Notwithstanding a dalliance with property in the mid-2000s, Ireland’s economic model has been consistent for the last sixty years: Ireland is a European base for American companies.

The model was set up in the 1960s, but it wasn’t until the ’90s that it started to really bear fruit. 

Two things changed in the 90s. First, American firms started thinking globally. They spent a lot of money going after overseas markets. 

Second, in the 1990s the nature of business started to change. Instead of selling stuff — like cars, chemicals and turbines — companies started selling ideas. Ideas can take the form of software licences, online services, or drug formulations. This suited Ireland because these types of knowledge-based products can be produced (and their revenue can be booked) anywhere in the world. 

Ireland attracted lots of investment from technology and pharmaceutical companies. They set up their European bases in Ireland and started churning out knowledge-based products for export into the single market. Now, Ireland is the world’s second-biggest exporter of software and pharmaceuticals. The workers and the accounting are Irish but the ideas are almost all American. 

In 2010-2012 it wasn’t clear whether Ireland would recover from the economic crash. But the golden-goose multinational sector came to Ireland’s rescue. A new crop of American multinational like Facebook and LinkedIn opened up, and existing ones like Intel doubled down on their previous investment.

 After 2008, the golden-goose multinational sector came to Ireland’s rescue.

The upshot of all this American investment is that Ireland’s economy is unlike any other. America’s cut of Ireland’s annual output, in the form of repatriated profits, is between 10 and 15 per cent. Multinational firms employ 10 per cent of Irish workers. And five huge multinationals account for a third of Irish exports.  

US multinationals come to Ireland because corporate taxes are low. Often they book revenues from other parts of Europe in their Irish subsidiary, where taxes are paid at the low Irish rate. The low tax rate has been so successful at attracting multinationals that it has turned into a big money-spinner for the Irish state. Corporation taxes came to €10.9 billion last year, more than double the level of five years previously. The top 10 firms – all multinationals – paid 45-50 per cent of the total.

The benefits of multinationals are clear enough. The biggest cost of them (apart from sky-high property prices) is that they use up all the oxygen in the economy. It’s hard for Irish companies to compete for talent and office space with the world’s richest companies.

As a result, Ireland’s small and medium-sized enterprises (SMEs) are not very good by international standards. The following chart shows, on the X-axis, how much value is added by Irish SMEs. And on the Y axis, it shows their proportion of total income. Irish SMEs add less value – ie, they’re less productive – than the SMEs of any of the countries in the OECD sample. 

There’s a whole debate over why SMEs are so unproductive. But it looks likely, to me at least, that Ireland’s overdeveloped multinational sector is the culprit. Particularly in light of studies showing very little positive “spillovers” from the multinationals to indigenous companies. In other words, the presence of multinationals doesn’t make Irish companies any better. More likely, it makes them worse.

The right industries

For the second time in ten years, Ireland’s economy is on the floor. Last time the multinationals came to the rescue. Will they do so again?

Ireland’s multinationals are concentrated in two industries: technology and pharmaceuticals / medical devices. I created charts comparing the Irish based companies in each industry to the S&P 500, a benchmark index, since Covid-19 hit in late February.

Technology is a big category. Technology companies do everything from making computer chips and mobile phones to selling ads. But as a group, they look to have taken Covid-19 in their stride. The following chart shows the stock prices of Ireland-based technology companies have rebounded faster than the S&P 500, a benchmark index of US companies, since Covid-19 hit in late February. Their stocks are down an average of 5.3 per cent, while the S&P 500 is down 13 per cent. The Iseq 20, an index of Irish stocks, is down 15 per cent.

The stock price of two big Dublin employers, eBay and Facebook, is higher today than it was in February. Though not included in this sample is the privately-owned Airbnb, whose European headquarters is in Dublin and which has been forced to cut 25 per cent of its workforce. 

The Ireland-based medical device and pharmaceutical companies have performed even better than the technology firms. All except Medtronic have outperformed the index. On average they’re down 2.9 per cent, against a 15 per cent drop for the S&P index. And none of the companies in the pharma, medical or technology sectors have announced job losses in response to Covid-19.

The lucky country

Ireland has attracted the most dominant and profitable companies in the world. It has the European base of the dominant social media company (Facebook), the dominant search company (Google), the dominant enterprise company (Microsoft) with its own dominant social network (LinkedIn). It has Apple, Pfizer and Johnson & Johnson, Intel, and Mastercard.

Martin Hirt of McKinsey, a consultancy, looked at stock market returns over the last fifteen years. He concluded that the industry a company happens to find itself in is more important than the company’s own performance. “The role of industry in a company’s position is so substantial that you’d rather be an average company in a great industry than a great company in an average industry”, he says. 

A separate McKinsey study looked at economic profit by industry in the period 2010-2014. It found that the top three best-performing industries were software, pharmaceuticals and consumer electronics – which are the three industries Ireland’s multinationals specialise in.

Ireland has been lucky many times over. It has attracted an outsized share of investment from overseas, the firms it attracted are in industries that have thrived over the past two decades, and it looks like the same firms are in a good position to lead Ireland out of the Covid-19 recession.