Upload
eoin-killian-costello
View
223
Download
0
Embed Size (px)
Citation preview
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 1/28
Capturing the value of
Ireland’s global connections
September 2014
McKinsey Global InstituteMcKinsey & Company, Ireland
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 2/28
Copyright © McKinsey & Company 2014
The McKinsey Global Institute
The McKinsey Global Inst itute (MGI), the business and economics research
arm of McKinsey & Company, was established in 1990 to develop a deeper
understanding of the evolving global economy. Our goal is to provide leaders in
commercial, public, and social sectors with the facts and insights on which to
base management and policy decisions. MGI research combines the disciplines
of economics and management, employing the analytical tools of economics with
the insights of business leaders. Our “micro-to-macro” methodology examinesmicroeconomic industry trends to better understand the broad macroeconomic
forces affecting business strategy and public policy. MGI’s in-depth reports have
covered more than 20 countries and 30 industries. Current research focuses
on six themes: productivity and growth; natural resources; labour markets; the
evolution of global financial markets; the economic impact of technology and
innovation; and urbanisation.
This research is the product of a special collaboration between MGI and
McKinsey & Company Ireland. Special thanks go to Conor Jones, McKinsey
partner and location manager of the Dublin office; Sorcha McKenna,
Barbara O’Beirne, Peter Mannion, Daniel Corcoran, Patrick Callinan, and the
McKinsey consultant team based in Dublin; and MGI senior editor Lisa Renaud.We are grateful for the contributions of our research colleagues Carlos Molina,
Moira Pierce, Amber Yang, and Kimberley Moran, as well as the support of
our production and communications colleagues Marisa Carder, Treasa Cox,
Julie Philpot, and Andrea Smith. This report builds on MGI’s previous research
on global flows, and we thank Susan Lund and David Poulter for their insight in
applying this framework to Ireland.
The partners of McKinsey & Company fund MGI’s research; it is not
commissioned by any business, government, or other institution.
For further information about MGI and to download reports, please visit
www.mckinsey.com/mgi.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 3/28
McKinsey Global Institute
Capturing the value ofIreland’s global connections
September 2014
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 4/28
Global flows . . .
€19 trillion+global flows of goods, services,and finance in 2012
14thIreland’s ranking on theMGI Connectedness Index
226%value of Ireland’s 2012 global flowsrelative to its GDP
1stIreland’s global ranking inservice flows in 2012
15%emerging markets’ share
of Ireland’s trade in goods
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 5/28
€700 billionfinancial flows through Irelandin 2007
€49 billionfinancial flows through Irelandin 2012
3%annual growth of Ireland’s tradein goods from 2002 to 2012
56%share of Ireland’s FDIoriginating in the United States
161,000 jobs created in Ireland
by multinationals
. . . by the numbers
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 6/28
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 7/28
Ireland’s recent history shows the huge economic potential of global flows—
but also their dangers. The country’s enviable track record for attracting the
operations of the world’s leading names in technology and pharmaceuticals offers
a textbook illustration of the value of openness. But at the same time, Ireland is
highly exposed to volatile global flows from which the economy extracts little real
value. With a modest recovery at hand, Ireland can reconsider how to carve out a
more sustainable and profitable position in the global marketplace of the future.
The McKinsey Global Institute (MGI) Connectedness Index assesses the immense
flows of goods, services, finance, people, and data and communication that move
in and out of 131 nations—and looking through this lens, Ireland ranks as the
world’s 14th-most-connected countr y. However, this pos ition is skewed by the
country’s number-one global ranking in flows of services, a number that accounts
for not only traditional foreign direct investment (FDI) by multinational companies
but also huge licensing and royalty fees that pass in and out of Ireland without
creating material jobs or investment.
Ireland performs exceptionally well in terms of FDI, but competition from across
Europe and around the world is intensifying. Irish policy makers and businesses
will need to step up their efforts to remain globally relevant. Excluding corporate
tax rates, Ireland places in the middle of the pack when measured against the
set of rivals we analysed on the critical factors of cost and quality that determine
a location’s ability to attract FDI over the long term. Perhaps even more telling,
too few Irish companies are scaling up and competing globally. When they do,
they focus heavily on traditional markets and trading partners. Faster growth
opportunities are being left on the table.
As Ireland returns to growth, it has a window of oppor tunity to shore up its
vulnerabilities and sharpen its strengths so that it is better prepared to compete in
an increasingly interconnected global economy.
For policy makers, the priorities include:
Deepening Ireland’s attractiveness as a location for multinationals beyond the
corporate tax regime
Creating a thriving environment for homegrown companies and encouraging
them to go global
Investing in people through quality-of-life and education initiatives
Capitalising on Ireland’s strength in technology and its still-untapped
digital potential
Continuing to enhance Ireland’s international credibility
Capturing the value of Ireland’s
global connections
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 8/28
2
To thrive in a more complex world, Ir ish businesses face several imperat ives:
Diversifying their customer base by capturing new high-growth markets while
maintaining ties with long-time partners
Adapting business models to an increasingly digitised world
Responding to an intense new wave of competition
Competing for global talent
Building Ireland’s global reputation for quality and professionalism
Recent research from MGI finds that in 2012, global flows of goods, services, and
finance alone reached $26 trillion (€19 trillion), and they could potentially triple in
value by 2025. Most important, these cross-border exchanges already drive some
15 to 25 percent of global growth, a share that will only increase in the yearsahead. To stake its claim on this future growth, Ireland will need to understand its
current position in global networks and take a long-term view towards capturing
the most promising opportunities.
WH AT ARE GLOBAL FLOWS, AN D WHY DO THEY MATTER?
We take it for granted that we live in a global world—but stepping back and
measuring the economic value that now flows across the world’s borders
reveals the sheer magnitude of the transformation that has taken place in just
a generation.
