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STRUCTURAL WEAKNESSES IN IRISH INDIGENOUS INDUSTRY
(OR: WHY WE STILL NEED LOW CORPORATION TAXES)
Frank Barry
Department of Economics
University College Dublin
When I made a presentation recently to the Institute of European Affairs on
why I thought it still important to maintain a relatively low rate of corporation
tax, my comments were met with general antagonism by the more left-wing
members of the audience. I agree that it is unfortunate that services sectors
be given such a windfall in profits – due to Ireland’s decision to respond to the
EU’s insistence on tax harmonisation across sectors by harmonising at a rate
close to the existing low rate on manufacturing industry – at a time (when has
there not been such a time?) when so many of our social services are in a
shambles. Recall though that other EU states had hoped we would have
harmonised at a higher rate, as they feel we have been diverting foreign
direct investment away from them by our low rates. The corollary is that a
higher rate would have diverted FDI away from us. I agree with this argument
that the other EU states have made. Such a result would have been to their
benefit, and to our cost!
We will ultimately probably need to wean ourselves off our current excessive
dependence on foreign industry. Note my use of the word “probably” here,
whose protective cover I intend to stretch all the way up to the word
“excessive” that appears later in the sentence. Ireland looks unusual
amongst EU states at present in having such a strongly foreign-dominated
manufacturing sector, but in fact virtually all EU and Central and Eastern
European countries (and perhaps all countries everywhere) are moving in this
direction. It is possible that Ireland has simply been globalised first and that
twenty years from now, even if our dependence is not reduced, we will no
longer appear unusual in this regard.
Let us assume though that our relative attractiveness to foreign industry does
diminish in the future. I have argued recently in fact that there is quite a strong
possibility of this occurring over the medium term, given that many of the next
group of EU entrants have learnt lessons from the close watch they have kept
on Ireland over the course of the boom period, and a number are likely to be
in a position to compete strongly against us for the type of FDI that we have
been successful in attracting so far. The important question then is what , if
anything, should we do to reduce our dependence before these threats
Published by tasc - think tank for action on social change, as a contribution to public debate.
The views expressed are those of the author.

ecome too virulent? Consider one of the more extreme actions we could
take – agreeing to corporation tax harmonisation at the EU level for example.
This would presumably give rise to substantial foreign direct divestment. This
would certainly wean us off FDI, but at what cost?
Many might assume that indigenous industry in this event, being thrown back
onto its own resources, would have no option but to adjust. This perspective
though is coloured by the notion that a country will always find a range of
goods in which it has a comparative advantage. This notion has been
restated recently as saying “countries do not go out of business”. This
perspective, however, I critiqued in my 2002 paper in the ESRI’s Quarterly
Economic Commentary.
It assumes that such an adverse shock will reduce wages or otherwise induce
sufficient efficiency-enhancing changes that new firms and new industries will
eventually emerge in Ireland. In the “regional economy” perspective against
which I contrasted this view however, wages, entrepreneurship,
management- and work practices etc. need not be much affected by such a
shock. Labour may instead flow out of the economy, rather than new
industries and new firms emerging. In a nutshell, “while countries can’t go out
of business, regions can and do!” Who amongst us old enough to remember
the 1980s, never mind the 1950s, can deny this as a possibility?
Such a catastrophe might not occur, even if foreign industry were to leave
precipitously, if we already had a strong dynamic indigenous sector in place
that could take up the slack. We do not at present however, as I will show in a
moment.
What we need to do, if we fear divestment, is to build a stronger indigenous
sector before this occurs. How to do this is one of the deepest, hardest and
most important questions in Irish economic development, and one on which,
to my own great disappointment, I do not have much wisdom to impart at
present. But it seems to me crucial that some such framework be put in place
and be seen to be working before we begin to think of raising corporation tax
substantially. Otherwise, that colourful phrase about cutting off one’s nose to
spite one’s face would appear apt!
So, where do these structural weaknesses manifest themselves? Across
virtually all dimensions, I would argue. We think of Ireland as a highly exportoriented
economy, yet indigenous manufacturing firms export less than onethird
of their output (compared to a figure of over 90 percent for foreignowned
firms). This is less than the export-output ratios for the manufacturing
sectors of 7 of the 8 EU countries for which OECD (2001; table C 2.2.1)
presents data.
We feel proud of the fact that we have diversified our exports strongly away
from the UK market, yet the UK still takes 40 percent of indigenous
manufacturing exports. Admittedly this figure has fallen by around 1
percentage point a year over the previous 15 year period, but the UK market
is now a much more volatile one to be in given that we can do little to protect
ourselves against sterling fluctuations.
We think of Ireland now as a high-tech economy, yet only 26 percent of
indigenous employment is in medium- or high-tech sectors (16 percent and
Published by tasc - think tank for action on social change, as a contribution to public debate.
The views expressed are those of the author.

