Is Ireland’s tech boom a miracle or a mirage? How governments can — and can’t — build a tech economy

In late October, the streets of Dublin were jammed with thousands of people who had flown in from all over to attend Web Summit, a showcase of startups and stars from the world of technology. Tesla founder Elon Musk was there to talk electric cars, and AOL’s(s aol) chief executive, Tim Armstrong, turned up in O’Neill’s, hoisting a glass and listening to Irish music.

Ireland’s politicians, of course, pointed to the hubbub as evidence that the technology sector is creating jobs and helping the country turn the corner on seven hard years of recession and austerity. The presence of startups working next to giants like Twitter and Microsoft was proof, they said, that Ireland has given birth to a vibrant technology economy nearly from scratch in a few short years.

The story is compelling. It suggests that any place, with the right mix of policy and promotion, can become a tech hub. But is it true? A closer look, however, shows a more subtle story, and provides lessons for other would-be Silicon Valleys.

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Tech hub or tax haven?

Ireland is proud to point to the arrival of Google(s goog) and other tech giants, whose new corporate offices now employ thousands in the country. But not everyone is convinced that the country has created a real tech ecosystem. One of the doubters is John Staunton, the CEO of Buzzoek, a startup that wants to make city transit passes double as merchant rewards cards.

Staunton studied at the University College Dublin, but now lives in Amsterdam, which he finds to be a more vibrant community for start-ups. He is also skeptical that governments are suited to mentoring or supporting new tech companies.

“Enterprise Ireland is pushing it in a way you have to predict how many employees you’ll have in a year. They’re too ‘government department,” said Staunton.

Other start-ups like Currency Fair and Trustev, however, have succeeded in winning prizes and attracting multi-million dollar investments while calling Dublin home.

But another entrepreneur at the Web Summit, who didn’t want to be named, suggested that Ireland could be somewhere to start out, but not the sort of place to produce a future Facebook.

“You start a startup here, get funded in the U.K., and then go to the United States,” he said, adding that Ireland’s reputation as a tech center rests on its corporate tax policies.

Those policies, well-known and controversial, have made Ireland a magnet for companies like Apple, which use the country as a corporate weigh station for intellectual property. Indeed, the tax tactics developed here by Apple and others have even made “double Irish” part of the corporate accounting lexicon.

Now, however, pressure from the European Union could force Ireland to change those tax rates — even the chief architect of the tax policies predicts their days are numbered. And if those loopholes vanish, will Ireland’s nascent tech sector blow away, leaving nothing but bad marketing memories?


“They’ll do it the Irish way”

It’s tempting to dismiss Ireland’s tech ambitions as no more than a tax gimmick, especially given the country’s small size and lack of venture capital. But that ignores how other small centers have grown to get a foothold in the larger tech economy.

One obvious example is Israel, which used to be just an R&D base for American companies, but has since created a generation of its own entrepreneurs. And, according to Shuly Galili, who founded the California-Israel Chamber of Commerce, Ireland is on its way to doing the same.

Galili, an executive at accelerator Upwest Labs, said the presence of large companies like Cisco served to inspire young Israelis to think big and start firms of their own. She believes the same phenomenon is taking route in Ireland, and is being aided by the country’s strong schools.

“It’s beginning. I see a connection between universities, big companies and investors,” said Galili, adding, “They’ll do it the Irish way.”

By “the Irish way,” she meant that no place will emerge as a technology hub in quite the same way as any other. For governments, this means the goal is not to copy another place, but instead to recognize their local strengths and graft those onto business-friendly policies. In Ireland, officials appear to recognize this already.

Dermont Clohessy, the head of development agency IDA, acknowledged that Ireland’s tax policies had helped to attract tech company head offices to Dublin. But he added that the country has a number of natural advantages to help keep them there. These include a convenient time zone and an English-speaking population, which makes Ireland a convenient jumping-off point for companies looking to expand to Europe for the first time.

And, like anywhere else, Ireland can tout its distinct cultural amenities, which include those famous pubs, its literature, and a culinary culture that was on display at the web summit:

Ireland food show

Can governments create the “next Silicon Valley?”

Government around the world would love to have a Silicon Valley of their own, but will never get one for a simple reason: there is only one Silicon Valley and it’s not going anywhere. The engineers, entrepreneurs and venture capitalists who populate the Valley won’t decamp to Dublin (or anywhere else) because they want to be near the region’s many amenities and, most importantly, to each other.

As Gigaom’s recent report on the London start-up scene shows, the city’s hyped-Shoreditch district is the nexus of something new, but it’s not Silicon Valley.

All this raises the question of whether government should have a role in fostering tech in the first place. Many tech entrepreneurs are skeptical and believe the best thing governments can do is just get out of the way.

One of them is Maurizio Rossi of H-Farm, an incubation and investment firm that is working to create connections between start-ups and the famous fashion brands of Northern Italy. Rossi believes the region’s wealth of artisans means it is poised to lead in wearable technology, but that the role of government should be to provide infrastructure and let the market do the rest.

Such skepticism towards a hands-on role for government in the tech sector is understandable — but so too is the view of government officials, who argue they must be cautious in how they spend taxpayer money. It’s fine in theory to want the government to be nimble like tech companies but, in practice, bureaucrats can’t make quick financial decisions in the same way as start-ups or venture capitalists.

As a result, if a government does want to try and boost its tech sector, its best bet is to find a limited niche where it can be effective. As Galili, the accelerator executive, points out, different countries are finding different ways to do that: in Ireland, it has been tax breaks, while Israel has relied on its Yozma fund (which tops up private VC investment) to kickstart the tech scene. But she adds a note of caution for governments.

“It’s a fine line,” she said between giving a boost and creating a boondoggle.

This story was updated at noon ET on Monday to include a reference to two successful Irish start-ups, CurrencyFair and TrustEv. Research for this story was based on dozens of interviews with people from government, industry and the start-up sector, from Ireland and abroad.

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