IRELAND'S GAME PLAN ON ECONOMIC COMPETITIVENESS

UNCLAS SECTION 01 OF 03 DUBLIN 001345

SIPDIS

USDOC FOR MARKET ACCESS COMPLIANCE/MCLAUGHLIN

E.O. 12958: N/A
TAGS: ECON ETRD EFIN EINV EIND ELAB
SUBJECT: IRELAND'S GAME PLAN ON ECONOMIC COMPETITIVENESS



1. Summary: Firms in Ireland must move increasingly into
high-value goods and services in order to safeguard the
country's prosperity, advises a high-profile,
government-commissioned report on Ireland's economic
competitiveness. The report notes that rising costs, poor
performance by indigenous firms, changes in EU policies, and
accelerating globalization threaten to overpower the factors
underlying Ireland's economic success during the past decade.
The report recommends that the Irish Government assist firms
with the transition into high-value goods and services by
promoting enhancements to sales/marketing expertise and
technology/R&D capability. An Irish Central Bank economist,
however, questions that approach, arguing that indigenous
enterprises should leave heavy R&D investment to
foreign-owned firms. Despite Ireland's worries about
competitiveness, U.S. firms continue to see the country as an
attractive investment destination and export platform. End
summary.

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The Focus on Competitiveness
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2. Concerns about Ireland's competitiveness as an exporter
and foreign direct investment (FDI) destination have featured
prominently in recent Irish economic commentary, even as the
country's economy continues to perform strongly. In late
August, for example, a Department of Finance report
forecasting the second half of 2004 warned, "We cannot afford
to worsen our already deteriorating competitive position."
By contrast, the same report upgraded projections for GDP
growth in 2004 from 3.3 percent to 4.7 percent, lowered
predictions for average annual inflation from 3.0 percent to
2.2 percent, and forecast a government surplus of euro 600
million. In public comments on the report, Finance Minister
Charlie McCreevy downplayed this rosy outlook and reiterated
that "regaining competitiveness is a key priority if we are
to safeguard our economic success."


3. Recent attention to competitiveness derives primarily
from a new, long-anticipated report entitled "Ahead of the
Curve: Ireland's Place in the Global Marketplace" --
essentially, a game plan for Ireland to sustain exports, FDI,
and economic prosperity in the face of international
competition. The report was written by the Enterprise
Strategy Group (ESG),established by Deputy Prime Minister
Mary Harney in 2003 with 21 representatives of industry,
labor, academia, and government (primarily Forfas, the
government office that coordinates Ireland's
business-promotion agencies). Eoin O'Driscoll, Executive
Vice President (and soon President) of the American Chamber
of Commerce, chairs the ESG and was the Chamber's channel for
significant input into the report. With additional
contributions from over 250 people, the ESG report is
Ireland's broadest industrial policy statement since the 1992
Culliton Report, which called for the development of an
export-oriented enterprise sector and thus set the stage for
the emergence of the Celtic Tiger economy.

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The Cause for Worry
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4. The ESG report argues that the factors underlying
Ireland's economic success over the past decade do not
adequately address emerging challenges to the country's
continued competitiveness. These positive factors have
included: ease of access to EU markets and EU regional aid;
an open climate for trade and FDI; a favorable corporate tax
regime (a single rate of 12.5 percent that applies to both
foreign and Irish firms),fiscal policies that minimize
government debt; burgeoning global trade (particularly in the
IT and life-science sectors, recipients of substantial FDI in
Ireland); and the availability of young, educated labor. The
challenges that threaten to overpower these factors, however,
are primarily:

A) Rising costs: Forfas ranks Ireland as the most expensive
country in the euro zone (in a tie with Finland). Although
CPI inflation in Ireland has converged downward toward the EU
average through mid-2004, annual inflation since the late
1990s has consistently exceeded the EU average. During the
same span, wage increases have been two to three times the EU
average.

B) Poor indigenous performance: Except for a few
high-performing firms, real growth in the sales and exports
of indigenous Irish enterprises was negligible between 1990
and 2002. The ESG report noted that a relatively small
number of foreign-owned firms that chose Ireland as their
base for serving European markets drove Ireland's strong
economic performance in that span. Foreign-owned firms still
account for over 85 percent of Ireland's exports by value.

C) Changes in EU policies: Grant aid limits for the EU-15
states will tighten after 2006, while those for the newer
member states will be relatively high. Ireland's ability to
provide grant assistance to attract foreign investment, a key
element of earlier enterprise strategy, could thus evaporate
in much of the country.

D) Accelerating globalization: China, India, and the new EU
Member States have emerged as attractive FDI destinations, as
they offer low costs, an ample supply of skilled labor,
comparably low corporate taxes, and access to new markets.

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The Solution: Sales/Marketing Expertise and Technology/R&D
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5. The ESG's strategy to shore up Ireland's competitiveness
is to enable enterprises to succeed in internationally traded
services and high-value manufacturing through
government-promoted enhancements in marketing/sales expertise
and technological/R&D capability. The strategy, in
particular, targets indigenous small and medium-sized firms.

