US embassy cable - 04DUBLIN1345

UNCLAS SECTION 01 OF 03 DUBLIN 001345 
 
SIPDIS 
 
USDOC FOR MARKET ACCESS COMPLIANCE/MCLAUGHLIN 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EFIN, EINV, EIND, ELAB 
SUBJECT: IRELAND'S GAME PLAN ON ECONOMIC COMPETITIVENESS 
 
 
1. Summary: Firms in Ireland must move increasingly into 
high-value goods and services in order to safeguard the 
country's prosperity, advises a high-profile, 
government-commissioned report on Ireland's economic 
competitiveness.  The report notes that rising costs, poor 
performance by indigenous firms, changes in EU policies, and 
accelerating globalization threaten to overpower the factors 
underlying Ireland's economic success during the past decade. 
 The report recommends that the Irish Government assist firms 
with the transition into high-value goods and services by 
promoting enhancements to sales/marketing expertise and 
technology/R&D capability.  An Irish Central Bank economist, 
however, questions that approach, arguing that indigenous 
enterprises should leave heavy R&D investment to 
foreign-owned firms.  Despite Ireland's worries about 
competitiveness, U.S. firms continue to see the country as an 
attractive investment destination and export platform.  End 
summary. 
 
---------------------------- 
The Focus on Competitiveness 
---------------------------- 
 
2.  Concerns about Ireland's competitiveness as an exporter 
and foreign direct investment (FDI) destination have featured 
prominently in recent Irish economic commentary, even as the 
country's economy continues to perform strongly.  In late 
August, for example, a Department of Finance report 
forecasting the second half of 2004 warned, "We cannot afford 
to worsen our already deteriorating competitive position." 
By contrast, the same report upgraded projections for GDP 
growth in 2004 from 3.3 percent to 4.7 percent, lowered 
predictions for average annual inflation from 3.0 percent to 
2.2 percent, and forecast a government surplus of euro 600 
million.  In public comments on the report, Finance Minister 
Charlie McCreevy downplayed this rosy outlook and reiterated 
that "regaining competitiveness is a key priority if we are 
to safeguard our economic success." 
 
3.  Recent attention to competitiveness derives primarily 
from a new, long-anticipated report entitled "Ahead of the 
Curve: Ireland's Place in the Global Marketplace" -- 
essentially, a game plan for Ireland to sustain exports, FDI, 
and economic prosperity in the face of international 
competition.  The report was written by the Enterprise 
Strategy Group (ESG), established by Deputy Prime Minister 
Mary Harney in 2003 with 21 representatives of industry, 
labor, academia, and government (primarily Forfas, the 
government office that coordinates Ireland's 
business-promotion agencies).  Eoin O'Driscoll, Executive 
Vice President (and soon President) of the American Chamber 
of Commerce, chairs the ESG and was the Chamber's channel for 
significant input into the report.  With additional 
contributions from over 250 people, the ESG report is 
Ireland's broadest industrial policy statement since the 1992 
Culliton Report, which called for the development of an 
export-oriented enterprise sector and thus set the stage for 
the emergence of the Celtic Tiger economy. 
 
------------------- 
The Cause for Worry 
------------------- 
 
4.  The ESG report argues that the factors underlying 
Ireland's economic success over the past decade do not 
adequately address emerging challenges to the country's 
continued competitiveness.  These positive factors have 
included: ease of access to EU markets and EU regional aid; 
an open climate for trade and FDI; a favorable corporate tax 
regime (a single rate of 12.5 percent that applies to both 
foreign and Irish firms), fiscal policies that minimize 
government debt; burgeoning global trade (particularly in the 
IT and life-science sectors, recipients of substantial FDI in 
Ireland); and the availability of young, educated labor.  The 
challenges that threaten to overpower these factors, however, 
are primarily: 
 
A) Rising costs: Forfas ranks Ireland as the most expensive 
country in the euro zone (in a tie with Finland).  Although 
CPI inflation in Ireland has converged downward toward the EU 
average through mid-2004, annual inflation since the late 
1990s has consistently exceeded the EU average.  During the 
same span, wage increases have been two to three times the EU 
average. 
 
B) Poor indigenous performance: Except for a few 
high-performing firms, real growth in the sales and exports 
of indigenous Irish enterprises was negligible between 1990 
and 2002.  The ESG report noted that a relatively small 
number of foreign-owned firms that chose Ireland as their 
base for serving European markets drove Ireland's strong 
economic performance in that span.  Foreign-owned firms still 
account for over 85 percent of Ireland's exports by value. 
 
C) Changes in EU policies: Grant aid limits for the EU-15 
states will tighten after 2006, while those for the newer 
member states will be relatively high.  Ireland's ability to 
provide grant assistance to attract foreign investment, a key 
element of earlier enterprise strategy, could thus evaporate 
in much of the country. 
 
D) Accelerating globalization: China, India, and the new EU 
Member States have emerged as attractive FDI destinations, as 
they offer low costs, an ample supply of skilled labor, 
comparably low corporate taxes, and access to new markets. 
 
--------------------------------------------- ------------- 
The Solution: Sales/Marketing Expertise and Technology/R&D 
--------------------------------------------- ------------- 
 
5.  The ESG's strategy to shore up Ireland's competitiveness 
is to enable enterprises to succeed in internationally traded 
services and high-value manufacturing through 
government-promoted enhancements in marketing/sales expertise 
and technological/R&D capability.  The strategy, in 
particular, targets indigenous small and medium-sized firms. 
 
