Transcript Ireland, EU Structural Funds and Tactical Errors

Ireland, EU Structural
Funds and Tactical
Errors
Building National
Competitive Advantage
Executive Summary
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Historical Context
 PEST Analysis
Celtic Tiger
 Competitive Advantage of Nations
 SPACE
EU Spending
 Sustainability
Foreign Direct Investment
 GDP and Conventional Wisdom
 Symptoms and Root Causes
Prospective Developments, Lessons Learned & Recommendations
 SWOT Analysis
 Lisbon Conference and Innovation
Conclusion
 Competitive Advantage
History and Context
Objectives - PEST
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Political situation
Economic situation
General overview
External trade
Industry
Monetary policy
Labour market
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Social situation
Technological
Political situation
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In 1937 , a new Constitution of Ireland reestablished the state as Ireland
In 1949 the state was formally declared a
republic and it left the British Commonwealth
In 1973 Ireland joined the European Union
Economic Situation
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General overview before EU
 High income-tax rates and tax burden
discouraged domestic growth
 High product price
 High Unemployment
 Very low level of income
External Trade
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90% of export was to Britain in 1950s
Food, drinks and tobacco – 60% of total export
Importing more merchandise than exporting
Growing export in 1980’s. Chemicals and
machinery represented 70% of the whole
export market.
Industry
Monetary policy
Labour Market
Irish People
During 1945-60 emigrated half million people from
Ireland
 Population has increased by one million in the thirty
years since 1973
 Increase in average life expectancy:
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For male was 67 years and for female 73, while 15 years
later the life expectancy for male was 71 years and for
female 77 years
Transport and Communication
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Low condition of networks (No serious
investments) before membership
Investments from EU Cohesion Funds after
1973
Overview of Celtic Tiger 1979-2006
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Period of massive growth
Competitive advantage of nations
Monetary Policies
Infrastructure
Aviation Deregulation
International Financial Services Centre
 Social Partnership
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SPACE
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Sustainability?
Porter’s Diamond of National Competitive Advantage
Government
Firm strategy,
structure &
rivalry
Demand
Conditions
Factor
Conditions
Related &
Supporting
Industries
Chance
Symptoms & Causes
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Young, well-educated, English-speaking workforce
Education and training
Infrastructure
Symptom
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Sustainable?
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Favourable Tax regime
Innovation focus and flexibility
Developing high value added niche industries
Tactical Errors with Unintended Consequences
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Government encouragement of FDI and R&D
Foreign expatriation of profits
European Monetary System & Euro
European Monetary System
79-99
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IRE£ linked to EMS
Fluctuations against
Sterling
Poor economic
competitiveness
mitigated through
currency fluctuations
Euro 1999+
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International risk sharing
model
Reduced transaction
costs for trading with
Europe
Diversification of trading
partners
Stability and Growth Pact
Aviation Deregulation 1984-6
Airline deregulation was one of
the first steps towards national
competitiveness
 Outer offshore Island
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Tariffs and quotas removed
Reduced transportation costs
 Increased business travel
 Allowed increase of tourism
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Increased revenue
Job creation
International Financial Services Centre (IFSC) 1987
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Focus on developing
financial services
Creation of World-Class
Financial Centre
Job Creation
Education
Housing
Social Partnerships - 1988
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Partnerships between:
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Employers
Unions
Government
Government to lower tax
 Unions to accept pay
 Wages linked to
productivity increases
 Brought stability to
business environment
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Employers
Em
ploye rs
Governm e nt
Unions
Unions
SPACE
Ireland – A sustainable success story?
1.
The study done by the Ireland team shows that
Ireland created a massive success out of a
combination of market driven and low tax pulled
foreign investment in Ireland.
2. EU subsidies had less to do with this success, though
the roads and bridges will have been for the benefit
of all investors.
