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Information Technology’s Impact on Ireland’s Economic Growth Wassim Boustani Globalization: Business and Society Professor A. Schlissel 19 December 2008
Information Technology’s Impact on Ireland’s Economic Growth Many developing countries have discovered the important contribution that information technology makes toward economic growth in an increasingly global market. Although Asia and India have captured most of the attention on the topic of economic growth, Ireland has had great success among European nations, largely due to its inviting approach to industrialization. Its policies and efforts transformed its weak economy into a world-class industry in computer hardware, software and services, earning it the nickname Celtic Tiger. Ireland has historically relied on agricultural exports to the U.K. as a means to be selfsufficient, especially after achieving independence from it in 1922. Unfortunately, its population continued dropping due to failed economic policies and opportunities (Dorgan, 2006). Agricultural subsidies from the EU elevated rural incomes, but also discouraged workers from bringing more value by moving to the cities, thus lowering incomes and slowing growth. EU transfers also created an incentive for entrepreneurs to shift efforts to lobbying for subsidies, rather than productive and innovative activities. Evidence of this effect is shown in the fact that low growth periods have coincided with increased EU receipts, when compared to rapid growth periods (Powell, 2003). During the 1960s Ireland attempted to reverse its course by lowering import tariffs, negotiating free trade agreements with the U.K., and later joining the European Economic Community in 1973. Moreover, it increased social services and paid for secondary schooling, raising the level of education in order to attract higher quality investments. By 1970, over 350 overseas companies had set up in Ireland to take advantage of low-cost English-speaking labor, including an exemption from taxes on export profits. Unfortunately, the influx reduced the free trade competitiveness of domestic companies, who were serving the previously closed Irish
market. However, the wider markets, diversified exports, and gains in agriculture improved the general livelihood and prospects of the Irish (Dorgan, 2006). Since then, Ireland has evolved from being one of the poorest countries in Europe, to housing some of the richest people per capita in the world, making Dublin one of the most expensive cities in Europe. This vast increase in wealth has also created the largest income gap between the rich and poor, with inequality levels only second to the United States. Home ownership is no longer a possibility for many, while a lack of government spending on welfare, health and education has left the elderly, disabled, and young at risk (Chrisafis, 2004). Ireland at this point was more concerned with hosting its MNC friends and supporting the talent that could help it do so, inevitably diminishing its support of the marginalized majority. Multinational corporations were mostly attracted to Ireland because it has the lowest corporate tax burden for businesses of all Western European countries. Its policy resulted in corporate income taxes of 13 percent of tax revenue, well above levels of the world’s largest economies. Tax revenues increased by 270 percent over three years, when the capital gains tax was halved in 1999, confirming the policy’s success. U.S. companies achieved higher average returns in Ireland than in other locations, accounted for two-thirds of all foreign projects invested, and more than 80 percent of capital invested (Dorgan, 2006). Ireland’s strategy to attract large-scale foreign investment focused on future prosperity in high technology, high output, and high skills; coming from the computer industry, pharmaceuticals, medical technology, and international services. The selling point was the attractive export platform to Europe that it provided for MNCs. Cooperation between the state and businesses was further supported by the creation of the International Financial Services Centre, as well as the development of the most advanced telecommunications and digital
network in Europe. Ireland was positioned to benefit from globalization and the rapid growth of technology, with high-growth sector MNCs settling in to serve the European market (Dorgan, 2006). Dublin was becoming the Silicon Valley of Europe, but most of its residents would no longer be able to afford living in such an environment; one modeled for young, talented, and technically proficient entrepreneurs. Ireland’s strategy seemed to be working, as employment increased by 800,000 from 1990 to 2005; creating an unemployment rate half that of the EU average, resolving the long-lasting emigration problem, and labeling Ireland as a land of opportunity for many EU workers. Its focus on education since the 1960s had produced many graduates in science, engineering, and business studies. Similar ambitions were shared by businesses, institutions, and government who worked with leading-edge companies to increase foreign investments to 17 percent of GDP by 2003. Hosting leading-edge MNCs that constantly reinvent themselves placed pressure on Ireland to do the same; complacency was not an option. Besides, Irish managers in MNCs had the skill, ambition, and global orientation to spare them from the effects of the technology business slowdown in 2001 (Dorgan, 2006). Education was an important factor, as technological institutes responded to business needs by creating the world’s highest level of science and engineering graduates per capita. There would be one thousand PhD graduates in 2008, twice the amount from ten years ago (IDA, 2008). Using public funding, the Science Foundation Ireland (SFI) was established to attract research in information and communications technology and biotechnology (Dorgan, 2006). Similar to the National Science Foundation of the US, the SFI invests in academic research that is most likely to generate new knowledge, leading edge technologies and competitive enterprises in the fields of science and engineering.
