Dan O'Brien: Home-grown companies lag when it comes to exports
Published 26/06/2016 | 02:30
Brexit is coming. New barriers to doing business will go up between the economies of Ireland and the UK. The only question is how high they will be. Nobody will be more concerned than Irish-owned exporting businesses. No market comes close to the UK when it comes to their foreign sales, unlike the much bigger foreign-owned exporting sector, which is far more focused on the continental and US markets.
The nightmare of Brexit will require businesses to expend time and money for years to come. I discuss the Brexit issue in depth in my column in the main section of the paper, but amid the gloom, let's give two cheers for last week's little-reported news that Irish businesses are getting better at exporting.
That's two cheers, not three cheers, because the news is not as good as suggested in the press release from Enterprise Ireland (EI) - the agency tasked with helping companies internationalise.
Let's start with some context that needs saying: Ireland would be one of the weakest exporting nations in Europe if the multinationals all left and the only people to sell goods and services to foreign markets were indigenous companies. Foreign-owned companies account for 90pc of all exports of goods and services from this economy.
Although no comparative figures exist, I would bet a lot of money that no peer economy has an export profile even remotely similar to Ireland's.
Last week's announcement by EI that the firms it supports had grown their export revenues by 10pc last year is good. But it is important to note that total exports grew by more than twice that rate during 2015. Just as relevant is that, while Irish-owned companies doubled export receipts over the decade, their share of total exports actually fell back slightly.
When Ireland joined the then EEC more than four decades ago, it was hoped that access to new markets would result in stronger export growth. That certainly happened - but it was mostly attributable to foreign companies.
Half of indigenous companies' exports went to the UK back then. Diversification has happened, but the UK market is still by far the most important.
Last week also saw the publication of another Government survey on the role of foreign and indigenous sectors in Ireland using a range of metrics. The Annual Business Survey of Economic Impact (ABSEI) is one of the very few sources of detailed data on how companies assisted by State agencies of various kinds are doing collectively.
Let's start with figures for overall export performance. Somewhat confusingly, the figures differ from the EI numbers. That is because EI also assists some foreign companies, most notably in the food sector, while ABSEI gives numbers for exclusively Irish-owned companies that are assisted by State agencies.
As a result, EI export figures are higher than those in the ABSEI survey. ABSEI figures are also less timely, covering only up to 2014. A further point that needs clarification is that the ABSEI survey data on the value of total exports is far below the total export figures compiled by the Central Statistics Office. The gap - of some €65bn in 2014 - is because many exporters, most notably financial institutions in Dublin's IFSC, are not client companies of any State agency. The ABSEI survey is huge, containing vast amounts of data, so the following analysis is limited to three sectors - food, pharma and IT services.
Your columnist was surprised to learn that half of the total food exports by all agency-assisted companies, amounting to €14bn in 2014, was accounted for by foreign firms. Moreover, exports accounted for almost 90pc of foreign firms' sales compared with half in Irish ones.
Despite this, food is by far the biggest export of Irish-owned businesses, accounting for almost as much as all other exports combined. If market diversification has been limited by geography, it has been even less so by sector.
Productivity differs a lot depending on ownership, and the gap is widening. Total sales per employee (which combines both sales into the home market and exports) was three times higher in foreign-owned companies than in home-grown ones in 2014. Because sales per employee has been rising more rapidly in foreign companies, the gap has been widening steadily since the first ABSEI survey in 2000.
The presence of most of the big global players in the pharmaceutical industry is a major success story, with the cluster of such firms in Cork being a world-beater.
As the second chart shows, sales per employee in foreign pharma companies was a staggering €1.6m in 2014. That was more than any other manufacturing sector and eight times that of the average Irish widget-maker. To what extent this is inflated by "transfer pricing" remains uncertain, but the practice of booking more profits in the Irish link in multinationals' value chains is very likely to explain at least some of that extraordinary figure.
It is worth noting that despite total pharma sales by all agency-assisted companies having doubled between 2000 and 2014, the numbers employed by those companies have fallen over the same period by close to one tenth. It stood at just under 22,600 in 2014. That's the miracle of productivity growth at work.
The other great success story in the foreign direct investment space is computer-related services. They have exceeded the pharma sector in foreign sales in recent years as so many US tech companies headquarter their European operations here. In 2014, the exports of the four sub-categories of computer-related services hit a combined €70bn.
The ABSEI figures show that in the same four sectors the numbers employed exceeded 54,000 in 2014, an increase of 12,000 on 2008. As the second figure shows, sales per employee are similar to the pharma sector, and as such it is not surprising that there are regular accusations of transfer pricing-type activity by tech companies.
If the foreign-owned sector is surging, interesting things are happening in its indigenously owned counterpart. Since 2008, the numbers employed have risen by 50pc in the four tech sub-categories - to reach 15,000. While that is good news, the degree of internationalisation of the sector is less stellar. The four sub-sectors earned €1.2bn in export revenues last year. Although that represents strong and consistent growth, it pales into insignificance compared with the €70bn that foreign tech companies earn from exports.
All told, there are plenty of nuggets of positivity about Irish business in the reams of data from last week's ABSEI, but the main takeaway is that we would be a trading backwater if it were not for the multinationals. If Brexit triggers a disintegration of the EU single market that those companies are in Ireland to service, we will once again become a backwater.
Sunday Indo Business