When the IMF came to town for an initial sortie in early 2010, their expectation was that the financial crisis would do permanent damage to the export sector of the economy.
While this fear was understandable, and shared by many in Ireland, the subsequent five years have shown that the main export sectors of the economy were actually very resilient.
The underlying model that explained the growth in the productive sectors of the economy before the crisis still explains what is happening today. Once competitiveness was restored and our most important trading partners began to expand again, exports in Ireland returned to vigorous growth.
The serious damage the economy suffered as a result of the crisis is manifested instead in the behaviour of sectors producing for domestic demand. In particular, the legacy of debt has slowed the recovery in consumption and, especially in investment, affecting firms supplying these markets.
The problems faced today gearing up to increase housing supply reflects real damage done to the productive infrastructure of the economy by the crisis.
This resilience of the multinational firms is not a surprise. These firms rely on international financial markets for funding and they sell their output to the rest of the world.
Thus they were relatively immune from the very severe problems that Ireland has experienced.
However, what is particularly interesting and reassuring is that the rest of the economy, populated by domestic firms, has proved at least as resilient as the foreign-owned sector.
New data
Two weeks ago, the CSO published new data on the increase in output by what they term the
Multi-National Enterprise
(MNE) sector and the contribution of this sector to the wider economy.
The MNE sector, as the CSO publication defines it, includes IT services, pharmaceuticals, manufacture of computers and medical devices. It does not include the financial sector and retailing, sectors which are also populated by major MNEs.
The latest CSO data shows that, since the recovery began in 2012, the growth of output in MNEs averaged 2.8 per cent a year, whereas it averaged 3.3 per cent a year in the rest of the economy, in sectors such as food processing, retailing and building.
However, these numbers don’t tell the full story.
Because their business model is based on transfer pricing, multinationals earn huge profits in Ireland, accounting for almost a third of all profits earned in the economy in 2014 (see Table 1, above). However, their benefit to the Irish economy comes from the wages and the corporation tax they pay; the profits just flow back out of the economy.
To take account of this I have adjusted the output of the MNE sector by excluding a measure of profits after tax. The unadjusted figures show the MNE enterprises accounted for almost 25 per cent of GDP last year.
However, when the output figures are adjusted to show the true contribution of the MNE sector to the economy, reflected in their contribution to GNP (which excludes remitted profits) rather than GDP, the figures look somewhat different.
On this basis MNEs contributed less than 10 per cent of GNP last year.
Using the adjusted figures, the relative contribution of the MNE sector to growth in the economy in recent years looks rather different from that shown in the raw CSO data.
As shown in Figure 1 (above), over the past 20 years around 20 per cent of the growth in GNP has come from the development of the MNE sector whereas the vast bulk of the growth, 80 per cent, came from the rest of the economy, predominantly from Irish-owned firms.
Pattern reversed
Even over the recession years, this pattern has remained largely unchanged. While the MNEs weathered the initial storm of the crisis years better than the construction-dominated sectors, in the recovery phase this pattern has been reversed.
The fact that most of the growth in the economy comes from the non-MNE sector, and predominantly from Irish-owned firms, does not mean that foreign investment in Ireland is not very important.
Multinationals constitute the best-paying sector of the economy. Their employees earn, on average, more than €1,000 a week, compared with an average across the rest of the economy, including the public service, of less than €700 a week.
Some of this pay difference represents their highly educated workforce – in 2006 employees in the pharmaceutical sector were among the best educated in the economy – but these firms can afford to be generous, given the low share their wage bill represents of their total Irish operations.
The MNE sector also contributes to a favourable balance of payments position. These firms account for a disproportionate share of our net exports and they have played a major role in moving Ireland into a current account surplus on the balance of payments. In doing so, they allow further major expansion elsewhere in the economy.
Another important benefit from multi- nationals is their contribution to transfer of knowledge, ideas and managerial and entrepreneurial knowhow. Ireland’s lively tech start-up scene owes a lot to the presence of Google and Facebook.
However, excess dependence on multinationals can leave the Irish economy vulnerable to worldwide changes in areas such as corporation tax.
So it is important that domestic firms continue to prosper and grow. And, while home-grown firms pay less well than multinationals, conversely, they are the major source of potential jobs growth.
With unemployment still above 9 per cent, they are vital for the future of the economy.
