Software and the Celtic Tiger

Software and the ‘Celtic Tiger’

Lessons from Ireland for the UK’s Peripheral Regions?

MIKE CRONE

Northern Ireland Economic Research Centre

Today’s paper is a follow-up to the main paper (and in the wrong order!):

ERSA 2002 Dortmund

The Irish Indigenous Software Industry:

Explaining the Development of a Knowledge-intensive

Industry Cluster in a Less Favoured Region

Rationale

• Recent interest of government in clusters and the knowledge economy:

 1998 DTI Competitiveness White Paper “Our Competitive Future: Building the Knowledge-driven Economy”

 August 1999: Lord Sainsbury’s report on “Biotechnology Clusters”

 February 2001: Trend Business Research study “Business Clusters in the UK - A First Assessment”

 DTI-DfEE White Paper “Opportunity for all in a World of Change”

• However, the DTI cluster mapping exercise shows that many clusters of knowledge-intensive industry (KII) are in South East.

• This presents a problem for the devolved administrations in the UK’s peripheral regions, who are tasked with developing clusters of KII.

DTI’s UK

cluster map

DTI’s UK cluster map for Biotech

A more detailed look at the pattern of

software and computer services

employment in the UK…..

SIC1992: Division 72 ‘Computer and related activities’

Employment in Division 72 by Government Office Region

London East North

West West Midlands South West East Midlands Yorkshire & the Humber

Scotland North East Wales Northern Ireland

1995 1999

Regional Location Quotients for Division 72

London East South West West Midlands North West East Midlands Yorkshire & Humber Scotland North East Northern Ireland Wales 1995 LQ 1999 LQ

Employment (000's) 20 to 65 (3) 10 to 20 (6) 7 to 10 (5) 5 to 7 (8) 3 to 5 (11) 1 to 3 (16) 0 to 1 (17)

County Employment in Division 72 in 1999

Location Quotients 150 to 500 (6) 125 to 150 (4) 100 to 125 (2) 75 to 100 (13) 50 to 75 (14) 0 to 50 (29)

County Location Quotients for Division 72 in 1999

Suggested explanations for uneven

development in software/computer services

•

Research by Neil Coe suggests the following explanations:

 The process of new firm formation: most new firms originate as localised spin-offs from existing firms, re-enforcing historical

dominance of South East in computer industry (dating from 1960s).

 Market linkages of firms: service industries, which are the major customers for software firms, are concentrated in the South East. Limited local industrial base means Northern firms tend to target manufacturing and public-sector (slower growth).

 Locational strategies of multinational firms: many foreign firms locate their European HQ in South East. Computer service firms operate offices in London/SouthEast, plus regional offices in Cheshire/Manchester and possibly Birmingham.

Two examples of the ‘cluster development

problem’ in peripheral UK regions

•

The ‘embryonic’ software industries in:

–

Scotland

–

Northern Ireland

•

Neither of these shows up in the DTI cluster mapping exercise

•

Both are embryonic but already locally significant, with potential

•

Both have become a focus for regional development agencies

Scottish Software Industry

 Estimated 950 ICT sector SMEs in Scotland (22% software products, 40% services) with total annual revenues of £1.4billion (83% of sales within UK).

 The Lothians account for a significant proportion of the Scottish software industry (~40%) - said to employ around 9,500 people in about 150 firms.

 Some major MNCs (e.g. HP) & a few established local players (e.g. KSCL).

 A few local stars (e.g. Orbital – listed on LSE, US offices; Atlantec)

 Small computer games cluster centred on Dundee (specialist academia at University of Abertay and several small local companies)

 Some institutional specialisation and software-specific policies in place (e.g. ScotlandIS, SE target sector, Software Academy, Graduates Into Software, National Software Strategy, Software Incubators).

 Domestic demand drivers (e.g. Edinburgh financial institutions – especially Royal Bank of Scotland, Scottish Parliament/government, utilities).

 Some research excellence in 3rd _{level educational institutions and good}

Northern Ireland Software Industry

 Significant inflow of software FDI starting about 1998 and continuing, mainly from US (but some from GB, Europe and Republic of Ireland).

