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Ireland's Emerging Information Economy: RecentTrends and Future ProspectsSeamus Grimes aa Department of Geography/Centre for Innovation and Structural Change , NationalUniversity of Ireland , Galway, Eire E-mail:Published online: 18 Aug 2010.

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Regional Studies, Vol. 37.1, pp. 3–14, 2003

Ireland’s Emerging Information Economy:Recent Trends and Future Prospects

SEAMUS GRIMESDepartment of Geography/Centre for Innovation and Structural Change, National University of Ireland, Galway, Eire.

Email: seamus.grimes@nuigalway.ie

(Received June 2001; in revised form March and July 2002)

GRIMES S. (2003) Ireland’s emerging information economy: recent trends and future prospects, Reg. Studies 37, 3–14. Thispaper examines the emergence of information economy related activity through inward investment and the indigenous sectorin one of Europe’s most peripheral regions. Ireland’s recent economic resurgence has benefited considerably from internationalcorporate restructuring as US multinationals in particular reconfigured their operations within Europe’s single market. Despitethe on-going concern about over-dependence on FDI, policy makers in Ireland seek to ensure that both skills and infrastructuralrequirements are adequately provided in order to solidify Ireland’s attractiveness for investment while, at the same time,encouraging the growth of indigenous high technology companies. Although internationally traded services sectors such assoftware, financial services, telemarketing and shared services have expanded considerably in recent years, the overall level ofregionalization of these activities within the country has been disappointing to date.

Foreign direct investment Internationally traded services Software Regionalization

GRIMES S. (2003) L’economie de l’information naissante en GRIMES S. (2003) Irlands aufkommende Informationswirt-Irlande: tendances recentes et perspectives d’avenir, Reg. schaft: kurzlich aufgetretene Tendenzen und Zukunftsaus-Studies 37, 3–14. Par moyen de l’investissement direct sichten, Reg. Studies 37, 3–14. Dieser Aufsatz untersucht dasetranger et par l’industrie autochtone dans une des regions les Aufkommen Informationswirtschaft bezogener Unterneh-plus peripheriques d’Europe, cet article cherche a examiner la men durch Investitionen aus dem Ausland und dem einhei-naissance de l’activite liee a l’economie de l’information. La mischen Sektor in einer der abgelegensten Regionenreprise economique recente en Irlande a profite consider- Europas. Irlands jungstes wirtschaftliches Wiederaufleben hatablement de la restructuration des societes internationales au betrachtlich von internationaler korporativer Umstruktur-fur et a mesure que, notamment les societes americaines, ont ierung profitiert, besonders als multinationale Firmen derredefini leurs activites au sein du marche unique europeen. USA sich auf Durchfuhrung ihrer Geschafte im gemein-En depit des soucis continuels quant a la dependance exces- samen Markt Europas umstellten. Trotz aktueller Besorgnissive vis a vis de l’IDE, les decideurs irlandais cherchent a uber all zu grosse Abhangigkeit von Investierungen imfaire en sorte que les habilites requises et l’infrastructure Ausland, suchen die fur Politik Verantwortlichen in Irlandnecessaire soient suffisamment assurees afin de consolider sicherzustellen, daß sowohl Fertigkeiten als auch infra-l’attrait de l’Irlande pour l’investissement, tout en encour- strukturelle Anspruche angemessen erfullt werden, damitageant le developpement des entreprises autotochtones a la Irlands Anziehungskraft fur Investoren erhalten bleibt, gleich-pointe de la technologie. Bien que les services echanges sur zeitig aber auch das Wachstum einheimischer Hochtechnol-le plan international, tels le logiciel, les services financiers, le ogiefirmen ermutigt wird. Obschon international gehandeltetelemarketing, et les services communs, se soient developpes Dienstleistungssektoren wie Software, finanzielle Dienstleis-dans les dernieres annees, Le niveau general de la regionalis- tungen, Telemarketing und gemeinsame Dienstleistungen ination de ces activites au sein du pays laisse toujours a desirer. den letzten Jahren betrachtlich zugenommen haben, ist die