Global flows in a digital age, a recent study from MGI, examines new patterns in
the movement of goods, services, finance, people, and data and communication
across borders. It paints a complex picture of a world that is being rapidly
transformed by rising prosperity in emerging economies and by the disruptive
impact of technology.
Among the major findings of MGI’s research:
Global flows are rising rapidly in value. In 2012, the flows of goods,
services, and finance across borders reached $26 trillion (€19 trillion), or
36 percent of global GDP. That is 1.5 times as large relative to GDP as they
were in 1990. These flows could nearly triple by 2025.
Global flows drive global growth. MGI finds an overall positive correlationbetween each type of flow and GDP growth and estimates that global flows
contribute between $250 billion and $450 billion (€183 billion and €329 billion)
of growth every year to world GDP. In fact, economies that are more
extensively connected to global networks can experience up to 40 percent
faster GDP growth than less connected countries.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 9/28
3Capturing the value of Ireland’s global connections
McKinsey Global Institute
Digitisation is transforming and sharply accelerating global flows. The
pervasiveness of Internet connectivity and the spread of digital technologies
are not only powering huge flows of data and communication; they are also
transforming and enabling flows of goods, services, capital, and even people. Today there is growing trade in new digita l goods and services, from digital
movies and music to products manufactured by 3D printers. Even trade
in traditional manufactured goods is being transformed by digital tracking.
Digital platforms such as eBay, Amazon, and Taobao connect suppliers with
international customers and allow new players to participate in sectors ranging
from shipping to payments.
Emerging economies account for a growing share of global flows.
Emerging economies now account for 38 percent of global flows, nearly triple
their share in 1990. By 2025, 1.8 billion people—nearly all from emerging
economies—will join the “consuming class”, attaining incomes that allow for
more than the basic necessities of life. These new consumers will spend$30 trillion (€22 tr illion) annually, up from $12 trillion (€8.8 trillion) today.1
This is already creating enormous new hubs of consumer demand and
global production.
Knowledge-intensive flows are growing faster than labour- or capital-
intensive flows. Knowledge-intensive goods (such as high-tech products,
pharmaceuticals, and automobiles) and services (such as engineering and
business consulting) are the result of sophisticated R&D or highly skilled
labour. They dominate global flows in value and reached $12.6 trillion
(€9.4 trillion) in 2012, accounting for almost 50 percent of goods, services,
and financial flows. They are growing at least 1.3 times faster than labour- and
capital-intensive flows. Ireland happens to be exceptionally strong in this area,which bodes well for the future.
The patterns of par ticipation in al l types of cross-border exchanges are shif ting.
Advanced economies remain more connected to global flows, but some emerging
economies are rising rapidly. Where multinational giants once dominated cross-
border trade, small and medium-sized enterprises (SMEs) and even individual
entrepreneurs can now be global players, too. At the national level, there is now
growing foreign competition even in the domestic arena, while the opportunity
cost of not penetrating new markets abroad grows daily.
IRELAN D IS THE WORLD’S
14TH-MOST–CONNECTED COUNTRY MGI has tracked the flows of goods, services, finance, people, and data and
communication that move in and out of 131 nations. It evaluates participation
in each type of flow as measured by trade intensity and share of world total, as
shown in Exhibit 1. Ireland ranks 14th in the world on the MGI Connectedness
Index, a relatively high overall position that is driven by its number-one ranking
in global flows of services (particularly knowledge-intensive services such as
royalties and licences).
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 10/28
4
Exhibit 1
Ireland ranks 14th in the world for overall flows—high on the list,
but behind the largest Western European countries
SOURCE: Comtrade; IHS; UN World Tourism Organization; Telegeography; World Bank World Development Indi cators;McKinsey Global Institute analysis
Country connectedness index and overall flows dataRank of participation by flow as measured by flow intensity and share of world total
Rank Country
Change
in rank,
1995–
2012
Goods
(2012)
Services
(2012)
Financial
(2012)
People
(2010)
Data
(2013)
Flows
value
$ billion
Flow
intensity
%
Flow
intensity
change,
1995–2012
%
1 Germany 1 3 5 7 5 2 3,770 110 +53
2 Hong Kong, China n/a 1 4 3 14 n/a 1 ,437 546 n/a
3 United States -1 8 9 5 1 7 5,622 35 +2
4 Singapore 1 2 3 4 18 5 1,198 436 +8
5 United Kingdom -1 13 6 9 7 3 1,471 60 -26
6 Netherlands 2 6 7 15 29 1 1,213 157 +397 France -1 9 10 36 15 4 1,581 60 +8
8 Canada -1 16 22 13 9 18 1 ,381 76 -3
9 Russia n/a 19 30 16 2 21 1 ,277 63 n/a
9 Italy 0 11 20 31 16 10 1 ,187 59 +4
11 Belgium n/a 4 8 30 39 11 937 194 n/a
11 Spain 0 21 12 35 12 12 932 70 +14
13 Switzerland -1 23 16 11 28 17 851 135 +64
14 Ireland 2 29 1 23 23 24 476 226 +32
15 Sweden 0 28 15 17 45 6 573 123 +17
16 Saudi Arabia 19 20 29 19 8 44 729 103 +40
19 Poland 5 22 31 28 34 22 478 98 +41
20 South Korea n/a 7 14 25 58 34 1 ,393 123 n/a
21 Japan -1 14 24 10 82 15 2,652 44 +18
25 China 5 5 21 6 93 33 5,124 62 +8
30 India 16 27 13 26 47 64 1,131 61 +37
43 Brazil 15 39 40 18 115 38 757 34 +11
49 South Africa 4 43 50 49 56 73 242 63 +12
53 Morocco 26 57 42 79 41 63 91 95 +46
Developed Emerging 51+26–5011–251–10
Connectivity Index Rank
<7070–99100+
Flow intensityEconomy
The index builds on similar previous work measur ing the degree to which
different countries are connected to global activity. While other assessments of
globalisation have focused on a country’s level of trade or flows relative to GDP
(a measure called “flow intensity”), the MGI index evaluates the connectedness
of a country by looking at the size of both inflows and outflows relative to its
GDP or population, and its share of global flows. 2 Taking both measures into
account corrects the tendency for small countries to rank high on trade intensity
measures alone.