3. Ireland did not achieve a similar success for its own
indigenous industry
Using structural funding to fill taxation gap
Ireland tax level under EU average ( in the area of 6%)
Irish EU receipts and payments (€)
3500
EU receipts to and payments from
Ireland 1974 - 2008
3000
2500
2000
’’€
Receipts from EU budget
Payments to EU budget
NET RECEIPTS
1500
%/GDP
1000
500
1.9 % 2.1 % 5.0 % 4.6 % 3.2 % 3.7 % 4.4 % 3.9 % 5.1 % 5.2 % 3.7 % 3.6 % 2.6 % 1.5 % 1.2 % 1.0 % 0.4 % 0.2 %
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
EU funds
EU Structural & Cohesion Funds
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1989-93
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Agriculture
Industry & Services
 Economic Peripherality
 HR Measures
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1994-1999
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2000-2006 Structural & Cohesion Funds
Contribution (€m)
Economic Infrastructure
Transport Infrastructure
Productive Sectors
Social Integration
Human Resources
2007-2013 National Development
Priorities
Economic and
Social
106
972
1431
Productive
Sector
49.6
54.7
Human
Resources
Regional OPs
PEACE OP
901
333
Economic
Infrastructure
Enterprise, Science
and Innovation
Human Capital
Social Infrastructure
20
33.6
Social Inclusion
25.8
Ireland – a sustainable success story?
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A lower priority was accorded to (EU) investment in aid to the
industrial sector
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Should there come new low cost bases for FDI in other parts
of Europe and should Ireland be forced to raise its taxes due
to changing economies, the FDI is likely to leave
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FDI benefits have then only been temporary
The Irish indigenous industry stills need strengthening
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Instead of training workers for others, Ireland should have
invested in local business development
Recent Developments
Foreign Direct Investments (FDI):
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Almost 1,000 multinational corporations have chosen
Ireland as their strategic European base
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FDI created employment that accounts for over
136,000 jobs or 42% of Industrial and Financial
employment in the economy
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The average salary in 2007 was almost €44,000 or
19% above the average industrial wage of €36,800
Foreign Direct Investments (FDI) Facts:
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Trainings given to workers in areas foreign
investors needed most, such as IT and
engineering
About 85% of manufactured goods
exported is produced based on FDIs, twothirds of which is from the United States
Drivers of FDI
Corporate Tax 12.5%
Infrastructure
Economy
Quality people
Education
Drivers of FDI
Tax Corporate
FDI facts
There are about 1000 FDI companies served by IDA (Irish
Development Agency) with a total personnel of 140.000
IRELAND FDI 1974-2007 (net)
m$
30000
25000
20000
15000
10000
5000
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
-10000
FDI net
1991
-5000
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
0
FDI net
Examples of some FDIs
Origin of FDIs
Symptoms of Irish Economic Crisis
House price crash
 Bubble in price deflated
Unemployment
 Increased unemployment reduced GNP
Reduced Growth
 Reduced consumer spending lead to decreasing retail sales growth.
Immigration Issues
 Decrease in immigration and increase in emigration
Policies
 Budget deficit in 2008 was 6.6% of GDP; EU ceiling is 3%
Foreign trade
 Negative export growth
Effect of Employment on GNP
Net Migration
Roots/Causes of Economic Crisis
Low corporate tax of 12.5%
 Laxity in fiscal control in boom years
 Increased population
 Employment growth
 Rapid increase in construction creating unsustainable bubble
in price
 Dependence of GDP on unsustainable construction revenue
 Impact of banking speculation in local market
 Limiting factor of Euro membership
 Conventional Wisdom of “safety in numbers” mentality that
Euro membership offers support in a crisis
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Key Economic Indicators
Years
2004
2005
2006
2007
GDP
157,664
167,713
177,286
187,971
GDP at Constant Market Prices Millions of Euros
•GDP: Estimated to have grown at 0% in 2008
•GDP per capita: 45,026 (2007)
•Inflation: 1.4 % in 2007
Is GDP a good metric?
Constant questioning about GDP and its
indication as a metric for nations’ economic
development
Does GDP indicate how sustainable a country’s
growth is?