Gesamthohe der Regionalisierung dieser geschaftlichenInvestissement direct etranger Unternehmungen im Lande bisher enttauschend geringServices echanges sur le plan international geblieben.Logiciel Regionalisation

Auslandische DirektinvestierungInternational gehandelte DienstleistungenSoftware Regionalisierung

0034-3404 print/1360-0591 online/03/010003-12 ©2003 Regional Studies Association DOI: 10.1080/0034340022000033367

http://www.regional-studies-assoc.ac.uk

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INTRODUCTION of strong economic performance, noting its evolvingnature over time and the role of the state in seeking toupgrade this investment. The relative success of IrelandThis paper traces the emergence of information econ-

omy activities in Ireland in recent decades. It begins by in attracting this investment, despite its peripheral loca-tion within the European market, has not been matchedexamining how the new information and communi-

cation technologies are helping to transform the geo- by a similar success to date in regionalizing this invest-ment throughout the country.graphy of economic activity, as they enable companies

to remain competitive in an increasingly globalized The paper also looks at indigenous internationallytraded services, particularly in the software sector,economy. Among the consequences of the restructur-

ing of transnational corporations has been the which currently is almost as significant as the overseas-owned activity in terms of employment, despite havingdecentralization of activities such as back office and

software localization as they seek more competitive only one-tenth of its export revenues. The changingpattern of teleservice activity from back offices initially,locations for outsourcing non-core transaction pro-

cessing. This restructuring has presented peripheral to call centres and shared services centres1 more recentlyis analysed, while Ireland’s most significant cluster ofcountries like Ireland with new opportunities to attract

increasingly sophisticated foreign investment in the back offices, located in the International FinancialServices Centre in Dublin, is also examined.internationally traded services sector, helping this peri-

pheral region to reposition its industrial strategy awayfrom less competitive sectors towards those associated

THE INFORMATION ECONOMYwith the information economy.

An important aspect of Ireland’s improved economic One of the most critical developments of the 1990swas the organizational transformation of the productionperformance in recent years has been its relative success

in attracting significant levels of inward investment in process, which included the transformation of multi-national companies and resulted in global productioninternationally traded services, such as software, finan-

cial services, and a variety of teleservices including being carried out by transnational production networks(CASTELLS, 2000). The new production system reliesshared services. Although there are statistical problems

associated with delineating internationally traded ser- on a combination of strategic alliances and ad hoccooperation projects between decentralized units ofvices, particularly in sectors such as software, the focus

in this paper is primarily on foreign-owned and indig- major corporations and networks of SMEs connectingamong themselves. Increasingly multinationalsenous information economy service activities which

are traded internationally. Each of these sectors is developed decentralized internal networks, organizedin semi-autonomous units, according to countries,examined both in terms of their employment creation

and their spatial patterns and the main factors influen- markets, processes and products. As the process ofglobalization progresses, Castells argues that organiza-cing the relative attractiveness of Ireland for inter-

nationally traded services investment are identified. tional forms have evolved from multinational enter-prises to international networks, and thus the newWhile much of the employment growth has been

associated with foreign direct investment (FDI), the economy cannot be characterized as being any longercentred on MNCs alone, even if there is little doubtsustainability of a development model based on an

inordinate dependence on such investment is a con- that they continue to constitute the core of inter-nationalized production.tinued source of unease. In particular, O’HEARN,

