Irish Economy
Ireland: Only 3% of Irish SMEs are active in manufacturing - Part 2
By Michael Hennigan, Finfacts founder and editor
Feb 23, 2015 - 8:24 AM

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Ireland: Only 3% of Irish SMEs (small and medium size firms with up to 249 employees) are active in manufacturing, whereas the equivalent figure for the EU is 10% according to European Commission data.

The Central Statistics Office (CSO) in business demography data published last June showed that of 12,551 enterprise births in 2012, only 674 were in manufacturing.

A Central Bank economics paper noted in 2012 that "despite Ireland’s reputation as one of the world’s most globalised economies, fully 64% of private sector workers are employed by indigenous non-exporting firms, with 56% working for indigenous, non-exporting SMEs."

The economists add: "These statistics highlight the importance of domestic demand for employment generation, and suggest that an export-led recovery may not be a panacea for the Irish unemployment crisis."

In the sample used in respect of 2008 data, foreign firms were responsible for 85% of exports and indigenous firms for 15%.

Forfás, the former policy advisory agency, reported in 2013 that overall, in 2011, foreign-owned firms accounted for 89% of exports in the Manufacturing Category, 95% of exports in the Internationally-Traded Services Category and 0% of exports in the Energy, Water, Waste and Construction Category, in State enterprise agency assisted firms. This compares with shares of 90%, 95% and 0% respectively in 2002.

Forfás data covers firms with a minimum of 10 employees while CSO data has a minimum of 3 employees.

The split for the number of CSO firms is about 3,600 Irish and 400 foreign-owned.

We focused on the Irish food & drink sector in Part 1 of this series and about 40,000 of the 50,000 employed in food & drink manufacturing, are in Irish-owned firms.

What is striking about the Forfás chart above is that direct expenditure by Irish manufacturing firms in 2011 was greater than that by the foreign-owned sector and employment was at 94,000 and 89,000 respectively.

Meanwhile, the chart below shows that foreign-owned firms had a dramatic fall off from 2006 for the percentage of Irish-produced services purchased as a share of total services purchased — this may well reflect rising fake services exports resulting from the tax avoidance as royalties rose to hoover up Double Irish revenue diversions to Ireland.

Changing manufacturing

Whether manufacturing should be left to developing countries while the developed countries focus on knowledge-based services is on ongoing debate. However, US Bureau of Labor Statistics forecasts show that the biggest growth in services jobs will be demand for poorly-paid personal aides for the growing number of old people.

Working for Apple in the US should seem like a good job to have but the majority of the 50,000+ staff are in retail and customer support.

The New York Times reported in 2012 that average retail staff annual pay was $25,000.

Employment in manufacturing has fallen in most major manufacturing countries over the past two decades and the US had a big drop between 2000 and 2010, but its decline in manufacturing employment since 1990 is in line with the changes in several European countries and Japan.

Robert Samuelson, Washington Post columnist wrote in April 2013:"Measured by jobs, the fall has been deep and persistent. From 1973 to 2010, manufacturing’s share of total non-farm US employment has dropped from 25% to 10%. The recent decline has been particularly severe, with more than 5m jobs disappearing since 2000..From 1973 to 2010, manufacturing’s proportion of employment fell from 22% to 10% in Canada; from 37% to 21% in Germany; from 23% to 9% in Australia; from 28% to 17% in Japan; and from 29% to 13% in France.

In the period 1990-2008, almost all the additional increase in US employment was in the non-tradeable sector led by government and health care. According to a paper Prof Michael Spence, a Nobel laureate in economics, and Sandile Hlatshwayo, a researcher at the Stern School of Business, New York University, almost all of the incremental employment increase of 27.3m jobs was on the non-tradeable side. On the non-tradeable side, government and health care are the largest employers and provided the largest increments (an additional 10.4m jobs) over the past two decades.

The authors say that companies in the tradeable sector, under the pressure of global competition, are moving low- and mid-skilled work to other countries while the higher-skilled Americans who remain in those firms share in the benefits of that shift through wages and salaries that started higher and have been growing faster. In the non-tradeable sector, the story is one of rapidly rising employment but a slow rise in output, which has resulted in stagnant wages and benefits.

Generally service jobs that replace manufacturing are less-well paid and even though manufacturing has become increasingly automated in recent times, Dani Rodrik, a professor of social science at the Institute for Advanced Study, Princeton, New Jersey, who specialises on globalisation, says manufacturing remains an imperative for the developing world. He is a native of Turkey.

The US Congressional Research Service says manufacturers have been responsible for approximately 70% of all R&D conducted by businesses in the United States in recent years. This is similar to the proportion in Italy, but far lower than in Germany, Japan, and Korea, where manufacturers account for close to 90% of all business financed R&D. Conversely, the service sector is relatively more important in undertaking research and development in the United States than in many other countries. The most notable exception is the United Kingdom, where service companies account for three-fifths of all business R&D spending - however, UK R&D is low compared with its competitors.

Germany has the highest manufacturing pay in the world and total Irish manufacturing employment as a ratio of the workforce at 11% is about half Germany's level.

In 2013, the Irish Government published a plan to add 43,000 jobs by 2020 from 206,000 in Q3 2012 (the CSO subsequently revised up the Q3 2012 level to 231,000 and the number was 238,000 in Q3 2014).

The report lacks any SWOT analysis: strengths, weaknesses , opportunities and threats. The words 'strength' and 'strengths' appears 44 times but 'weaknesses' or "weakness" were forbidden.

If only aspirations and platitudes could be monetised!

Irish manufacturing earnings on average are higher than the service jobs of most other sectors of the private workforce. See here.

Patrick Honohan, Central bank governor and a former professor of economics, said in a speech in March 2014:

One hoped-for element of the policy of encouraging foreign-owned firms is the inward transfer of technology and business know-how including to locally controlled firms. As the decades passed, this transfer does seem to have happened to an increasing extent. But the reliance on foreign-owned firms has lasted a long time. Irish-owned companies have grown and prospered over the past half-century, and the most pessimistic of prognostications have not materialised. Nevertheless, this systemic dependence on foreign capital and know-how has skewed Irish development. In the interests of robust diversification, most Irish economists observers would hope for a greater convergence towards normality in this aspect of Irish economic development, with a stronger emergence of innovative Irish companies alongside those steered from abroad.

One side-effect of the heavy reliance on multinational corporations for driving employment and productivity growth has resulted from the fact that these companies generally bring most of their financing with them, thereby reducing the pressure on the local financial intermediaries and markets to innovate in the direction of designing and appraising financing packages for modern industry. While this did not discourage Irish banks from expansion, it likely contributed to their slide into a monoculture of property lending."

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