From 1990 to 2007, combined flows of goods, services, and finance both in and
out of Ireland grew from $64 billion to $1.4 trillion (€47 billion to €1 trillion). This
represented an annual growth rate of approximately 20 percent—twice the global
growth rate. The tremendous spike after 2002 was primarily driven by a real
estate market that attracted huge inflows of foreign capital, which plunged in the
wake of the financial crisis.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 11/28
5Capturing the value of Ireland’s global connections
McKinsey Global Institute
Today Ireland’s flows of goods and services have stabil ised, but capital flows
remain far below their pre-crisis level (Exhibit 2). Although Ireland’s population
was only 4.6 million in 2012, its GDP was $211 billion (€154.5 billion), making it the
world’s 48th-largest economy. The value of all flows across Ireland’s borders wasworth $476 billion (€348.5 billion) in 2012, which was equivalent to 226 percent
of GDP.
Exhibit 2
1003
1,273
357
866
1,401
206
64
509
81
469430
1,068
432
132
478
74
409
85
774
60
144
476
347
709
94 97 98 0695 2000 05 20121990 07 0996 01 02 0804 119391 92 99
Service flows
Financial flows
Goods flows
Goods, services, and financial flows, 1990–2012$ billion, nominal
SOURCE: Comtrade; IMF Balance of Payments; World Trade Organization; McKinsey Global Institute analysis
Ireland’s flows of goods, services, and finance were just shy of $500 billion in 2012, but financial flowsremained well below their 2007 peak
UNDERSTANDING IRELAND’S PARTICIPATION IN EACH TYPE
OF FLOW
As a small, open economy, Ireland is largely a “waypoint” for global flows rather
than a source or a final destination. Waypoints act as conduits that channel
and redistribute flows from many sources to many destinations. Acting as a
waypoint can generate significant economic output and high-quality jobs, and
it helps a region accumulate knowledge, with positive spillover effects on the
broader economy.
Despite its high level of connectedness, however, a key question for Ireland iswhether it is successfully extracting value from the flows that move in and out
of its borders. The challenge for policy makers will be to deepen Ireland’s ties
with the rest of the world while striking a more sustainable balance—one that
harnesses the economic potential of global flows while minimising the volatility
they can sometimes bring.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 12/28
6
Flows of goods
An exporter of machinery and equipment, computers, chemicals,
pharmaceuticals, and agricultural products, Ireland ranks 29th in the world for
inflows and outflows of goods. Between 2002 and 2012, however, its 3 percentannual growth in trade lagged well behind the Western European average of
8 percent. R&D- and knowledge-intensive goods constitute the vast majority of
Ireland trade flows (Exhibit 3).
Knowledge-intensive products such as chemicals, medical equipment,
electronics, and transportation equipment dominate Ireland’s goods trade
Exhibit 3
200
0
220
160180
140
120
100
80
60
40
20
090807
Resource-intensive
Capital-intensive
R&D/knowledge-intensive
Labour-intensive
201211100604 05032002
Components of goods flows, 2002–12
$ billion, nominal
SOURCE: Comtrade; McKinsey Global Institute analysis
Ireland’s plateau can be at least partly attributed to the country’s limited trade
ties to emerging markets during a period in which they generated unprecedented
demand growth. In 1992, emerging markets accounted for 5 percent of Ireland’s
goods trade and 18 percent of Germany’s. By 2012, Ireland was trading
15 percent of its goods with developing countries, while Germany had increased
its share to 37 percent.
Emerging economies were the major force that drove global trade from 2002 to
2012, posting 16 percent annual growth—twice the pace of advanced economies,
where markets for many products are already mature. By 2025, emerging markets
will account for half of global consumption. With their lower costs of production,
emerging economies tend to manufacture more labour-intensive goods, but asincomes rise, consumers in these countries will begin to buy more sophisticated
imported products. Given its strength in knowledge-intensive flows, Ireland could
be poised to benefit from this trend.
Whether they sell at home or abroad, Irish manufacturers have to be
internationally competitive. Ireland’s agriculture and food sector has shown the
way in this regard, as companies such as Kerry Group, Greencore, and Glanbia
have transformed themselves from locally focused producers to global market
leaders. Additionally, Ireland’s exports of pharmaceuticals and medical devices
outpaced the global growth rates in these categories from 2000 to 2012. These
sectors could position themselves for further growth as emerging economies
around the world build out their health-care systems.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 13/28
7Capturing the value of Ireland’s global connections
McKinsey Global Institute
Flows of services
Traded services can be considered in four categories: knowledge-intensive,
labour-intensive, capital-intensive, and public services. Ireland is heavily weighted
towards knowledge-intensive services, while the share of labour- and capital-intensive flows remains much lower (Exhibit 4).
Service flows grew strongly over the last decade,
with knowledge-intensive services accounting for
more than 90 percent of the total
Exhibit 4
99.6
28.4
113.3
93.1
71.7
116.1
93.9
98.4
41.9
52.760.0
Components of services flows, 2002–12$ billion, nominal
SOURCE: Comtrade; McKinsey Global Institute analysis
Knowledge-intensiveservices
Health, education,and public services
Capital-intensiveservices
Labour-intensiveservices
65.4
03
80.2
107.3
201205 10
115.7
08
71.6
04
103.6112.0
11
110.9
0907
94.7
06
41.9
54.5
2002
Exports
Imports
Ireland’s knowledge-intensive service flows grew in value at an annual rate of
almost 24 percent f rom 2002 to 2007, although they have posted just 5 percent
compound annual growth per annum since then. Ireland exports more than
$45 billion (€33 billion) worth of computer and information services annually
(Exhibit 5). Major multinationals, including Google, Facebook, PayPal, and others,
have established back-office operations in Ireland for servicing their broader
EU operations. The “other business services” exports shown here for Irelandwere predominantly made up of business, professional, and technical services
(36 percent); merchanting and other trade-related services (35 percent); and
operational leasing services (29 percent), which were a factor of Ireland’s strong
position in global airline leasing.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 14/28
8
The main components of services flows are computer/information exports,
business services exports and imports, and royalty imports
Exhibit 5
Components of services flows, 2007–12$ billion, nominal
SOURCE: Comtrade; IMF Balance of Payments; World Bank World Development Indicators; McKinsey Global Instituteanalysis
NOTE: Components may not sum exactly to top-down measurements of goods, services, or capital flows due to differingcollection methodologies.
