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Ireland, EU Structural Funds and Tactical Errors Building National Competitive Advantage Executive Summary Historical Context PEST Analysis Celtic Tiger Competitive Advantage of Nations SPACE EU Spending Sustainability Foreign Direct Investment GDP and Conventional Wisdom Symptoms and Root Causes Prospective Developments, Lessons Learned & Recommendations SWOT Analysis Lisbon Conference and Innovation Conclusion Competitive Advantage History and Context Objectives - PEST Political situation Economic situation General overview External trade Industry Monetary policy Labour market Social situation Technological Political situation In 1937 , a new Constitution of Ireland reestablished the state as Ireland In 1949 the state was formally declared a republic and it left the British Commonwealth In 1973 Ireland joined the European Union Economic Situation General overview before EU High income-tax rates and tax burden discouraged domestic growth High product price High Unemployment Very low level of income External Trade 90% of export was to Britain in 1950s Food, drinks and tobacco – 60% of total export Importing more merchandise than exporting Growing export in 1980’s. Chemicals and machinery represented 70% of the whole export market. Industry Monetary policy Labour Market Irish People During 1945-60 emigrated half million people from Ireland Population has increased by one million in the thirty years since 1973 Increase in average life expectancy: For male was 67 years and for female 73, while 15 years later the life expectancy for male was 71 years and for female 77 years Transport and Communication Low condition of networks (No serious investments) before membership Investments from EU Cohesion Funds after 1973 Overview of Celtic Tiger 1979-2006 Period of massive growth Competitive advantage of nations Monetary Policies Infrastructure Aviation Deregulation International Financial Services Centre Social Partnership SPACE Sustainability? Porter’s Diamond of National Competitive Advantage Government Firm strategy, structure & rivalry Demand Conditions Factor Conditions Related & Supporting Industries Chance Symptoms & Causes Young, well-educated, English-speaking workforce Education and training Infrastructure Symptom Sustainable? Favourable Tax regime Innovation focus and flexibility Developing high value added niche industries Tactical Errors with Unintended Consequences Government encouragement of FDI and R&D Foreign expatriation of profits European Monetary System & Euro European Monetary System 79-99 • • • IRE£ linked to EMS Fluctuations against Sterling Poor economic competitiveness mitigated through currency fluctuations Euro 1999+ • • • • International risk sharing model Reduced transaction costs for trading with Europe Diversification of trading partners Stability and Growth Pact Aviation Deregulation 1984-6 Airline deregulation was one of the first steps towards national competitiveness Outer offshore Island Tariffs and quotas removed Reduced transportation costs Increased business travel Allowed increase of tourism Increased revenue Job creation International Financial Services Centre (IFSC) 1987 Focus on developing financial services Creation of World-Class Financial Centre Job Creation Education Housing Social Partnerships - 1988 Partnerships between: Employers Unions Government Government to lower tax Unions to accept pay Wages linked to productivity increases Brought stability to business environment Employers Employers Government Unions Unions SPACE Ireland – A sustainable success story? 1. The study done by the Ireland team shows that Ireland created a massive success out of a combination of market driven and low tax pulled foreign investment in Ireland. 2. EU subsidies had less to do with this success, though the roads and bridges will have been for the benefit of all investors. 