Foreign firms the backbone of industrial sector in Ireland

ECONOMICS:The self-deception that Ireland is unusually entrepreneurial, as officials claim, can lead to misguided policy

IRELAND IS among the most industrialised countries in the developed world. Industry accounted for 31 per cent of gross domestic product in 2009, according to the World Bank. In the euro area as a whole, industry generated less than one-quarter of output in that year. Even in the manufacturing powerhouse Germany, the figure stood at just 26.5 per cent.

There is only one reason for Ireland’s outlier status – foreign companies. Without them, Ireland would, for all intents and purposes, never have industrialised. Every metric available shows how unusually important they are. Almost half those employed in manufacturing work in foreign-owned companies (see chart). Across 25 OECD countries, the only sizeable economies to come close to this percentage are former communist states – in their case more as a result of State-run industry being sold off to western companies in the privatisations of the early 1990s.

The importance of foreign companies also extends to services sector employment. As the chart illustrates, Ireland tops that league too.

If the employment proportions are unusual, the difference in productivity is eye-widening. In foreign-owned manufacturing companies, turnover per worker was just shy of €1 million in 2009, according to recently released figures from the CSO. In indigenous companies, it is one-quarter of that figure.

Foreign companies account for 80 per cent of all manufacturing output in Ireland. As they are much more focused on international markets than home-grown companies, they account for 90 per cent of exports. The proportion is very similar in services exports.

Is there any downside to this unusually high proportion of foreign company involvement? The answer is a qualified no. These companies pay more, on average, than their Irish counterparts. The duration of each job is longer, offering workers greater security. The intangible spillover effects – in terms of know-how, exposure to international business and in-house training – may be the biggest gain of all. The sole qualification is that multinationals will more readily exit if conditions do not suit them.

The success in attracting foreign companies is rightly celebrated. But their relative importance to the Irish economy is not only because there are so many of them, but also because home-grown business is so weak.

This statement may raise an eyebrow in a week when two reports extolling Irish business were published. Wednesday’s annual report from the agency charged with nurturing indigenous companies, Enterprise Ireland, lauded a solid export growth performance last year, noting they had recovered 70 per cent of the ground lost during the downturn. That sounds good until one considers the wider context: world trade volumes have already surpassed pre-crisis peaks. This means Irish companies have lost market share. Home-grown exports account for only about one-tenth of GDP. Without the exports of foreign companies, Ireland would be the most closed economy in the EU.

Despite the long-term failure of Irish companies to achieve by the measure that counts most – exports – yesterday’s Global Entrepreneurship Monitor (GEM), paid for by Enterprise Ireland, found yet again that Ireland was more entrepreneurial than average in the developed world. It should be noted that it is this source, and this alone, that is the basis for the frequent claims by “official Ireland” that the State is a hive of entrepreneurial activity. The GEM has its value, but it is a survey of the entrepreneurial aspirations and self-reported business achievements of the general population. It contrasts with the hard comparative data on corporate demographics compiled by national statistics agencies in Europe.

Repeating the untruth that we are unusually entrepreneurial will not make it true. Among other things this self-deception leads to unwise policy choices. The Government’s focus on boosting exports to the Bric economics – Brazil, Russia, India and China – is an example. While a laudable ambition, it is not realistic. If companies have not made inroads into continental markets on their doorstep which are part of the barrier-free EU and with which they have shared a currency for a dozen years, why would they crack the distant Brics?

This country has a long tradition of ignoring unpalatable and unflattering truths, with the property bubble being only the most recent example. If the weakness of indigenous business is not faced up to, the problem cannot even start to be addressed. Better to face reality than to generate false hope.