1998, has been a consistent critic of the overwhelming In a similar vein, COHEN et al., 2000, chart thedevelopment of highly flexible and adaptable ‘Cross-dependence on foreign capital, and questions the

sustainability of a model which he argues has been National Production Systems’ as a response of compan-ies to competitive pressures. In an attempt to stimulatedominated by growth in corporate profits and profes-

sional incomes, but with little evidence of ‘trickle- research that is both empirically and theoretically richerthan at present, HENDERSON et al., 2002, have putdown’ in other sectors. In a recent critique of Ireland’s

development model in which import-substituting forward the ‘global production network’ as a moreinnovative framework which would probe the organ-industrialization has replaced export-subsidizing

industrialization, O GRADA, 2002, suggests that while izational dynamics of transnational subsidiaries as theyevolve over time. Cross-National Production Systemsbeing somewhat vulnerable to its distorted foreign trade

regime, so far Ireland has not been a loser, overtaking emerged as a result of the disintegration of industrialvalue chains, as producers discovered they could lowerthe UK in terms of output, if not quite in living

standards. This period of catching up with Europe’s their costs by concentrating on what they did best, andcontracting the rest from those with a firm-specific orcore regions, however, is unlikely to be sustained with

the exogenous effects of slower US economic growth nation-specific comparative advantage based on factorcost. Information and communication technologiesand greater competition for FDI from an enlarged

Europe. The paper will explore the contribution of (ICTs) enabled firms to implement outsourcing strat-egies, extending their division of labour across nations.information economy FDI to Ireland’s recent period

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Ireland’s Emerging Information Economy 5

Rather than being about lower wages or access to within the firm to be more cost-effective than usingoutsiders, such as licensees, import agents, distributorsmarkets, these strategies were more about the emer-

gence of locations which could deliver different mixes and so on (DUNNING, 2000). DUNNING, 1998, notedthat late twentieth century capitalism is knowledge-of technology and production at different cost-

performance points. Thus relatively peripheral regions based, regional or global in its scope and involves moreintra- and inter-institutional alliances than any of itssuch as Ireland, with the capacity to develop their skills

and competencies and to build connection to centres predecessors. With advances in telecommunicationsand the lowering of barriers to trade, the locationalof excellence, could become world class, with these

connections being based on virtual work teams and options open to firms to engage in both asset-augmenting and asset-exploiting activities haveorganizations, or on corporate organizational structures

(CASTELLS, 2000). widened considerably, while at the same time, theneed of countries to attract knowledge-related assets toCorporate reorganization is also a significant factor

in the redistribution of service employment opportuni- sustain and upgrade the competitiveness of their ownfirms is more acute. While Dunning argues that theties across space, with the concentration of corporate

functions into specialized offices from core regions eclectic paradigm is sufficiently robust to accommodatemost of the changes which have characterized FDI inproviding opportunities for peripheral regions

(RICHARDSON, 1996). As part of wider regulatory the 1990s, there is a need to incorporate more recentchanges in international business models in order toprocesses involved in creating a single market for fin-

ancial services, the European Commission imple- explain the rationale for investment strategies associatedwith the new technologies and exploiting relativelymented a number of directives within the banking,

financial services and insurance sectors, to open up peripheral locations like Ireland. The acknowledge-ment by DE LA TORRE and MOXON, 2001, of thedomestic financial markets to competition (MURPHY,

1998). Non-core activities ranging from finance to limited ability to date of international business theoryto effectively integrate the ICT revolution into theirhuman resources, technical and customer support,

marketing, IT, procurement and logistics are increas- theoretical frameworks is indicative of the need forfurther progress in this area.ingly being outsourced or being centralized in shared

services operations. A number of different trends have Dunning argues that strategic asset-seeking invest-ment is very much a feature of the contemporaryinfluenced the growing acceptance in Europe and

elsewhere of concentrating back office support func- globalizing, knowledge-based economy, with firmsaugmenting their own assets by acquiring those oftions at one or more specialist centres (KPMG, 1999).