ExportsImports
2007
2012
8.6
0Construction services
23.9
9.8
6.3
2.8
1.1
0.1
Computer and informationservices
0.9
Government services, n.i.e.
0.2
Communication services
40.8
Travel
Other business services
Financial services
Personal, cultural, andrecreational services
Transportation
Insurance services
Royalties and license fees
6.1
0.2
0
28.2
29.7
0.7
1.2
12.0
0.7
10.2
4.0
5.9
2.2
42.1
0.2
0
5.9
45.7
1.4
8.0
0.4
0.1
Royalties and license fees
Financial services
Computer and informationservices
Transportation
Insurance services
Government services, n.i.e.
Construction services
Travel
Communication services
Other business services
Personal, cultural, andrecreational services
11.5
45.9
0
0.3
3.9
0.4
5.9
33.3
9.1
0.8
5.0
One important element of Ireland’s service flows is royalty and licence fee
imports, which are three times higher than those of any other importer in
the world.3 Ireland has become one of the leading jurisdictions of choice for
establishing special-purpose vehicles for intellectual property securitisation.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 15/28
9Capturing the value of Ireland’s global connections
McKinsey Global Institute
Flows of nance
The chart of Ireland’s financial flows tells the story of the economy’s roller-
coaster ride over the past 15 years (Exhibit 6). Growing from a base of $39 billion
(€28.6 billion) in 1995, financial flows reached just over $1 trillion (€0.7 trillion) in2007 before plummeting to negative $30 billion (€22 billion) in a wave of capital
flight in 2009.
Financial flows fell off sharply after 2007 and have not recovered since
Exhibit 6
298
9239
11
202
274257
2412 86
249
43
936
756
466
-30
490
9
444
93
1,004
66
9895 110904 05 0691 96 07 102000 0199 0394 201297 02 08921990 93
Equity
Debt
Reserves
Loans and deposits
FDI
Components of financial flows, 1990–121
$ billion, nominal
SOURCE: IMF Balance of Payments; McKinsey Global Institute analysis1 Flows represents the sum of net inflows and net outflows.
The recession saw foreign investors withdraw significant capita l from the countr y.
Like most of Europe, Ireland experienced a contraction in lending during this
period. Even in 2012, total loan and deposit flows out of Ireland still stood at some
$185 billion (€135 billion), essentially unchanged from 2009.
While bank lending is generally the most volatile type of financial flow, FDI is
the most robust—and indeed, Ireland’s inflows of FDI held steadier during the
recession. Ireland punches above its weight in attracting FDI. In 2012, Ireland
represented 2 percent of global FDI, ranking among the top 15 recipient
countries globally. It has been especially effective in attracting foreign operationsof multinationals in the pharmaceutical, software, and information and
communication technology (ICT) service sectors.
The main sources of Ireland’s FDI inflows in 2012 were the United States
(56 percent), the United Kingdom (18 percent), Germany (8 percent), Australia
(5 percent), and Canada (2 percent). Pfizer, GlaxoSmithKline, Boston Scientific,
Facebook, Microsoft, Intel, Citi, and Zurich are just some of the major names with
operations in Ireland. Together the operations of multinationals account for more
than 161,000 jobs.4
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 16/28
10
Ireland’s FDI performance gained new momentum after 2000. Policies such as
the Business Expenditure on Research and Development were introduced to
encourage spending in knowledge-intensive areas; the estimated expenditure on
R&D through this scheme for firms in Ire land was €1.96 billion in 2012.
5
Ireland’s Industrial Development Agency (IDA Ireland), the government entity
responsible for securing FDI, has successfully promoted the country as an
attractive place to invest, marketing its natural appeal as an English-speaking
country in the Eurozone with a well-educated labour force. In fact, Ireland has
capitalised on the presence of multinationals to cultivate specialised skills and
expertise in high-value fields such as technology, pharmaceuticals, medical
devices, and finance. However, it will need to continue building on this foundation,
as government agencies around the world are chasing foreign investment. They
have studied the IDA playbook, and the bar is moving ever higher.
Flows of labourSkilled migrants are vital to innovation. Attracting highly skilled foreign workers—
and retaining homegrown talent—is a key enabler of growth. Migrants account
for 12 percent of Ireland’s population; this is a large share by EU standards, and
it is slightly up from its pre-crisis level, when 11.5 percent of the population was
born outside of Ireland. Moreover, Ireland tends to attract well-educated foreign
citizens: 45 percent have third-level qualifications, which is the second-highest
proportion in the European Union (after the United Kingdom).6
Ireland has a highly educated workforce overall. Approximately one-third of
the population possesses a third-level qualification (substantially higher than
the EU-27 average of 23.5 percent and second only to the United Kingdom at
about 34 percent).7 This makes Ireland an attractive place to do business fromthe perspective of companies seeking talent, although the pool of highly skilled
workers is smaller on an absolute scale.
But when economic circumstances change, labour flows are quick to rebalance,
demonstrating the increasing ease with which people “vote with their feet”.