Complimenting the educated labor pool, foreign investments brought with them industrial expertise that domestic firms could not readily offer. Standards were set high as only the best MNCs in emerging technologies were allowed to participate in Ireland’s future IT industry. MNC operations in Ireland provided over one-third of all computers sold in Europe, making it the eight largest computer exporter in the world, after holding the fastest computer export rate among top producers. In 1999, Ireland ranked fifth in production and second in exports of packaged software, reaching a 40% market share in Europe (Tallon and Kraemer, 1999). MNCs were using Ireland as a platform to serve the European and surrounding markets, but they did not necessarily benefit the domestic workforce while doing so. Most did not employ many skilled workers; and did not source supplies from indigenous suppliers who were regrettably lacking in expertise, economies of scale, and capital. The Economist (1997) referred to the disparity between Irish and foreign firms as “a tale of two economies: a still backward, unproductive and labor-intensive one owned by the Irish, and a modern, exceptionally productive and capital-intensive one owned by foreigners” (Tallon and Kraemer, 1999). These challenges did however mature the domestic IT sector by forcing them to adapt or perish, but more improvement would be needed for continued future growth. In addition to being marginalized and underdeveloped; indigenous firms had been slow to make use of IT, with only 40% having access to the Internet. Low levels of IT use created a reliance on foreign MNCs which increased Ireland’s vulnerability, and risks losing a great share of its wealth if MNCs were to relocate due to changes in global markets. To prolong economic growth and not lose foreign investments to other developing countries, Ireland will need to focus on internal growth by improving its IT infrastructure, developing its human capabilities, and promoting IT use by indigenous firms to interact with global markets and MNCs (Tallon and
Kraemer, 1999). Converting “mom-and-pop” shops into technically proficient operations is a challenging transformation that requires time, training, and compliance that few have the patience for. The government at this point had chosen to serve those who were eager first, and worry about the lacking later. The new technology environment will require uninterrupted energy supplies to continue attracting foreign investments. Achieving continuity requires Ireland to reduce its everincreasing dependency on imported oil, while simultaneously increasing its energy capacity to accommodate power-hungry MNCs. Ireland consumes more oil per capita than any EU-25 country, with international connections wholly dependent on fossil-fueled air and sea transportation. The Energy Performance Building Directive of 2006 was adopted to improve the efficient use of electricity in buildings, but more research is required to lower automobile usage, increase public transportation, and expand communication networks to facilitate worker telecommuting (Forfás, 2006). Ireland is not alone in the battle to provide uninterrupted energy to its high-tech infrastructure, as most industrialized nations are facing the same challenges. Although Ireland’s unemployment rate of 4.1 percent is the lowest in Europe, the housing property bubble, international credit crisis, rising inflation and interest rates, create a perfect storm to challenge the confidence the country has in its future. More than 90 percent of total exports are from foreign-owned firms, showing the dependence Ireland has on them. The country will need to involve itself more with the EU market and services in order to have a stable economy despite the availability of foreign MNCs (Hennigan, 2008). By converting itself into a host for foreign firms, Ireland has placed its future in their hands. Similar to how Detroit, Michigan depended on the auto industry, a shift in the market could find Ireland abandoned by MNCs, making it wholly dependent on the EU once again.
Future unemployment may increase rapidly, whereas a return to higher growth will be slow. Therefore, the country must keep itself in a competitive position to maintain activities in manufacturing and services, in addition to continuing public investments in infrastructure and education. With land prices being the highest in Europe and office rents among the highest in the world, corporations are now considering locations anywhere but Ireland. Irish investments can continue to be focused on US and UK corporations, but it must make itself affordable to more countries (Hennigan, 2008). Likewise, IT startups in the US find it highly beneficial to locate themselves in the expensive Silicon Valley area of California, but many have found just as much success by choosing a less costly location. Ireland is not recession proof by far, and the Economic and Social Research Institute expects a recession in 2008, the first since 1983, with a return to net emigration in 2009. A decline in domestic spending of 2.6 percent, investment spending of 14.9 percent and real consumer spending growth at just 1 percent are to blame. Moreover, an expected 20,000 emigrants for 2009 will be caused by a decline in the labor market, with unemployment increasing by 60 percent between 2007 and 2009, to 7.1 percent. Furthermore, government debt as a percentage of GDP is expected to rise, in addition to a decline of housing prices of 7.7 percent by 2010 (Tansey, 2008). In order to combat this decline, the Ireland Action Plan released in 2004 suggested goals to be achieved by 2010. Proposals suggest an increase of business investments, doubling the number of indigenous companies with research and development (R&D) activity and foreign affiliates, increasing the number of foreign companies with R&D activity, and increasing the R&D performance of higher education and public sector institutions. Proposed actions to achieve these goals include developing a culture that supports invention, risk-taking, and
entrepreneurship; increase the R&D budget by re-orienting funds while reducing the bureaucracy surrounding R&D support; develop research skills based on needs; create an attractive environment for quality researchers and research careers; develop the commercialization needed to exploit research in higher education and public sectors by corporations (DETE, 2004). According to a report by the Steering Group, increasing R&D may be a challenge to Ireland, even though investments tripled during the 1990s to reach €917 million in 2001. Twothirds of R&D expenditures come from 19 out of the 300 foreign enterprises, creating a risk of major losses if those were to relocate. Only one-third of the 1,000 indigenous enterprises have R&D expenditure, with the majority coming from only twenty six of them. The higher education and public research sector reached €422 million in R&D expenditure in 2002, with the hope of injecting more talent into the local market. Government funding of 4.5% for R&D to support business remains lower than the EU average of 8% (DETE, 2004). The low investment in R&D to support indigenous businesses raises questions about whether Ireland aims to support them, or is simply funding education of the young to support MNC growth. Because trade exports account for 85 percent of GDP, Ireland’s goals for business development depend on trade-enhancing measures, unrestricted capital flows, and doubletaxation agreements that protect MNCs from being taxed twice. These measures, as well as policy consensus among all political parties, have helped Ireland outperform all other industrialized countries in the past decade, as well as experience two to three times the average annual growth of EU and OECD countries (Dorgan, 2006). Two thirds of MNCs see their Irish operations as being very important, or at least strategically important. The most important factors to them are wage costs, inflation rates, energy costs, corporation tax, and non-labor costs (IDA, 2008).
