This case study will look at:
◗ Ireland’s productivity performance and the
implications for the economic future
◗ how technology, ICT and Science and Innovation
have aided productivity in Ireland
◗ the role of technology as a productivity tool within
RESEARCH & DEVELOPMENT
INTRODUCTION In 2005, Microsoft celebrated 20 years in Ireland. As part
of its celebrations, Microsoft announced the
Microsoft is the world’s leading software development establishment of a new centre for research and
company. Its mission, as a business, is to enable people and development (R&D). The new centre will focus on
businesses throughout the world to realise their full potential. research and development of technologies that will
become part of a number of Microsoft’s core products.
Microsoft has three distinct operations based at its
campus in Sandyford in Dublin: Microsoft Ireland Sales The decision to locate the new R&D Centre in Ireland is
and Marketing Subsidiary, Microsoft European Operations testament to the success of the Microsoft European Product
Centre (EOC) and Microsoft European Product Development Centre team and Microsoft’s highly valued
Development Centre (EPDC). relationship with the local community and government.
Microsoft’s Sales and Marketing Subsidiary is an PRODUCTIVITY: IRELAND’S
integral part of the significant ICT sector in Ireland. ECONOMIC IMPERATIVE
During the evaluation process for the R&D Centre it
became clear that the role played by productivity in any
competitiveness analysis is very significant. It was found
that there was a need for an increased focus on the role
that productivity can play in driving economic growth. In
order to quantify this factor, and also to invest in
something with a potential long-term impact as part of
the 20th anniversary celebrations, Microsoft
commissioned an in-depth study entitled Productivity:
Ireland’s Economic Imperative – A Study of Ireland’s
Productivity Process and the Implications for Ireland’s
Future Economic Success. Authored by respected labour
economist Paul Tansey, it explores Ireland’s productivity
performance during the Celtic Tiger years to date and the
implications for the country’s future economic success.
Both the Report and the R&D Centre show Microsoft’s
commitment to innovation, and to Ireland.
Business 2000 www.business2000.ie 1/4
THE MICROSOFT REPORT – KEY Irish Economy: Major performance indicators 1985-2005
This case study will focus on the main points of the Report 1
commissioned by Microsoft. It puts Ireland’s economic success
into a historical context, identifies drivers for future economic
growth and also successfully quantifies the role of productivity 500
today and the emerging importance of this factor as a driver for 400
growth in the future. It also identifies ways in which productivity 2
rates can be increased: primarily by focusing on Physical Capital, 3
Human Capital Investment and Total Factor Productivity. 4
The Report presents actual findings and trends with regard to many 0
of the key economic indicators. Such factual economic 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 19971998 19992000 2001 20012002 2004 2005
performance and demographic information is of vital importance Year
1 Exports 2 Gross Domestic Product 3 Consumer Spending 4 Employment
to students of the Economic and Business subjects. Sources: GDP, Consumer Prices and Exports, National Income and Expenditure 2003, Central Statistics
Office August 2004.Table A: National Accounts 2004 (Preliminary), CSO March 2005. The CSO data in
constant 1995 prices, have been re-based to 1985=100. Employment International Labour Office
THE CELTIC TIGER - THE TRANSFORMATION (ILO) definitions, derived from Annual Labour Force Surveys, CSO 1985-1987; Quarterly National
Household Surveys CSO, various issues to Quarter 4, 2004.To ensure continuity, employment data is
OF THE IRISH ECONOMY shown for the second quarter of each year. Forecasts for 2005 are taken from the Central Bank
Quarterly Bulletin, No 1 2005,
The Irish economy has been transformed over the past two
decades. Economic performance has been characterised by rapid
CAUSES OF THE
growth, both in output and employment. The numbers out of work
have been reduced to very low levels. Real personal incomes have eCONOMIC BOOM
risen and taxes have fallen. Material living standards have
improved for virtually all in the community. The principal structural requirements for sustained and rapid
economic growth in Ireland had been put in place by the 1970s. The
country’s failure to achieve an economic take-off until the 1990s can
Involuntary emigration has almost ceased and has been replaced
be attributed to the combined effects of bad luck and bad management.
by sustained and strong migratory inflows. As a result, the
Ireland was unlucky in that it largely missed out on the great post-war
numbers living in the country have risen – exceeding 4m in 2004
economic boom and was also affected by the oil crises of the 1970s.
for the first time since the Census of 1871.