3. Ireland did not achieve a similar success for its own indigenous industry Using structural funding to fill taxation gap Ireland tax level under EU average ( in the area of 6%) Irish EU receipts and payments (€) 3500 EU receipts to and payments from Ireland 1974 - 2008 3000 2500 2000 ’’€ Receipts from EU budget Payments to EU budget NET RECEIPTS 1500 %/GDP 1000 500 1.9 % 2.1 % 5.0 % 4.6 % 3.2 % 3.7 % 4.4 % 3.9 % 5.1 % 5.2 % 3.7 % 3.6 % 2.6 % 1.5 % 1.2 % 1.0 % 0.4 % 0.2 % 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 0 EU funds EU Structural & Cohesion Funds 1989-93 Agriculture Industry & Services Economic Peripherality HR Measures 1994-1999 2000-2006 Structural & Cohesion Funds Contribution (€m) Economic Infrastructure Transport Infrastructure Productive Sectors Social Integration Human Resources 2007-2013 National Development Priorities Economic and Social 106 972 1431 Productive Sector 49.6 54.7 Human Resources Regional OPs PEACE OP 901 333 Economic Infrastructure Enterprise, Science and Innovation Human Capital Social Infrastructure 20 33.6 Social Inclusion 25.8 Ireland – a sustainable success story? A lower priority was accorded to (EU) investment in aid to the industrial sector Should there come new low cost bases for FDI in other parts of Europe and should Ireland be forced to raise its taxes due to changing economies, the FDI is likely to leave FDI benefits have then only been temporary The Irish indigenous industry stills need strengthening Instead of training workers for others, Ireland should have invested in local business development Recent Developments Foreign Direct Investments (FDI): Almost 1,000 multinational corporations have chosen Ireland as their strategic European base FDI created employment that accounts for over 136,000 jobs or 42% of Industrial and Financial employment in the economy The average salary in 2007 was almost €44,000 or 19% above the average industrial wage of €36,800 Foreign Direct Investments (FDI) Facts: Trainings given to workers in areas foreign investors needed most, such as IT and engineering About 85% of manufactured goods exported is produced based on FDIs, twothirds of which is from the United States Drivers of FDI Corporate Tax 12.5% Infrastructure Economy Quality people Education Drivers of FDI Tax Corporate FDI facts There are about 1000 FDI companies served by IDA (Irish Development Agency) with a total personnel of 140.000 IRELAND FDI 1974-2007 (net) m$ 30000 25000 20000 15000 10000 5000 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 -10000 FDI net 1991 -5000 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 0 FDI net Examples of some FDIs Origin of FDIs Symptoms of Irish Economic Crisis House price crash Bubble in price deflated Unemployment Increased unemployment reduced GNP Reduced Growth Reduced consumer spending lead to decreasing retail sales growth. Immigration Issues Decrease in immigration and increase in emigration Policies Budget deficit in 2008 was 6.6% of GDP; EU ceiling is 3% Foreign trade Negative export growth Effect of Employment on GNP Net Migration Roots/Causes of Economic Crisis Low corporate tax of 12.5% Laxity in fiscal control in boom years Increased population Employment growth Rapid increase in construction creating unsustainable bubble in price Dependence of GDP on unsustainable construction revenue Impact of banking speculation in local market Limiting factor of Euro membership Conventional Wisdom of “safety in numbers” mentality that Euro membership offers support in a crisis Key Economic Indicators Years 2004 2005 2006 2007 GDP 157,664 167,713 177,286 187,971 GDP at Constant Market Prices Millions of Euros •GDP: Estimated to have grown at 0% in 2008 •GDP per capita: 45,026 (2007) •Inflation: 1.4 % in 2007 Is GDP a good metric? Constant questioning about GDP and its indication as a metric for nations’ economic development Does GDP indicate how sustainable a country’s growth is? GDP Composition by Sector 2004 Agriculture, forestry and fishing Industry (including building) Distribution, transport and communication Public administration and defense Other services (including rent) GDP (constant market prices) 2005 2006 2007 3,728 4,086 3,812 3,863 47,895 50,044 52,609 56,754 22,967 24,111 25,258 26,726 5,249 5,298 5,396 5,529 60,436 65,057 69,098 74,186 157,664 167,713 Industry and Services amount for about ¾ of total GDP 177,286 187,971 Ireland Economy Development Ireland - SWOT Analysis STRENGTHS •More rapid increase in property than in any other developed economy •2007 Per capita GDP in 2007 surpassed US •Investment in infrastructure •Good country position in Innovation - HR (Education) •Innovation follower country (above EU average) OPPORTUNITIES •Opportunities for M&A •Irish economy depending on EU Economy