Irish Exports: Eurozone top market but poor for local firms: Part 2
The Eurozone is the top market for Irish-based exporters but the presence of Irish-owned firms in the 18-country single market ex-Ireland, is low at a time when Brexit is a threat to exports to the UK.
The Eurozone accounted for almost a third of adjusted headline exports (goods + services) in 2016 compared with 17% ratios for both the United Kingdom and the United States.
However, indigenous tradeable exports of €3bn to the single market according to Enterprise Ireland (EI) data, the State enterprise agency for Irish-owned firms, account for only 1.2% of the 32% Eurozone share of total exports value in 2016.
The serious challenges for Ireland are 1) missing trade performance data 2) low number of exporting firms 3) low new business startup rate 4) low innovation 5) high reliance on foreign-owned firms and 6) low foreign language competence.
Irish-owned vs FDI firms
Central Statistics Office (CSO) data for 2015 and 2016 show the headline export values as €318bn and €319bn in the respective years. In determining market shares we use €250bn for 2016 as we exclude foreign contract manufacturing, which is mainly related to tax avoidance.
Department of Jobs Enterprise and Innovation data for 2015 show a 89:11 percentage breakdown for FDI (foreign direct investment) and Irish-owned firms on total tradeable exports of €171bn in 2015.
Based on indigenous tradeable exports plus inward tourism and transport (airlines + freight) Finfacts estimates the percentage breakdown at 82:18* (see bottom of page).
However the lopsided export data masks the serious threat posed by Brexit.
In 2015 in firms supported by state enterprise agencies, there were 197,000 directly employed in FDI firms and 191,000 in Irish-owned firms. The latter spent €22bn on payroll, material and services in the economy compared with €21bn spent by FDI firms.
Payroll accounted for half the total spend in FDI firms and one-third in Irish-owned firms.
Chemicals and Related Products such as medical devices accounted for 57% of goods exports of €117bn in 2016 while food + drinks accounted for over 9% but in the latter sector Irish-owned firms, which are dominant spent €8.4bn on Irish materials and services in 2015 while FDI firms in drugs and medical devices purchased a total of €2.7bn in Ireland.
In November 2015, Catherine Mann, chief economist of the Organisation for Economic Cooperation and Development (OECD), a think-tank for mainly rich countries, said in Dublin that Ireland will have to sell itself as more than just a low-tax destination in the new era of global tax transparency. She also highlighted the poor links between the FDI sector and the rest of the economy, with Ireland having one of the lowest EU spends on R&D (research and development), despite housing some of the most innovative firms in the world.
“Global capital has come into Ireland...but somehow it hasn’t translated into Irish-owned firms,” said Dr Mann. “The patents are here, but they’re not being linked into the domestic economy, not being levered up by domestic firms or married to domestic workers.”
The United Kingdom last had an annual trade surplus in 1998 but its trade with the Republic of Ireland has been in surplus every year since then. In 2015 the goods and services surplus with Ireland at £7bn was the highest in the European Union among deficits with 23 countries while Ireland had the fourth biggest surplus in the world after the United States, Switzerland and Gulf Arab countries ex-Saudi Arabia as a group, according to the UK's Office for National Statistics (ONS).
In 2016 Ireland was the UK’s fifth largest trade partner for export of goods and there was a balance in food and drinks trade between the two countries, at about €4.4bn.
"Ireland imports more goods from Britain than the rest of Europe combined," according to the British Irish Chamber of Commerce in 2013.
The UK is the top market for Irish indigenous exporters and according to the Enterprise Ireland, the proportion of exports to the UK fell from 45% in 2005 to about 37% last year.
The UK accounts for about 40% of total food and drinks exports and the impact of the June 2016 UK vote to leave the European Union, already had an adverse impact in the second half of the year.
Growth in indigenous exports to the UK in 2016 slowed from 12% in 2015 to 2% in companies supported by the EI agency while total global sales grew by 6% last year to €21.6bn.
In 1922 on its formation the Irish Free State had one-third of the industrial production on the island and income per capita was at 56% of Great Britain's — by 1957 it had fallen to 49%.
