Growing the ICT industry: can New Zealand be the new Ireland?
December 19, 2007
One of the great success stories of the past decade has been the emergence of Ireland, which has been experiencing one of the highest levels of economic growth in the OECD. In particular, the ICT sector has played a remarkable role in that transformation, despite the limited size of the domestic market.
This turnaround came after severe economic crises throughout the 1970s and 1980s: high unemployment, high levels of emigration, and large government deficits. Businesses in traditional industries such as textiles and apparel, and metal and engineering, were experiencing high failure rates. In 1973 when Ireland joined the European Union, it was the poorest member state (in terms of GDP per capita) – yet since 2002 GDP per capita has consistently been the second highest in the EU (after Luxembourg).
Can New Zealand – or for that matter any other similarly sized nation – replicate Ireland’s success?
Up until the mid-1990s both Ireland and New Zealand had similarly sized economies, but from that time Ireland experienced an economic surge which has been consistently maintained over the next decade, resulting in a widening gap between the two countries (Exhibit 1).
Exhibit 1: GDP, PPP, current prices 1990-2006 for Ireland and New Zealand [Source: World Bank]
The ICT sector is now pivotal to the Irish economy. In 2004:
- the sector was responsible for 16% of total business value added in Ireland
- Ireland’s exports of ICT goods comprised more than USD23 billion and exports of ICT services over USD19 billion
- the ICT sector represented 6% of all enterprises and 8% of total employment
- the ICT sector employed 83,400 persons across approximately 5300 enterprises.
From the 1990s Ireland achieved huge success in attracting foreign investment in the ICT industry and became a major manufacturing base for computer hardware. Over one-third of all PCs sold in Europe are manufactured in Ireland. This success in the export of ICT goods is now being matched by success in the export of ICT-related services.
One of the earliest drivers of the economic boom was the establishment of call centres, with initial business coming from US companies seeking to benefit from the time zone differential and the well-educated English-speaking workforce.
Ireland has the advantage of geographic proximity to the rest of Europe, so that it is a potential location for companies establishing major European operational centres – over 500 ICT businesses (around 10% of all ICT enterprises) are foreign-owned and produce 80% of the ICT gross value added. These companies include Avaya, Google, HP, Sage Group, SanDisk, SAP and Trend Micro.
But why should any enterprise choose Ireland, rather than a base in continental Europe? What are the key factors that have driven Ireland’s success? According to ICT Ireland:
Low corporate tax rate and a transparent taxation system
Ireland’s corporate tax rate (12.5% – compared to the current 33% in New Zealand, which is to be reduced to 30% in 2008) is one of the lowest in the world. Commentators claim that cuts in the corporate tax rate – which has fallen gradually from 40% in 1994 – have been a positive contributor to Ireland’s economic growth over the past ten years. Incremental expenditure on R&D also receives a 20% tax credit.
Education and training has been a priority under the National Development Plans for 2000-2006 as well as for 2007-13, the latter comprising investment of €25.8 billion (NZD37.2 billion – note all currency conversions in this paper use PPP rates) in training and skills development, schools and higher education over seven years. Public expenditure on education has increased by over 10% per year over the past decade. The Irish Government has implemented a number of policies aimed to increase science participation. Basic scientific concepts and methodologies have been introduced into the primary school curriculum. At secondary level, 60% of students take at least one science subject at Leaving Certificate level (the final year of school), with a target of 80% by 2013.
Government focussed on innovation, research and development
In 2003, Science Foundation Ireland (SFI) was established to administer Ireland’s Technology Foresight Fund in the areas of biotechnology and ICT. Over the period 2007-2013 SFI will be responsible for the investment of €1.4 billion (NZD2.0 billion) in scientific programmes. The programmes also encourage partnerships between industry and academia, with the SFI Centres for Science, Engineering and Technology (CSETs) having close links with companies such as Bell Labs, HP, IBM, Intel, Microsoft and Siemens. Industry R&D is also supported by the Government investment agency IDA Ireland – in 2006 it funded 54 projects with a total investment of €470 million (NZD677 million). Companies with major R&D centres in Ireland include Avaya, Cisco, Dell, HP, IBM, Microsoft and Palm.
Guaranteed continued availability of workforce
The economic boom has been supported by the availability of workers to support continued expansion. Membership of the European Union has facilitated the movement of workers to Ireland without restrictions, and the low personal income tax rate – compared to other EU countries – has also helped to attract workers.
However, prospects for future growth are not without challenges. The World Economic Forum’s Global Competitiveness Report 2007-08 found that the most problematic factor for business in Ireland is the inadequate supply and the quality of infrastructure, most notably electricity and transport. The OECD warns that increases in both population and economic activity are resulting in the emergence of bottlenecks – not just in infrastructure, but also in labour supply – that have the potential to constrain further growth.
Over the past decade, the Irish Government has implemented a comprehensive and holistic range of policies and programmes with the objective of fostering the ICT industry and encouraging ongoing economic development. ICT is now a major economic sector, accounting for more than one-third of all exports, the major driver of Ireland’s economic revival.
Is it possible to replicate this success? Every country has a unique combination of characteristics – geographic, demographic, economic, its relationship with the world at large – which is not simply frozen in time but also exhibits a temporal dimension. Any overarching plan must be tailored to suit those specific circumstances and be sustainable into the medium- to long-term future. Nonetheless, the Irish model provides a real-life example of what is possible to achieve.