Communication technology facilitates companies to other firms and tapping into the immobile assets of thehost country. Such investment results in the develop-undertake back office functions at locations remote

from their operating businesses. There is an increasing ment of interdependencies between multinational andindigenous companies especially in high technologyemphasis on business support activities and less on

what is regarded as non-value added activities such sectors. Although globalization has widened theoptions open to multinationals to locate in differentas transaction processing in the finance function of

companies. The emphasis on cost effective operations, countries, within countries there is a tendency forknowledge-intensive FDI to become more concen-the growth of common global businesses processes

and the simplification of business models have also trated in sites which have clusters of firms engagedin synergistic activities (KUEMMARLE, 1996). Thuscontributed to the development of service centres with

core competencies of their own. MNCs exacerbate regional disparities by invariablylocating in the major urban and core regions of thehost countries (PORTER, 1990). Building on the work

The role of FDIof Storper and Scott, Dunning notes the significanceof regions as ‘loci of untraded interdependencies’ inWhile a number of theoretical frameworks of FDI help

to explain some aspects of recent patterns of this which firms seek to capture the benefits of interrelatedtrading and learning economies arising from such clus-investment in Ireland, some of the specific character-

istics of the Irish economy, including its small size, tering of firms (STORPER, 1995; STORPER andSCOTT, 1995; DUNNING, 1998).its extreme openness to outside influences and its

inordinately high dependence on inward investment, BRADLEY, 2002, suggests that Porter’s diamond-based framework of competitiveness provides somesuggest a need for caution in applying such models to

the Irish experience. Dunning’s eclectic paradigm of useful insights into explaining how a country likeIreland could implement a development strategy in aforeign investment argues that the likelihood of a firm

investing abroad depends essentially on firm specific sequence of separate stages. The first stage from the1950s to the 1980s was factor driven, with an emphasisfactors, location specific factors that make it advanta-

geous to invest in a particular country, and inter- on low corporation tax, low wages and subsidizedcapital formation. The second stage from the 1980snationalization advantages which cause the internal

transfer of labour, capital and technical knowledge to 2000 involved massive public investment in plant,

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6 Seamus Grimes

infrastructure and human capital, which was co-funded persistence of what they call the ‘compulsion of prox-imity’ were urbanization economies arising from thethrough EU regional aid. Policy makers are now

attempting to shift to the third stage, which would benefits of shared physical and business infrastructuresand labour pool. In particular the continued metro-be driven by innovation and is associated with the

information economy, and Bradley suggests that this politan bias in telecommunications infrastructure isinfluential, but so also is the role of the market, whichhas exposed some of the limitations of Irish industrial

strategy, which has been so dependent on FDI. Porter’s is constituted mainly of large firms and organizationsin sectors such as financial services, media, telecom-model has been criticized as being inappropriate for

small open economies like Ireland, since he insists that munications and publishing.While agreeing that the Internet creates forces fordevelopment is crucially dependent on the domestic

market, and cannot be based simply on supply chain agglomeration and deagglomeration, LEAMER andSTORPER, 2001, conclude that overall it is not likelylinkages to the global economy (RUGMAN and

VERBEKE, 1993). Porter also ignores the evolution of to have a dramatic effect on the geography of economicactivity. They argue that spatial agglomeration hasmultinational companies, from their earlier, centralized,

hierarchical structure to a more organic web of parent- accompanied the geographic fragmentation of certainparts of the production chain, particularly intellectualsubsidiary relationships where initiatives can come from

the company’s periphery as well as from its core and immaterial activities such as accounting, strategy,marketing, finance and legal work, all of which are(BRADLEY, 2002). The need to pay much more atten-

tion to the evolution of transnational subsidiaries has growing in significance. Such intellectual activities havebecome increasingly outsourced since they are amen-been highlighted in a number of recent studies

(BIRKINSHAW and HOOD, 1998; HOOD and able to an extremely fine division of labour, making ituneconomic for a single firm to employ these specialistsYOUNG, 2000), while ZANFEI, 2000, in an unusually

positive assessment of such evolution, suggests that as on a full time basis. They argue that as complex andunfamiliar coordination tasks become transferred intotechnical and market complexities increase, TNCs are

being forced to tap into international networks, which routine activities, they can become increasingly dis-persed to more remote and cheaper locations. Newenhances the abilities of decentralized subsidiaries to

innovate. innovative activities, however, requiring high levels ofcomplex and unfamiliar coordination tend to becomeagglomerated in urban locations. Rather than having a