Agriculture dominated exports and we were also heavily dependent on the UK. In 1949, CSO data show that 91% of Ireland’s exports went to the UK. This was followed by the Netherlands at 2.4%, Belgium at 2.1%, and the US with a less than 1% share. A value of IR£44m of a £61m total value of exports, related to live animals and food. The exports of these products to the UK alone accounted for more than two-thirds of export value.
The UK ratio was down to 75% of exports in 1960 and almost 55% in 1973 (helped by rising FDI) when Ireland joined the then European Economic Community (EEC) — the US ratio was at 10% in 1973 and 21% in 2003, when the UK ratio had fallen to 18% while the EU-15 (prior to the big enlargement of 2004) ex-UK, had a ratio of 43% in 2003 from 21% in 1973.
Food, Drink & Tobacco was the dominant export category in 1973 with a 43% share; by 2003 Chemicals & Related Products had a dominant share of goods exports of 43% and 57% in 2016 (as noted above, domestic materials purchases by the Chemicals sector are low. Imports in 2016 were also low at €15bn, suggesting that part of the €51bn sector trade surplus reflects profit shifting by foreign multinationals).
Denmark with a population 1m bigger than Ireland's has an economy that is a good comparator.
In 1950 agriculture accounted for 70% of Danish exports and today food and drink account for almost a fifth of the country's goods exports.
Today's second biggest meat exporter in the world had ended Irish dominance of the British bacon market in the early years of the 20th century and Henry Denny & Sons which had begun operations in Waterford in 1820, in 1894 invested in a pork-processing venture in Jutland with a German firm.
Denmark has evolved to a high-wage knowledge economy with Danish-owned firms responsible for two-thirds of goods export value and about 75% of services exports.
Foreign firms in Denmark account for 20% of business expenditure on research and development (BERD) and in Ireland while the majority of FDI exporting firms spend zero on BERD, other FDI firms account for two-thirds of BERD and the research is generally at a low-level. According to the CSO "The largest 100 enterprises in terms of R&D spend accounted for over €1.4bn, or 70%, of the total R&D expenditure in 2013. Of these top 100 enterprises, 80% of the spend can be attributed to foreign owned enterprises."
Last October the Irish Exporters Association published the first issue of a new annual report 'TOP 150 BORN IN IRELAND 2016 — An analysis of the leading indigenous Irish exporters by turnover,' which ranks an eclectic mix of exporters, importers, national distributors such as car dealers, building suppliers, state companies including Dublin Airport and Dublin Port, banks, retailers, wholesalers, utilities such as vehicle service stations, hotels, newspaper firms, hospitals etc.
It is striking how few significant exporters are in the group: among the 150 there are 19 Consumer Goods firms; 7 in Manufacturing, and 3 in Information Technology at ranks 108, 122, and 125, including one that is American with an Irish headquarters.
Among the big turnover firms Pernod Ricard of France's Irish Distillers is a big exporter shipping €450 to €500m worth of Irish whiskey annually — it of course isn't an indigenous company.
Smurfit Kappa, the Irish-Dutch packaging group, has Irish revenues of €114m — 1.4% of group revenues and it's not clear if it exports while Greencore, the former state-owned Irish Sugar Company, has about 40 employees in Dublin from a total payroll of about 13,000.
Kerry Group has opened a significant R&D centre in Ireland and it's unclear what value of goods it exports — it has 132 manufacturing plants worldwide; 5 in the Republic and 24 in Great Britain and Northern Ireland. Meanwhile 61% of Glanbia's revenues come from the US, 22% in Ireland and less than 3% from the UK.
Denmark's export champions maintain significant levels of home employment: e.g. Arla Foods 4,000 of 11,000 payroll; Lego 4,000 of 9,000 payroll; Novo Nordisk 15,000 of 20,000 payroll. More here on Denmark and what should inspire Ireland's new taoiseach/ prime minister:
1) missing trade performance data: For decades the underperformance of the Irish indigenous international trading sector has been masked by the data of the dominant FDI exporting sector.
Good analysis requires robust data but Ireland typically is among a small number of European countries that is unable to provide complete enterprise datasets for Eurostat and the OECD.
For example Ireland and Luxembourg could not provide data on the activity of SME (small/medium size firms up to 249 employees) firm activity in intra and extra-EU trade.