 However, we don’t really know what they do: How complex is the work? How significant are these operations within their parent companies?

 Some established indigenous firms (e.g. SX3, Kainos) and some emerging start-ups (e.g. Lagan Technologies, mineIT).

 But indigenous firms are mainly small and none have gone public yet.

 Some institutional specialisation and software-specific policies in place (e.g. targeted sector for FDI and company development, software

incubators, industry association – but questionable influence so far).

 Plentiful and growing supply of 3rd _{level computer science graduates}

but shortage of experienced managers and project leaders.

The Irish Indigenous Software Industry (IISI):

a possible role model for the UK periphery?

of software development activity.

• Software has been one of the leading sources of employment growth in Ireland’s ‘Celtic Tiger’ economy (growth of 16% p.a. during 1990s).

• By 2000, the Irish software industry comprised 900 companies, with up to 30,000 employees and a combined annual turnover of €10 billion.

• One ingredient has been a major influx of software FDI since the mid- 1980s (see work of Neil Coe, for example).

• The ‘overseas’ software industry currently employs 16,000 people. It includes leading software multinationals (but some doubts over quality).

• More interesting, is the parallel emergence of a vibrant ‘indigenous’ software industry….

The Irish Indigeneous Software Industry in 2000

(Source: National Software Directorate and HotOrigin Ltd)

Software

Sector

Seven publicly listed companies: SmartForce, IONA, Baltimore, Trintech, Datalex, Parthus and Riverdeep (4,900 employees worldwide/annual turnover €835m)

Software Industry Employment in Ireland

(Source: National Software Directorate)

0 5,000 10,000 15,000 20,000 25,000 30,000 1991 1992 1993 1994 1995 1996 1997 1998 1999 Irish Takeovers Overseas

0 200 400 600 800 1000 1200 1400 1991 1992 1993 1994 1995 1996 1997 1998 1999 R e v e nues (I R £ m illion)

Revenues (IR£m) Exports (IR£m)

Revenues and Exports for Indigenous Software Industry

Size Analysis of Indigenous Software Industry in 1998

(Source: National Software Directorate)

28 40 75 90 213 77 99 137 143 263 1445 1769 2057 1814 2107 316 112 58 24 10 0% 20% 40% 60% 80% 100% Exports (IR£m) Revenue (IR£m) Employment No. of companies 1-10 11–24 25–49 50–100 100+

UK 21% Far East 1% Pacific Rim 3% Other 4% North America 43% Western Europe_28%

Irish Indigenous Software: Geography of Exports

Geography of Irish Indigenous Software Industry

(Source: author’s analysis of company database)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Companies Employment

The leading Irish indigenous software firms

•

Publicly listed: competing and winning at international level

[SmartForce, IONA, Baltimore, Trintech, Datalex, Parthus, Riverdeep]

•

Second tier: on brink of breaking through to international level

[e.g. FINEOS, CR2, Eontec, cardBASE, Norkom, WBT Systems]

•

Latest fast-growth start-ups: intent to internationalise from outset

Specialisms of leading indigenous firms



financial services applications/solutions

[e.g. Kindle (Misys), Fineos, Eontec, CR2, Norkom]



e-security/secure payment solutions

[e.g. Baltimore, Eurologic, Trintech, cardBASE]



e-learning/computer-based training

[e.g. SmartForce, Riverdeep, WBT Systems]



open systems-based middleware

[e.g. IONA Technologies, Cape Clear, Macalla]



telecommunications software

[e.g. Aldiscon (Logica), Euristix (Marconi), Network365, Xiam]

Regional Comparison of Software Industry Employment

(Source: National Software Directorate and Annual Business Inquiry, ONS)

1995 1999 increase CAGR

UK 237,839 434,431 196,592 16.3%

South East region 60,492 114,359 53,867 17.3% Berkshire county 14,726 33,453 18,727 22.8%

