Monday 23 October 2017

Dan O'Brien: Now it's time to consider Ireland's services exports

Irish service firms which exported performed better in terms of employment, productivity, wages, sales, and investment
Irish service firms which exported performed better in terms of employment, productivity, wages, sales, and investment
Dan O'Brien

Dan O'Brien

International trade is the lifeblood of small economies. Recently, this column looked at new research on Ireland's foreign trade in goods - tangible things, such as meat and medicines, that are put into containers and shipped to other countries. Today, the much less discussed subject of services trade is put under the spotlight.

It needs plenty of discussion, because total sales of services to foreigners last year brought in €133bn to Ireland Inc. The value of services export earnings in recent times have come close to the value of goods exports, a very unusual state of affairs (on average globally, economies export four times more goods by value than services).

Another reason to discuss the matter is Brexit. In 2015, the most recent year for which figures are available by individual market, Irish services exports to the UK were worth €24bn. It is not well known that this far exceeds the value of merchandise goods, at €14bn, that the British buy from Ireland-based firms. That latter figures, incidentally, includes all food products sold into the UK market.

The enormous uncertainty around Brexit is particularly acute when it comes to services trade.

Services are one of the 'Four Freedoms' of the EU Single Market. While Europe's is the most integrated service trading regime in the world, there is nothing like perfect freedom to trade services across borders. There are formal and informal barriers, such as national licensing and regulations. The EU also does not have a uniform trade regime with non-EU countries.

All of this makes the rules around cross-border sales of services hard to understand. Even the likes of Peter Ungphakorn, a veteran trade practitioner, analyst and blogger, calls the system internationally "unbelievably complicated".

This, along with many other factors, will make negotiating an EU-UK free-trade agreement time-consuming, and even more so if there are moves to deepen the Single Market for services among the 27 EU member states before such a deal is inked.

At present it appears certain that any new arrangement will result in a deterioration in market access to the EU for UK firms compared to the current single market arrangement. It will also mean a deterioration in access to the UK by EU-based firms. Brexit was always going to mean more barriers to doing business.

Services have become an increasingly important part of global and Irish trade. Yet there is less known about them than trade in goods. Services have proven to be more difficult to account for and subsequently harder to analyse.

A recent ESRI paper by Martina Lawless and Zuzanna Studnicka attempts to fill in some of the knowledge gap for Ireland*. Using detailed data from the CSO's Annual Services Inquiry, the economists looked at the differences between Irish-owned and foreign-owned firms, and between export-oriented services firms and others (It should be noted that their analysis excludes financial services exports and imports).

Ireland's trade in services shares some similarities with its trade in goods. Among the most eye-catching similarities is how little of the exporting is done by Irish-owned firms - a mere 8pc by value in 2012 (the most recent year cited in the paper). The ESRI paper confirms what all other research has shown, that is that foreign-owned firms dominate Irish services exports.

It also shows that only 1.5pc of Irish-owned service firms export, compared with 20pc of foreign-owned ones.

A small number of large firms account for the most export earnings, something that is not unusual by international standards or compared to goods exports. Despite being a small share of total firms, exporters account for a fifth of total services employment, again reflecting the presence of large firms.

The lower number of firms can partly be explained by the nature of many services, which cannot be provided over distance (hairdressers and barbers are the textbook examples). But the difference in the export participation rate between Irish and foreign firms highlights both the weakness and potential of indigenous businesses.

According to the ESRI research, there are three big sectors in non-financial services exports: "Computer Programming and Publishing Activities" (47pc of total), "Wholesale trade, except motor vehicles" (27pc) and "Information service activities" (14pc). Owing to a lack of data and confidentiality reasons, these sectors are not further disaggregated. That said, it would be reasonable to assume from the data that the largest non-financial services exporters are IT companies, or more specifically US tech giants based in Ireland.

Among Irish firms wholesale, IT services, and air transport are the three largest exporting sectors. The foreign sales of Irish business and professional services (accounting, legal, real estate, R&D, and telecommunications) are a small share of the total, but still amount to hundreds of millions of euro.

The ESRI economists also looked at the difference between performance of exporters and non-exporters. In line with previous studies, they find an "export premia". Those Irish service firms which exported performed better in terms of employment, productivity, wages, sales, and investment. There is, of course, a direction of causality issue here: successful firms may have become successful because of exporting or exported because of good performance at home. Either way, there is a good case for incentivising and supporting firms looking to export, particularly given the small size of our domestic market.

A rather surprising finding is that a majority of "services" firms in the exporting business sell both goods and services, or even more commonly, only goods - the classic import-export operator. In fact, just 41pc exclusively exported services. The inclusion of the "retail and wholesale" sector in services can account for some of this. However, the finding holds true even when the sector is excluded.

A final point is the increasing importance of online presence. Irish firms which made more sales online were more likely to export. Not surprisingly, given role of technology in the modern economy, the study finds that many services are delivered digitally. For an island economy, this route to foreign markets can and should be a game changer. Time will tell whether the opportunity is exploited.

* https://www.esri.ie/publications/services-exports-and-exporters-of-services/

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