Aside from technology, the largest pharmaceutical and medical products companies also serve the global markets from operations in Ireland; these were responsible for half of Irish exports in 2007 (IDA, 2008). In addition, companies such as Microsoft and Oracle have made Ireland the world’s largest software exporter, while e-businesses such as eBay and Amazon have set up large centers to serve Europe (Dorgan, 2006). In recent years, Ireland has shifted its exports from computer hardware production, to higher value added pharmaceuticals and business services (IDA, 2008). Shifting away from a software and hardware based industry was a wise decision on the part of Ireland, as those sectors have suffered a decrease compared to the increase in the healthcare enterprise. Ireland must continue to re-engineer itself to adapt to the volatile markets it chose to be part of. Ireland’s government chose to empower its city centers with technology, emerging market enterprises, and future-driven industries. It has done this with great success, wisdom, and has achieved what many developing countries would like to achieve; independence. However, with great success it has lost some tradition and culture, replacing it with an environment more suited to foreign multinationals. Marginalized, are the people who lack the ability to coexist with the citizens of the newly renovated cities. Government funding must not forget the social services and needs of these people, regardless of the goals it has for its city centers.
Works cited: Chrisafis, Angelique. "Celtic Tiger roars again - but not for the poor." The Guardian 07 Oct 2004 26 Oct 2008 <http://www.guardian.co.uk/world/2004/oct/07/ireland>. Department of Enterprise, Trade and Employment, "Tánaiste Welcomes Ireland's Action Plan To Promote Investment In R&D To 2010." Press. 08 Sept 2004. Department of Enterprise, Trade and Employment. 26 Oct 2008 <http://www.entemp.ie/press/2004/20040809.htm>. Dorgan, Sean. "How Ireland Became the Celtic Tiger." Backgrounder 1945, 23 June 2006. 26 Oct 2008 <http://www.heritage.org/Research/WorldwideFreedom/bg1945.cfm>. IDA Ireland, "Irelands new culture of science -The Scientist magazine uncovers how Ireland went from scientific ignorance to genius." Press Centre. 17 July 2008. IDA Ireland. 26 Oct 2008 <http://www.idaireland.com/home/news.aspx?id=9&content_id=903>. IDA Ireland, "Multinationals in Ireland Moving up Value-Chain." Press Centre. 10 July 2008. IDA Ireland. 26 Oct 2008 <http://www.idaireland.com/home/news.aspx?id=9&content_id=956>. Forfás, "A Baseline Assessment of Ireland's Oil Dependence." Forfás. Apr 2006. Forfás. 26 Oct 2008 < http://www.forfas.ie/media/forfas060404_irelands_oil_dependence.pdf >. Hennigan, Michael, “Recession Ireland 2008: It may be like a Feast and a Famine as Celtic Tiger declared dead but all is not lost.” Finfacts Business News Centre. 24 June 2008. Finfacts Ireland. 26 Oct 2008 <http://www.finfacts.ie/irishfinancenews/article_1013998.shtml>. Powell, Benjamin. "Markets Created a Pot of Gold in Ireland." CATO Institute. 15 Apr 2003. CATO Institute. 26 Oct 2008 <http://www.cato.org/pub_display.php?pub_id=3070>. Tallon, Paul P., and Kenneth L. Kraemer. "The Impact of Technology on Ireland's Economic Growth and Development: Lessons for Developing Countries." IEEE. 1999. University of California. 22 Oct 2008 <http://www2.computer.org/portal/web/csdl/doi/10.1109/HICSS.1999.772774>. Tansey, Paul. "ESRI warns of recession, job losses and renewed emigration." irishtimes.com. 24 June 2008. The Irish Times. 26 Oct 2008 <http://www.irishtimes.com/newspaper/frontpage/2008/0624/1214257072258.html>.
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