Bad management included inappropriate policy responses to the
international economic slowdown which left the Irish Exchequer with
an overall Budget deficit equivalent to 15.7% of GNP.
Yet by the end of the decade, Ireland’s fiscal position and its
financial economy had been transformed. The reasons include:
◗ Improved International Economic Conditions: Real GDP
growth in the EU and the US averaged 3% or better each year
between 1985 and 1990.
◗ Better Economic Management: From the late 1980s onwards,
successive governments focused on correcting public finances
imbalances and on restoring economic incentives by reducing taxes.
◗ Competitiveness Regained: The reintroduction of national
collective bargaining after 1987, where income tax cuts were
traded for wage moderation, assisted both in curbing money
wage growth and, more importantly, in reducing the incidence
of industrial disputes, through the first half of the 1990s.
◗ European Structural Funds Support: The resources
transferred to Ireland co-financed major investment
programmes in both physical infrastructure and human capital.
In the space of a single generation, Ireland has moved from being the
poor man of Europe to one of the richest countries in the world. In
1987, Ireland’s Gross Domestic Product (GDP) per capita was less
than two thirds of the EU average. By 2003, Irish GDP per capita had
climbed to 125% of the EU-15 average (European Commission). As
measured by trends in real GDP, the Irish economy has tripled in size.
There is a near eight-fold expansion in Irish exports of goods and
services. The volume of personal consumer spending has risen by
140% indicating the combined effects of gains in real incomes, large
additions to employment and a rising population. The total numbers
at work have increased by more than 70%.
Productivity driving economic growth Business 2000
◗ Rapid Labour Supply Growth: The labour resources available Gains in productivity are the consequence of two separate sets of
to the Irish economy increased substantially over the past two changes: variations in labour inputs and changes in net outputs.
decades. Also, enhanced employment opportunities, advances
in after-tax real wages, and higher levels of educational IRISH EMPLOYMENT
attainment have assisted growth.
◗ Foreign Direct Investment and Productivity Growth: US foreign The gains in Irish employment registered over the last decade have
direct investment flowed into Ireland during the 1990s, led by been the most important feature of the Irish boom, in both
firms including Microsoft. This provides a clear indication of economic and social terms. From 1995 to 2004, an additional
Ireland’s growing attractiveness as an overseas investment 555,000 people were recruited to the national workforce. Since
location. These decisions were influenced by enhanced policy 1995, agricultural employment continued its long-run decline.
credibility and low rates of corporation tax and the availability of Industrial employment increased by 146,000 mainly due to very
well-educated labour in the domestic economy. rapid employment growth in the construction sector. But Ireland’s
recent employment growth has been driven by the services sector.
THE ROLE OF PRODUCTIVITY IN
THE PROCESS OF ECONOMIC Total sectorial employment shares in Ireland 1995 and 2004
For an economy close to
full employment, the
scope for raising the
level of employment
will be determined
largely by the growth in
the labour force. Where
domestic labour force 1995 2004
growth is flagging, it
Services Productive Industry Building Farming
can be helped by net
migratory inflows from
the rest of the world.
Productivity growth – increasing net output per person at work – is MANUFACTURING & IRISH
shaped by an array of factors including the scale of physical capital
investment, additions to the skills and knowledge of the workforce,
changes in technology and the diffusion of technical change and the
Manufacturing is a centrally important component of total value
quality and capability of management at enterprise and national levels.
added in Ireland. Virtually all of the gain in real value added in the
Free trade has integrated Ireland into the international economy manufacturing industry between 1997 and 2003 was attributable to
progressively over the past 30 years. The importance of global the performance of four leading manufacturing segments where
trends to Irish economic development can not be underestimated. foreign ownership predominates. These leading segments are:
When the international economy weakens or where Irish cost/price ◗ Software
competitiveness deteriorates the Irish economy either falters or ◗ Chemicals
stalls altogether. ◗ Computers and Instrument Engineering
◗ Electrical Machinery and Equipment
PRODUCTIVITY PERFORMANCE: These four leading industry segments are all modern high technology
businesses, where both productivity and productivity growth are
A 20 YEAR REVIEW inherently much higher than in older, more mature industries. All of
the Irish-based leading manufacturing segments are also drawing on
Average productivity represents the level of output produced per
inputs of extensive and sustained Research and Development,
person employed in a given time period. Real productivity growth
shows percentage changes in output per person employed between Product Innovation and Product Development, which are primarily
time periods. In this standard approach to measuring productivity, undertaken outside Ireland. These four leading manufacturing
both investment-driven increases in the productivity of capital, and segments invest much more heavily than the rest of industry. This
also technological advances, are seen as manifesting themselves in includes investment in, and applications of, Information and
enhanced labour productivity. Communication Technology (ICT) and also training.
