The Irish economy has come through an economic crisis of unprecedented proportions since 2007, but over the past couple of years it has started to emerge with a level of vigour and momentum that few would have predicted. The recovery that effectively commenced during 2014 has been sustained and built upon in 2015. The external trade performance continues to be strong; manufacturing activity is vibrant; the labour market is continuing to improve; the public finances are getting steadily better; construction activity is bouncing back from a very low base; tourism is doing very well with the number of inward visitors to the country growing steadily; and consumer spending is gaining strength. In other words the economic recovery is becoming more broadly based and this trend looks set to continue. Over the next couple of years GDP looks capable of expanding at an annual average rate of around 4%, assuming that there will be no significant external shock.
Ireland has been fortuitous in the sense
that factors outside of the country’s control have developed in a very favourable manner. Two of the country’s main export markets, the US and the UK have been doing well and this has helped insulate the economy from the weakness in the Euro Area; the euro has fallen significantly against the dollar and sterling; and oil prices have fallen sharply. In addition, the domestic policy pursued in relation to the public finances and the banking sector is gradually proving successful. Ireland’s recovery is due to a combination of positive external developments and generally sensible domestic economic policy.
The Employment Imperative
One of the most important areas of the economy is the labour market. From an economic and social perspective, unemployment is an evil that causes severe social problems such as forced emigration and inequality; it imposes a major burden on the Exchequer through the loss of payroll taxes and increased social expenditure; and it represents a loss of potential output in the economy. Consequently, one of the key metrics for success or failure should be the number of people at work in the economy. Ireland is now doing reasonably well on that count. The number of people unemployed declined to 206,500 in August, which represents a decline of 66,800 over the past 2 years, and the unemployment rate stood at 9.5% of the labour force down from a high of 15.2% at the beginning of 2012.The latest employment data from the CSO show that in the second quarter of the year the number of people at work in the economy stood at 1.96 million, which represents an increase of IDA client companies make the following contribution to the Irish economy:
- They pay €8.5 billion in wages and salaries;
- They purchase €2.6 billion in materials in the Irish economy;
- They purchase €11.3 billion in services in the Irish economy;
- They pay corporation tax of €2.8 billion;
- They account for €124.5 billion in exports of goods and services; and
- They engage in total expenditure of €1.4 billion in in-house R&D expenditure.
In summary, IDA supported companies make a very significant economic and financial contribution to Ireland and the potential for further growth is very significant.
In its latest strategic outlook the IDA has set a number of ambitious targets for future FDI.
Specifically, by 2019 it is seeking to achieve the following targets:
- Direct employment of 209,000 in companies supported by the IDA by 2019;
- 900 new investments;
- Grow the portfolio of client companies from 1,195 to 1,350;
- Win a greater share of investments made by European and Growth Market FDI companies;
- Win a cumulative €3 billion in new RD&I investment projects, including in-house and collaborative RD & I projects with companies and universities, and encourage 120 additional companies to engage in R&D across the FDI portfolio; and
- Increase Irish economyexpenditure from €22.4 billion in 2013 to €26.8 billion by 2019
The Growth Potential For The SME Sector
FDI makes a very significant contribution to all aspects of Irish economic and financial wellbeing. It has set ambitious targets for
2019, but based on the long-term track record and recent trends, such targets look eminently achievable provided Ireland preserves its corporation tax status; its focus on supplying a well educated English speaking labour force with other language skills; and preserving a competitive cost environment, where the ability to do business is strong.
The big question for the indigenous Irish economy, which is dominated by Small and Medium Enterprises (SMEs), is the extent to which the growth in FDI can feed into the SME sector to a much greater extent than we have seen in the past.
The SME sector accounts for around 54 per cent of total employment in the Irish economy, and 70 per cent of total private sector employment.
Most people recognize that the re- building of the Irish economy over the coming years will have to depend heavily on the SME sector. This is not to suggest that the multinational sector will not have a role to play, in fact the very opposite is the case, as demonstrated by the recent track record and the targets set by the IDA. However, in an increasing competitive global environment for FDI, indigenous SMEs will have to play an increasingly significant role in the future development of the economy, and particularly in the regional economies that are currently lagging the Greater Dublin area in terms of economic activity and employment creation.
The SME sector is incredibly diverse. It ranges from single person operations to operations with up to 500 employees; and from trout farming, to car sales, to engineering, to IT, and a lot more besides. Despite the wide diversity within the sector the issues facing it are very similar.
Lack of demand
The lack of demand in the economy over the past few years has obviously been the biggest issue. At a more structural level however, it is clear that many SMEs are very good at doing what they do, as in manufacturing a product or providing a service, but they are a lot less good at developing other necessary attributes of the business such as marketing, developing export potential, innovation, and driving efficiencies and economies of scale in the business.
A major challenge for many small Irish companies is to move from Small to Medium to Large. Many lack the capability of completing this business transformation.
Those multinational companies who invest here can play an increasingly important role in developing the indigenous SME sector.
Between 2015 and 2019, the IDA is targeting an increase of 155 extra multinational companies in Ireland, taking direct employment up from 174,488 to 209,000, representing an increase of 34,512 in total FDI employment. Based on IDA employment multiplier, this would result in the creation of an extra 24,158 indirect jobs, taking that total up to 146,158. This would take the total number of jobs supported by IDA sponsored companies up to 355,158 from 296,488 jobs at the moment.
It is estimated that the value of global sourcing by Irish-based multinational companies is around €80 billion, with just €11 billion in services and €2.6 billion in materials sourced in Ireland. A large part of the expenditure on goods and services is likely to be on services such as water, energy and other utilities, which cannot be sourced elsewhere but locally.
Potentially, the multinationals operating in Ireland offer enormous trading potential for indigenous SMEs, and could alleviate the pressure to grow export markets to achieve scale, a process that many Irish companies find very difficult to achieve. However, this is easier said than done.
One difficulty for Irish firms in securing greater trading linkages with multinationals is the fact that many operate centralised global procurement systems and significant changes to global supply chain management approaches.
To exploit the potential growth emanating from the multinational sector in Ireland SMEs need to achieve a number of attributes. They need to be of sufficient scale to satisfy the requirements of a demanding client base; they need to be efficient in production and priced competitively; they need to be able to comply with multinational procurement systems; they need total quality assurance; they need high quality financial management; they need high quality HR management; they need very strong IT systems and capability; they need top quality customer service systems; and they need to engage in R&D and be as innovative as possible.
All of these attributes are essential if the potential to service a very sophisticated and demanding multinational client is to be realized. Most Irish SMEs are nowhere close to achieving all or even some of those objectives, but they should be given whatever assistance is required to help them move up the value chain. State agencies should provide whatever support and mentoring necessary, but every effort should be made to get FDI companies to help SMEs achieve the objectives. This would be good for the multinationals, the SMEs and the economy in general.
If the necessary attributes were to be achieved and success attained in servicing SMEs, the projected number of indirect jobs supported by FDI companies in 2019 could easily be 75,000 higher than the projected 146,158 jobs.
This clearly is an agenda worth pursuing, because if the Irish SME sector were to achieve success in servicing the FDI sector to the greatest extent possible, it would put them on to a platform from which building export capability would be the next logical step.
The Opportunity for Irish SMEs
Jim Power, Economist
This is an extract from the CPA Ireland Report – Charting a Course for Growth. The report is being serialised exclusively on smallbusinesscan and other articles will be related in the coming weeks.