Chapter 1
Introduction
In correspondence to the inception of a new era, the information and communications technology (ICT) sector of Ireland apparently became very dynamic. (O’Connor, 2000) This acquired personality of the said sector is among the thrusts of the Irish national government (GOI) to rank the country as a significant participant in the currently flourishing information age. Moreover, international and indigenous companies are establishing competitive positions in the hardware, software, telecommunications, e-commerce, e-business, m-commerce, and internationally tradable services segments.
Economic Profile of Ireland
In the duration of the years between 1995-2001, Ireland’s economy acquired an average growth averaging a robust 9%. The country is characterised by a minor, contemporary, and trade-dependent economy. In the history of the country, its agricultural sector has been among the most vital area of the country’s income. Nonetheless, recent accounts show that it is dwarfed by the industry sector. Today, the country’s agricultural output is depicted by 38% of its GDP, about 80% of exports, and employs 28% of the labour force. Moreover, it was allegedly the country’s exports that continue to be the fundamental machinery of its economic growth but one could not discount the fact that the economy is as well reaping its advantages from a rise in consumer spending and recovery in the construction and business investment sector.
Over the past decade, the Irish government has implemented a series of national economic programs designed to curb inflation, reduce government spending, increase labour force skills, and promote foreign investment. Ireland is among the countries that launched the euro currency system in January 1999 along with 10 other members of the European Union. Moreover, its economy encountered the global economic deceleration in 2001 specifically in their high-tech export sector. Likewise, growth rates were cut by nearly half of previous years’ indices.
The graph below summarizes the economic outline of Ireland from 1998 to 2001. The figure shows that the real GDP growth from 9.5% to 5.8%. Moreover, it also shows that the Irish economy is constantly reducing its government debt. This is also evident in the decreasing behaviour of the economy’s inflation rate. Nonetheless, the figure also shows the apparent reduction of the country’s employment rate in the said period.
Figure 1. Key figures of Ireland 1999 to 2001 Source: European Commission, Date: 13 January 1999
Foreign Direct Investments
The UK is the second largest recipient of Foreign Direct Investment (FDI) globally. (O’Doyer, 2000) Likewise, a larger part of these investments is based on Ireland. The figure below summarizes the percentage of FDI of the United Kingdom and its specific wings.
Figure 2. Foreign Direct Investments of Ireland Compared to other UK Territories
Source: UK National Statistics, Regional Trends 2001
The key to understanding Ireland’s merchandise trade performance in recent years lies with foreign direct investment (FDI) flows. (O’Doyer, 2000) By 1998, foreign multinationals accounted for 88% of Irish industrial exports and three-quarters of total exports. In the period 1991-98, foreign-owned companies were responsible for 95 per cent of the growth in industrial exports. Ireland attracts a disproportionate share of FDI inflows into the EU relative to its small population and economic size. While accounting for just over one per cent of EU GDP in 1999, Ireland took in over 5.7 per cent of total inward FDI flows into the EU in that year based on Eurostat data. On a per capita basis, of the EU-15 only Sweden attracted higher FDI inflows in 1998-99 than Ireland.
Issues Covered
This paper intends to uncover the main causes of the rise of foreign direct investment (FDI) in the Information, Communication and Technology Sector (ICT) of Ireland.
Specifically, the study shall gauge the sector’s potential based on several studies previously made in relation to the topic. The research described in this document is based solely on qualitative research methods. This permits a flexible and iterative approach. During data gathering the choice and design of methods are constantly modified, based on ongoing analysis. This allows investigation of important new issues and questions as they arise, and allows the investigators to drop unproductive areas of research from the original research plan.
This study basically intends to identify and provide a description on the critical factors of FDI in the ICT in Ireland. The primary source of data will come from published articles from social science journals, theses and related studies on economics and the information and communication technology sector.
For this research design, the researcher will gather data, collate published studies from different local and foreign universities and articles from social science journals; and make a content analysis of the collected documentary and verbal material. Afterwards, the researcher will summarize all the information and make a conclusion on the discussions dealing with the foreign direct investments of the ICT sector of Ireland.
Chapter 2
Foreign Direct Investment Theories
Product Life CycleThe Product Life Cycle (PLC) is based upon the biological life cycle. (Klepper, 1996) The cycle is divided into four parts as presented by the illustration below. The stages include the introduction, growth, maturity, decline, and withdrawal. In the Introduction stage, the need for immediate profit is not a pressure. The product is promoted to create awareness. If the product has no or few competitors, a skimming price strategy is employed. Likewise, limited numbers of product are available in few channels of distribution. On the growth stage, competitors are attracted into the market with very similar offerings. Products become more profitable and companies form alliances, joint ventures and take each other over. Advertising spend is high and focuses upon building brand. Moreover, the market share tends to stabilize.
