Only 14 per cent of chief executives believe the outlook is 'favourable', writes Fiona Reddan.

COST CONTAINMENT, talent development and maintaining a favourable tax regime are the three areas Ireland needs to work on to conserve its competitive advantage on the world stage, according to a new survey of Irish chief executives.

According to the Pulse survey of 173 chief executives by PricewaterhouseCoopers (PwC), only 14 per cent believe the outlook for Irish business in 2008 is "favourable".

Friends First chief economist Jim Power says it is "refreshing to hear an explicit admission of just how difficult things are out there", as he says there has been a tendency to keep heads buried in the sand.

The slowdown in construction, the fallout from the credit crunch, the appreciation of the euro and higher energy costs have slowed growth and created a more difficult business environment.

"The whole trading environment has become extremely difficult for Irish companies," says Power. "Domestic demand conditions are poor, external demand conditions are weakening, and exchange rates are going against Irish companies, particularly the dollar and sterling."

While rising costs have plagued businesses for some time, favourable economic conditions downplayed their significance.

Now, however, the PwC survey sends out a clear signal that the business environment needs to be improved. Some three-quarters of chief executives were unhappy with the cost of doing business in Ireland.

"Generally the cost of doing business over the last five years has increased dramatically and all costs such as State services, wages, commercial rates, fuel, electricity, etc have increased. The Government needs to ensure that the environment remains as business friendly as possible, so keeping the cost base in order is extremely important," says Power.

This means restoring competitiveness and ensuring the national wage agreement is a low wage agreement with strong productivity delivery built into it, he says.

To combat rising costs and control cost bases, 63 per cent of the firms in the survey said they would conduct a review of their supply chain, while 68 per cent have outsourced or intend to outsource one or more non-core activities.

Some 77 per cent were unhappy with labour costs. Ireland's goal of becoming a fully-fledged "knowledge-based economy" depends largely on having a pool of skilled labour. However, rising labour costs may impinge on this, and although three-quarters of the chief executives expressed satisfaction with the availability and quality of labour, only 36 per cent expected growth in employment, down from almost 50 per cent last year. This means continued investment to attract higher-quality jobs and investing in training and upskilling will be key to future employment growth.

Other problems regarding the business environment included dissatisfaction with transport infrastructure (90 per cent) and telecommunications (63 per cent).

Tax has been a major factor in Ireland's attractiveness as a location for multinational corporations, and the vast majority (88 per cent) expressed satisfaction with the corporate tax regime.

However, with two-thirds of the chief executives of multinationals deeming tax to be an important factor in the decision to operate here, it is clear that governmental policy on the issue is pivotal to sustaining Ireland's advantage in the sector.

With regards to inward investment, almost two-thirds of chief executives of multinationals indicated that additional Irish investment was being considered and about three-quarters believed Ireland was still well placed to attract investment.

Some 93 per cent of chief executives of multinationals agreed that investment incentives offered by the Government compared favourably with those of most developed economies. However, newer initiatives such as the holding company regime and research and development (R&D) tax credits have not yet found favour. Only 36 per cent of those surveyed agreed that these initiatives had helped promote Ireland as a suitable location, with the absence of an outright exemption for foreign dividends and a perceived complexity associated with the R&D regime possibly deterring multinationals from availing of them.

Of the multinationals seeking to expand in countries other than Ireland, there has been a notable decline in those considering the UK, down from 25 per cent in 2007 to 6 per cent this year, and an increase in those considering India, up to 13 per cent from 4 per cent last year.

While the global credit crisis has led to a tightening of lending practices, surprisingly 47 per cent said this had no significant impact on their business, while only 10 per cent of respondents said it had made it more difficult to raise finance. However, one-third did say the credit crunch had made it more difficult to do business.

Power says a recovery will not come for some time. "Over the next 12 months, the external environment will remain very challenging, and it will be later in 2009 and into 2010 before you see any real recovery."

However, while the majority of respondents fear deteriorating economic conditions, most of the companies surveyed still have aggressive growth strategies. Almost two-thirds plan to enter new product markets, while 42 per cent will enter new geographic markets.

Moreover, the majority of chief executives felt revenues, profits and capital investment would continue to grow."