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A note on the role of multinational companies in the Food Manufacture sector in the Republic of Ireland.

Posted on November 10, 2016 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

In an earlier post I contrasted some measures of productivity in food manufacture [A Tale of Two Cities]. The Republic of Ireland stands out as having the highest gross value added per employee in 2012 amongst EU Member States.  Clearly something is odd with this.  The clue lies in a further distinction within this sector between home-owned enterprises and foreign-owned enterprises. In 2012 (the latest year for which data are available on the Eurostat website here) it is reported that there were 579 enterprises in total in the food manufacturing sector in the Republic of Ireland of which there were 31 foreign-owned enterprises. Total employment in the sector was 35,7000 of which 5,600 were employed in foreign-owned enterprises.

There is a marked contrast in ‘productivity’ performance within Irish food manufacture to such an extent that the overall productivity level is extraordinarily high by international standards (Chart 3 in [A Tale of Two Cities]. However, once we strip out foreign-owned enterprises in the food sector productivity levels are dramatically lower. The value of ‘gross value-added per person employed’ in 2012 in Irish-owned food manufacturing was €61. This level of productivity is higher than in the ‘non-food manufacturing’ sector (a point that will be considered in detail in a working paper by Goldrick-Kelly and Taft, forthcoming). The level of productivity in Irish-owned food manufacture is reasonably high by EU standards (see Chart 1 below). This is an important observation because productivity levels and – by derivation the inverse of unit labour costs – are higher in native food manufacture in the Republic of Ireland than elsewhere (though slightly less than the average for the UK although the latter may be influenced by transfer pricing by multinationals albeit at a much lower level than in the Republic of Ireland). Southern Irish food producers tend to export heavily to the UK market including Northern Ireland. These are vulnerable not only to an appreciating Euro against the sterling but, also, to trade uncertainty in the medium-term if and when Brexit happens and especially if Brexit is more ‘hard’ than ‘soft’ implying disruption of trade links and additional costs and administrative hassle. At this point it seems reasonable to assume that Brexit is highly likely at some stage in the coming years and to plan on this basis although nothing - nothing - is ever certain in this strange old world. 

Whatever about the unit cost of food produce on UK markets (or, indeed, UK imported food produce which ought to be cheaper in retail outlets in the republic of Ireland even though consumers wait for early signs of this) what matters greatly is the quality of produce, its reputation and image as well as the efficacy of supply chains, marketing, produce innovation and linkages into major UK distributors and retailers.

While the global and UK markets look a lot more uncertain now than this time six months ago we can be sure that a major challenge lies ahead for Irish food exporters. Rather than seeking to compete on low personal or corporate taxes or on wage costs the focus must be on:

  • Long-term market diversification strategies
  • Investment in new product lines and improvements
  • Exit and retraining strategies for workers where redundancies are unavoidable.

Brexit is going to provide a huge shock to the economies of the Republic of Ireland, Northern Ireland and Great Britain. It is likely that economic growth will be significantly lower than the alternative scenario of no Brexit (though in the real world we can never observe the ‘counter-factual’). Moreover, the impact is likely to be severe to traumatic in vulnerable sectors of Irish manufacture of which Food is one example.  However, nobody can predict the ultimate shape of things or the performance of this and other sectors. As is evident from the data on productivity it is clear that we are looking at two Irish economies of which Food is a good example along with Pharma and ICT: an extraordinarily high productivity foreign-owned sector and a more EU average productivity performing indigenous sector.  We can surmise that much of the extraordinary productivity performance of the relatively small foreign-owned sub-sector within Food is related to tax planning and price transferring activities of enterprises. Yet again we need to face the hard challenge of weening ourselves off excessive dependence on such activities. Remember the warnings about over-reliance on property and associated lending during the ‘Celtic Tiger’ years? Well, we need to pay heed to the FDI one-pony strategy – North and South of this island.  The writing may be on the wall in the medium-term due to a series of ‘unfortunate events’ on both sides of the Atlantic.

 Postscript

For the times we live in an occasional uplift and inspiration is required. This short youtube clip about entitled The World is Hungry for Food Sustainability used by Bord Bia as part of their Origin Green project highlights the potential for Irish food exporters to develop, innovate, change and build on some positive images. It is only one part of a programme of adaptation to a fast-changing and often troublesome world. Yet every initiative, every step and every policy can be helpful if it is part of a wider development strategy.  The Origin Green programme is described as follows:

Origin Green is a unique programme which will allow Ireland to become a world leader in sustainable high quality food and drink production. The Origin Green programme is built upon the Origin Green Sustainability Charter which will commit participants to engage directly with the challenges of sustainability. This will include reducing energy inputs, minimising overall carbon footprint and lessening impact on the environment in order to increase efficiency and competitiveness. 

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