At maturity, the strong growth in sales diminishes. (Klepper, 1996) In this stage, the competition may appear with similar products. The primary objective at this point is to defend market share while maximizing profit. At this point, the product features may be enhanced to differentiate the product from that of competitors. Likewise, the pricing may be lower because of the new competition while the distribution becomes more intensive and incentives may be offered to encourage preference over competing products. In addition, this stage also provides emphasis on the promotion of product differentiation.
Figure 3. PRODUCT LIFE CYCLE PARADIGM
The decline stage is the last portion of the cycle. As sales decline, the firm has several options. (Klepper, 1996) A firm may maintain the product, possibly rejuvenating it by adding new features and finding new uses. Likewise it could harvest the product, specifically the company could reduce costs and continue to offer it, possibly to a loyal niche segment. A final option would be to discontinue the product, liquidating remaining inventory or selling it to another firm that is willing to continue the product.
Vernon’s (1966) product life cycle theory of investment suggests that FDI is a natural stage in the life cycle of a new product from its inception to its maturity and to its eventual decline. Here, foreign investment is seen as essentially a defensive investment designed to preserve profit margins in both export and home markets. This theory is, however, no longer wholly suitable since it is now evident that transnational corporations (TNCs) introduce products simultaneously in several markets of the world, and not just in a standardized but in a differentiated form as well.
Dunning’s Eclectic Theory Dunning (1981) developed the eclectic (OLI) model in 1958 to explain why production is sometimes organized internationally. He examined the internationalisation of firms based on ownership-specific (O), location-specific (L) and internalisation-specific (I) advantages. A firm considering producing abroad will analyse each of these factors in turn, to determine their FDI strategy. The ownership Specific advantages (also called firm-specific advantages) explain why the firm in question produces the good, rather than any other firm. It also explains why that firm is better at fulfilling the needs of the market for that product, both domestic and foreign, than its competitors. The location-specific advantages explain why a firm chooses to produce in the host country. The L advantages of the chosen host country are non-transferable and immobile. These are differences that arise from the endowment of natural resources, infrastructure, culture, production and transport costs. Moreover, these advantages can also be created artificially through government policies on trade barriers, taxation etc. On the other hand the Internalisation advantages refers to the way firms organised the generation and use of the resources and capabilities within their jurisdiction and those they could access in different location.Dunning (1981) acknowledged that only way to fully explain the extent and pattern of the foreign value added activities of firms, one also had to explain why firms opted to generate and/or exploit their firm-specific advantages internally, rather than to acquire and/or sell these, or their rights, through the open market. Of the variables that are likely to cause firms to internalise markets, the likelihood and costs of a contractual default and the inability of a contractor to capture the external economies of any transaction are perhaps the two most important.
Each of these determinants of FDI relates to an advantage of direct investment over alternative modes of serving the firm's customers abroad. It means, therefore, that a firm can only capture a foreign market through FDI if it has the capacity to exploit simultaneously all the three advantages. If for instance, it possesses only the ownership advantage without internalisation and locational advantages, then it will pursue other strategies such as licensing agreements or exporting as a means of entering the foreign market.
Internalisation
Traditional trade theory (Helpman and Krugman, 1985; and Krugman and Obstfeld, 1994) asserts that the direction and magnitudes of capital flows are determined by differences in factor proportions among countries, which cannot be countered by international trade. Developing on Dunning’s electric theory, Eiteman, Stonehill and Moffett (1995) emphasized the merits of internalisation. Under the internalisation theory, the key ingredient for maintaining a firm-specific competitive advantage is the possession of propriety information and control of the human capital that can generate new information through expertise in research, management, marketing and technology.
Moreover, Buckley and Casson (1976) discuss this theory of Internalisation further. Initially, they aimed to provide a theory of multinational enterprises (MNE) sufficiently powerful to afford long-term projections of the future growth and structure of MNEs. It emphasized very general forms of imperfect competition stemming from the costs of organizing markets, with a special focus on imperfections in intermediate product markets, including various types of knowledge and expertise, embodied in patents, human capital etc. They asserted that internalisation of such imperfect external markets, when this occurs across national boundaries, leads to the creation of MNEs.
