Monday, August 05, 2019

Ireland's missing exporters

Naïve commentary on exporting and opening new overseas markets is not uncommon. International expansion often ends in failure — research published in 2017 by Banco de España (Bank of Spain) on service firm exporters in Belgium, France, Germany and Spain found that French export starters had the lowest survival rate with 31% of firms staying in the market after the first year. Spain was at 36% and 57% of new exporters had survived in Germany.

The French Treasury reported on new goods exporters in 2009, "When they export, they export to just one or two countries, generally to neighbouring countries, and 30% fail to hold onto their market for more than a year. German SMEs (small and medium-sized firms with 10 to 249 employees), which are larger and more innovative, are also bigger exporters, with exports accounting for a larger share of their total revenue, and they also export more regularly."

Typically, neighbouring countries become important trade partners and Martin Wolf of the Financial Times has noted, “In 2018, the US sent 34% of its merchandise exports to Canada (18%) and Mexico (16%), against 19% to the EU and 7% to China. Yet the size of the markets of Canada and Mexico, together, was just 16% of the EU’s and 26% of China’s. The EU’s exports to the UK were 79% of its exports to the US and 153% of its exports to China, though the UK economy was 14% of that of the US and 21% of China’s. The UK sent 47% of its exports to the rest of the EU, against 13% to the US and 6% to China, though the US economy was 29% bigger than the EU’s (excluding the UK), and China’s was only 16% smaller.

Wolf added, “It is remarkable that the US exports almost as much to Canada as to the EU. It is no less remarkable that the EU exports almost as much to the UK as to the US.”

In light of Brexit, research shows from the launch of the European Union’s Single Market in 1992, large British exporters in 1992-2007 had much more non-EU exports (see chart).

Irish exporting without design, sales, marketing and innovation functions

In May 2016, a month before one-third of the British voting-age population supported leaving the European Union, IDA Ireland, the Irish inward investment agency, said it would target up to 10,000 London bankers to move to Dublin by 2020. This was music to the ears of senior staff of big accounting and law firms in Dublin who profited from selling tax avoidance vehicles to mainly US multinationals while also being informal advisers to Irish governments. Although the surge in banker refugees has not materialised so far, the lure of ready-made foreign-provided jobs is strong.

In recent weeks as a no-deal Brexit became more likely, an academic pleaded with government ministers to have the cojones to underwrite Irish business in opening up to the world, “We are citizens of Europe, citizens of the world, and need leaders that will support us in so being,” he wrote while an armchair commentator noted, ”Ireland is fully plugged into the world economy and it is that world economy which will dictate our prosperity.”

With a tiny domestic market affiliates of multinationals in Ireland who deliver to international supply chains are not “fully plugged into the world economy” as many of them do not have Irish design, sales, marketing and innovation functions.

The Enterprise Strategy Group report in 2004 noted:

"...much of our enterprise base is disadvantaged by its relative distance from the end customer – not only in geographical terms, but also, in the case of most foreign-owned enterprise, in terms of the business functions located here. Firms that are demand-led focus on market research, product design and innovation, and sales and marketing activities. Irish enterprise, both indigenous and foreign-owned, is particularly weak in these high-value areas."

