Author: George Mangion 
Published on Malta Today 19th October 2017

With so much ado about innovation and blockchain technology in the air, one may believe that having a research and business innovation hub in Malta complementary to Silicon Valley is not a fantasy dream similar to when Alice was caught staring at the Looking Glass in Lewis Carroll’s novel. It can prove to be a true catalyst to anchor existing manufacturing community and attract new ones. Skeptics disagree, saying Malta will never attract the bonanza that enriched the Bay area. They lament this dream is an ambitious one as governments in Europe are in competition to attract blue-chip companies and start-ups particularly in biosciences, fintech and blockchain technologies.

But did La Vallette not resist the attack of the mighty Ottoman fleet in 1565? So hope springs eternal and an excellent effort was made last week when Netrefer and government agencies supported the Innovation Summit opened by Silvio Schembri – the parliamentary secretary for Digital Economy, Financial Services & Innovation. Opening the summit, Schembri said that next year the government is budgeting €2.2 million for research and innovation. Such funds will be dedicated to assisting researchers, startups and consortiums in research and innovation projects.

The event had the unique pleasure and privilege to regale delegates by the presence of Edward De Bono, Malta’s pioneer in Brain Training. Both the Education Minister and the minister responsible for Economy, Investment and SMEs gave their contributions and waxed lyrical about the need to attract and retain new talent.

This prestigious event was a sequitur to another successful event organized and funded by the Malta Communications Authority, which organized a two-day international innovation event called Zest.

The 2018 budget makes a token gesture by giving two-year tax breaks to PhD students of whom a mere 30 qualify annually. Ideally more doctorates are attracted to populate our research centres in spheres such as oncology, nanotechnology and quantum learning. The budget (now with a surplus) created a stir among political observers as the prime minister started on a high saying it was not an accountant’s or a politician’s budget, but a budget drawn up with an economic rationale. Equally worth mentioning was the event styled “Blueprint for Innovation” organized and sponsored exclusively by PKF at Microsoft Centre Skyparks last June.

PKF introduced Stas Gayshan as a keynote speaker.  He is the MD of Boston-based Cambridge Innovation Centre and a parallel organization to MIT university. The event saw an extended morning session and showcased an expert lineup of speakers.  These included Gor Sargsyan, president, Qbitlogic International, Silicon Valley USA, Joe Woods Director, Creolabs, Kenneth Farrugia, chairman FinanceMalta, and Ing Joe Sammut CEO LifeSciences Park. Speakers from MCAST and University physics department were invited while Prime Minister Dr Joseph Muscat could not attend.

Gor Sargsyan is the president of Qbitlogic International, Atlanta (USA) which is a US based company specialising in building multi-purpose approaches and tools that synergize the power of artificial intelligence and quantum computing to help humans build and protect software systems across various industries. Many multinational companies have opened their base in Silicon Valley where companies scout for the best talent.

The Compass Global Startup Ecosystem Ranking of 2015 found Silicon Valley to be the world’s leading innovation region incorporating venture capital investment, start-up company exit valuations, talent pool and entrepreneurial supports and networks.  This is called an active ecosystem and basically is what glues together the fabric of innovation and design talents to create high value-added products.  It is precisely what Malta lacks.

Innovation is slowly becoming the new buzzword because both political parties promised in their election manifesto to substantially increase investment in innovation. We promised the EU to increase by up to four times the mere 0.7% of GDP annual contribution, albeit the 2018 budget makes no extra allocation. PKF thinks that its efforts to attract a world class organization in his field does not come a moment too soon although regrettably its altruistic attempts to fan our feeble flame of innovation was met with unenthusiastic support from government agencies branding it as another sound bite.

Conversely the head of the National Social fund highly acclaimed the initiative to attract a top US business accelerator but felt that at this stage of economic development it was premature to support it. It is like putting the cart in front of the horse. Strangely, resistance to creating an ecosystem is ingrained such that some State agencies label it as spurious and proclaim that of its own it does not generate wealth or jobs.

Extra millions so crucial on research makes policy makers ululate. Another drawback is venture capital. Even though we just read that banks increased customer deposits by 12% and this contributes to more liquidity yet venture capital never took ground.  It is a given fact that the best start-ups look for VCs that can plug them into broader ecosystems to provide additional leverage and extend their vision.