GDP Composition by Sector
2004
Agriculture, forestry and fishing
Industry (including building)
Distribution, transport and
communication
Public administration and defense
Other services (including rent)
GDP (constant market prices)
2005
2006
2007
3,728
4,086
3,812
3,863
47,895
50,044
52,609
56,754
22,967
24,111
25,258
26,726
5,249
5,298
5,396
5,529
60,436
65,057
69,098
74,186
157,664
167,713
Industry and Services amount for about ¾ of total GDP
177,286 187,971
Ireland Economy Development
Ireland - SWOT Analysis
STRENGTHS
•More rapid increase in property than in
any other developed economy
•2007 Per capita GDP in 2007 surpassed
US
•Investment in infrastructure
•Good country position in Innovation - HR
(Education)
•Innovation follower country (above EU
average)
OPPORTUNITIES
•Opportunities for M&A
•Irish economy depending on EU
Economy performance
•Current opportunities for Pharmaceutical
and Financial Sector
WEAKNESSES
•Economic slowdown affecting property
and construction
•Over-reliance on Foreign Multinationals
•Bank debt ratings cut
•Innovation metrics
•GDP growth affected by Economic
slowdown
•Low level of Firm’s Investment value
(Performance Investment)
THREATS
•Worldwide Economic Meltdown
•Decrease in foreign Investment
•Potentially ejection from EU
•Increasing Competitive Advantage of
other less developed nations
Ireland - Distribution of Investment
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Infrastructure
Human Resources (Education)
Finance and Support
Linkages and Entrepreneurship
Firm Investments
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Lisbon Innovation and Technology Conference
(August 1998)
Focus of the meeting:
“Knowledge for development and the need to
advance the understanding of the
processes associated with knowledge
creation and diffusion for policy-making
and for management”
Innovation Performance
Comparative assessment of innovation performance of EU
Member States, under the EU Lisbon Strategy:
Ireland
Innovation
Innovation leaders
Catching-up
Countries
Moderate
Innovators
Followers
Innovation Growth Leaders
Growth
Rate
Growth leaders
GROUP
Innovation
Leaders
1.60%
Switzerland
Moderate growers
Slow growers
Germany, Finland
Denmark, Sweden, UK
Innovation
Followers
2.00% Ireland, Austria
Moderate
Innovators
3.60%
Catching-Up
Countries
Latvia, Hungary, Malta,
4.10% Bulgaria, Romania Poland, Slovakia, Turkey
Cyprus, Portugal
Belgium
Czech R, Estonia,
Greece, Iceland,
Slovenia
France, Luxemburg,
Netherlands
Italy, Norway, Spain
Croatia, Lithuania
Average annual growth rates as calculated over a five-year period
The Paradox
Conventional Wisdom:
“GDP is a metric for nations’ wellbeing”…
Growing GDP in Ireland from 1987 to 2007
Is it actually true?
?
Indicators for the EIS 2008 - 2010
Human Resources
Graduate and Doctorate Graduate Education in
Science, Engineering, Social Sciences,
Humanities
Finance and Support
Public R&D Expenditure
Venture Capital
Private Credit
Broadband access by firms
Firm Investments
Business R&D Expenditures
IT Expenditures
Non-R&D innovation Expenditures
Linkages and
Entrepreneurship
SMEs Innovating in-house
Innovative SMEs collaborating with others
SMEs entries and exits
EIS - EUROPEAN INNOVATION SCOREBOARD
Performance Per Dimension
Innovation Performance
Growth Performance
In Human Resources Ireland is notable in combining a high performance level and a strong growth
performance.
Downturn opportunities in Ireland
OPPORTUNITY FOR ACQUISITION STRATEGIES:
 Filling strategic product and market gaps
 Strengthen position in existing markets
 Complement organic growth strategy
Currently happening in:
Pharmaceutical companies (flush with cash):
 Aggressively looking to buy bio-tech companies
(Target prices are relatively cheap)
 Seeking to be well positioned with new products for the future
Financial Companies:
 Stronger banks seized acquisition opportunities fitting their growth
strategies in chosen markets
Mergers and Acquisitions in Ireland
2007 - 2008
M&A Deals 8% higher
QuickTime™ and a
decompressor
are needed to see this picture.
M&A Deal value down 57%
The Flip Side of Acquisition Strategy
ASSET DISPOSAL:
 Companies forced to make hard choices about their
core and non-core assets
IMPROVEMENT IN PROFITABILITY:
 Cash Flow: Preserve and maximize it within strict time
lines
 Costs: Aggressive cut
Recommendations
Currently Opportunities for:
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Increase growth
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Create and maintain sustainable competitive
advantage over other countries
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Create winners and losers in every industry segment
How to do it?
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Aggressive strategy focused on improvement of innovation
metrics with emphasis on:
 Firm Investments
Economic slowdown affecting property and construction
Diversification strategy for export sector (currently
dominated by foreign multinationals)
Enhancement for M&A
Decrease in reliance on foreign Investment
Rebuild Ireland’s sustainable competitive advantage!
Conclusions
Conventional wisdom regarding economic growth
does not consider long term perspectives
 National development of transport infrastructure and
business economy was effective use of EU Funds
 Offsetting tax burden with EU Funds to temporarily
enhance competitiveness was poor use of EU Funds
 National Competitive advantage comes from
sustainable development and investment in local
innovation and business linkages
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