RSAI-BIS 2002 Brighton & Hove (August 21st–23rd)
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.
•
Examples….
DTI’s UK
cluster map
for R&D
DTI’s UK cluster map for Biotech
• Insert map
DTI’s UK cluster map for Software
A more detailed look at the pattern of
software and computer services
employment in the UK…..
SIC1992: Division 72 ‘Computer and related activities’
Source: Annual Business Inquiry
Employment in Division 72 by Government Office Region
140,000
1995
120,000
1999
100,000
80,000
60,000
40,000
20,000
0
South
East
London
East
‘Greater South East’
North
West
West
Midlands
South
West
East
Midlands
Yorkshire
& the
Humber
Scotland North East
Wales
The Periphery
Northern
Ireland
Regional Location Quotients for Division 72
200
1995 LQ
1999 LQ
150
100
50
0
South
East
London
East
‘Greater South East’
South
West
West
Midlands
North
West
East
Yorkshire Scotland
Midlands
&
Humber
North
East
Northern
Ireland
The Periphery
Wales
County Employment in Division 72 in 1999
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 Location Quotients for 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)
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.
 Difficult to see what policy can do in the face of these forces?
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
supply of computer science graduates from Scottish universities
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.

Generally weak local demand for software and IT services.
The Irish Indigenous Software Industry (IISI):
a possible role model for the UK periphery?
•
Over the last decade, the Republic of Ireland has emerged as a hotbed
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 mid1980s (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)
TURNOVER
€1,400 million
1.4% of GDP
770 companies
Software
Sector
14,000 jobs
EXPORTS
€870 million
62%of T/O
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)
30,000
25,000
Irish
Takeovers
Overseas
20,000
15,000
10,000
5,000
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
Revenues and Exports for Indigenous Software Industry
(Source: National Software Directorate)
1400
Revenues (IR£ million)
1200
Revenues (IR£m)
Exports (IR£m)
1000
800
600
400
200
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
Size Analysis of Indigenous Software Industry in 1998
(Source: National Software Directorate)
11–24
1-10
316
No. of companies
1445
Employment
Revenue (IR£m)
Exports (IR£m)
0%
25–49
77
28
112
1769
99
40
20%
2057
137
75
50–100
58
1814
40%
24 10
2107
143
90
100+
263
213
60%
80%
100%
Irish Indigenous Software: Geography of Exports
(Source: National Software Directorate)
Far East
1%
North America
43%
Pacific Rim
3%
Other
4%
UK
21%
Western Europe
28%
Geography of Irish Indigenous Software Industry
(Source: author’s analysis of company database)
Employment
Companies
0%
10%
Dublin
20%
Cork
30%
40%
50%
Limerick/Shannon
60%
70%
Galway
80%
Other
90%
100%
Unknown
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
[e.g. Cape Clear, Macalla, Orbiscom, Network365, Xiam]
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]
[Note that nearly all of the leading firms are software product firms]
Regional Comparison of Software Industry Employment
(Source: National Software Directorate and Annual Business Inquiry, ONS)
UK
South East region
Berkshire county
Scotland
North East
Wales
Northern Ireland
ROI total software
ROI indigenous
1995
1999
increase
CAGR
237,839
434,431
196,592
16.3%
60,492
14,726
114,359
33,453
53,867
18,727
17.3%
22.8%
9,354
3,864
3,635
1,380
18,248
7,320
7,066
3,970
8,894
3,456
3,431
2,590
18.2%
17.3%
18.1%
30.2%
11,784
5,773
24,891
13,176
13,107
7,403
20.6%
22.9%
Two Phase Explanatory Framework
Sustaining Cluster Development
Origins & Initial Establishment

Window of opportunity

Favourable factor conditions

Spark of entrepreneurship

Firm-building and marketbuilding strategies

Supporting role of State and
semi-State institutions

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 thirdlevel 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)
3. English language (in common with US market)
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]

Note: software multinationals in Ireland not a major source of spin-offs.
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
•
The Irish State substituted for the absence of specialised suppliers,
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
•
They also promoted business and technical learning within the industry.
Two Phase Explanatory Framework
Sustaining Cluster Development
Origins & Initial Establishment

Window of opportunity

Favourable factor conditions

Spark of entrepreneurship

Firm-building and marketbuilding strategies

Supporting role of State and
semi-State institutions

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 softwarerelevant 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)
•
•
•
Clear evidence of development of specialised supply industries in
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
• Formal and informal networking by managers and professionals
Knowledge circulation due to movement of key
individuals: example of Dr Chris Horn
Sept 2000:
Appointed
chairman of
ITEQ advisory
committee
Chaired<‘Commision
fill >
on Future Skills’
Prominent role in
industry affairs
1984-89:
EU Esprit
research
Comp Sci
Trinity CD
1991:
Co-founder of
IONA
Technologies
1991-2000:
Chairman and
CEO of IONA
Technologies
1997: IONA
floats on
Nasdaq
May 2000:
Resigns as
IONA CEO
(stays on as
Chairman)
Sept 2001:
appointed nonexec. director
by Sepro
Nov 2001:
appointed nonexec. director
by CR2
Knowledge circulation due to movement of key
individuals: example of Barry Murphy
Early 1970s:
University
College Cork
B.E. Electrical
Engineering
& M.Eng.Sc.
1980s:
Managing
Director of
Insight
(leading Irish
software co)
1988: Insight
acquired by
Hoskyns
(CapGemini)
1988-96:
First head of
Ireland’s
National
Software
Directorate
1996-99:
CEO of
Cullinane
Group Ireland
Involved in
writing strategy
document for
Irish Software
Association
Since 1996:
CEO of
Openet
Telecom
Argument:
 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
•
The State (Irish government departments, development agencies,
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.
•
Both are now doing many of these things (but to varying degrees).
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.
•
Also one potential negative: competition for scarce skilled labour.
3. Role of global ties in cluster development
•
Local dynamics are a major part of the Irish indigenous software story.
•
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.
•
Commercialisation of HERD is hap-hazzard in both Scotland and NI.
Web-site: www.qub.ac.uk/nierc
E-mail: m.crone@qub.ac.uk