A key feature of Ireland's successful growth over the past 10 years has been the rapid expansion of foreign-owned manufacturing industry, which now accounts for over 75 per cent of net manufacturing output. Much of this new industry is US-owned and concentrated in high-tech industries, where employment has more than doubled since the late 1980s.
Promotion of investment by world-class companies in these fast-growing industries, as a lever to building up Irish companies in the same industries, is at the heart of our current industrial development strategy. This strategy sees Ireland as a knowledge-based economy specialising in higher value-added production.
Announcements of job losses in several high-profile companies in recent weeks have led some to question whether the policy of encouraging investment in these high-tech industries remains a good strategy for Ireland. This question has two dimensions: do the foreign companies in high-tech industries really create and sustain jobs better than companies in the traditional (lower-tech) industries? Do particular types of plants generate jobs that are more likely to survive in the longer term?
To help answer these questions with hard figures, we have just published the first systematic study for Ireland of these issues (in the current issue of the journal Research Policy).
Our research looks at over 600 foreign-owned companies in Irish manufacturing over the 1980s and 1990s. It shows that foreign companies in Irish high-tech industries (such as computers and office machinery, electronics, and pharmaceuticals) have a 50 per cent better record in terms of plant and job survival than companies operating in the traditional, lower-tech industries, such as wood and furniture, clothing and footwear.
This strongly suggests that recent job losses, while they are a real cause of concern for those who need to find alternative employment, should not cause Ireland as a country to lose confidence in its policy of promoting high-tech industries.
So, if we are to continue to promote high-tech industries, can we identify whether there are types of plants that are likely to do better in terms of surviving and sustaining employment in the long term?
IDA Ireland's policy over the past decade has been to encourage foreign companies to undertake research and development (R&D) in their Irish plants, as this is seen as a means of increasing their long-term commitment to Ireland. Do many of the foreign plants in Ireland undertake R&D? When they do, is their performance, in terms of plant and job survival, better than those that do not? Our study addressed these questions.
The research and development efforts of foreign companies have increased significantly over the past decade, and these companies account for the major part of industrial R&D undertaken in Ireland. However, the study shows that, despite official encouragement, only a quarter of them undertake research or development, and many of these do not have formal departments for these activities.
In terms of performance, the message from our analysis is unambiguous: plants actively engaged in R&D have a life expectancy which is 40 per cent higher than that of plants which are not research-active. Furthermore, the average duration of jobs in those plants which conduct research activities in Ireland is twice that of those which do not engage in research here.
What are the implications of our study for policy? Our research points to the need to recognise that, in competitive markets, there will always be some job losses, as companies respond to changes in products and processes of production.
These rates of change are fastest in high-tech industries, where leadtimes from product design to manufacture to marketing are very short. If Ireland is to develop as a high-tech, knowledge-based economy, more of the foreign plants based here must be part of the product development cycle of their parent companies. To do this, they must engage seriously in research-type activities that improve either products or production processes.
Since our low corporate tax regime reduces the incentive for foreign companies to undertake R&D in their Irish plants (because tax write-offs are greater in higher-tax countries), our science and technology infrastructure should make it particularly attractive for new and existing foreign companies to engage in R&D here. It has been acknowledged since the mid1990s that, as a country aspiring to develop a modern economy, we have under-invested in science and technology over past decades.
While we have made some progress in recent years, the reality is that we still lack a coherent 20year policy framework with the implied commitment of long-term resources.
The Government has always given financial priority to industrial policy, allowing it to take a long-term planning approach. It has not given the same priority to education, which, as well as being our economic and social bedrock, is now central to building the scientific and technological infrastructure we need to support continued development.
Is there a real commitment in Ireland to fund an educational policy, at all levels, but most especially at third level, which matches our economic and social aspirations? Temptations abound to cover up past and present weaknesses and to seek short term fixes for long-standing problems, or to promote high-profile projects that are simply appended to our existing weak structures. If Ireland is to sustain its recent success, our politicians and policy-makers must resist these temptations.
Our research suggests there is a clear long-term payback to the policy of promoting high-tech, R&D-active industry. The Government must take a 20-year rather than a five-year strategic view of education and research planning, and resource it accordingly. Without this commitment, we will find it difficult to persuade foreign companies to undertake serious research and development in Ireland.
Frances Ruane and Allan Kearns are economists