Centralization and decentralizationdispersed geography indifferent to proximity, they sug-gest that economic sectors such as financial services areIn considering the locational dynamics of the ‘new

economy’, GILLESPIE et al., 2001, refer to the greatly highly agglomerated in locations which communicateover long distances. Because such activities involveincreased locational configurations which ICTs offer

corporate organizations resulting in enhanced loca- the exchange of uncodifiable ambiguous information,they are likely to continue to require face-to-facetional flexibility in their strategies to manage territory

and serve markets. While ICTs enable new ‘spatial interaction.divisions of labour’ to emerge, at both internationaland intranational scales, they argue that decentralization

THE INFORMATION ECONOMY INis by no means inevitable, since ICTs tend to

IRELANDstrengthen both centrifugal and centripetal forces inthe spatial organization of the economy. Whatever Within this increasingly globalized economy, domin-

ated by corporate restructuring, one of the more peri-decentralization did take place would have a strongcost-based logic behind it. pheral regions in relation to the European core has been

relatively successful in exploiting the decentralization ofIn their review of European case studies, they notethat regions with the right attributes in terms of pro- economic activity, particularly from the US. While it

would be too far fetched to claim that the Dublinduction costs – even where such regions were previ-ously defined as ‘peripheral’ – have become increasingly region has come close to becoming an ‘innovative

milieu’, the Irish economy in general and the Dublinincorporated into corporate structures of production.This partly resulted from the increased industrialization region in particular has benefited from many of the

shifts towards a global economy, and in particularof service functions associated with the standardizationof procedures and work practices in the 1990s, and from the restructuring of operations controlled by

multinational companies (BREATHNACH, 2000). Eco-with tele-mediation, which replaced face-to-face con-tact with the customer in some services. Despite the nomic performance in recent years has been excep-

tional, with Irish export growth between 1996 andimproved opportunities for peripheral regions, GILLES-

PIE et al., 2001, identify numerous reasons why the 1999 almost double the growth of Ireland’s exportmarkets, placing it at the top of the OECD leagueforces of centralization continue to hold significant

sway on the evolving distribution of activities associated (FORFAS, 1999a). Employment growth during thesame period was seven times the EU average, with fullwith the new economy. Among the reasons for the

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Ireland’s Emerging Information Economy 7

employment being achieved in recent years. In 1998 overseas companies in Ireland, employing 127,000 dir-ectly. Of these, 500 were companies from the US,there were 336,100 more people in the labour force

than in 1989 (an increase of 25·6%), and this employ- employing 74,000. With FDI inflows, however, consti-tuting 3·6% of GNP, Ireland was ranked 11th out ofment boom has been considerably fuelled by an influx

of information economy companies together with con- 28 countries, with the top performing countries beingSweden, the Czech Republic, the Netherlands andsiderable growth in indigenous companies in areas such

as software, computing and communication skills. Irish Belgium (FORFAS, 2001). In 1998 foreign-ownedmultinational companies accounted for two-thirds ofGNP per capita as a percentage of the EU 15 average

was 104% in 2000 compared with 79·4% in 1994 manufactured output, 88% of Irish industrial exportsand 95% of growth in exports between 1991 and(FORFAS, 2001).

Using data from the OECD Science, Technology and 1998, while US-owned companies in Ireland wereresponsible for 70% of industrial exports (FORFAS,Industry Scoreboard 2001, the Financial Times recently

ranked Ireland in fourth place after Switzerland, 2000b). With export volumes rising over several yearsat several times growth in Ireland’s export markets, thisSweden and the US in a list of countries most likely

to succeed in ‘knowledge industries’ (The Irish Times, performance is attributable to the economy’s specializa-tion in foreign owned high-growth, high-tech sectors.16 November 2001). The indicators used in devising

the Organization for Economic Cooperation and The role of foreign companies in exporting servicesfrom Ireland was also very significant with only 3%Development (OECD) scoreboard frequently place

Ireland in first place among member countries in terms of indigenous service businesses actively engaged inexporting. On a more positive note, however, Irish-of the significance of the ICT sector in its economy.

