If Ireland is to avoid falling back into the role of European laggard, we must seek out new markets, either by creating new products or increasing exports by indigenous Irish companies

WHY WAS IRELAND so poor for so long? That question has been posed many times. Will Ireland bounce back from its current travails to retain its position as one of the higher per capita income countries in the world, or will it slump back to being a European laggard? That question preoccupies many people now, and not only in this country.

Central to answering both questions is the capacity to innovate. Although there is nothing approaching a consensus on the reasons for the under-performance of the Irish economy over most of the 20th century, low levels of innovation were central.

The most important innovation for small economies is the penetration of new markets, either by creating new products or by coming up with ways of increasing sales volumes of existing products. Only by exporting can small economies specialise, which in turn is the only way to increase output per person. It is, in short, the only route to riches.

But for most of the last century a shortage of innovation meant new products were not developed – unlike in the famed Danish example, agricultural exports did not move up the value chain, but remained largely accounted for by unprocessed commodities. Nor were new markets sought out.

Despite Britain being the slowest growing large European economy for decades, it remained the main focus for Irish exporters until very recently (and is still by far the most important market for Irish-owned exporters).

As a result of all this, Ireland’s export record, until relatively recently, was not good. In 1930, when figures were first collected, Ireland exported €57 million worth of goods, according to the Central Statistics Office (CSO). Protectionism and war saw even these modest receipts fall back drastically over the following decade and a half. It was not until 1948 that the 1930 figure was exceeded.

Over the course of the blighted 1950s, the nominal value of Irish exports almost doubled – not a strong performance given the opening of the West to free trade and the continental growth miracle that took place as recovery from the second World War was in full swing. The 1960s were more open and foreign sales of goods grew much more rapidly.

The beginnings of a more dynamic economy were to be seen, with much of that innovative capacity imported in the form of foreign companies establishing operations here.

The earliest figures for foreign trade as a percentage of the wider economy are from 1970. Then, exports of goods and services were equivalent to 35 per cent of gross domestic product (GDP). Over the following 20 years, exports grew faster than the wider economy and reached 57 per cent of GDP by 1990. Things changed radically in the final decade of the century as export growth rates went stratospheric, pushing Ireland to the top of the league table of global exporters. In the first decade of the new century, the picture has been more mixed, with services exports continuing to grow rapidly while goods exports plateaued.

When the global recession erupted in late 2008, Irish exports were less affected than those of most other countries. Now the foreign-focused part of the economy is the only fully healthy and expanding sector.

But if Ireland’s current success at exporting is unusual, it is even more unusual in that the overwhelming proportion of those exports are accounted for by foreign companies. Typically, Irish companies account for just one tenth of total exports. Put another way, if every foreign company ceased exporting tomorrow, Ireland would go from being one of the most open economies in the EU 27 to being the most closed. In other words, the long-term failure of Irish companies to innovate their way into new markets persists.

At one level, the argument can be made that this really doesn’t matter. Ownership is irrelevant in a globalised world. It is what companies do, not where their shareholders reside, that counts. There is much truth in this. But diversification is always the best strategy, not least because multinational firms are more footloose than home-based companies without operations in many countries. On that basis it would make the economy less vulnerable to shocks if we had more eggs in more baskets – that is, if Irish companies accounted for a larger share of total exports.

Taking the optimistic perspective, one could say that, from such a low base, there is huge potential for domestic companies to grow exports. All the ingredients seem to be in place: unimpeded access to the largest market in the world; participation in a large (usually) stable currency which lowers the transaction costs of cross-border commerce; a ready-made global network in the shape of the diaspora; spillovers into the domestic economy of technology and know-how from the many world-beating international companies already located here; comparatively low levels of red tape (according to the World Bank’s comprehensive “Doing Business” database); fluency in the international language of business; a well-educated population which no longer has abundant employment opportunities or the prospect of making easy money in property speculation; and a large number of young, thrusting and well-educated immigrants who are typically among the most entrepreneurial-minded.

This cocktail may already have begun to generate real innovation where it counts most – exports. According to figures from Forfás, in the middle of the last decade, export growth accelerated in home-owned companies to overtake that registered by foreign-owned firms. Recession halted and then reversed some of these gains in 2008-09 (there are no figures yet available for 2010). It remains to be seen whether the upsurge in indigenous exporting in the mid-2000s was a flash in the pan or the beginning of a structural reorientation of corporate Ireland.

With so many well-educated people unemployed or underemployed, it may be that they have no choice but to become more innovative and entrepreneurial. Necessity can be the mother of invention.