Nonetheless, internalisation occurs only to the point where the benefits equal the costs. Here, it is interesting to observe that Buckley and Casson (1976) already recognized four sets of parameters relevant to the internalisation decision such as industry specific factors related to the nature of the product and the structure of the external market, region-specific factors, nation-specific factors, including government policies, and firm-specific factors, with a focus on the ability of the management to organize an internal market.
Chapter 3
Trends in the Information and Communication Technology Sector
According to the American University (www.american.edu) in Washington, the information and communications technology (ICT) sector is a key component of the Irish economy with over 1,000 companies – both international and indigenous – employing over 100,000 people and accounting for more than 25% of Irish exports. Despite the recent ICT downturn worldwide, the projection for the $3.6 billion Irish ICT sector in 2002 remains positive. The principal market segments includes the Telecom services with $1.5 billion, computers & peripherals garnering $1.0 billion, computer software with $0.6 billion and telecom equipment acquiring $0.3 billion.
This section shall describe the statistical profile of the Information, Communication and Technology sector of Ireland as it affects its Foreign Direct Investments. Majority of the data collated in this chapter are extracted from several business and financial journal and columns.
Macroeconomic Environment
Since the early 1990s, Ireland has benefited from double-digit economic growth, which is largely attributed to its investment in, and dividends from the ICT industry. The table below summarizes the continuous rise of Ireland’s ICT industry through the use of the gross domestic product as its tool of measurement.
Table 1. Information and Communication Technology Among Countries From 1993-1997
Information and Communication Technology (ICT) % GDP
ECU per capita
1993
1994
1995
1996
1997
1997
USA
n/a
6.1
6.5
6.8
7.0
1565
Sweden
5.3
5.8
5.9
6.1
6.2
1427
UK
4.8
5.5
5.8
6.1
6.3
993
Switzerland
n/a
5.3
5.5
5.7
6.1
2012
Ireland
5.1
5.4
5.4
5.8
6.0
920
Netherlands
4.9
4.9
5.1
5.5
5.8
1177
Denmark
4.6
4.7
5.0
5.2
5.4
1482
Finland
4.3
4.6
4.7
5.0
5.2
1028
Norway
n/a
4.5
4.7
4.8
5.0
1427
France
3.9
4.3
4.4
4.5
4.8
1013
Portugal
3.8
4.2
4.4
4.6
4.9
447
Germany
4.1
4.1
4.3
4.2
4.3
1029
Belgium/Luxembourg
4.1
4.1
4.2
4.5
4.8
1026
Italy
3.5
3.8
3.7
3.7
3.9
698
Greece
3.1
3.6
3.7
3.9
4.1
396
Austria
3.4
3.5
3.6
3.8
4.1
931
Spain
3.5
3.3
3.4
3.7
3.8
465
Published:
EITO Yearbook 1997 and 1998
The contribution of ICT to the Irish economy is readily apparent. Based on the data above, Ireland is among the top ten countries that benefit largely from its ICT industry. The table shows a continually increasing per capita output from the year 1993 to 1997. This shows that the country is exceptionally stable in the said industry. It also shows that of all the world leaders in the industry, Ireland maximizes the potential of its information, communication and technology sector as compared to countries with greater capabilities such as the United Kingdom, Germany, and France.
According to the website ICT Ireland, the Sector employs almost 100,000 people in 980 companies up from 47,000 in 1993. Moreover, foreign owned companies provide 55,000 of these jobs. The site also stated that Ireland is the largest exporter of software in the world and seven of the worlds leading software companies having a base in Ireland. In fact, one third of all PC's sold in Europe are manufactured in Ireland. Concurrently, Ireland is the 4th most successful country in the world in attracting Foreign Direct Investment. The total exports of ICT products and services amounted to €31 billion in 2001 representing 33% of all exports. Furthermore, ICT exports grew by 23% per annum over the period 1993-2001, 1.5 times that of non-ICT export values. It also stated that Ireland ranks as the sixth fastest growing exporter, with Ireland's top three exporters (Dell, Microsoft and Intel) accounting for 18% of total exports in 2001. Thus, the output of ICT products and services was equivalent to almost 16% of Ireland's GDP in 2001. This increased by 18% per annum over the period 1993-2001 twice the rate of overall GDP growth. The GDP of Ireland and its competitor countries are summarized below.