A) Sales and Marketing: Ireland-based enterprises do not have
strong outreach to international consumers when compared with
firms in other trading countries, argues the ESG. Negligible
real growth during the 1990s in indigenous firms' exports,
most of which went to the UK, would suggest weak
international sales management. Foreign-owned firms in
Ireland have focused primarily on production as a single step
in their parent companies' supply chains, with few selling
directly to customers. To help firms understand and provide
what customers want, the ESG proposes a new government entity
called "Export Ireland," which would focus on export market
intelligence and sales promotional activities. The ESG also
suggests a five-year plan to place, on a cost-sharing basis,
1,000 graduates and internationally experienced professionals
in Ireland-based firms to augment the stock of sales and
marketing talent. (In discussions with the Embassy, ESG
Chairman O'Driscoll highlighted this plan, expressing hope
that the personnel could be sourced largely from the United
States.)

B) Technology and R&D: Enterprises should simultaneously
upgrade their technological/R&D capability to develop
innovative, higher-value products and services, urges the
ESG. The ESG report acknowledges Ireland's status as a world
R&D leader in the IT and pharmaceuticals sectors. The report
points out, however, that Ireland's total business
expenditure on R&D is 0.88 percent of GDP, only 73 percent of
the EU average and 57 percent of the OECD average. To
encourage more R&D investment, the ESG proposes increased tax
incentives and the establishment of "Technology Ireland," a
government office that would coordinate R&D strategy among
business-promotion agencies, in consultation with business
networks. The ESG also recommends stronger collaboration
between enterprises and academia, so that the latter "might
generate the intellectual capital required to fuel an
innovation-driven economy."

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Ireland: The European Singapore
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6. The drive to improve competitiveness reflects Ireland's
natural anxieties as a small, open economy, econoff was told
by Andrew McDowell, Forfas Department Manager for Trade and
Innovation and a principal contributor to the ESG report.
McDowell compared Ireland to Singapore, as both were newly
prosperous countries of comparable population size aiming to
succeed in competitive markets against larger neighbors and
aggressive new entrants. As a euro-zone country,
furthermore, Ireland could not rely on monetary policy tools,
such as exchange rate adjustments, to enhance its
competitiveness. Echoing the ESG report, McDowell said that
Ireland's best bet was to move up the value chain to provide
higher-end, innovative goods and services, ceding lower-end
manufacturing to the new EU member states and Asia. He
explained that higher relative costs in Ireland did not mean
that enterprises could not achieve efficiencies to provide
higher-value products. He cited Hewlett-Packard as an
example of a foreign-owned enterprise in Ireland that had
moved out of assembly operations, introduced novel R&D
programs, developed new product lines, and expanded its work
force despite rises in domestic cost/wage levels.

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A Contrary View
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7. Although competitiveness is a vulnerability in the Irish
economy, the ESG's call to strengthen technological R&D and
sales and marketing expertise in indigenous firms is overly
ambitious," Irish Central Bank Assistant Director General
Michael Casey told econoff. He argued that Irish firms,
lacking economies of scale and a deep pool of highly educated
labor, should simply copy (though not pirate) from
foreign-owned enterprises, rather than invest heavily in R&D
to pursue innovations of their own. Casey noted that Japan
had used this strategy successfully in the formative years of
its auto industry, with Japanese companies simply copying
American car models before eventually developing their own
distinctive styles. He noted that the dissemination of
technology from foreign-owned to indigenous firms was already
underway and that Irish firms intent on R&D investment would
do better to focus on niche areas. Casey expressed
confidence that foreign firms with substantial investments in
Ireland would remain in country; his concern was that they
would use their preponderant position in the economy to
influence government policies on taxation and grant aid.
Overall, he saw no downside to continued reliance on
foreign-owned firms to sustain Ireland's economic success,
quipping that "we've been getting away with that for 30
years."

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Comment: Steady as She Goes with U.S. Investment
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8. Despite Ireland's concerns on competitiveness, it would
seem that U.S. firms continue to view the country as an
attractive investment locale and export platform. In 2003,
U.S. investment in Ireland was USD 4.7 billion, tripling the
previous year's total and raising the total stock of U.S.
investment (on a historical cost-basis) to USD 46.7 billion.
This past year has seen the high-profile opening of Intel's
new "Fab 24" wafer production facility, signaling the
company's confidence in Ireland as a base to develop the next
generation of micro-chip technology. U.S. subsidiaries in
Ireland, in fact, see the competitiveness issue more in terms
of the challenge to out-perform sister subsidiaries in other
countries. The ESG's recommendations to help enterprises
move further into high-value goods and services should thus
be welcome news to U.S.-owned firms. As the ESG report
notes, firms that can succeed in such transitions will hold
greater strategic importance to their parent companies and,
in turn, become more embedded in the Irish economy.
KENNY