Innovation is essential for a company’s development and growth. How, then, can this be achieved? Taking advantage of R&D tax credits and incentives will go a long way to boost RD&I, write Ken Hardy and Eoin McCarthy from KPMG’s R&D Incentives Practice.
It is well established that the creation and exploitation of new ideas are critical to a company’s development and growth. A clear example of this is in the tech industry, where the persistent development of new ideas is a core element of the business, very much built into their day to day culture. This strive for innovation has seen many of the tech giants of today make rapid ascents to the top in a relatively short period of time. In a broader sense, innovation is a key economic driver across most industries, enhancing commercial profitability and improving the landscape for consumers. So, how is innovation assessed, measured and compared?
The Global Innovation Index
Measuring innovation within global economies is led by the World Intellectual Property Organisation (WIPO), who publish the Global Innovation Index (GII) annually. The GII provides detailed metrics about the innovation performance of 131 countries across roughly 80 indicators including research & development (R&D), infrastructure, market and business sophistication, political environment, and education, as well as the impact and diffusion of knowledge and technology outputs.
Ireland’s performance
Published in September this year, the 2020 assessment has Ireland at number 15 in the global rankings, slipping two places from last year. Although this may appear concerning at first, Ireland remains an innovation leader and scores highly in multiple critical economic drivers. For example, we rank first for FDI outflows, ICT services exports, knowledge impact and knowledge diffusion. This shows our strength in translating innovation investment into realisable, tangible returns, which is in part a reflection of the national support mechanisms from the IDA, Enterprise Ireland (EI), Knowledge Transfer Ireland (KTI) and R&D Tax Credits. Indeed, the KTI is highlighted within the GII 2020 report for developing a successful model to assist businesses in handling their intellectual property (IP) within complex situations.
Opportunities to maximise innovation
Innovation and R&D are very much complementary. The precursor to innovation is commonly R&D, of which Ireland is ranked in the top twenty globally. Our high ranking is a result of extensive FDI from large multinationals in the pharma and tech space, in addition to strong investment in highly skilled researchers. Companies based in Ireland can maximise the benefit from their R&D activity through the R&D Tax Credit, a valuable tax based incentive of 25% credit on qualifying R&D expenditure in the science and technology areas. Although not specifically captured in the GII report, SMEs are a key stakeholder in our economy, and represent 54% of the R&D Tax Credit claimed in Revenue’s latest report. Introduced in Finance Act 2019, SMEs may claim an R&D Tax Credit of 30% on qualifying R&D expenditure. (These measures are subject to a commencement order.)
Within the rankings, Ireland’s strength in knowledge and technology outputs is marked by ranking first in both knowledge impact and knowledge diffusion. IP generation is a key indicator that feeds into these metrics and is commonly born from R&D activity. In generating IP from qualifying R&D activity, a company can claim the Knowledge Development Box (KDB) incentive, which provides a 6.25% corporate tax rate for income generated from commercialising certain IP. However, in general, the KDB is underutilised, with only a small number of companies availing of it. This does not reflect Ireland’s high ranking in knowledge and technology outputs, and companies may be missing an opportunity to claim the KDB.
The path from an innovative idea to profitable exploitation can be extremely challenging. Industry sectors such as semiconductors, biopharma/pharma, and medical devices require significant investment in physical infrastructure, as well as highly skilled personnel before an idea can be realised. It can also take a long time to move through the stage gates of development, especially in highly regulated industries. For example, it takes on average 10 years to develop a new drug. For SMEs, there is the dreaded ‘valley of death’ in the development cycle, a critical period where the probability of failure is highest and attracting funding can be hard to come by. RD&I Grants can be leveraged from the IDA and EI to support companies during this phase.
What does the future look like?
In the current environment, many companies are focused on short- to medium-term sustainability and, in some cases, survival. This will be reflected in the cadence of innovative activity. For example, the pharmaceuticals and biotech sector will likely experience growth in R&D because of the renewed focus on health. In the medical devices sector, there may be a shift in developments towards respiratory applications and remote diagnostics. Generally, companies will seek to diversify their supply chains to de-risk future unpredictable events. Moreover, accelerated development of Industry 4.0 (the Fourth Industrial Revolution) is likely to enable remote or autonomous control capabilities.
When considering the future, we learn from events in the past. Historically, business R&D expenditure moved in parallel with GDP, slowing during economic downturns. Although this may not be the case across all sectors (pharma, med-tech and ICT being the exceptions), there is an expected contraction in expenditure on innovation, and as business innovation expenditure declines, government may strive to counteract that effect through expenditure boosts to innovation, via mechanisms such as the R&D Tax Credit, KDB and RD&I Grants.
Ken Hardy is a Partner and Eoin McCarthy is a Scientific Consultant in KPMG.