| Corporates move up the value chain and focus on skills led operations |
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| With Ireland no longer a competitive location for manufacturing facilities, in order to keep up levels of foreign direct investment (FDI), companies are moving up the value chain through the establishment of skills led operations alongside their existing facilities, writes Jim Dennehy. Though there is still value for manufacturing operations here, the country is undergoing a transition, he says, from an export-oriented manufacturing base to a ‘high value added research and development’ focused European hub. |
Ireland has evolved as a location for foreign direct investment. Strong economic growth during the ’90s coupled with a steady stream of graduates annually has meant that Ireland could capitalise on the business opportunities that existed as a result. International companies setting up operations here have played a pivotal role in the ongoing development of the country’s strong business franchise. Based on the success of these operations, other international companies have been encouraged to set up their European bases here. | | Jim Dennehy |
It is true to say that businesses in Ireland have embraced change and been rewarded for doing so and in most cases have seen substantial growth in all sectors. One particular success story is the evolution of a significant financial services sector in Dublin. The International Financial Services Centre (IFSC) has expanded beyond its original site and has become a vital part of the wider Irish economy. In total, there are almost 450 international financial institutions operating from Dublin with a further 700 managed entities carrying on business under the IFSC program. The IFSC now houses many of the world’s premier financial institutions, together with the leading law firms and accountancy and taxation advisors who support them.
Over the last twelve years or so employment has grown by close to 70 per cent and direct employment in the International Financial Services Centre (IFSC) alone stands at around 11,000 people. The sector contributes over 5 per cent to annual GDP and the industry directly contributes about ?3.6 billion to the economy in wages paid to employees and in spending on goods and services. AIB has relationships with many of the industry leaders in life insurance, banking and other financial services sectors.
More recently, we are seeing a number of companies moving up the value chain through the establishment of skills led operations alongside their existing facilities. This trend is counteracting the increased competition in FDI for manufacturing facilities as a result of the emergence of lower cost geographies. When looking at their options for regional bases, international companies are beginning to consider Eastern Europe where manufacturing costs are very competitive. Also, outside of the European Union, there continues to be strong growth in countries such as India and China, where again the cost base is substantially lower. Though there is still value for manufacturing operations here, the country is undergoing a transition: from an export-oriented manufacturing base to a ‘high value added research and development’ focused European hub.
Despite a reduction in competitiveness due to rising costs in wages and services and increased competition in the EU as our member states increase, the fundamental drivers of Ireland’s success in attracting inward investment remain. The key to a country’s success is its people. Ireland is fortunate to have a young, highly educated workforce. By 2010, some 34 per cent of the workforce will be 25 years old or younger. Each year, in excess of 38,000 graduates will qualify in areas such as business studies, engineering and science – this is a significant competitive advantage in Ireland. Company directors are reassured that their Irish operations will develop and grow over time, creating value for their parent companies.
Other areas of competitive advantage include the fact that Ireland is the only English speaking country in the Eurozone and Ireland continues to be one of the more vibrant economies in Europe. With real GDP growth of 5.6 per cent and inflation of 3.8 per cent forecast for 2006, the Irish economy is in good shape looking into the future. We also invest significantly in relationships with our overseas partners through organisations such as the American Chamber of Commerce. The Chamber acts as a forum for promoting the importance of US investment to the Irish economy and keeping Irish decision makers focused on the factors contributing to the continued attractiveness of Ireland as a location for foreign direct investment. Indeed our strong links with the US cannot be overlooked. Over 100,000 people are directly employed in over 600 US firms in Ireland and account for 70 per cent of all IDA supported employment. In 2005 the US accounted for between 60-70 per cent of Ireland’s inward investment.
The Irish government is committed to implementing policies which transform Ireland’s inward investment profile, and there is a broad consensus on this across the political spectrum and among the social partners. The roadmap for Ireland’s evolution into a hub for higher-value activities is now in place. Ireland’s corporation tax rate has been fixed at 12.5 per cent until at least 2025, one of the lowest such rates in the EU. The Minister for Enterprise, Trade and Employment recently proposed more favorable tax treatment for research activities, in the form of an improved R&D tax credit. The next decade will see the rollout of the National Spatial Strategy, providing for improved transport and telecommunications infrastructure throughout the country. The National Development Plan will see billions in spending on capital projects to make the necessary structural improvements in our road, rail and air networks. |
Jim Dennehy is head of AIB International Corporate Banking and leads three specialised sector teams focused on serving the needs of multi-national companies operating in Ireland.
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| Article appeared in the September 2006 issue.
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