Scotland 9,354 18,248 8,894 18.2%

North East 3,864 7,320 3,456 17.3%

Wales 3,635 7,066 3,431 18.1%

Northern Ireland 1,380 3,970 2,590 30.2%

ROI total software 11,784 24,891 13,107 20.6%

Two Phase Explanatory Framework

 Window of opportunity

 Favourable factor conditions  Spark of entrepreneurship  Firm-building and market-

building strategies

 Supporting role of State and semi-State institutions

Sustaining Cluster Development

 Improved environment for

entrepreneurship/firm-building...  Agglomeration economies:

 Local pool of skilled labour  Specialised supply industries

(e.g. VC, support services)  Collective learning/knowledge

dissemination processes:

 Movement of key individuals through the cluster

 Spin-offs/new firm formation  Formal/informal networking

Favourable factor conditions in Ireland

1. Single most important factor: early abundance of skilled labour

 From 1970s onwards Irish State invested heavily to expand the third- level education system (initially intending to attract FDI);

 Ireland’s 3rd level education system rates highly in international comparisons (particularly strong in engineering/computer science);

 Ireland had a surplus of computing graduates until the mid-1990s;

 In mid-1990s: producing over 1,500 computing graduates per year

 Also: multinationals in Ireland acted as training ground for graduates;

 Also: possible role of return migration from US (‘brain circulation’).

2. Upgrading of telecoms infrastructure in 1980s (EU funded)

Spark of entrepreneurship

 Where did the pioneering entrepreneurs/firms of the cluster come from?

 Early software product firms emerged by 3 main routes (Ó Riain, 1997):

1. Services to products - began providing ‘bespoke’ services to serve emerging local demand for IT services from large

organisations in Ireland (later developed into products/exports).

2. Spin-outs from larger firms - created when firms in other

industries (e.g. telecoms, computer hardware, banking/finance) or public sector bodies spun off their IT divisions.

[e.g. Datalex from work of in-house IT team at Aer Lingus]

3. Firms based on academic research - set up by professors and graduate students based on on-campus research (among the most technically-sophisticated firms).

[e.g. IONA Technologies, Baltimore, Trintech]

Firm- and marketing-building strategies

Key strategies of leading Irish indigenous software firms:

1 Focus on developing software products for niche markets (rather than providing bespoke services). Aim to compete on basis of innovation rather than low-cost (contrast with India).

2 Emphasis on exporting from an early stage, especially to US market (often positioned in product spaces that are complementary to US expertise rather than competing directly with them).

3 Internationalised operations from an early stage (e.g. overseas offices in US). More recently some overseas M&A activity.

4 Used international strategic alliances to access the marketing and distribution networks of larger, established firms (e.g. IONA with Sun).

5 Use of initial public offering (IPO) on Nasdaq to raise capital to finance growth and also to building profile/reputation in the US market.

Support of State and semi-State institutions

service providers and supporting institutions in the initial phase.

• In early/mid-1990s, there was no private VC industry in Ireland  State agencies were dominant supplier of early-stage finance (grants, equity).

• State agencies also provided ‘softer’ forms of assistance (e.g. help with marketing, management development and training).

• The State also created a specialised set of supporting institutions (e.g. National Software Directorate, Centre for Software Engineering).

• These institutions helped to develop a common sense of purpose between the State agencies and the ‘pioneers’ of the industry

Two Phase Explanatory Framework

Origins & Initial Establishment

 Window of opportunity

 Favourable factor conditions

 Spark of entrepreneurship

 Firm-building and market-

building strategies

 Supporting role of State and

semi-State institutions

Sustaining Cluster Development

 Improved environment for

entrepreneurship/firm-building...  Agglomeration economies:

 Local pool of skilled labour  Specialised supply industries

(e.g. VC, support services)  Collective learning/knowledge

dissemination processes:

 Movement of key individuals through the cluster

 Spin-offs/new firm formation  Formal/informal networking

Agglomeration economies (1):

a local pool of specialised skilled labour

• Ireland has now developed a thick technical labour market in software- relevant skills, especially in Dublin.

• Hence, there is now a much greater range of experienced managerial and technical labour available to growing firms than in the early 1990s.