Ireland’s labour flows in many ways track its financial flows: at the height of
Ireland’s boom times, it seemed that the age-old story of a growing diaspora
had been reversed once and for all. The country became a net importer of some
522,000 people between 1996 and 2009, thanks in part to the growth of the
EU labour base through new entrants and increasing connectedness through
advanced and inexpensive transportation links. But as the global financial crisis
was succeeded by the euro crisis and a protracted slump, Ireland again became anet exporter of labour, losing 122,000 workers over the past four years, of whom
more than three-quarters were native. As unemployment spiked, many young Irish
once again left home to find better opportunities.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 17/28
11Capturing the value of Ireland’s global connections
McKinsey Global Institute
Flows of data and communication
Today, one-third of the planet is onl ine, and a torrent of data travels around
the world. Between 2005 and 2012, cross-border Internet traffic grew by
more than 50 percent annually. This surge of data and communication movinginstantly across borders constitutes a massive flow in and of itself, and it is also
transforming the other types of flows, as it speeds and enables the movement
of goods, services, finance, and people. This shift is occurring at a remarkable
pace: some 10 percent of all goods are now traded electronically, from a base of
virtually zero just ten years ago.
Global data and communication flows also play a role in innovation. Individuals,
researchers, and companies can now collaborate seamlessly across borders.
International co-authorship of academic papers has surged over the past
two decades, as has collaboration in open-source software projects, clinical
trials, and other types of scientific research. The value of these cross-border
collaborations is difficult to measure, but their rapid adoption hints at the value ofbringing together the best ideas and talent from across the world.
Surprisingly, although nine of the top 10 US tech firms (including Google,
Facebook, Microsoft, Apple, Hewlett-Packard, and Intel) have a presence in
the country, Ireland ranks relatively low on flows of data (Exhibit 7). In terms of
broadband connectivity, Ireland ranks 14th out of the 34 OECD countries, with
gaps outside the major metropolitan regions.
Ireland lags other Western European countries in Internet traffic per capita
Exhibit 7
Total Internet traffic by country
Megabits per second per capita
SOURCE: Comtrade; IMF Balance of Payments; World Bank World Development Indicators; McKinsey Global Institute
analysis
0
50
100
150
200
250
300
350
400
Ireland
Czech Republic
France
Germany
United Kingdom
Netherlands
Russia
Poland
Spain
0806 10 11092005 201207
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 18/28
12
In part, this apparent deficit is due to Internet topology. Firms seeking to minimise
latencies (that is, time delays between one networked point and the next) tend
to route their traffic through the most connected locations. Within Europe, the
Netherlands, for example, has a large number of submarine cables coming ashoreand is host to several critical Internet exchange points. The Netherlands hopes
to take advantage of this infrastructure to further accelerate high-tech growth. A
cooperative initiative of local government, industry, and the Eindhoven University
of Technology, “Brainport” is meant to develop the knowledge economy of the
Eindhoven region.
Ireland can generate economic growth and jobs by continuing to enhance its
digital infrastructure. Investment in high-capacity, low-latency connections to
the United Kingdom, for example, now allows data to move rapidly between
Ireland and London—a critical capability for Ireland’s financial services firms.8
Ireland could also benefit from becoming the preferred routing exchange and
hosting point for content creators and distributors, especially in an age of digitalentertainment and digital goods.
While more capacity, lower prices, and less latency are always desirable, the
location of Amazon Web Services, Google, and EMC data centres in Ireland
suggests that speeds and bandwidth are more than adequate for current
business levels (although it will be important to monitor this issue as the recovery
takes hold and economic activity picks up). Ireland’s speeds average over
10mbps and have risen dramatically since 2012.9
Although the country’s residential broadband prices are higher than European
averages, its business broadband prices are lower than the benchmarks, so cost
is not necessarily an inhibitor. If capacity, latencies, and price (representing the
supply side) are not the primary barriers to data flows in Ireland, then it stands to
reason that there are issues on the demand side.
Ireland’s SMEs have been relatively slow to digitise or make the leap into
e-commerce.10 One recent study found that almost half of all Irish SMEs surveyed
have not migrated any services or processes to the cloud.11 Companies may
need to gain confidence in the strength of the recovery before they make capital
investments and launch new business lines. Other factors, such as a lack of tech
and digital marketing capabilities, may be at work.
The explosive growth of data and communication flows is indicative of how rapidly
global markets are changing as new users and geographies come online. These
forces are accelerating change and intensifying global competition. Sustaining
Ireland’s leading position in knowledge-intensive flows will require robust digital
infrastructure, including comprehensive penetration of high-speed Internet, data
centres, and high-quality mobile networks—as well as a commitment to helping
SMEs understand and harness the full potential of the Internet to connect with
customers both at home and abroad.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 19/28
13Capturing the value of Ireland’s global connections
McKinsey Global Institute
Box 1. Ireland’s partner regions
While Ireland’s flows have grown significantly in
both volume and value over the past decade, itsprimary connections have not changed substantially
(Exhibit 8). The rest of the European Union accounted
for 62 percent of Ireland’s total flows in 2002—a share
that fell marginally to 60 percent in 2012. The North
Amer ican share fell f rom 22 to 20 percent over the
same period. These two most significant “trading
partners” have collectively shifted from 84 percent of
Ireland’s total flows to 80 percent.
Maintaining such deep connections with the world’s
most lucrative markets has been a clear advantage for
Ireland—but this lack of diversification also proved tobe a vulnerability when most of the world’s advanced
economies experienced a simultaneous downturn.
In addition, it is harder to claim a unique niche within
these mature markets.
While Ireland has focused on its traditional partners, the
world has been rebalancing towards Asia and emergingmarkets around the world. Emerging economies have
gained importance as both consumers and producers.
They accounted for 38 percent of global flows in 2012,
nearly triple their share in 1990.
Irish exports, including agricultural products and
pharmaceuticals, match up well with areas of growing
demand in China and other emerging economies.
