IRELAND:
Catching up and forging ahead
Fastest growing European economy in the nineties:
GDP +8% p.a. (EU +1.9%, US +3.3%)
Catching up much faster than the famous 2% rule
GDP/employee: +3.2% vs. EU (4.2% – 1.0%; 1990-2000)
Productivity manufacturing + 4.9% (8.0% - 3.1; 1990-2000)
Three core elements
(i) selective inward FDI
(ii) skilled workforce
(iii) prudent coherent policy
In 3 decades: from agrarian, economy to above average
GDP/capita
GDP per capita 2000: 26.700 EURO (EU: 22.500)
from 63% in 1970 to 119% in 2000
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History:

Agrarian country

Celtic population (Gales)

Main product: potatoes

Many crisis incl. Famines in 19th century

Emigration to US, declining population

Land owned by Great Britain

Split into protestant North, catholic south

Member of EU since 1973

EURO introduced in 2002 (not in UK)
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Size, location and income
Population:
GDP:
GDP/capita:
GSP:
Exports
Imports
3.7 mill
102 bn EURO 2000 (1% of EU)
26.700 EURO at PPP
80 bn EURO (difference to GDP: profits to MNE)
94 bn EURO
80 bn EURO
Specifity from the European Angle
Periphery
North-North- East location
Hub for re-exports into US
Exports to US 13% of GDP (five time EU average)
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The roots of the success
The deliberate choices:

Openness and EU membership

Outward orientation

Determinedness for change
The institutions:

Social partnership & consistent public policy

Development focus with informal public/private networks

5- years indicative planning: consistent policy framework

IDA, Enterprise Ireland, Regional planning
Three pillars in the implementation:

Cheap production strategy: taxation, EU structural policy

Selective FDI: High tech based FDI,
export oriented; not for domestic demand

Skilled and flexible labor, upgrading, connecting
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The role of government:
Development planning of the competitive environment
Consistent strategy, not firm targets or industry targets
1958: National Development Strategy shift:
from forbidding to encouraging MNE
1985: 1st comprehensive plan
Structural targets: selective policy in favor of 3 C's

Computers

Communication (call centers)

Chemicals (largest industry; incl. Pharma 1/3 % of value added)
Ex post evaluations of Industrial Policy
1982 Telesis Report
1992 Culliton Report
Education and training, R&D
Infrastructure, taxes
Education and training, R&D. Infrastructure, taxes
Cluster formation recommended
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Some prudent measures of Irish Industrial
Policy:

Fiber optic lines to all European centers (call center location)

National Linkage Program 1985
IDA enforces backward linkages of MNE firms
Forbait (Enterprise Ireland) supports SME's

Indigenous firms have to prove export base to get grants

High profile headquarters and R&D activities in Irish subsidy
a priority of NDP

Incomes from patents developed in Ireland are tax free
(Tobin 1997)
Measures in Irish regional policy:
All regions have development plans
And make use of domestic and EU subsidies
(contrast to Italy)
Investment grants are contingent
on value added and intangibles
Dublin, Cork, Waterford, Galway (ports)
Galway in the North West: Silicon Valley
Shannon center for MNE
Belfast industrial center
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The importance of FDI
Inward FDI investment/ GNP
Flow 2000:
22% of GDP
7% in EU
6% in Spain
Share and characteristics of MNE
16% of firms
47% of manufacturing employment
91% of exports foreign owned
40% of GDP produced by MNE
88% of Irish MNE production is exported
The selectivity of Irish FDI policy:

No FDI in labor intensive industries

Leading EU location for high-end US FDI in electronics

33% of PCs sold in Europe are from IRE

40% of PC software, 60% of business application produced in IRE

9 of top 10 pharmaceutical companies have plants in Ireland

10 out of 15 medical device companies
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The role of FDI and the European Integration
FDI - Type: greenfield investments for re-export
Locations advantages
Institutional credibility (well organized development agency)
Financial incentives: Low costs, taxes, cheap loans
Skills (technical, local entrepreneurs, English language)
Low transport costs
(via sea and towards non European countries)
Negligible local market
Export based production
No fear of substitution of local firms
Greenfield + export orientation
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History: Ireland had not always been open for
FDI:
Pre 1950 anti FDI approach:
prohibition of foreign ownership (incl. UK firms)
protection of incipient industry (infant industry argument)
a few tariff jumping MNE
Policy change in 1958:
Economic Development 1st comprehensive national plan