performance •Current opportunities for Pharmaceutical and Financial Sector WEAKNESSES •Economic slowdown affecting property and construction •Over-reliance on Foreign Multinationals •Bank debt ratings cut •Innovation metrics •GDP growth affected by Economic slowdown •Low level of Firm’s Investment value (Performance Investment) THREATS •Worldwide Economic Meltdown •Decrease in foreign Investment •Potentially ejection from EU •Increasing Competitive Advantage of other less developed nations Ireland - Distribution of Investment + Infrastructure Human Resources (Education) Finance and Support Linkages and Entrepreneurship Firm Investments - Lisbon Innovation and Technology Conference (August 1998) Focus of the meeting: “Knowledge for development and the need to advance the understanding of the processes associated with knowledge creation and diffusion for policy-making and for management” Innovation Performance Comparative assessment of innovation performance of EU Member States, under the EU Lisbon Strategy: Ireland Innovation Innovation leaders Catching-up Countries Moderate Innovators Followers Innovation Growth Leaders Growth Rate Growth leaders GROUP Innovation Leaders 1.60% Switzerland Moderate growers Slow growers Germany, Finland Denmark, Sweden, UK Innovation Followers 2.00% Ireland, Austria Moderate Innovators 3.60% Catching-Up Countries Latvia, Hungary, Malta, 4.10% Bulgaria, Romania Poland, Slovakia, Turkey Cyprus, Portugal Belgium Czech R, Estonia, Greece, Iceland, Slovenia France, Luxemburg, Netherlands Italy, Norway, Spain Croatia, Lithuania Average annual growth rates as calculated over a five-year period The Paradox Conventional Wisdom: “GDP is a metric for nations’ wellbeing”… Growing GDP in Ireland from 1987 to 2007 Is it actually true? ? Indicators for the EIS 2008 - 2010 Human Resources Graduate and Doctorate Graduate Education in Science, Engineering, Social Sciences, Humanities Finance and Support Public R&D Expenditure Venture Capital Private Credit Broadband access by firms Firm Investments Business R&D Expenditures IT Expenditures Non-R&D innovation Expenditures Linkages and Entrepreneurship SMEs Innovating in-house Innovative SMEs collaborating with others SMEs entries and exits EIS - EUROPEAN INNOVATION SCOREBOARD Performance Per Dimension Innovation Performance Growth Performance In Human Resources Ireland is notable in combining a high performance level and a strong growth performance. Downturn opportunities in Ireland OPPORTUNITY FOR ACQUISITION STRATEGIES: Filling strategic product and market gaps Strengthen position in existing markets Complement organic growth strategy Currently happening in: Pharmaceutical companies (flush with cash): Aggressively looking to buy bio-tech companies (Target prices are relatively cheap) Seeking to be well positioned with new products for the future Financial Companies: Stronger banks seized acquisition opportunities fitting their growth strategies in chosen markets Mergers and Acquisitions in Ireland 2007 - 2008 M&A Deals 8% higher QuickTime™ and a decompressor are needed to see this picture. M&A Deal value down 57% The Flip Side of Acquisition Strategy ASSET DISPOSAL: Companies forced to make hard choices about their core and non-core assets IMPROVEMENT IN PROFITABILITY: Cash Flow: Preserve and maximize it within strict time lines Costs: Aggressive cut Recommendations Currently Opportunities for: Increase growth Create and maintain sustainable competitive advantage over other countries Create winners and losers in every industry segment How to do it? Aggressive strategy focused on improvement of innovation metrics with emphasis on: Firm Investments Economic slowdown affecting property and construction Diversification strategy for export sector (currently dominated by foreign multinationals) Enhancement for M&A Decrease in reliance on foreign Investment Rebuild Ireland’s sustainable competitive advantage! Conclusions Conventional wisdom regarding economic growth does not consider long term perspectives National development of transport infrastructure and business economy was effective use of EU Funds Offsetting tax burden with EU Funds to temporarily enhance competitiveness was poor use of EU Funds National Competitive advantage comes from sustainable development and investment in local innovation and business linkages