The main reason for this is the exceptional role of owned internationally-traded services exports, whichhave been primarily driven by the growth in softwareforeign affiliates in Ireland’s ICT sector (OECD,

2001). The report also notes the increased significance exports, grew by 23% in 1997 to reach 3·04 billion(FORFAS, 2000a).of R&D investment by these companies, something

which was previously underestimated due to poor The attractiveness of Ireland for US investment islargely explained by the fact that US companies inquality data. Business sector expenditure on R&D

(BERD), however, in Ireland was only 1·1% of GDP Ireland received a return on investment four times theEU average during the past 10 years. While the State’s(1·13% of GNP), compared to the EU average of

1·15% in 1999. Only around 60 companies (mainly low rate of corporation tax at 10%, which is due tochange to 12·5% in 2003, has been an important factormultinational) spend more than 1·27 million annually

on R&D, accounting for two-thirds of total business accounting for this high rate of return, it is generallyagreed that a number of different factors workingsector R&D. The Republics low corporate tax rate,

which has played such an important role in attracting together help to attract FDI to Ireland (HANNIGAN,1998). Over four years, 57% of foreign-owned com-FDI, has been a disincentive to encouraging MNCs

to locate R&D activity in the country. panies have ranked appropriate skill levels as the mostimportant advantage, Ireland’s corporation tax regimeA number of factors have contributed to the signifi-

cant improvement in Irish economic performance in ranked second (47·5%), English language in third place(31%) and motivation and loyalty of staff (30%) inrecent years. Ireland’s birth rate remained high until

1980, 20 years after it had declined steeply in the rest fourth place (FORFAS, 2002). The high levels ofprofitability of foreign firms in Ireland has been attrib-of Europe, with the result that the labour force was

still expanding until recently. Improvements in the uted to both domestic wage restraint and low corpora-tion tax, although the most important proximate causeeducation system also came about 20 years after signifi-

cant improvements in other EU countries, so that has been an extremely high level of productivity(O’SULLIVAN, 2000). O GRADA, 2002, emphasizessimilar benefits which countries like Germany and the

Netherlands received in the 1960s, began to accrue to the importance of transfer pricing for US FDI inIreland, with consequent distortions in both Irish GDP,Ireland more recently. Despite being ranked 36th place

in the world for overall infrastructure, the World Eco- industrial production data and for data relating to muchof Ireland’s internationally traded services sector, whichnomic Forum ranked Ireland as the fifth most competi-

tive economy in the world. According to a separate has benefited from low corporation tax since 1987.Partly because of the decline in the volume ofindex, however, which seeks to measure whether

growth is sustainable over a long period, Ireland was greenfield sites in recent years, the Industrial Develop-ment Authority (IDA) has sought to ensure that theranked in 22nd place (Irish Times, 7 September 2000).

It is expected that growth rates in the next few years business functions undertaken in Ireland by foreign-owned firms will be developed in range and depth sowill be considerably lower than the 9% average rate of

the past five years (FORFAS, 2000a). that they will become core rather than peripheralactivities for those firms. It is acknowledged that for-Ireland’s growth and exporting performance during

the 1990s is primarily attributable to its success in eign-owned firms are much more deeply embedded inthe economy than in the past, because the pool ofattracting FDI. In 1998 there were more than 1,200

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8 Seamus Grimes

available skills, work practices, back-up services and Table 1. Labour force changes, 1989–98external agglomeration economies are much more

% changeimportant (BARRY and BRADLEY, 1997). In both 1989 1998 1989–981998 and 1999, around half of the new projects went

Labour force 1,310,500 1,646,600 25·6to the International Financial Services Centre (IFSC)Manufacturing 213,435 264,167 23·8

in Dublin, accounting for 65·7% of total inward invest- Internationally-tradedment, while the remaining projects were almost equally services 9,617 46,322 381·7

Local services 608,383 847,678 39·3divided between greenfield investments and expansionsTotal services 618,000 894,000 44·7of existing companies (FORFAS, 2000b). Ireland’s over-Other industries 95,000 170,000 80·8all share of US investment was 23% of all new green-

field projects, while Ireland was leader in Europe for Source: FORFAS, 2000a.greenfield software, teleservices and shared services.