Agglomeration economies (2):

specialised supply industries

(e.g. venture capital)

response to increasing local demand from software firms.

• Example: the emergence of a sizeable venture capital industry in Ireland, primarily since 1998/1999.

• Also: emergence of various service firms with a specific focus on the software/technology sector (e.g. incubators, consultants, IPR lawyers).

Localised Collective Learning Processes

•

Knowledge circulation due to movement of key individuals

•

Localised spin-offs from existing businesses

•

Reconfiguration of staff in new firms

Knowledge circulation due to movement of key

individuals: example of Dr Chris Horn

1984-89: EU Esprit research Comp Sci Trinity CD 1991: Co-founder of IONA Technologies 1991-2000: Chairman and CEO of IONA Technologies < fill > Sept 2001: appointed non- exec. director by Sepro 1997: IONA floats on Nasdaq May 2000: Resigns as IONA CEO (stays on as Chairman) Sept 2000: Appointed chairman of ITEQ advisory committee Chaired ‘Commision on Future Skills’ Prominent role in industry affairs Nov 2001: appointed non- exec. director by CR2

Early 1970s: University College Cork B.E. Electrical Engineering & M.Eng.Sc. 1980s: Managing Director of Insight (leading Irish software co) Involved in writing strategy document for Irish Software Association 1988: Insight acquired by Hoskyns (CapGemini) 1988-96: First head of Ireland’s National Software Directorate 1996-99: CEO of Cullinane Group Ireland Since 1996: CEO of Openet Telecom

Knowledge circulation due to movement of key

individuals: example of Barry Murphy



Through their involvement with numerous private

firms, State agencies and commissions, and

supporting institutions these individuals (and others

like them) accumulate ‘embodied knowledge’ (about

technologies, ways of doing business, key markets)

and disseminate it through the cluster.

Some general lessons from the IISI story

1. The role of the State in cluster development

2. The relationship between FDI and indigenous development

3. The role of international / global ties in cluster development

4. The origins of entrepreneurial firms within clusters

1. Role of the State in cluster development

semi-State institutions and the EU) has played an important role in the development of the Irish indigenous software industry:

 invested in and expanded relevant third-level education

 upgraded telecoms infrastructure

 financed start-ups/emerging firms (grants and equity)

 provided non-financial assistance to emerging firms

 established and funded sector-specific institutions

 kick-started the local VC industry through public-private funds

• Suggests the devolved governments in Scotland and Northern Ireland can do a lot to support the emergence of embryonic software clusters.

2. FDI and indigenous development

• The relationship between the software MNCs operating in Ireland and the indigenous software industry is less important than one might expect.

 Few direct trading linkages between the two sectors

 Relatively few indigenous spin-offs from software MNCs

• But indirect spillovers relating to the labour market:

 MNCs helped develop labour skills for the indigenous industry

 Many indigenous entrepreneurs have worked in MNCs at some time

• Suggests regions like Northern Ireland, which are attracting software FDI, should be realistic about the likely knock-on effects.

3. Role of global ties in cluster development

• However, we must not overlook the important role played by various international or global ties in the development of the cluster:

 Demand from export markets = the major driver of growth

 International strategic alliances used to distribute products

 Floatation of leading firms on international stock markets

 Increasing involvement of international VCs in Ireland

 Possible role of emigration and return migration

• Suggests regions like Scotland & NI must embrace and engage with the global economy, encourage firms to be more outward looking, and

support the building of globally significant indigenous firms

• Some encouraging noises in recent programmes for government (but the proof of the pudding will be in the eating)

4. The origins of entrepreneurial start-ups

• In the early stages of cluster development, the majority of Irish software product firms originated as:

 spin-offs from larger firms in other sectors

 start-ups targeting emerging demand for IT services

 spin-offs from academic research

• More recently firms have emerged:

 mainly as spin-offs from established indigenous software firms

 (continuing role for spin-offs from academic research)

• Suggests importance of adequate government funding for academic R&D and promoting/assisting its commercialisation.

• NI has very low HERD expenditure compared with other UK regions.

Web-site: www.qub.ac.uk/nierc

E-mail: [email protected]