Table 2. Gross Domestic Product Growth among countries from 2001-2001Country
Real GDP Growth
2001
2002 (F)
Ireland
6.8%
3.6%
UK
2.3%
1.9%
France
2.0%
1.4%
Germany
0.7%
0.7%
Netherlands
1.4%
1.4%
Spain
2.7%
2.1%
Portugal
1.9%
1.7%
USA
1.1%
2.5%
Japan
-0.7%
-0.7%
Source: The World Competitive Yearbook 2001; OECD Economic Outlook June 2002
Employment Growth and Unemployment
According to the Investment Development Agency of Ireland (2002), Ireland has an abundance of workforce that would cater to the needs of the ICT industry. The agency projected the amount of able and competent workers in the year 2010. This data is summarized below.
Table 3. Future Availability of workforce Percentage population under 25 in the year 2010
Country
%
Ireland
35.5
United Kingdom
31.0
France
30.1
Netherlands
28.7
Portugal
28.6
Germany
24.4
Spain
24.3
USA
34.2
Japan
25.3
Source: United Nations
The data shows that thirty-five percent of Ireland’s population would be able to satisfy the requirement of the ICT industry regarding the employment of competent employees. Based on the projection, the ability of the Irish population to satisfy the need for a competent workforce in a decade’s time is far superior to countries such as the United States, France and the United Kingdom. It is also important to note that the Agency extracted the data from a study by the United Nations.
This projection is based on the emphasis made by specific countries on education. The Organization for Economic Cooperation and Development (2001) provided a comparative data regarding the expenditure of members of the European Union on public education. The top spot is acquired by Ireland incurring the highest expenditure on education as compared to the other members of the EU. The table shows that almost 10% of Ireland’s budget, compared to the other members, answers to the public education of both secondary and primary level of instruction while it allots 3.5% on its universities. The top spot is shared by Portugal and Ireland. The former takes the top spot on sustaining a 10.2% allotment on public education while the latter takes the stage in prioritising its collegiate level by allotting 3.5% of its income for the use of public education.
Table 4. Some Comparative Educational Data Public Expenditure on Education as % of total Public Expenditure by level of education.
Country
Total % All levels
Primary & Secondary %
Tertiary %
Ireland
13.5
9.9
3.5
UK
11.9
8.3
2.6
France
11.3
7.9
2.0
Germany
9.8
6.3
2.3
Netherlands
10.6
6.8
3.0
Spain
11.1
8.1
2.2
Portugal
13.5
10.2
2.4
Belgium
10.2
6.9
2.2
Italy
10.0
7.1
1.6
Source: OECD Education At A Glance 2001
Ireland produces over 34,000 graduates every year and since 1992 there has been an increase of 35% in students studying third level engineering/technology courses. (IDA, 2002) A significant number of third level students now study engineering, computer science or business studies. Combined with competitive levels of government spending and initiatives for third level education and research, Ireland is not only a first choice for high value inward investment, but also a first class location for business expansion.
Ireland also possesses one of the lowest hourly rates for workers. This is summarized in the table below. Based on the table, the lowest cheapest labour among the countries is provided by Spain having € 10.85 per hour. The second spot is acquired by Ireland providing € 12.50 per hour of service. This is one of the assets of the Irish country considering they have a high level of literacy rate with a low cost of employment.
Table 5. Total Hourly Compensation costs in (€) for workers
Country
Total
Ireland
12.50
United Kingdom
15.88
France
16.38
Germany (Unified)
22.99
Netherlands
19.08
Spain
10.85
USA
19.86
Japan
22.00
Source: US Department of Labour, 2002
Another advantage of Ireland is the attractiveness of its working conditions. The table below summarizes the working profile of several countries including Ireland. The table states that Ireland has a maximum of 48 working hours per week. Nonetheless, a total of 39 hours is the actual time spent throughout a workweek. Moreover, the country has approximately 20-25 days considered as a holiday but only 20 are recognized by the state as non-working.
