which this could be done is to implement an SME-specific R&D tax credit regime. As small companies are much less likely to claim the R&D tax credit in its current form, a scheme tailored for SMEs, similar in approach to other countries, could remedy this.

uSince its creation in 2004, the R&D tax credit has certainly helped to increase investment in R&D in Ireland. However, a lot more needs to be done to increase awareness of the incentive and to encourage increased uptake. While companies seem to be more aware of the regime than in previous years, a large number still see their innovation activities as outside the realm of Revenue’s definition of R&D and thus miss out on a potentially vital financial benefit. We recommend a communications initiative to ensure companies are fully briefed on the criteria and Revenue

guidelines for the R&D tax credit; we suggest that this be incorporated into the Government’s Action Plan for Jobs initiative mentioned above.

uOur research found that a key driver of innovation among Irish business is the availability of qualified in-house personnel to undertake the innovative activities. Yet the “key employee” reward mechanism element of the R&D tax credit regime, introduced in Finance Act 2012, seems overly restrictive in its current state. We would urge the Government to revise the criteria for availing of the mechanism to make it applicable to a wider range of companies and their key R&D employees.

uCollaboration between industry and academia is vital to improving the success of innovation within Irish businesses, as well as improving Ireland’s innovation culture overall. While agencies such as Enterprise Ireland, ISIN, and IRDG are available to help companies source collaboration partners, it is essential to ensure this is communicated effectively to all companies, large and small. It is vital that smaller businesses, which generally don’t have the resources available to large companies, see collaboration as a viable route to innovation.

uIn an increasingly globalised economy, Ireland most certainly holds its own in terms of R&D and innovation, featuring consistently high on European and international scoreboards for innovation performance. While we recognise the severe constraints on expenditure and the need for the exchequer to ensure value for money, innovation must be prioritised if we are to compete successfully. We therefore urge Government to continue to review the innovation incentives available to ensure they are fit for purpose to meet the changing needs of Irish business.

A healthy environment in which innovation can flourish is a vital component in economic recovery. This was recognised in the Irish Government’s Action Plan for Jobs, published in February 2012, which outlined the importance of industry innovation to Ireland’s international competitiveness.26 In order to achieve the Government’s goal of “an innovation driven culture”27, we must understand not only what is working, but also what needs improvement. It is hoped this research will help Irish business, Government and key stakeholders understand the primary drivers of innovation and the key focus points for improvement.


recommendationsAbout

KPMG

To help and support these ambitions, we have a long term commitment to supporting innovation and sharing our knowledge and insight based on our experiences not just here in Ireland but around the world. We produce a wide range of global thought leadership publications including the recently published Mobilizing Innovation which provides an in-depth analysis of current developments in technology and innovation worldwide.

Here in Ireland, we are proud to support events such as the Dublin Web Summit, IT@Cork and Archipelago, to name just some of the innovation-led initiatives that we are involved in. Importantly, we also support our clients in ensuring that they can make informed decisions about the business issues that matter most.

Of particular note are our services in the area of R&D incentives. Our R&D Incentives Practice is Ireland’s largest, longest-established and most experienced specialist R&D tax credit practice. With over eight years’ experience helping Irish companies claim R&D tax credits, our dedicated team of tax, finance and technical experts has built the expertise required to help ensure our clients submit maximised and robust R&D tax credit claims to Revenue. Furthermore, as members of KPMG’s Global R&D Incentives Practice, an international network of specialist R&D practices, we have access to over 300 multidisciplinary professionals working full-time on R&D tax incentive claims.

In conclusion, we would welcome further discussion with you on any of the matters raised in this publication so please don’t hesitate to get in touch.

KPMG provides a wide range of audit, tax and advisory services and we are proud of our strong association with many of Ireland’s most innovative businesses. With a global network and conveniently located offices in Dublin, Belfast, Cork and Galway, we work with a wide range of companies from leading multinationals to dynamic Irish owned operations. Whilst they may differ in scale and sector they all have one thing in common – namely an ambition to succeed in an often hugely challenging environment.

1. Government of Ireland, Strategy for Science, Technology and Innovation 2006-12, http://www.djei.ie/publications/science/2006/sciencestrategy.pdf, p.8.