And indeed, Ireland is taking steps to gain a foothold
in new markets by establishing trade offices in 60
countries and conducting frequent trade missions.
Client companies of Enterprise Ireland, the governmentorganisation responsible for the development and
growth of Irish enterprises in world markets, grew
their exports by 8 percent in 2013, with the strongest
increase in the Asia-Pacific region; food products
accounted for more than half of these exports.12 As
incomes continue to rise in the developing world,
capturing the consumer markets of the future will
become even more important to Ireland’s economy.
Most of Ireland’s goods and services trade is within the European Union
Exhibit 8
Irish trade flows1 of goods and services by partner, 2002–12
% of total goods and services consumed/provided by each partner region
SOURCE: Comtrade; McKinsey Global Institute
60
20
40
80
70
90
10
30
50
100
0
1008 201209 11052002 04 0603 07
1 Includes exports and imports.
EU
North America
Asia Pacific
Latin America
Other
China
Other Europe
Africa and Middle EastNorth America’s share of Irish goods and services flows
fell from 22% in 2002 to 20% in 2012
EU share of Irish goods and services fell marginally
from 62% in 2002 to 60% in 2012
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 20/28
14
IMPLICATIONS FOR IRELAND
Ireland’s recent history is a case study in the huge economic potential of global
flows—and the dangers they can sometimes pose. Now that a modest recovery
seems to be at hand, Ireland has an opportunity to strike a more sustainablebalance between minimising volatility and seeking out growth. Policy makers who
relentlessly focus on creating the right enablers for long-term growth in this new
environment will attract, develop, and retain greater economic opportunities for
their citizens.
Global flows are transforming not only the way that countries trade but also
the way that companies operate. Businesses will face an intense new wave
of global competition for market share, resources, and talent. Those that
spot potential new markets and move quickly to fill the gaps, and those that
create new platforms for cross-border trade and traffic, can realise enormous
economic rewards.
Priorities for policy makers
Deepen Ireland’s attract iveness to FDI
Ireland is already home to the foreign operations of a prestigious roster of
leading multinationals, and IDA Ireland continues to build momentum. In fact,
Ireland topped the Forbes list of the best countries for business in 2013. But in
an increasingly competitive world, policy makers cannot afford to rest on these
laurels. In the words of former Intel CEO Andy Grove, “only the paranoid survive”.
Policy makers will need to double down on their efforts to raise Ireland’s profile in
the business communities of the emerging world. A recent MGI report predicted
that the next decade is likely to usher in a dramatic increase in the number ofmajor companies based in emerging regions that will join the ranks of the world’s
true corporate giants. The big new opportunity in the coming decade will be
to attract the regional head offices of rising multinationals from the developing
world.13
Ireland has already attracted foreign names in high-value, knowledge-intensive
sectors. But efforts to attract FDI should not focus solely on large multinationals;
they can also target high-potential startups and companies just starting to scale
up their international operations. Ireland can benefit by making it as easy as
possible for foreign entrepreneurs to start and grow businesses on its shores
through incentives, streamlined visa processes, and support for finding high-
quality work space and housing.
When companies compare alternative locations for their foreign subsidiaries
and operations, they consider both cost- and quality-related factors. McKinsey
has developed a “Global Locator Tool” to help companies take a quantitative
approach to this process and to help governments seeking FDI understand how
they stack up. It compares thousands of data points on issues such as energy
and property costs, regulatory and business environment, sector linkages,
infrastructure, talent, and quality of life. It is important to note that this tool
consciously excludes corporate tax rates. Because they can be easily replicated
or undercut by any other country, they are not in and of themselves a long-term
strategy for FDI.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 21/28
15Capturing the value of Ireland’s global connections
McKinsey Global Institute
Using the Global Locator Tool, we analysed Ireland’s relative attractiveness across
key sectors in which it should outperform its peers, given its current investments
and clustering strategies, and found that Ireland posts merely average cost and
quality levels.
14
This result puts Ireland squarely in the crosshairs of competitors.
We compared Ireland with a subset of other leading destinations for FDI (including
the United Kingdom, Poland, Switzerland, Denmark, and Israel) and found
that each competitor’s attractiveness scores typically spike on one or more
dimensions of cost or quality across different sectors (Exhibit 9). Ireland, by
contrast, scores in the “middle of the road” on both counts. While this may be
seen as a balanced position for Ireland today, these spikes in competitors’ scores
point to strengths that will become important for companies looking to achieve
distinctive and specific advantages as global connectedness intensifies.
Current tax regimes and traditional ties will not be enough to win future
investment and retain it over the long haul. In order to continue its strong
performance in FDI, Ireland must focus on improving its value proposition to
international businesses. A more detailed examination of FDI attractiveness
reveals a short list of factors that would begin to move Ireland from the “middle
of the road” towards either cost or quality “spikes”. The highest priorities
include ensuring the availability of scientists and engineers, developing
physical infrastructure, and controlling the cost of living. In addition, Ireland
would benefit from a greater focus on developing specific industry clusters.
The number of people employed and the number of companies in a particular
industry are important drivers of future FDI decisions, as they indicate both scaleand expertise.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 22/28
16
Create a thriving environment for homegrown companies and help them
go global
FDI can be a critical enabler of growth, but it is equally important to help Irish
companies become global players in their own right. In recent years, Irelandhas conducted multiple trade missions to dozens of countries and established
trade offices in 60 countries in an effort to open new markets for Irish products.
Continuing and expanding these outreach efforts will be crucial if Ireland is to ride
the wave of growth in emerging economies.
Ireland’s small businesses, in particular, have large untapped export potential—
and new digital platforms can dramatically lower barriers to entry in international
markets. Many SME owners assume that exporting will involve too many
challenges, unknowns, and burdensome requirements, but the Irish government
has programmes available to help them learn the landscape and navigate the
challenges. Ireland may need to build awareness of the growth potential in
foreign markets among SME owners—and raise their aspirations to pursuethese opportunities.