This brings us to the focal topic of this article. It starts with a recount of a pioneering trip last year by a delegation from PKF which together with Malta Enterprise visited Massachusetts Institute of Technology (MIT) in Boston, USA to explore links to promote Malta as a potential business accelerator and/or Life Sciences hub for innovators, start-ups and entrepreneurs. It is no stranger to accolades – rated as the world’s best university in chemistry; economics; linguistics; materials sciences; nanotechnology and astronomy. Another interesting landmark is the Boston-based Cambridge Innovation Center (CIC) which opened new branches in St Louis, Missouri, Miami, Rotterdam, Warsaw and Sydney.

Additionally, Android co-founder Rich Miner built his unique Google Android software in CIC. It also has a non-profit sister, the Venture Cafe Foundation (this provides a Forum for venture capitalists to scout and help fund new talent). What is so special about CIC?  The answer is that as an innovation hub it succeeded to attract world class start-ups which proved very supportive for the US economy through the generation of premium jobs and its high value-added inventions.

Now that the economy is on the mend and a modest surplus enthuses us on the horizon, we need to seriously plough back some of the fruits of our harvest into a proper ecosystem. In the near future, such an undertaking will be reinforced by the output of talent from Barts Medical school, MCAST, University, AUM and other colleges all acting in unison to baptize us as the birthplace of a nexus of superior minds in the Med.

It is not an easy journey as many countries want to emulate the commercial success of Boston, New York, Singapore, Tel Aviv and Silicon Valley. An innovation centre partnered with CIC (among others) will shine a light to guide us along the shadowy tunnel at the end of which we can underpin GDP growth and improve our competitiveness level. Only thus can Alice ever discover the White Rabbit wearing a waistcoat and pocket watch that points to our island-graced with smiles and a cornucopia of riches.

Author: George Mangion 
Published on Malta Today 19th October 2017
Get in touch: info@pkfmalta.com | +356 21 493 041

Author: George Mangion
Published on Malta Today 23rd February 2017

This article shows how fragile our industralisation policy is which since Independence has not been based on attracting cutting edge technology and transfer of intellectual talent but took the easy option of giving tax perks, including 10-year tax holidays and various incentives so long as the investor guarantees creation of jobs.

This policy attracted various cycles of investors since the sixties and apart from building a tourist infrastructure, we welcomed investors in the ‘cut-make-and-trim’ textile operations lured to the island because of our comparatively low labour cost. Such a nascent textile industry was not properly capitalised and excluded any R&D or innovation/design units. Such unique intellectual capital was not transferred by the foreign investor.

The obvious consequence of this weak industrialisation policy was that once wages increased beyond a certain level there was a mass exodus and the industrial estates became a ghost city.  Replacement of the textile industry was followed by attracting other manufacturing units, which included (but was not limited to) pharmaceuticals, microchip, printing and Playmobil investors. All these have a common denominator – they do not carry out any R&D studies in Malta.

This is a policy which cries out for reform as competition from other Eastern European countries is intensifying and we risk being exposed to another exodus as wages are gradually revised upwards. Having attracted foreign manufacturing companies in our industrial estates, not conducting our own R&D is a risky scenario.

Readers may ask – what is the solution?  The answer is not simple as the reform involves not only a sea change in the direction of Malta Enterprise but also a cultural and educational revolution that ensures that our young entrepreneurs are nurtured to explore innovation while the country invests more in attracting overseas talent. The target set by the government to reach 2% of GDP in R&D by 2020 is far higher than our current level of around 0.7%, reaching a mere €60 million. Other European countries have been keen to attract innovation to their shores and even give tax incentives fully approved by the Commission.

This year saw the inaugural launch of new “Innovation Box” tax rules in Netherlands, which was fully approved by the Commission after the OECD put some pressure on the Netherlands to change the old scheme which has been successfully running since 2007. The old scheme has been providential to attract many R& D companies to set up base in the Netherlands and claim tax exemptions, reducing the rate of corporate tax to a preferential rate. This means that instead of taxing the full amount of such profits at the general corporate income tax rate of 25 per cent, only one-fifth of such profits may be taxed at that rate.