Table 6. Working Profile
Country
Legal Max. Working hrs p/w
Actual average working hrs p/w
Statutory Holidays
Typical Holidays
Ireland
48
39
20 days
20-25 days
UK
48
35-40
20 days
20-30 days
France
35-39
35
25 days
25-30 days
Germany
48
35-38 West
37-40 East
20 days
30 days
Netherlands
45
35-38
4 x days worked p/w
23-30 days
Spain
40
34-38
20 days
22-25 days
Portugal
40
35-40
22 days
22-25 days
USA
No limit
30-35 hrs for union members;
40 hrs for clerical staff
Nil
10 days
Japan
40
n/a
10-20 days
n/a
Source: Incomes Data Services UK, October 2001
Inclination to ICT among the localsIreland has become a significant world centre for software development because of its skilled, highly educated workforce, excellent supply infrastructure, cost competitive environment, and sophisticated telecommunications network. (O’Connor, 2000) The country produces over 400 computer science graduates annually and these individuals are being employed in the local software development laboratories of major international software firms. Moreover, software is one of Ireland's fastest growing business sectors with growth being about 15 percent every two years. (O’Connor, 2000) In 2000, the Irish computer software market should exceed $800 million. The Irish software industry is comprised of over 600 firms employing almost 19,000 people in a broad range of activities including development and customisation, localization and translation, production and distribution, and technical support. It is an export-oriented industry with over 90 percent of domestic production sold abroad. Indeed, some industry observers rank Ireland behind only the United States as a software exporter. In addition, there is also a strong indigenous sector consisting of both small-specialized firms operating at the forefront of software development technologies and larger companies that have successfully targeted niche markets worldwide. Indeed, the small size of Ireland's domestic market has necessitated a strong focus on international markets by indigenous firms in order to achieve sustainable growth. (O’Connor, 2000) Thus, more than 80 percent of all indigenous software companies are active in international markets. Similarly, the telecommunications sector in Ireland is extremely buoyant at present with sales within the telecommunications services segment likely to exceed $1.9 million in 2000 while the market for telecommunications equipment should exceed $425 million. (O’Connor, 2000) The driving forces behind this market demand are Ireland's strong economic performance since 1995, the emergence of new technologies and business philosophies related to e-commerce, and the liberalization of the sector by the Irish government. Furthermore, the Irish telecommunications sector has undergone significant change over the past three years as the Irish government implemented the EU's liberalization agenda. (O’Connor, 2000) Since December 1998, the sector has been fully liberalized and there is a strong competitive presence in the market with several service providers competing for market share including Eircom, BT/Esat, MCI WorldCom, Stentor, GTS and ITL. Since mid-1997, annual investment by market players has almost doubled to $500 million. The acquisition of Esat by BT in January 2000 will generate increased competition throughout the entire telecommunications market in Ireland. On the other hand, the mobile telephony sector has also experienced excellent growth in recent years with Eircell currently having over 645,000 subscribers of which about 420,000 are on the GSM network while the remainder is analogue customers. (O’Connor, 2000) The second GSM network operated by BT/Esat Digifone commenced operations in March 1997 and has over 240,000 subscribers. It has been the most successful start-up by a second GSM operator in Europe. Unfortunately, the awarding of the third mobile telephony license to Meteor Mobile Communications, a U.S./Irish consortium has been delayed because of an ongoing legal action against that decision by the unsuccessful bidder, Orange UK. The number of mobile phone subscribers is forecast to exceed one million in 2000. The frequency of utilization of ICT products by the Irish is summarized below. Table 7. Irish Utilization of ICT Products
1998
1999
2000
Television licenses*
1,015,668
1,037,845
964,989**
Telephone lines
1,507,470
1,634,131
1,737,794
Mobile cellular telephones (‘000 subscribers)
946
1,655
2,490
Personal computers (‘000 in use)
1,010
1,180
1,360
Internet users (‘000)
300
679
784
Daily newspapers
6
6
6
* Sales of licenses.
** To November 2000.
1996: Non-daily newspapers 77 (estimated circulation 1,561,000)
1997: Radio receivers 2.550,000 in domestic use; Television receivers 1,470,000 in domestic use; Facsimile machines 100,000 (estimated number in use).
Source: UNESCO, Statistical Yearbook and International Telecommunication Union.
CHAPTER 4
THE RATIONALE
`This study is conducted to assess the effects of the information and communication technology sector of the Irish nation to its foreign direct investments. This study is conducted in consideration of the Ireland has been reaping the fruits of the successful implementation and continuous flourishing of the economy with special attention to the ICT sector. This study contains graphs and figures of the recent improvements in the Irish ICT section. Along with these are the specific interpretations of the said information. Using these data, the researcher shall be pinpointing the strong points of the Irish situation and specify the reasons of Ireland’s successful ICT sector. Moreover, the study shall be a potent tool in providing other countries the specific strengths of the Irish paradigm in its pursuit in ICT excellence through its foreign direct investments. This study could be used as a benchmark for other developing countries as well as other first world economies who have been struggling with the affairs of gaining its respective FDIs. This study stresses that the ICT is a potent tool in improving the level of a nation’s economic well being, thus should be regarded as one of the vital aspects of the market.