Ireland has a vibrant startup scene, but the challenge for fledgling companies has
always been scaling up to the next level of growth. Both government initiatives
and private business incubators are available to support entrepreneurs. Ireland
may need to complement these efforts with a greater emphasis on “accelerator”
programmes that are geared to the next stage in the business life cycle. These
programmes help small firms scale up by assisting them with putting institutional
systems in place, creating strategic expansion plans, and securing deeper
financing. Building export capabilities into both incubator and accelerator
programmes can embed a more global mindset into the next generation of
Irish companies.
Invest in people through qualit y-of-life and educat ion initiatives
Advanced and emerging economies alike will face an acute shortage of highly
educated workers in the years ahead.15 The most skilled and specialised
among them will be able to choose among global opportunities. Ireland needs
to consider how it is positioned to compete for top talent, taking into account
factors such as housing, the ease of obtaining work visas, and the amenities and
environment it offers immigrating families. This is an important area of focus, as
skilled migrants have been critical to the growth of some of the world’s leading
technology hubs. In fact, recent research has found that one-quarter of all US
high-tech startups have an immigrant founder.16 Flows of high-skilled migrants
between countries and other types of cultural ties also facilitate cross-border
venture capital deals.17
Capitalising on global flows of people, ideas, and collaboration often starts with
students—in fact, international students who undertook the enormous personal
and financial challenges to study at California’s top universities have played a
major role in building Silicon Valley. While most international students in Ireland
once hailed from the United States, it is notable that China has now become the
leading country of origin.18 Welcoming more students from Asia and across the
developing world can have a significant long-term payoff.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 23/28
17Capturing the value of Ireland’s global connections
McKinsey Global Institute
However, in order to attract the world’s best students and to deliver more qualified
homegrown graduates, Ireland must rapidly address the erosion of its education
system. Irish universities do not place atop international rankings.19 Even more
fundamentally, Ireland’s performance on the Programme for International Student Assessment (PISA) test, which assesses educational achievement among
second-level students in OECD countries, has been lacklustre. With competing
countries making rapid gains, Ireland urgently needs to turn its attention to its
educational standards.
Capitalise on Ireland’s ICT strength and digital potential
Ireland has a considerable advantage in the ICT sector, but it is one that could be
quickly eroded by neighbouring regions. As home to operations of nine out of the
top 10 global ICT companies, Ireland has an excellent supportive base from which
to create a thriving digital ecosystem and launch new digital enterprises. But
other governments are not standing still: they are putting substantial investment,
infrastructure, and policy support behind startup hubs such as Tech City inLondon, Brainport in Eindhoven, and the new Google-backed Factory complex
in Berlin. Ireland will have to keep pace with these regions and should focus
on building its own tech cluster with global reach and global connections. This
will involve greater coordination and outreach, indigenous and foreign capital,
enhanced digital infrastructure, and a supportive policy environment that includes
streamlined visa issuance and tax incentives for startups.
There are long-term benefits to promoting more sophist icated use of the
significant bandwidth and cloud infrastructure already available in Ireland.
Examples could include securing a higher proportion of the shared back-office
services business from multinationals and broadening the definition of “back
office” to include big data analytics or information security. In order to go afterthis type of niche, Ireland will need a well-defined strategy that emphasises skill
development within its education system.
Continue to enhance Ireland’s international credibility
Through the proper ty boom and bust and financial cr ises, Ireland suffered a
reputational blow; at one point it was even dubbed the “Wild West of European
finance”.20 Ireland’s strong performance against the demands of its bailout
agreement has shown the world a new sharpness of focus and ability to deliver.
While its regulatory approach has now changed substantially, Ireland will
have to continue to build its profile as a country of disciplined compliance and
professional prudence. Moreover, as growth in data flows continues, compliancewith international data protection standards will become ever more important.
Ireland’s capacity and willingness to enforce international best practices in this
area will be an important reputational pillar. Ireland’s standing as one of the
best countries in which to start a business should be cherished and enhanced,
but the world needs to know that discipline is part and parcel of its business-
friendly climate.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 24/28
18
Implications for Irish businesses
Understanding the flow of goods, services, finance, labour, and data will help Irish
businesses position themselves for the next wave of global growth.
Build on current markets and capture new ones
Ireland is a waypoint for multiple types of flows and is well positioned as a
strategic gateway between its two biggest trading partners, the United States
and the European Union. Businesses, both large and small, should go after
the opportunities this creates. But the developing world continues to grow in
strength and importance—and as the global economy rebalances in its favour,
Irish business needs to rebalance with it. Businesses must now look to emerging
economies not just as sources of cheap inputs, but rather as sources of new
customers, talent, innovation, and partnerships.
Greater connectedness, lower costs of trade, and digital platforms are lowering
barriers to entry in the up-and-coming markets of the developing world. Butin order to seize these opportunities, most firms need to do more to structure
themselves to operate in a genuinely global fashion. This may include tailoring
their products and services in new ways and even lowering price points to
compete in volume-driven markets. B2B companies will need greater sales force
mobility to serve a much more diverse and dispersed customer base. Gaining
deep knowledge of local markets is essential; Irish firms may need greater
numbers of senior executives based in Asia. At the very least, Irish firms need
to add a greater proportion of long-haul flights to their international business
development itineraries. While the United Kingdom will likely remain Ireland’s
strongest and most important local trading partner for many years to come, Irish
firms should also seek to build more distant relationships rapidly.
Adapt business models to an increasingly digitised world
Companies in every sector need to give their full attention to digital technologies
and their impact on global flows of all kinds.
