In part one of a two-part analysis, Jamie Smyth looks at the threats posed by EU enlargement
The chill winds of economic change have blown through the town of Youghal in Cork since the turn of the millennium.
Several hundred people have lost their jobs as two big multinational employers, Technicolour Home Entertainment and Artesyn Technologies, closed their factories and relocated manufacturing to low-cost locations.
Technicolour manufactured DVDs at its Youghal plant, which was set up in 1996 by US firm Kodak. But, in the face of tough competition from manufacturers based in low-cost locations in Asia and eastern Europe, it decided to relocate its production to Poland.
"It has been a difficult period for us losing big employers," says Ms Anne Murray, chief executive of the Youghal Chamber of Commerce. "The main thing is that the mindset of the people has had to change. People are now realising that the days of working in big factories in Ireland are over."
Since the fall of the Berlin Wall in 1989, there has been a gradual shift of big manufacturing investments from western Europe to central and eastern Europe. But in the past four years in particular, Ireland has begun haemorrhaging jobs to accession states.
IDA Ireland statistics show that there has been a net loss of 6,000 jobs at multinational firms during 2002 and 2003. Total employment at overseas firms in Ireland is now 129,000. Job creation has also slowed dramatically, falling from 22,838 in 2000 to just 9,182 during last year.
"Ireland would have had 40 to 50 firms selling parts into the automotive industry. But they have moved, or are moving, eastwards into central Europe," says Mr Gerry Murphy, Enterprise Ireland's Europe director, who admits accession is now more a symbolic event rather than a huge driver for extra investment.
Slovakia, the Czech Republic, Hungary and Poland have become hubs for the automotive industry, attracting billions of euro of investment from Volkswagen, Peugeot, Toyota and Opel. Most of the multinational supply firms in the sector based in the Republic have little choice but to follow their customers to these regions, he says.
The low wages paid to staff in accession states are a key factor, causing foreign investors to move their operations eastwards. Irish salaries are up to six-times higher than those paid in some EU accession states, according to the latest research.
This proves particularly attractive for manufacturing firms, says Mr Murphy. Big contract manufacturers such as Flextronics, Celestica and Manufacturing Services Ltd have closed Irish facilities since 2000, resulting in thousands of job losses. Celestica now has an operation in the Czech Republic and Flextronics has a big investment in Hungary.
This shift in production is also pulling many of the Irish sub- supply firms to these multinationals into central Europe. Connacht Electronics, Mergon International and Realtime Technologies have all recently set up operations in the Czech Republic.
"One of the key requirements for us is flexibility and we need to be close to our customers," says Mr Paddy White, managing director of Realtime Technologies, an indigenous supplier.
Realtime has set up a 5,000 sq ft factory in the Czech Republic from which it supplies electronics firms in the region with printed circuit boards. But Mr White says it remains totally committed to its Dublin-based operations.
Central Europe is fast becoming a very competitive location for electronics, in part due to its location at the heart of Europe.
Some of the accession states also have better basic infrastructure than Ireland. The budget impact of enlargement will vastly reduce the amount of EU structural funding available for Irish infrastructure projects as money is diverted to close the gap between accession states and existing members.
"We have one of the highest densities of road and railways in Europe," says Martin Jahn, chief executive of CzechInvest, the agency responsible for attracting foreign investment to the Czech Republic. "Our telecoms is very good and Prague is fast becoming a major air hub."
Skills levels are also particularly high in the Czech Republic, which has been a big engineering centre in Europe for centuries.
These benefits have not gone unnoticed by investors and the Czech Republic has attracted €32.67 billion in investment since its transition to a market-driven economy.
In the 1990s most of these were manufacturing investments but increasingly technology and shared services operations are setting up in the Czech Republic. About half of the jobs created from the investments are positions that have relocated from other states, says Mr Jahn.
Two of CzechInvest's biggest recent success stories have been decisions by LogicaCMG and Accenture to set up technology and shared services centres in the Czech Republic. Both firms undertake similar work in Dublin, and already cost considerations have forced LogicaCMG to cut hundreds of skilled jobs.
Mr Jahn makes no secret of the fact that the Czech Republic is competing directly with Ireland and CzechInvest's marketing material contains direct comparisons between the two countries.
"We learnt most from the Irish and Scottish models and have secured advisers from both countries and sent our people for training there," he says.
The Czech Republic is moving to reduce its corporation tax rate to 24 per cent by 2006, down from 26 per cent, to enhance its attractiveness for investment. Ireland will face even tougher competition on corporation tax rates from other accession states.
Lithuania, Latvia and Poland, which are all very low-cost economies, are setting corporation tax rates at 15, 19 and 19 per cent, respectively. And Estonia, one of the three Baltic states entering the EU, has set a 0 per cent rate of tax on companies' retained profits.
"In 2000 we introduced this taxation policy which effectively abandons corporate tax rates for reinvested profits," says Ms Kristiina Ojuland, Estonia's foreign minister. "Since this time, we have experienced big economic growth rates, investment and decreases in unemployment."
Estonia is one of the best-placed accession states and its government is limbering up for an inevitable fight with larger EU states, such as Germany and France, which are seeking to harmonise corporation tax rates.
"High corporate taxes throughout the EU would be catastrophic for the community as a whole and would suck capital out of the area," says Ms Ojuland, whose government is also proposing to introduce a flat rate of income tax set at 20 per cent by 2007 to promote business.
Estonia is following the Irish model of a liberal economy and is targeting the same industries as Ireland, information communication technologies and biotechnology, according to Ms Ojuland.
IDA Ireland spokesman Mr Colm Donlon says the investment agency is aware of the competition from eastern Europe. He insists it is not a new issue but rather the continuation of a trend that started in the 1990s.
"Our market research suggests that 56 per cent of ICT investment is now going to eastern Europe. Hungary in particular," he says. "But we are already changing our economy and the type of industry that we bring to the Republic... We are bringing more skilled jobs to the Republic and are competing with Boston and Switzerland for these type of projects."
But clearly Ireland will face tough competition from accession states and will have to remodel its economic policies to ensure continued success.