THE BENEFITS OF THE STUDY
This study shall be able to benefit the ICT sectors in general. This is because the study provides the course of action undertaken by the Irish ICT sector to be at par, or even superior, to highly industrialized countries such as the United Kingdom and the United States. These strong points could be used as a framework of both developed and developing nations in their quest for ICT supremacy. Moreover, the study also points out the shortcomings of the ICT sector, thus providing lessons for other nations in undergoing the process of strengthening of their ICT sector.
Moreover, the ICT sector of Ireland would also benefit from this inquiry. The provided analysis and recommendations would allow the sector and the national government to further encourage the entrance of foreign direct investments. This would also encourage local entrepreneurs to invest in the world of ICT. The more investments that the national government collects entail a much leaner growth in terms of the economic aspect of the Irish nation.
More importantly, this study would benefit the Irish population. The ensuing effects of the rise of the country’s GNP and GDP brought about by the contributions from the FDIs from the ICT sector, begets a sort of assurance for the proper rendering of government services.
ANALYSING THE EFFECTS OF THE FDI
In an attempt to analyse the effects of FDI to the ICT sector of Ireland, the researcher would like to utilise Dunning’s OLI theory to provide a more lucid interpretation of the study.
Firm Specific Advantages
In terms of technological capabilities, companies that has invested in the country could be described as belonging to one of four different types, particularly, research performers operating with a specific R&D budget and typically having a formal R&D department; technological competents performing some element of product and process development; minimum capability companies adopting and implementing package solutions; and low technology companies with no meaningful technological capability. (Walsh, 2000) Moreover, most companies in Ireland fall into the lower two categories. In fact, there are only 500 from a total of 4,000 companies in manufacturing and internationally traded services (with >10 employees) in the country which can be described as ‘research performers’ spending at least IR£100,000 per annum on R&D. Even within that group, the top 50 R&D spending companies – those spending a minimum of IR£1 million each per annum on R&D – account for two thirds of business sector R&D activity. Only one in five foreign owned companies could be described as a ‘research performer’. R&D, as a percentage of sales, trails behind other countries, particularly in high-tech sectors such as pharmaceuticals and office and computing machinery. Indigenous industry needs to build on national strengths in software and electronics and transform its approach to innovation. There is a low level of patenting by Irish-based companies in general and particularly in the US market. Irish industry must position itself higher up the economic chain in terms of the innovation, including R&D, and the value it adds to the products and services exported. This competitiveness shift is necessitated by the globalisation of markets and firms, the challenges faced by traditional cost-based industries, economic and monetary union, the progress towards greater tax harmonisation in Europe, and improving quality of labour supply and more cost effective manufacturing and exporting systems, particularly in Eastern Europe. The repositioning will also have to be underpinned by Government policy action in related areas as set out in the following section.
Aside, from the presence of foreign direct investments, a strong culture of innovation is an essential source of industrial competitiveness. (Walsh, 2000) Ireland must constantly seek to improve the capability and performance of its industrial base to cope with increasing global technology-based competition. To do this, Ireland will have to put in place a durable science and technology infrastructure which will create new, technology-based indigenous firms, establish an internationally competitive research base in universities, colleges and institutes, attract the R&D activities of MNEs to locate in Ireland and provide the physical infrastructure and environment to promote innovation.
Location Specific Advantages
Ireland has built a strong reputation as a location for high quality manufacturing and internationally traded services. (Walsh, 2000) This has been achieved because of a mix of attractive fiscal arrangements, a plentiful supply of skilled and adaptable labour, the recent emergence of technology entrepreneurs, English as the main spoken language and access to European markets. However, the underlying base driving output and exports is quite narrow and the long-term performance of industry in Ireland continues to be hampered by a weak commitment to technological innovation. Exports grew from IR£15 billion in 1991 to IR£46 billion in 1998. Half of the country’s exports are accounted for by 50 companies, of which only 13 do any research and development (R&D).
Government-supported Programmes in Advanced Technology in the areas of software, power electronics, optoelectronics and telecommunications, as well as the National Microelectronics Research Centre, carry out research and provide postgraduate opportunities in the ICT field. (Walsh, 2000) However, the level of existing funding for these organisations does not permit them to generate the scale and activity necessary to build up and maintain world-class centres of expertise. Whether from public or private or both sources, support at a higher order of magnitude is needed. In the context of Ireland’s ambition to become a knowledge-based and technology driven economy an infrastructure, which develops and transcends what is already in place, must be developed to cope with the rising standards provided by FDIs.