This means charging an effective tax rate of five per cent. Of course, this year there are new rules to prevent any misuse of the scheme but the lower rates are still available. The incentive applies to self-developed (meaning in-house) technology and creation of other intangible assets, such as the know-how for a new product or for a new production process. The new scheme which has been styled “the nexus approach” – this allocates development expenditures into qualifying expenditures and non-qualifying expenditures. It is opportune to explain what are qualifying expenditures. These are expenditures exclusively incurred for the development of the intangible fixed asset, with the exception of costs incurred for the outsourcing of R&D to group companies and indirect costs such as accommodation and financing costs.

Expenses for contract R&D activities performed by third parties are considered qualifying expenses since a company is expected to only outsource ‘non-fundamental’ R&D activities to third parties. Another bonus in this Innovation Box scheme (which was never introduced in our tax code) is the treatment of losses in the start-up period.  In my opinion, this is a clever way to attract multinational companies to set up R&D centres in our country to support a dynamic economy buttressed by cutting-edge technology. Simply put, the Innovation Box allows losses to be generally tax deductible at the general tax rate of 25 per cent (ours at 35%), not at the reduced effective tax rate of five per cent.  The cherry on the cake is that initial losses incurred before business operations have been started are also deductible at a 25 per cent tax rate.

At this stage, readers may ask, what has this genius piece of tax legislation got to do with us, a small island on the periphery of Europe?  It is only a part of the complex structure which constitutes an effective ecosystem that supports a culture of successful entrepreneurship. The grass roots of a successful industrialisation policy start with nurturing of start-ups (both local and those attracted to migrate here). For this purpose we need a paradigm shift in our mentality to attract FDI that is sustainable and is anchored on fundamental research conducted through business accelerators. But simply throwing money at the national start-up scene will not automatically create more members of that Billion Euro Club, whose members are known as “unicorns”.  These start-ups don’t exist in isolation.  It is true that many of them fail to create success. Sometimes the causes of such failure are the lack of careful nurturing in an ecosystem, which comprises a mosaic between venture capital, angel investors, mentors and the bricks and mortar where the start-ups create their magic.

Since many a year we run incubators – which are more about providing bricks and mortar and a place to work and not so successful as they still have the connotation of ‘life support’ rather than inculcating the ambition to innovate and do something bigger and better. The alternative which proved successful in the USA was the accelerator business model, whose origins are most often attributed to a vibrant start-up scene.

These form part of the much desired ecosystem that fostered Airbnb & Uber (so called Unicorns now worth billions).  Why is it so hard for Malta to start enjoying the success registered at other innovation centres run by universities such as MIT, Stanford, Oxford, Leiden and others?  Now that we are hosting two new educational institutions such as Barts medical school and AUM, we may take heart and try to attract more universities to create a nucleus of talent. Naturally the future output of graduates from these institutions can either result in a brain drain or ideally, they stay to populate innovation/research centres of international repute. These are non-existent locally and as stated earlier there is no impetus to sustain cohorts of talented graduates who simultaneously receive seed money, office space and mentoring in exchange for a percentage of equity.

What do such centres do?  Broadly speaking, they help ventures define and build their initial products, identify promising customer segments, and secure resources, including capital and employees. More specifically, we need accelerator programmes – these are usually of limited-duration, lasting about three to eight months, that help cohorts of start-ups with the new venture process. They also offer a plethora of networking opportunities, with both peer ventures and mentors, who might be successful entrepreneurs, programme graduates, venture capitalists, angel investors, or even corporate executives.

To conclude, this essential innovation reform may sound like a dream. Those enjoying the status quo criticise visionaries saying they are armchair critics lamenting that reality is somewhat different given limitations of our own size and geographical location away from the mainland. Surely, we have come a long way since the time when our island was a colony and we are a cohort of talented and resourceful people. It is a pity that our dreams cannot become reality unless somebody decides to pierce the proverbial glass ceiling.

Author: George Mangion
Published on Malta Today 23rd February 2017
Get in touch: info@pkfmalta.com | +356 21 493 041