ECONOMICS:AS THE IRISH economy slows it is naturally going to be more difficult for companies doing business here. During the Celtic Tiger period the economy grew by over 8 per cent a year. Then in the aftermath (2002 to 2007) it averaged about 4.5 per cent a year - quite a credible performance, writes Michael Casey.

Unfortunately, for a variety of reasons, economic growth is going to slow to about 1.5 per cent in 2008 and perhaps something similar in 2009.

Foreign multinationals located here might not suffer unduly, however. Many of them export into Europe where there is little sign of recession as yet. As far as non-EU trade is concerned the exports of multinationals are partially shielded from the rise in the Euro against other currencies including the dollar.

It is probably reasonable to assume that existing Multinational Companies (MNCs) are not going to pull out of Ireland because of a domestic recession. They don't depend on the domestic market. If some do pull up stakes it will probably be because of increasing costs, including wage costs. Competition from other low tax regimes may also be a factor. It goes without saying that we have to maintain the best possible environment for foreign companies because the economy depends heavily on them. Foreign direct investment reached a peak some years ago, at about €180 billion. This part of the capital stock also embodies sophisticated technology based on research carried out mainly in the US at no cost to us.

In fact this investment has pitch-forked us into the information or knowledge economy and has created many jobs for skilled people. It is a central plank of Government policy to move further up the value chain.

But to ensure this outcome we have to do much more in relation to research and development, scientific training, the roll-out of broadband, and suchlike. Indeed at a more basic level the deficit in physical infrastructure needs to be addressed.

There are about 5,000 manufacturing firms in Ireland of which some 85 per cent are Irish-owned. However, in terms of employee numbers, the jobs are split almost 50:50 between the foreign and Irish-owned firms. Less than 10 per cent of the firms are US-owned but these account for a staggering 65 per cent of gross output and almost 80 per cent of total merchandise and ICT-service exports. These figures give some idea of how dependent we are on foreign, especially American, companies.

This is not to downplay the role of Irish firms which, growing from a low base, have invested over €90 billion abroad; almost equal to the inward foreign direct investment which has been slowing down in recent years and fallen well below its peak of €180 billion. When Irish firms locate abroad they usually do it via takeovers and mergers, earning average yields of about 7 per cent. US firms investing here tend to operate green-field sites and earn yields of up to 18 per cent, reflecting in part the high-tech nature of their activities.

The large weight of MNCs in Ireland means that net profit repatriations (mainly to US headquarters) are very large and form the bulk of 'net factor income to the rest of the world'. In recent years this has been running at about €27 billion a year. It adds to our current balance-of-payments deficit and it also drives a wedge between GDP and GNP, the latter being considerably lower.

So as not to flatter - or mislead ourselves - it is important to measure economic growth in terms of the lower GNP figure. Most other countries don't have to do this and usually adopt the GDP measure. International comparisons often flatter Ireland unduly. For example, by comparison with other countries we seem to have low Government spending as a proportion of GDP but if we used the GNP figure, which we should do, the comparison is not as favourable.

In general of course, the policy of attracting foreign MNCs to Ireland has been very successful, not just because of the direct contribution these companies make to employment, output and exports. There are major indirect benefits as well, from the multiplier effects to the dissemination of high-tech and entrepreneurial knowledge. There have also been many examples of foreign companies mentoring Irish firms and sourcing products from them. Shell or brass-plate companies would not, of course, have anything like this degree of value-added, but there are not too many of these.

In many ways we have a dual manufacturing sector, the foreign component being considerably more productive than the indigenous one. For example, over the last 12 years the foreign sector has increased industrial output by over 13 per cent a year while the performance of the Irish sector was just over 2 per cent a year. The latter is actually quite reasonable by international standards but the disparity between the two sectors is very marked.

So, the policy of attracting foreign companies into Ireland was not just enlightened but essential and it was this policy, more than any other that brought us the Celtic Tiger period. A cynic might argue that the indigenous sector was crowded out by the glamorous high-tech companies, that in the early years there was wage invasion, where wages were bid up by the foreign firms to the detriment of the Irish companies. It is hard to find much hard evidence for this, but in any case the advantages of foreign firms greatly outweigh any disadvantages there might have been.

As indicated earlier, one of the biggest threats to all companies here, whether foreign or indigenous, is cost inflation. Many of these costs - oil, electricity, commodities - are largely beyond our control and in a sense so also are wage costs in so far as the labour market works. But in Ireland, supposedly a market-oriented economy, we have an incongruous arrangement known as "social partnership".

Positions have already been taken up by the social partners. The unions want full compensation for inflation (of around 5 per cent) and a top-up for productivity. The employers claim that this would worsen an already serious competitiveness problem, exacerbated by the strong Euro. Many Irish firms export to Britain and are handicapped by the relative weakness of sterling.

Because of much tighter fiscal conditions, the Government will not be able to sweeten the pill by offering lower taxation in exchange for wage moderation. In fact it is likely that there will be resort to stealth taxes. After months of negotiations the figure for average wage rises will probably come somewhere in the middle of the present bargaining range-perhaps around 4 per cent a year which will still be high by the standards of other countries. While this sort of pay increase will be paid mainly to public servants it is probable that the demonstration effect will lead to pay rises of much the same in the corporate sector. Whether they can be afforded or not is a moot point. Clearly some Irish firms with low productivity will not be able to afford them. It is to be hoped there will be an "inability to pay" clause. If not, jobs will be lost.

If the Government were to forego their own excessive wage increases and if senior corporate executives were to pay themselves more realistically than they have in the past, the chances of securing a better pay deal would be improved.

There are those who argue that since most of our existing MNCs haven't yet relocated to low wage-cost countries, an extra 4 per cent or thereabouts in our wages is not going to make any difference, given the benefit of tax treaties and low profits tax. There is also the bland assumption that Ireland has all of the required labour skills and that low-wage countries do not. These are very risky assumptions to make. Inward foreign direct investment has been falling over the past few years. There is a tipping point. We just don't know where exactly it is but it could be closer than we think.

Dr Michael Casey is is a former senior official with the Central Bank and a former member of the board of the International Monetary Fund.