10 percent respectively), compared to 76 percent of foreign-sector
employment (with 20 percent in medium-tech and 56 percent in high-tech
sectors).
We laud the fact that R&D expenditures relative to GDP are now at the levels
attained in other small European economies. Yet, when account is taken of
the high-tech sectoral location of our foreign industry, we find that on a sectorby-sector
basis Ireland emerges poorly by EU standards. Very little of this
R&D, furthermore, is done by indigenous firms – whose spend per job is even
lower than for foreign firms in most sectors – and the indigenous sector has a
very poor record in developing patentable processes or inventions.
The tendency for multinationals to concentrate R&D expenditures at their
home locations might be taken to indicate that the Irish situation may be set
to change, given the strong growth in outward FDI from Ireland over the
course of the 1990s. These Irish-owned multinationals however are
disproportionately located in non-traded sectors such as Construction and
Paper and Packaging and do not exhibit the type of “created asset” intensity
(derived from R&D and strong product differentiation) that has been found for
Korean or Taiwanese multinationals, for example, by Dunning et al. (2001).
Irish indigenous overseas mergers and acquisitions activities in the high-tech
area, furthermore, are concentrated on the US and tend to be directed toward
“technology sourcing”, which can in fact lead to a downsizing of domestic
R&D facilities and a reduction in high-skill employment at home.
In none of these areas then does indigenous industry at present appear
capable of sustaining the economy on a strong upward trajectory. If Ireland’s
foreign sector were to be decimated by a sharp increase in our corporation
tax rate much of the economic progress made over the boom period would
likely disappear along with it. These are areas of policy concern that
advocates of high corporation tax rates ignore at very great peril!
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For further information, contact Frank at frank.barry@ucd.ie
References
Barry, F. (2002) "The Celtic Tiger Era: Delayed Convergence or Regional
Boom", ESRI Quarterly Economic Commentary, Summer 2002; available at:
http://www.ucd.ie/~economic/staff/barry/research.html
Barry, F. (2002) "A Note on Transfer Pricing and the R&D Intensity of Irish
Manufacturing", UCD Working Paper 02/30, available at:
http://www.ucd.ie/~economic/workingpapers/2002.htm
Barry, F., H. Görg and A. McDowell (2003) “Outward FDI and the Investment
Development Path of a Late-Industrialising Economy: Evidence from Ireland”,
Regional Studies, (forthcoming); available at:
http://www.ucd.ie/~economic/staff/barry/fdi.html
Published by tasc - think tank for action on social change, as a contribution to public debate.
The views expressed are those of the author.

Dunning, J.H., C.S. Kim and J.D. Lin (2001) “Incorporating Trade into the
Industrial Development Path”, Oxford Development Studies, 29, pp. 145-154.
OECD (2001) Science, Technology and Industry Scoreboard: Towards a
Knowledge-Based Economy, Paris: OECD.
O’Sullivan, M. (2000) “The Sustainability of Industrial Development in Ireland”,
Regional Studies, 34, 3, 277-290.
Published by tasc - think tank for action on social change, as a contribution to public debate.
The views expressed are those of the author.