2. Global Innovation Index 2012, http://www.globalinnovationindex.org/gii/main/fullreport/index.html.

3. Innovation Union Scoreboard 2012, http://ec.europa.eu/enterprise/policies/innovation/files/ius-2011_en.pdf.

4. 2011 EU Industrial R&D Investment Scoreboard, http://iri.jrc.ec.europa.eu/research/scoreboard_2011.htm.

5. Ireland’s National Reform Programme 2012 Update, http://ec.europa.eu/europe2020/pdf/nd/nrp2012_ireland_en.pdf.

6. Strategy for Science, Technology & Innovation. Indicators, Dec 2011, http://www.djei.ie/publications/science/2011/SSTI_Indicators_December2011.pdf, p.9.

7. Dáil Debates, Private Members’ Business – Tax Reliefs. Tuesday, 12 June 2012, #190, http://debates.oireachtas.ie/dail/2012/06/12/00122.asp.

8. Building Ireland’s Smart Economy – A Framework for Sustainable Economic Renewal, http://www.taoiseach.gov.ie/attached_files/BuildingIrelandsSmartEconomy.pdf, p. 36.

9. Strategy for Science, Technology & Innovation. Indicators, Dec 2011, http://www.djei.ie/publications/science/2011/SSTI_Indicators_December2011.pdf, p.9.

10. Global Innovation Index 2012, http://www.globalinnovationindex.org/gii/main/fullreport/index.html.

11. American Chamber of Commerce, http://www.amcham.ie/article.aspx?id=461.

12. KPMG, Mobilizing Innovation Survey 2012, http://www.kpmg.com/IE/en/IssuesAndInsights/ArticlesPublications/Pages/Technology-pub13.aspx, p. 39.

13. Dáil Eireann Debates, 2 October 2012, Written Answer #253, http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2012100200061?opendocument.

14. Definition of product and process innovation taken from “Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data”, used by the OECD. For the purposes of this survey marketing and organisational innovation were excluded. http://www.oecd.org/site/innovationstrategy/defininginnovation.htm.

15. Chartered Accountants Ireland Pre-Budget Submission 2013, http://www.charteredaccountants.ie/General/News-and-Events/News1/2012/September/PreBudget-Submission-2013/.

16. The Irish Times, 25 June 2012, http://www.irishtimes.com/newspaper/finance/2012/0625/1224318628674.html.

17. Subject to certain conditions, see Revenue guidelines, http://www.revenue.ie/en/tax/ct/research-development.html.

18. KPMG, Take a Closer Look. Results: 2011/12 – 14% (Small) vs. 22% (Large) / 2010/11 – 12% (S) vs. 24% (L) / 2009/10 – 6% (S) vs. 28% (L).

19. Government of Ireland, Tax Strategy Group, Corporation Tax, http://taxpolicy.gov.ie/wp-content/uploads/2012/09/11.19-Corporation-Tax.pdf.

20. 62% of 46% of companies that have not claimed the credit.

21. KPMG, Take a Closer Look 2011/12, http://www.kpmg.com/IE/en/IssuesAndInsights/ArticlesPublications/Pages/RD-pub1.aspx.

22. Dáil Debates 2 October 2012, Written Answer #253, http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2012100200061?opendocument.

23. Government of Ireland, Strategy for Science, Technology and Innovation 2006-12, http://www.djei.ie/publications/science/2006/sciencestrategy.pdf.

24. See ‘Deciding to innovate’, Innovation Monitor 2012, p.16.

25. KPMG, Mobilizing Innovation Survey 2012, http://www.kpmg.com/IE/en/IssuesAndInsights/ArticlesPublications/Pages/Technology-pub13.aspx

26. Government of Ireland, 2012 Action Plan for Jobs, http://www.djei.ie/publications/2012APJ.pdf, p. 20.

27. Strategy for Science, Technology and Innovation 2006-12, http://www.djei.ie/publications/science/2006/sciencestrategy.pdf, p.8.

28. Dáil Debates 2 October 2012, Written Answer #253, http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2012100200061?opendocument.

End notes


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Produced by: KPMG’s Creative Services. Publication Date: October 2012. (102239)

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PartnerIreland & EMEA R&D Incentives Practice LeaderKPMG 1 Stokes PlaceSt. Stephen’s Green Dublin 2T: +353 1 410 1645 E: [email protected]

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