The Malta Independent 29 June 2017, Thursday

The dawn of innovation

George M Mangion Sunday, 19 March 2017, 10:00 Last update: about 4 months ago

In February 2006, the Government of Malta announced the start of framework discussions with Tecom Investments of Dubai to invest $300 million to build a dream 'SmartCity' in Ricasoli. This was the hobbyhorse of the Minister for Investment, Industry and Information Technology who 11 years ago called this project a city of marvels.  

He visualized it as a nexus of knowledge-based jobs in Malta. The government accepted to devolve a massive plot of prime industrial land to the investor at a heavily subsidised rent in order to create a mecca of ICT jobs. The ambition was to beat India in its remarkable achievement to offer the world a range of superior IT services. Due to a severe recession that hit the global markets in 2007/8 and other reasons, SmartCity suffered a stillbirth.  

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Had this ambitious dream materialized, our contribution to innovation and research in science and digital competences would have peaked. On the contrary, today we have not fulfilled our commitment to establish a solid ecosystem in the sphere of research and development. Readers may ask: why do we invest such a small amount of our national budget on research and development when compared to the EU average? Because of this parsimony, we stand rather low in the pecking order where technologies such as block chain, robotics, nanotechnology and biotechnology are concerned. In the meantime, the government has made a commitment with the European Commission that the spend on R&D will be revised upwards to reach two per cent of GDP by 2020. In 2016, total expenditure on research and development amounted to a mere €60.5 million, or 0.75 per cent of GDP. This is not putting our money where our mouth is. We ought to budget judiciously to ensure a pole position in the race for economic survival in a competitive world.

Indeed, our research landscape is relatively poor albeit a number of government agencies are involved in research activities to a degree, but they do not have an appropriate budget for research. In a country with so few public research organisations, the resulting competitive allocation of institutional funding is not realistic or effective considering the fact that our only raw material is the collective intelligence of our workforce.

While we pride ourselves on having one of the oldest universities in southern Europe and that we provide free and fully subsidized education from primary up to and beyond tertiary levels, we have never succeeded in building a solid bridge linking the academic world to industry. In essence, it is all about delivering jobs and economic growth to keep up with competition from other countries which continuously strive to stay ahead of the game. A case in point is the commercial position of pharmaceutical and microchip manufacturing units in Malta which invariably carry out their R&D overseas. Granted, competition to attract top technology companies is tough and we mentioned how the previous administration worked very hard (but failed) to attract innovators/investors in a purpose-built ICT city - paradoxically in an effort to breed a nexus of excellence. Nevertheless, we must try again.

It is encouraging to read that one of the budget proposals in 2017 included the intention to start exploratory talks with the Boston-based Cambridge Innovation Center (CIC) founded in 1999 and located in Kendall Square, USA. It houses more than 1000 companies in close to 50,000 square metres of premium office and co-working space across eight facilities, including its expansion in St Louis, Missouri, Miami, Rotterdam (The Netherlands). A number of local high-profile companies (including top names such as Facebook and Amazon) claim their baptism at CIC including its HubSpot, which now employs over 1,100 people, and raised $125 million through its IPO last year and Greatpoint Energy, which announced a $1.25 billion deal to build reactors in China.

Additionally, Android co­founder Rich Miner built his portion of Google Android and established Google's New England headquarters. CIC has a non-profit sister organization - the Venture Cafe Foundation. What is so special about CIC? The answer is that as an innovation centre it has succeeded to attract world-class start-ups which boosted the Boston economy through the generation of premium jobs enriched with high value-added research in an impressive range of scientific sectors. Recently, it branched into Australia, opening its new start-up hub in Sydney.  

The Netherlands qualified as an ideal location where to base the first European centre for CIC as it offered a unique tax break (5% tax) to investors which make use of a unique "Innovation box scheme". A study conducted in 2010 showed that making use of the scheme resulted in attracting a number of top quality firms which saved €361 million in tax; two years later this increased to €743 million and the expectation is that this will rise again in 2016 to well over €1.2 billion. According to the evaluation by the Ministry of Finance in The Netherlands, such a scheme contributes handsomely to the economy. It is estimated that for each euro forfeited in tax, the scheme generates up to €0.54 in extra expenditure on R&D. Other unique selling points are existence of knowledge, researchers and possibilities for cooperation, but after some objections by the Commission, the Dutch government took steps to fine tune the scheme. It is no surprise that it a winner in the international tax race. The Dutch government stated: "According to the researchers, however, it is very important to have an innovation box because the country without such a regime will lag behind other countries which do."

The scheme in the UK was first introduced in 2013, styled the Patent Box. It is a popular incentive scheme used by companies wishing to benefit from their registering new patents since they pay lower taxes on the profits generated from patent revenue. In line with the UK government's objective to promote further developments in the fields of research and development, the Patent Box is a method of putting those objectives into practice. This approach has already been successfully implemented in Europe. In fact, the Patent Box enables a company to apply a 10 per cent rate of tax on income derived from patents. This is in contrast to the 20 per cent UK corporation tax applicable in most cases.

Our tax incentives towards R&D are not attractive to realistically double the investment necessary to reach our declared targets by 2020. Regrettably, at this rate it will never reach two per cent of our GDP unless we wake up and smell the coffee as the Dutch and British did. Both fine-tune their tax armoury to attract innovation to their shores and stay ahead of competition. During Malta's presidency of the EU Council, our political leaders can use this golden opportunity to generate more interest in Europe to allocate sufficient resources for R&D.

Let us learn from the USA how they boldly support business accelerators/ incubators to help start-ups and SMEs proliferate and expand their market share exporting innovative solutions. The advantages are: a balanced economy enriched with a high tech industrial base, cutting-edge creativity in sectors such as medical research, robotics and biotechnology. This elixir fired so many start-ups in the USA. Strategically, we can plan to exploit the rules of the game - remember that in the budget speech it was proposed to attract a top-notch business accelerator. Let us have the courage to bite the bullet.

 

Mr Mangion can be contacted at gmm@pkfmalta.com or on +356 2148 4373.


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