A) Sales and Marketing: Ireland-based enterprises do not have 
strong outreach to international consumers when compared with 
firms in other trading countries, argues the ESG.  Negligible 
real growth during the 1990s in indigenous firms' exports, 
most of which went to the UK, would suggest weak 
international sales management.  Foreign-owned firms in 
Ireland have focused primarily on production as a single step 
in their parent companies' supply chains, with few selling 
directly to customers.  To help firms understand and provide 
what customers want, the ESG proposes a new government entity 
called "Export Ireland," which would focus on export market 
intelligence and sales promotional activities.  The ESG also 
suggests a five-year plan to place, on a cost-sharing basis, 
1,000 graduates and internationally experienced professionals 
in Ireland-based firms to augment the stock of sales and 
marketing talent.  (In discussions with the Embassy, ESG 
Chairman O'Driscoll highlighted this plan, expressing hope 
that the personnel could be sourced largely from the United 
States.) 
 
B) Technology and R&D: Enterprises should simultaneously 
upgrade their technological/R&D capability to develop 
innovative, higher-value products and services, urges the 
ESG.  The ESG report acknowledges Ireland's status as a world 
R&D leader in the IT and pharmaceuticals sectors.  The report 
points out, however, that Ireland's total business 
expenditure on R&D is 0.88 percent of GDP, only 73 percent of 
the EU average and 57 percent of the OECD average.  To 
encourage more R&D investment, the ESG proposes increased tax 
incentives and the establishment of "Technology Ireland," a 
government office that would coordinate R&D strategy among 
business-promotion agencies, in consultation with business 
networks.  The ESG also recommends stronger collaboration 
between enterprises and academia,  so that the latter "might 
generate the intellectual capital required to fuel an 
innovation-driven economy." 
 
------------------------------- 
Ireland: The European Singapore 
------------------------------- 
 
6.  The drive to improve competitiveness reflects Ireland's 
natural anxieties as a small, open economy, econoff was told 
by Andrew McDowell, Forfas Department Manager for Trade and 
Innovation and a principal contributor to the ESG report. 
McDowell compared Ireland to Singapore, as both were newly 
prosperous countries of comparable population size aiming to 
succeed in competitive markets against larger neighbors and 
aggressive new entrants.  As a euro-zone country, 
furthermore, Ireland could not rely on monetary policy tools, 
such as exchange rate adjustments, to enhance its 
competitiveness.  Echoing the ESG report, McDowell said that 
Ireland's best bet was to move up the value chain to provide 
higher-end, innovative goods and services, ceding lower-end 
manufacturing to the new EU member states and Asia.  He 
explained that higher relative costs in Ireland did not mean 
that enterprises could not achieve efficiencies to provide 
higher-value products.  He cited Hewlett-Packard as an 
example of a foreign-owned enterprise in Ireland that had 
moved out of assembly operations, introduced novel R&D 
programs, developed new product lines, and expanded its work 
force despite rises in domestic cost/wage levels. 
 
--------------- 
A Contrary View 
--------------- 
 
7.  Although competitiveness is a vulnerability in the Irish 
economy, the ESG's call to strengthen technological R&D and 
sales and marketing expertise in indigenous firms is overly 
ambitious," Irish Central Bank Assistant Director General 
Michael Casey told econoff.  He argued that Irish firms, 
lacking economies of scale and a deep pool of highly educated 
labor, should simply copy (though not pirate) from 
foreign-owned enterprises, rather than invest heavily in R&D 
to pursue innovations of their own.  Casey noted that Japan 
had used this strategy successfully in the formative years of 
its auto industry, with Japanese companies simply copying 
American car models before eventually developing their own 
distinctive styles.  He noted that the dissemination of 
technology from foreign-owned to indigenous firms was already 
underway and that Irish firms intent on R&D investment would 
do better to focus on niche areas.  Casey expressed 
confidence that foreign firms with substantial investments in 
Ireland would remain in country; his concern was that they 
would use their preponderant position in the economy to 
influence government policies on taxation and grant aid. 
Overall, he saw no downside to continued reliance on 
foreign-owned firms to sustain Ireland's economic success, 
quipping that "we've been getting away with that for 30 
years." 
 
--------------------------------------------- --- 
Comment: Steady as She Goes with U.S. Investment 
--------------------------------------------- --- 
 
8.  Despite Ireland's concerns on competitiveness, it would 
seem that U.S. firms continue to view the country as an 
attractive investment locale and export platform.  In 2003, 
U.S. investment in Ireland was USD 4.7 billion, tripling the 
previous year's total and raising the total stock of U.S. 
investment (on a historical cost-basis) to USD 46.7 billion. 
This past year has seen the high-profile opening of Intel's 
new "Fab 24" wafer production facility, signaling the 
company's confidence in Ireland as a base to develop the next 
generation of micro-chip technology.  U.S. subsidiaries in 
Ireland, in fact, see the competitiveness issue more in terms 
of the challenge to out-perform sister subsidiaries in other 
countries.  The ESG's recommendations to help enterprises 
move further into high-value goods and services should thus 
be welcome news to U.S.-owned firms.  As the ESG report 
notes, firms that can succeed in such transitions will hold 
greater strategic importance to their parent companies and, 
in turn, become more embedded in the Irish economy. 
KENNY