Product churning has increased because of globalisation and most new products fail. According to GfK, the German market research firm, only "one in ten new products is still on the shelf 12 months after it has been launched" — and even the biggest names experience rejection.
Researchers at the Economic and Social Research Institute (ESRI) in a report published last April noted that "the decomposition of export growth shows that the extensive margin —introducing new products and entering new markets — is extremely important. The finding that manufacturing export growth is driven predominantly by the extensive margin suggests that continuous churning of products and markets is a crucial underpinning of this process."
The Department of Enterprise, Jobs and Innovation told Finfacts in 2012 that the enterprise agencies do not commission longitudinal studies, which would track successes and failures over long periods. Finfacts noted last December:
Tracking the successes/ failures of entrants/ exits to export markets and startups is crucial.
The FT’s Daniel Dombey explains the six most likely Brexit scenarios
2) low number of exporting firms: Ireland has one of the lowest rates of enterprises that export in the European Union.
Ireland and Luxembourg have the lowest number of manufacturing firms in the EU and about 10% of Ireland's 4,100 firms are FDI-owned and account for about half the employment in the sector.
Modern manufacturers are responsible for both significant amounts of a country's business R&D spending and services exports — in 2009 Rolls Royce, the UK aircraft engine manufacturer reported 49% of its revenue from services.
Only 1.5% of Irish-owned services firms export according to the ESRI.
3) low new business startup rate: Based on 2014 data, Ireland had the second lowest business startup rate in the European Union while the number of self-employed firm owners with employees in March 2017 was below the level in the year 2000 and 30% below 2007!
Total enterprise births rose from a rate of 6.8% in 2014 to 7.3% in 2015, compared with UK rates of about 14% in both years; the Irish death rate was 6.4% in 2014 while the UK death rate was 9% in 2014.Denmark's enterprise birth rate was 11% in 2014 and 10% in 2015.
Ireland's CSO does not provide a separate employer (a firm with employees) startup rate in its business demography statistics but in the UK, the ONS data show that the employer business birth rate, as a proportion of all active employer businesses for 2015 was 15.2% and the employer business death rate for 2015 was 9.2% — the British performance is impressive.
On goods exporters, ESRI data show that "The survival probability in the first year of export activity is 60% for Irish exporters while for foreign-owned firms is around 80."
Related to missing Irish issue raised above, are 'born global' startups which export in the year of their birth or the following year.
In a 3-year period born global startups accounted for 2.5% of new firms in 5 Nordic countries with the highest concentration in Denmark and Iceland. Research shows survival rate of born globals is considerably higher than that of other new enterprises and a considerable number begin to export already in their birth year, supporting findings in other studies that very few of the other new enterprises begin to export goods later on. The analysis also shows that the average number of employees per born global is at least twice as high as in the other new enterprises — and that employment in born globals grows much more as well.
4) low innovation: Despite the presence of significant units of some of the world's most innovative companies in Ireland, "Patenting in particular is noticeably low compared to the innovation leaders, and more recently compared to Singapore, which has now overtaken Ireland in filing volume," according to an international report.
Some international innovation/ R&D rankings include US firms which are domiciled in Ireland for tax purposes in Irish data and data are also boosted by multinational distortions in Irish national accounts.
Google and Facebook account for about a third of global revenues in Ireland while the Microsoft ratio is 25%. Together with other companies such as Oracle, this means that ICT (information and communications technology) services exports are overstated by about €60bn while total headline services exports were valued at€133bn in 2016.
US research firm International Data Corporation (IDC) estimated in 2013 that there were 46,000 tech professionals working in the broad Irish ICT sector — almost half the sector total, meaning that the other half were working in administration positions such as marketing and sales.
A report published by the Joint Research Centre (JRC) of the European Commission in 2016 stated that Irish research and development activity is largely carried out by foreign multinationals and there have been limited spillovers to SMEs.
The JRC says patenting in Ireland is low compared to innovation leaders and "a small number of firms are responsible for the majority of patent applications.
Research published in 2015 showed that more than 300 shareholders and executives at Irish tech firms had become millionaires over the previous 15 years through selling their businesses mainly to overseas firms. However, there had been no significant scaleups (“Competitive advantage doesn’t go to the nations that focus on creating companies, it goes to nations that focus on scaling companies”) despite the commercialisation of research being the flagship enterprise policy.