Key statistics

  • Reported Irish exports were valued at €384bn in 2018 with indigenous tradeable goods and services value estimated at €25bn. Adding about €10bn for inward tourism and transport gives a ratio of 9% applicable to Irish domestically-owned business. Excluding multinational phantom exports, the ratio would be about 19% — see detail on fake exports here.
  • Including part-time employees in 2017, there were 205,000 employed in indigenous tradeable exporting companies and 223,000 in foreign-owned exporters. Inward tourism and transport (freight + airlines) would put the indigenous sector on top for employment.
  • In 2017, Direct Expenditure in the Irish Economy (DEIE) by public enterprise agency-assisted firms amounted to €46.4bn. Irish-owned client companies spent approximately €25.1bn in the Irish economy in terms of payroll and purchases of Irish materials and Irish services. Foreign-owned clients spent €21.3bn.
  • In 2018 a paper prepared by economists at the Economic and Social Research Institute, Dublin (ESRI) for the Organisation for Cooperation and Development (OECD) noted, "The evidence provided by this analysis indicates that attracting foreign direct investment is not sufficient to generate benefits to indigenous firms via involuntary knowledge spillovers and demonstration effects. Since productivity spillovers are not automatic, enhancing the absorptive capacity of indigenous firms is key in order to ensure they can benefit from advanced knowledge and technologies associated with multinational firms."
  • The National Competitiveness Council noted in a briefing last year that a)  the top five exporters accounted for almost one-third of all goods exports in 2016 b) while 16% of Irish-owned goods exporters export just one product to one market and account for just 1.4% of total export value. Over 20% of Irish-owned firms export one product with almost 50% exporting fewer than five. Food products account for close to half of the export value of Irish-owned exporters, and 40% of firms export a single product. In 2015, one product, Meat of Bovine Animals, accounted for 23% of total exports by Irish-owned enterprises. Related research suggests a similar pattern of concentration with services exports with overall performance dominated by a relatively small number of enterprises. "
  • About 60% of annual Irish indigenous tradeable exports are made to 4 so-called Anglo-Saxon countries  — UK, US, Canada and Australia — while in 2018 only €5bn in exports were made to the other 18 countries of the Euro Area despite 20 years of currency stability. The Euro Area is a total market of over 340m people!! 

Missing exporters

1) Irish data on the top of page chart includes foreign-owned firms and the large firm (250+ employees) total of 291 firms is likely dominated by foreign-owned firms.

2) The measure here is the number of inhabitants per exporter a) with Column C reflecting all exporters b) Column K reflects the ratios of firms with 10 or more employees. Firms in this category are more likely to have resources to be persistent exporters compared with micro firms with up to 9 employees.

3) About 10% of total exporters are not classified.

4) The overall total for the UK is reliable but not the category breakdown. The total 69,818 firms with over 250 employees are clearly wrong and in previous years the number was above 3,000.

5) Goods and services exporters are included based on NACE (Nomenclature statistique des activités économiques dans la Communauté européenne) — see page 57 here.

In 2006 large enterprises accounted for 81% of goods export value in both France and Germany while Ireland was at 70%.

Germany had 6,956 large firms in 2017 compared France's 6,956.

The EU average population per exporter ratio was 310 and 974.

Ireland was among the countries with a high population ratios of exporters at 556 and 1,369 per exporter.   

Eurostat report

Official Ireland may be forced to change course

Official Ireland has been comfortable with the Irish FDI (foreign direct investment) model based on a low headline corporate tax rate of 12.5% coupled with additional tax incentives and the facilitation of tax avoidance through the use of Irish shell companies with Apple leading in diverting foreign revenues. Ireland became a significant services entrepôt economy in financial and IT services with a jump in exports from 2001 when the Double Irish Dutch Sandwich tax dodge was first used by Microsoft. In 2013 Google Ireland disclosed that 70% of its mainly administration support staff in Dublin were from other European countries, providing support to users in their countries of origin. At the time Google Inc. was booking 40% of its global revenues in Dublin.

With likely big changes in international business tax rules on the horizon, policymakers will have to give overdue attention to the indigenous sector.

In 2018 Irish material standard of living per capita was again below the EU average and Italy's despite the latter's two decades of stagnation! Occupational pension coverage in the Irish private sector is only at 29%.

Patrick Honohan, then Central Bank governor, noted in a March 2014 speech 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." 

In November 2015, Catherine Mann, then chief economist of the Organisation for Economic Cooperation and Development (OECD), a think-tank for 36 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."

Minimum corporate tax rate to imperil Ireland's FDI model

Ireland's 2018 standard of living per capita below EU28 average

The poor state of entrepreneurship in Ireland

Ireland's underperforming indigenous exporting sector

Occupational pension coverage of Irish private-sector workers is only at 29%. Data compiled as part of the OECD’s Pensions at a Glance 2017 report show the percentage of a working wage retirees receive around the world. Ireland was at 40% (including permanent public sector workers who have guaranteed/ defined benefit pensions)  compared with Denmark's 80%.