Abolishion of Control of Manufacturers Plan

Shannon Airport Development Company

Aggressively enforcing inward FDI
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Role of European integration

Membership 1973

Large share of regional and structural funds
Used actively for upgrading regions (contrast to Italy)

Continued proactive role of national government (contrast
to Greece)
Ireland most pro active industrial policy (Ruane 1999)
Hands on micro dirigism (Ruane and Görg 1999)
Incentives tied to employment and R&D content
Upfront payments with repayment if target were not fulfilled
High tech favored
Clusters: the three C's
EU demands less distorting rules for attracting investment
Tax exemption for MNE
Tax differentiation manufacturing / other industries
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Examples for large MNE
In ICT- industries
Intel: 4000 employees, building 3rd wafer fabric
Dell: 5000 employees, regional center for EU, Middle East, Africa
IBM: 3000 employees, support, software, global e-procurement
Hewlett Packard: 2000 employees, manufacturing, banking,
e.business
Microsoft: 2000 employees, product development, internet
hosting
In Healthcare and Pharmaceuticals
Production and exports of blockbusters like Lipitor and Viagra
Production sites for cardiac, optical, orthopedic devices
2 recent success stories in 2002:
Wyeth Medica decides to build largest bio-pharma plant ever
Microsoft buys NAVISON for 1.5 bn Euro as entry into European software market
Largest Irish Firms:
CRH
Bank of Ireland
Allied Irish Bank
Smurfit
Irish Life and Permanent
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Cheap production strategies
EU Structural funds 3% of GDP in early 90s, 2% in late 90s
Taxes: profit tax waived for MNE
1982 10% for manufacturing; 28% for other firms
tax will increase to 12.5% (starting in 2003)
but 10% remains for existing firms up to 2010
remind: tax is 35% for other European countries
Social partnership lead to moderate wage increases
and
Enabled a consensus that high profits of MNE are positive
Profits make up 40% of GDP
Wages 24% below EU average (2000)
Wages make up only 26% of value added (1998; EU 52%)
Unit labor costs have fallen by 44% in nineties
Productivity increase not fully reflected in wages
A policy which may change and is not fully optimal
At the verge of a knowledge based economy
Result:
Share of manufacturing in GDP increases in Ireland from 34% to 40%
Growth of output in nineties: 8% p.a.
In contrast to declining share of manufacturing in all industrialized countries
And less than 20% in the US
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Education and Skills: the method to attract
technological firms and to induce them to upgrade
plants
Highest rate of investment in human capital between 1960-1985
according to Mankiw, Romer, Weill 1992
7 universities, many colleagues
60% of students in business and science
2nd highest education outlays (after Finland)
57% of graduates in engineering, science, compute, business
Media lab Europe (sister of MIT Media Lab)
Result:
Ireland evaded the development trap
Is not hooked on subsidies if they decrease
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Growth drivers:
Research increasing but below EU average
60% of research expenditure by MNE
first only “peripheral R&D” in Ireland
now attempts of “upgrading” (Amin et 1994 new functions)
Excellent education
Technology diffusion
Asset for the future:
Young and increasing population
40% are younger than 26 yr.; 30% in EU
Pensions costs/GDP 3% in 2040
Between 12% and 18% in other countries (max I, D, SF)
OECD, FT 23 11 99
Liability: Low domestic savings ratio
Currently not binding due to high inward FDI
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The National Development Plan (NDP) 20022006
Focus at the policy shift needed
When Ireland passes European average
And subsidies and cheap production strategies have to be
abandoned
Investment of over EUR 52 bn over the period 2000-2006
in health services, social housing,
education, roads, public transport,
rural development, water and waste services.
Now 90% from domestic sources
EU will contribute EUR 6 bn
EUR 3.8 bn from the Structural and Cohesion Funds
EUR 2.2 billion under the Common Agricultural Policy (CAP)
Rural Development Plan
Shift to research and education www.ndp.ie
Science foundation Ireland www.sfi.ie
New policy become necessary recently
wage restraint became more difficult
knowledge based society needs skills and training
immigration of skilled people
benchmarking of public sector payments
initiative for 3rd level research capability
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Ireland as seen from Theory:

Dynamic specialization against H-O model

Export oriented FDI

Catching up faster than 2% rule

Catching up and forging ahead in productivity

High investment without high savings

Skills and Research in underdeveloped economy

Foreign investment lead to growth,

Ireland escaped from development trap
Ireland as seen from policy strategies:

Policy plans in market economy

Incomes policy: social partners coordinated with
government

Prudent industrial and regional policy

Determined not to be “the poor's corner”
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Status 2002:

Productivity no 4 in world (after B, US, I)

Highest labor productivity in manufacturing in EU

High unit value of exports

High share of technology driven industries

Productivity higher, wages lower than EU average

GDP per head (domestic value added) above EU
GSP (Income per head) lower
GSP/GDP 80%; difference profit flow to MNE

Asset price inflation (mortgage lending, house prices)

Infrastructure deficit in some regions
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Summing up: no miracle but economic success based
on
Openness and economic integration
Prudent, active, cooperative institutions
Selective FDI, low costs and skills
And the knowledge that the factors defining success will change
Final question marks: Celtic Bubble or Celtic Tiger?

Will the process continue ?

Is a BSP 20% below BIP sustainable ?

Part of BIP extra profits and transfer prices

Is it sustainable that own investment is low
(and complemented by FDI?)

Inflationary pressure increases (EU )

Crowding out of indigenous firms via wage increase (input market)

What happens if cheap production strategy and structural funds are
lost ?
The coherence of the society,
the prudent planning and the determinedness of the people
together with investment in research, education and new
technologies
Favor a continued growth scenario (however at a smaller difference to Europe)
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References:
Sean Dorgan: Competitiveness in the Science Based Economy, WIFO Symposioum, Vienna 2002
Paul Tobin: Ireland Dublin, 1999
Denis O`Hearn: Inside the Celtic Tiger: the Irish Economy and the Asian model” London, Sterling,
1998
Frank Barry (ed) Understanding Irelands Economic Growth, Basingstroke London 1999
Ana Tavares: Systems, Evolution and Integration: Modelling the Impact of Economic Integration on
Multinationals’ Strategies’. PHD Dissertation, University of Porto
A. Tavares: ‘The Dialectic Between Regional and Corporate Integration: The Impact of the Single
Market Programme on the Strategic Orientation of Multinational Enterprises, with an
Application to the Portuguese Case’.
A. Tavares: ‘Multinational Subsidiary Evolution and Public Policy: Two Tales from the European
Periphery’ Journal of Industry, Competition and Trade (2002), forthcoming.
Robert J. Barro und Xavier Sala-I-Martin „Convergence across States and Regions" Brookings
Papers on Economic Activity 1: 1991, S. 107-182.
Eurostat/EU-Kommission „Europäische Wirtschaft„ Nr.70, 2000, S. 186f.
Tim Callan und Brian Nolan „Income Inequality in Ireland in the 1980s and 1990s" in Frank Barry
(ed.) „Understanding Ireland’s Economic Growth" Basingstoke/London 1999, S.176.
Europäische Kommission „Einheit Europas, Solidarität der Völker, Vielfalt der Regionen. Zweiter
Bericht über den wirtschaftlichen und sozialen Zusammenhalt – Statistischer Anhang„
Brüssel 2001, Tabelle A2.
Paul Sweeney „The Celtic Tiger. Ireland’s Continuing Economic Miracle" Dublin 1999, S.37
EU Kommission „Sechster Periodischer Bericht über die sozioökonomische Lage der Regionen der
Europäischen Union„, Brüssel 1999, S. 221
Denis O’Hearn „Inside the Celtic Tiger. The Irish Economy and the Asian Model" London/Sterling
1998,
Bart van Ark und Robert H. Mc Guckin „International comparisons of labor productivity and per
capita income„ Monthly Labor Review July 1999, S. 36
European Commission „The Economic and Financial Situation in Ireland: Ireland in the Transition to
EMU" special issue of European Economy 1996 (zitiert bei O’Hearn, S.85).
Wirtschafts- und Sozialausschuss der EU (CES) „Opinion of the Economic and Social Committee on
The EU Economy 1999: Review" 369/2000, Appendix „Ireland: An Example of Economic
Policy Success"
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