Times Higher Education reported in 2013 that Ireland ranked at the bottom of 30 countries behind Portugal for the value of business funding of academic research.
The JRC report noted:
The weakness of the Irish R&I (research and investment) system in terms of low degree of collaboration between business-academia has been recurrently highlighted in recent years. The Enterprise 2025 background report points out that despite some progress being made, there is still evidence of the considerable challenge faced in stimulating increased interaction and collaboration between SMEs and the range of research infrastructures available throughout the country. [ ] Looking at the input side, the level of business enterprise funding of public R&D as a percentage of GDP was 0.007% in 2013 (Eurostat data), one of the lowest in the EU-28 and much lower than the EU average of 0.05% (2012). This value is even more striking if compared with innovation leaders like Germany (0.114%) or Finland (0.065%) or other strong innovators like the Netherlands (0.088%) or Belgium (0.072%). Another figure provided by OECD shows that the percentage of HERD (higher education R&D) funded by indigenous industry has dropped from in 5.3% in 2000 to a very low 1.6% in 2013.
5) high reliance on foreign-owned firms: Patrick Honohan, then Central Bank governor, noted in a speech in March 2014 that the FDI model "has been a significant driver of Ireland’s success" but the "systemic dependence on foreign capital and know-how has skewed Irish development. In the interests of robust diversification, most Irish economists observers would hope for a greater convergence towards normality in this aspect of Irish economic development, with a stronger emergence of innovative Irish companies alongside those steered from abroad."
Data from Eurostat last month show that the typical Irish standard of living based on consumption of public and private goods and services adjusted for price differences, ranks with Italy's — below the EU-28 and Eurozone average.
Two-thirds of the Irish private sector workforce are in non-exporting sectors with many on low pay while the 60% of the workers without occupational pensions are among the worst for pension coverage among OECD nations.
The UK is also reliant on FDI firms like Ireland and it too has many on low pay.
6) low foreign language competence: Ireland's native language is destined to become as quaint as Aramaic, and since at least the 1980s, lip service has been paid to the need to improve foreign language competence.
“Ireland’s indigenous sector has psychologically switched off to certain markets and they don’t go further for cultural and linguistic reasons,” said Tony Donohue of Ibec, the business lobby group, at a conference in Dublin in March 2016. “Ireland’s globalised business model is not sustainable . . . unless we get an indigenous exporting base.”
In 2010 an EU Eurobarometer report on a survey of companies in the EU-27 countries employing more than 50 employees, found that only 9% of Irish companies surveyed considered that foreign language skills would be essential for future graduates over the coming 5-10 years — compared to a 31% EU average — the Irish response was second lowest out of EU-27 member states and only the UK was lower.
In 2015 another Eurobarometer survey on the 'Internationalisation of SMEs' found :
Within the EU, companies in Latvia (70%), Austria (66%) and Lithuania (64%) are the most likely to have had experience with exporting, and they are amongst nine Member States where at least half of all companies have had experience. At the other end of the scale only 11% of companies in Bulgaria, 16% in Italy and 17% in Ireland and France have had some experience with exporting...Within the EU, SMEs in France (73%), Ireland (68%), and the UK (60%) are the most likely to say a lack of language skills to deal with foreign countries would be a problem. In contrast, just 5% of SMEs in Denmark, 9% in Malta and 12% in Croatia say this would be a problem if they were to export.
*On the 18:82 indigenous/FDI export shares, Irish-owned tradeable exports plus inward tourism and transport services results in a total of €30bn.
The headline exports total of €319bn has been reduced to €165bn reflecting the elimination of overseas so-called contract manufacturing of €69bn where the output of mainly foreign pharmaceutical plants is booked in Ireland. An additional €85bn is adjusted in respect of both computer services exports where sales are booked in Ireland not in the countries where the sales took place, and an excess surplus on goods trade due to profit shifting.
The adjusted total is consistent with a 2015 estimate of exports by the Department of Enterprise, Jobs and Innovation for enterprise agency assisted clients.
Pic on top: Mario Draghi, ECB president, in a graphic produced by Pixabay.