In the past, executives largely viewed technology as a way of cutting costs
and boosting productivity. That remains the case, but digitisation is shaking
up the business landscape in much more fundamental ways—most notably by
dramatically accelerating the pace of change and by making it possible for an
unprecedented range of players to participate in global commerce. There is a
major opportunity for Irish companies of all sizes to create the platforms to enable
production, exchange, distribution, and consumption across borders. SMEs nowhave the ability to source and export globally, and they can take advantage of
new online platforms to go anywhere in the world to tap into expertise they may
not have in-house. Indeed, this is fast becoming a necessity. Today international
retailers dominate e-commerce within Ireland. Irish companies need to devise
their own growth strategies to capture these revenue streams—and this will
undoubtedly start with acquiring capabilities in technology and digital marketing.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 25/28
19Capturing the value of Ireland’s global connections
McKinsey Global Institute
Get to know new competition
The expansion of global flows is opening up a ll companies to a wider range of
competitors, including companies from new geographies and new sectors—not
to mention fast-moving startups. Business leaders will need to watch for newsources of innovation and potentially disruptive change. And it is only a matter of
time before the most successful companies in the emerging world set their sights
on international expansion. Companies from emerging regions are growing faster
than their counterparts from developed regions—both in their home markets and
overseas. As Irish companies find new challengers arriving in their own backyard,
they will need to be prepared to compete not only for customers but also for
talent, capital, and resources.
Compete for global talent
Irish companies have a tradition of “jobs for the boys”. This can take many
forms, but the end result is often a relatively homogenous workplace, especially
at senior levels. In an increasingly global market, this penchant for local talent
limits the potential of Irish business. Ireland has a great advantage as the only
native English-speaking member of the Eurozone, but it cannot afford to let that
translate into general complacency. As mentioned earlier, improving the quality
of life is important for attracting international talent. However, this is a relatively
passive “build it and they will come” approach. Irish companies must take a more
proactive role in attracting, developing, and retaining global talent if they are to
conquer world markets. It may take relevant local experience and relationships to
crack specific markets, and building them may require investment. Irish business
can take a page from some of the global players located on its shores: Google,
PayPal, and Facebook aggressively recruit talented employees with international
languages, perspectives, and knowledge to increase workplace diversity.
Professionalise, focus, and deliver
Irish businesses need to show that they are ready to rise to the challenge
as genuine global leaders in their fields. The German model of Mittelstand
companies has long been seen as one of the driving forces in that country’s
remarkable and broad-based economy. These enterprises are typically SMEs, but
they have staked out niche markets and become true global leaders within them.
Within Ireland’s agriculture and food sector, Alltech has become an international
name in animal nutrition and health, driving its valuable R&D from its base in
Dunboyne, Co. Meath. Dairymaster has done the same in dairy technology, from
its base in Causeway, Co. Kerry. Both of these companies have demonstrated
an ability to rise to the top through a combination of professionalism, focus, anddelivery. Aspiring Irish companies would do well to follow this model of bringing
distinctive niche offerings to an international stage.
* * *
With recovery taking hold, Ireland now has to ask how it can capture growth from
the high-value flows that are the hallmark of the new global economy. Ireland will
have to open its doors more widely to the world and venture far beyond them
to stake its own claim in fast-growing emerging markets. Now is the moment
for leading Irish players to expand their global presence and for Ireland to play a
bigger role in the world’s flow of innovation and ideas.
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 26/28
1 Urban world: Cities and the rise of the consuming class , McKinsey Global Institute, June 2012;
Yuval Atsmon, Peter Child, Richard Dobbs, and Laxman Narasimhan, “Winning the $30 trillion
decathlon: Going for gold in emerging markets”, McKinsey Quarterly , August 2012.
2 This approach builds on methodology developed by Jay Squalli and Kenneth Wilson in A new
approach to measuring trade openness, Economic Policy Research Unit, Zayed University,
Dubai, working paper number 06– 07, May 2006.
3 These include payments for the authorised use of intangible non-produced, non-financial
assets and proprietary rights such as trademarks, copyrights, patents, processes, techniques,
designs, manufacturing rights, and franchises; and the use, through licensing agreements, of
produced originals or prototypes (such as manuscripts and films).
4 “IDA Ireland reports 13,367 jobs were created in 2013”, IDA Ireland (Industr ial Development
Agency) press release, January 2014.
5 Department of Jobs and Innovation, Ireland.
6 Eurostat, 2011.
7 Eurostat, 2011.
8 “New low-latency route from Colt puts Ireland at the heart of Europe’s network structure”, Colt
Telecom press release, June 2012.
9 Akamai’s state of the Internet , Q1 2014 report, volume 7, number 1.
10 John Mulligan, “Value of an online presence still not clicking”, Irish Independent , July 30, 2014.
11 Marian Carcary, Eileen Doherty, and Gerard Conway, “The adoption of cloud computing by
Irish SMEs: An exploratory study”, The Electronic Journal of Information Systems Evaluation,
volume 17, issue 1, 2014.12 Enterprise Ireland, Annual repor t & accounts 2013.
13 Urban world: The shifting global business landscape, McKinsey G lobal Institute,
September 2013.
14 Biomedical device manufacturing, biopharma manufacturing, consumer electronics, food
manufacturing, software development, customer support, and fund administration.
15 The world at work: Jobs, pay, and skills for 3.5 bill ion people, McKinsey Global Institute,
June 2012.
16 Vivek Wadhwa, AnnaLee Saxenian, and F. Daniel Siciliano, Amer ica’s new immigrant
entrepreneurs: Then and now , October 2012, Ewing Marion Kauffman Foundation,
October 2012.
17 Sonal Pandya and David Leblang, Deal or no deal: The growth of international venture capital
investment , University of Virginia, November 2011.
18 International students in higher education in Ire land 2011–2012, Education in Ireland,November 2012.
19 Times Higher Education, World Reputation Rankings 2014.
20 Brian Lavery and Timothy L. O’Brien, “Insurers’ trails lead to Dublin”, New York Times,
April1, 2005.
Endnotes
8/11/2019 Capturing the Value of Ireland's Global Connections
http://slidepdf.com/reader/full/capturing-the-value-of-irelands-global-connections 27/28