An 87.0% total rise in labour productivity over two decades – Without these four leading manufacturing segments, average
equivalent to compound productivity growth of 3.5% a year – productivity levels throughout the Irish economy would be much
represents an exceptional performance given the unparalleled scale of lower and the pace of productivity growth over the past decade
employment expansion sustained over the period. would have been much slower.
Productivity driving economic growth
The scale and efficiency of investment in Human Capital also
Productivity Growth in Irish-based manufacturing 1991-1999
needs to be increased. Further research and development of
technology is required and student ICT training needs to be
150 enhanced. Finally, even with extensive immigration into Ireland,
this will be insufficient for adequate labour growth.
The focus therefore turns to improving Total Factor Productivity
50 through maintaining macroeconomic stability, inducing technical
change, encouraging modern technology and allocating resources
1991-1995 1995-1999 1991-1999 efficiently. This should help Irish productivity.
Irish Foreign of which USA All Manufacturing
Source: Frances Ruane and Ali Ugur (2005) CONCLUSION
While every effort has been made to ensure the accuracy of information contained in this case study, no liability shall attach to either The Irish Times Ltd. or Woodgrange Technologies Ltd. for any errors or omissions in this case study.
If Ireland is to maintain its competitiveness in the future, not only
do we need to focus on measures that will increase productivity,
A TOOL FOR PRODUCTIVITY but specifically there is a need to identify measures that are
targeted at the services sector. Action is needed on a broad front
When analysing the productivity growth which has taken place in across Physical Capital, Human Capital, and Total Factor
Ireland, it was discovered that between a half and two thirds of the Productivity including technology.
growth could be accounted for by increases in the two traditional
factors of production – capital and labour. According to Microsoft’s productivity report, "Given that faster
productivity growth provides the clearest route to higher living
So what accounted for the other growth? This has been attributed to standards in the future, the time is now appropriate to design and
an array of different factors, the most important of which are changes implement clear and coordinated policies that will quicken
in the way things are produced and the technological advances which productivity growth in the years ahead."
have taken place. This illustrates the increasingly important role that
technology has played in Ireland’s productivity growth. The
contribution of technological advances to productivity improvements
and economic growth can be separated into three distinct stages: GLOSSARY
1. Scientific discovery or invention
2. Innovations and commercial application of inventions Total Factor Productivity: The efficiency with which
3. Technology diffusion from technology leaders to other industries people and capital are combined in the output of the
economy. Productivity gains lead to improvements in the
Historically, it is the multinational companies who have brought these standard of living, because as labour, capital, etc. produce
technological benefits to Ireland. The challenge for Ireland into the more, they generate greater income.
future is to foster an environment where the technological invention,
discovery and development takes place within its own economy. This
requires investment in education and in research and development to
support and develop systems of national innovation.
While Ireland has already taken steps in the 2004 Finance Act to
strengthen incentives for research and innovation, two other key
1. Define economic development. How can government
issues need to be addressed:
promote economic development?
1. Ireland’s investment in modern technologies, and particularly
2. Explain how government encourages economic growth.
Information Technology, is low relative to its economic status.
3. Foreign Direct Investment is vital for the Irish economy.
2. The adaptation of school students to new Information and
How does Ireland encourage this investment?
Communications Technology (ICT) may be insufficient.
4. Explain why investment is considered to be important
for the Irish economy.
FOSTERING IRISH PRODUCTIVITY
GROWTH IN THE FUTURE
Ireland generally lags behind both the UK and the USA. Irish
productivity appears remarkably high, but this is mainly due to Find out more
high technology foreign-owned firms. This foreign investment
needs to be encouraged. For more information on Microsoft:
◗ Click on the website www.microsoft.com/ireland
FUTURE COMPETITIVE THREATS and www.productivity.ie
Ireland also faces a number of competitive threats for the future.
◗ Irish Price Levels ◗ Irish Business Costs
◗ Irish Wage Costs ◗ The Euro Exchange Rate
Productivity driving economic growth Business 2000