In addition, the Information and Communications Technologies have made a major contribution to recent economic growth in all developed countries. Ireland has benefited very significantly from these technologies, in terms of employment and wealth generation. These technologies will continue to be at the core of economic and social progress in the years ahead.
Ireland is justifiably proud of its performance in the ICT area. (Walsh, 2000) It has attracted many of the world’s leading companies to establish bases in the country and have been convinced, by the quality of people and the industrial climate, to broaden the scope of their operations. The national government has built a vibrant indigenous industry and a number of indigenous companies have achieved very significant success on world markets. Nonetheless, these successes there are several weaknesses in the current industry structure that must be addressed if the industry is to prosper in the coming years and realize the potential benefits for Irish society. In general, the ICT industry in Ireland is positioned at a relatively low point on the value chain: it deals in relatively mature technology that has been developed elsewhere. In the years ahead, there will be intense competition at this end of the value chain. The main competitive factor will be cost and particularly labour cost. Ireland is unlikely to be able to compete on this basis: we need to increase the value-added component in our ICT products and services.
In order to carry this out, the industry will need a cadre of world class professional researchers in the ICT disciplines – people who can contribute original marketable ideas, who can form the nucleus of new, world class companies, and who can attract a new kind of multinational investment. (Walsh, 2000) The current output of postgraduates (approximately 60 per annum with pertinent skills) is quite inadequate for this kind of development. Likewise, state investment in research is significantly lower than in most developed economies. As we move from an economy based on relatively low skill levels to one based on knowledge and expertise, our continued prosperity depends on substantially increasing this investment. Moreover, the efforts of the PATs (Programmes in Advanced Technology) and other RTI (research, technology and innovation) programmes have led to measurable benefits, but the current structures are incapable of developing teams with ‘world class’ scale or expertise. They are therefore unable to conduct the type of research that will attract international attention, bring in significant industrial investment, or routinely spin off high technology, market-leading enterprises.
The development impact of ICT has two distinctive aspects. The first is the benefits of enhancement of the infrastructure and applications to users of information and communication services, who can be distinguished according to whether they use these services for production, distribution or consumption activities. The second is the benefits derived by the economy from changes in the supply of communications network infrastructure and applications.
Furthermore, improvements in ICT lower the cost of information, the cost of dealing with others in the market (such as suppliers and customers) and the cost of business start-ups. Through both of these processes, transaction costs in society drop, which improves overall efficiency and growth. Complementing this, the ability to transmit data on communications networks contribute to increases in the quantity and quality of information available to service and productive enterprises, which opens up new opportunities and enables more thorough evaluation of the risks and returns associated with these opportunities. In many instances, the additional information that becomes accessible will contribute to the spatial expansion of markets, assisting producers to move from local into regional or national markets, and from domestic into international markets. Access (or the lack of it) to cheap and sufficient information is an important determinant of firms’, sectors’ and countries’ competitive advantage.
Evidence suggests that countries that have invested in communications network infrastructure have attracted high levels of foreign direct investment as well as domestic investors into other sectors. The value of the infrastructure is in the linkage effects to other sectors, more than in the infrastructure per se. Economic benefits also arise from changes in the supply of communications network infrastructure, which contributes to the emergence and growth of specialist firms, or new branches of existing firms, in a range of service sectors to take advantage of new market opportunities in the production and distribution of information itself. On one hand, these will include software production firms and Internet service providers, who provide essential pieces of machinery for information production and distribution. On the other hand, there are firms who provide the content of the information, such as web marketing agencies, electronic news media and so on. The changes in information and communications technology have broken down barriers between different manufacturing and service sectors in the economy, and opened up competition between them. This enhances efficiency in these sectors, and contributes to overall growth.
Much of existing economic data point to a high correlation between ICT and economic growth. And in the past several decades this has been confirmed by the revolutionary impact of ICT on country economic performance, particularly in the areas of production, trade & market access, employment, and public and corporate governance. Converging and emerging technologies have allowed countries to accelerate economic growth, empower people and alleviate poverty through expansion in private and public business opportunities, extend services to socially disadvantaged groups, and pervasively use and develop ICT for revenue and income generation purposes.
Internalisation Advantages
Foreign direct investments increased the productivity rate of the Irish ICT sector. One of its effects is the provision of higher standards on the ICT industry. The government recognized that the capabilities in information and communication technologies must be developed in order that Irish society can participate in economic, cultural and educational activities and that Irish business can take advantage of the opportunities arising in this field. (Walsh, 2000) Information and communication technologies impact on society and the economy in a number of different ways. First, ICT is an underlying and necessary technology for society in general and for business in particular. ICT also functions as an enabler/facilitator for industry, for example, in electronic commerce, logistics and telematics. Secondly, looking outward, organisations will increasingly use ICT to link their stock of tacit knowledge to that of other organisations so as to develop cross-discipline solutions in areas of emergent need e.g. in bio-informatics, smart products, supply chain management. Thirdly, in recent times the ICT sector has been the engine of growth for all developed countries. Ireland has been particularly successful in this area both in attracting foreign direct investment and in developing a select number of companies with a global reach. Currently 40 per cent of all Irish exports come from the ICT sector and employment in this sector is forecast to double by 2003.
The encouragement of foreign direct investments is as well subjected to a stiff level of competition among Ireland’s neighbouring countries. This provided the Irish government the realization that if Ireland is to compete in an era of rapid development of ICT products and services, appropriate state-of-the-art infrastructure must be put in place. (Walsh, 2000) Furthermore, if Ireland is to fully meet the future societal and economic challenges posed by the rapid developments in ICT, a number of general capabilities will be required. Moreover, raising the levels of IT and computer literacy in the population became the top priority action. The high potential for job creation in this area provides an opportunity to tackle the existing situation where significant numbers of young people are excluded from the job market because of lack of training and skills. The extremely high cost of research into future technological developments will place a premium on sophisticated modelling and simulation systems, which can substantially reduce the risks involved. There is an opportunity for skills to be developed in this area and tradable services commercialised. For the foreseeable future the need for top class electronic engineers and computer scientists will continue and the enhancement of mathematical and fundamental engineering principles will be critical to maintaining Ireland’s position as a global player in these industries.
According to Dorgan (2002), the surge of FDIs provided major contributions in the country. First, it provided a very strong export-led contribution to economic growth. Moreover, unlike other decades, the investments provided the employment sector an intensive growth. It has been a key driver of business friendly infrastructure, human resource development and regulatory change, which has benefited the economy as a whole. Concurrently, FDIs has both forced and sustained flexibilities in the economy, which might otherwise have gone the way of much of Europe, in developing rigidities and protections for existing economic agents. Moreover, it has been a key source of new technology, skills, management and business know-how, and a global orientation. It has also provided a breeding ground for Irish entrepreneurs, for example, in the indigenous software sector. Furthermore, it has given Ireland scale and critical mass in new technologies, far faster than that could otherwise be achieved. A good example is the advent of critical mass in the bio-pharmaceutical sector in Ireland when Wyeth decided on a major new facility in Grange Castle, Dublin. Another effect was the collection of Substantial Corporation Tax revenues (1.9bn in 2001 alone), and additional tax revenues from income tax and indirect taxes, have helped the country to be able to afford the cost of new infrastructure and human resource developments, envisaged under the National Development Plan, so important to sustaining economic growth in the future.
CHAPTER 5
CONCLUSION
Virtually all aspects of daily life are being changed by ICT. (Walsh, 2000) Whole new industries are growing up around ICT; new business models are being realised and old ways of doing business are being rapidly outmoded and made obsolete. The ICT industries themselves are changing. In particular, we note a trend towards global rationalisation, with mergers and acquisitions, both vertical and horizontal, becoming commonplace.
As the market becomes more global, even the most innovative of such companies are in danger of creating markets that are subsequently exploited by more powerful players. (Walsh, 2000) Global markets demand companies that are capable of operating globally: companies that can identify an opportunity, move fast to dominate the market niche and erect effective barriers to the entry of competitors. This implies access to the best in venture capital investment (hands-on, aggressive, with a desire for quick development and exit), strategic marketing and ready access to world-class expertise.
This is what exactly Ireland did. The country recognized its potency as well as its frailty. With the realization of the two, Ireland capitalized on its strengths and in the same time, worked on its flaws. In doing so, Ireland is currently the leading country among its co-members in the European Union that excels in the ICT industry. The study did not fall short on emphasizing the current state of ICT in the economy of Ireland. Likewise, the study also provided the effects of foreign direct investments to the said sector. It is the realization of the Irish ICT sector of the importance of external investments to achieve the level of success that it now experiences.
Ireland’s economy is very open, thus the long-term success is inextricably linked to the growth rates of the main export markets and the country’s competitive position.
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