Ireland’s internationally traded services sectorInfrastructure and skills Services employment growth accounted for 42% of the

total growth in the labour force encompassing bothThe construction of a high quality telecommunicationsmanufacturing and internationally-traded services overnetwork in the 1980s played an important role inthe period 1989 to 1998 (Table 1). Internationally-attracting technology companies to Ireland. Investmenttraded services companies in Ireland are positionedin the more recent and more powerful broadbandgenerally in high-productivity, knowledge-intensiveinfrastructure came slowly, partly because of the con-and high-tech services segments and include activitiestinuing dependence on the former state-run telecom-such as software, financial services and a wide rangemunications company, which is reluctant to provideof teleservices. Total employment in internationally-access to the backbone infrastructure for competitors.traded services grew nearly five-fold between 1989 andAfter an investment of 3·3 billion between 1985 and1998 and doubled between 1995 and 1998, accounting1998, the backbone transmission network2 was fullyfor 15% of the labour force comprised of manufacturingdigital, but only some of the main population centresand internationally-traded services by 1998, up fromwere connected with the high speed broadband4% in 1989. Financial services, telemarketing andfibreoptic cable required by internationally traded ser-shared services experienced considerable expansionvices companies involved in the transmission of highwith software shifting from third to second place as thevolumes of data. Before the most recent round ofbiggest internationally traded sector after food in 1998.investment, there were 2·5Gbits3 links in most of theWhile the export of services from Ireland has grownSouth and East regions, but the Border, Midlands andin recent years, mainly driven by the growth in softwareWestern regions, which incidentally now constituteexports, the services sector, which accounted for onlythat part of Ireland which retains Objective 1 status for11% of total exports, had a low export propensityEU Structural Funds, had few such links. In particularrelative to Austria with 42% and Denmark at 21%. Inthe northwest region was very poorly catered for,its 1999 Annual Review of Ireland, the OECD referredand not surprisingly, IDA Ireland had great difficultyto the country’s atypical industrial structure, with anattracting high technology industries to this region.unusually small share of output in the form of non-The rapid pace of development of the ICT andgovernment services, which is partly accounted for byinternationally traded services sectors in Ireland inthe relatively strong growth in industrial productivity.recent years has resulted in a growing shortage of IT

The Forfas Annual Employment Survey shows thatskills, particularly in areas such as software engineering.by 1999, about 50,000 of the almost 300,000 jobsThis problem has been further exacerbated in thesupported by IDA Ireland and the other developmentDublin region by the increasing inability of manyagencies were in internationally traded services whichyoung professionals to obtain affordable housing in anwas, however, only half the number of jobs in metalsoverheated market. The shortage of IT skills gave riseand engineering. Yet, the shift towards service employ-to a series of policy measures, with a commitment inment is reflected in the fact that in 1998, 44·2% of1997 to increase technology places in third level educa-new jobs created in companies supported by IDAtion to bring the level of supply to 6,100 per annum,Ireland, were in internationally traded services as com-leaving a shortfall of 2,200. An expert group appointedpared with 14·2% of the gross number of jobs lostby the government recommended that the Enterprise(O’SULLIVAN, 2000). Of the 50,000 jobs in inter-Ireland campaign to attract more software people backnationally traded services, around 36,000 were locatedto Ireland should be extended, to cover the hardwarein Dublin and the southwest, while the region withelectronics sector, and recruitment agencies have beenthe next largest concentration had less than 4,000 jobsproactively engaged in overseas recruitment in areasin this sector. Around 71% of companies and 76% ofsuch as Eastern Europe, Israel and India (ENTERPRISE

IRELAND, 2000). employment in foreign owned internationally traded

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Ireland’s Emerging Information Economy 9

services sector are in the Dublin region, compared localization complex originated in the middle of the1980s, when MNCs like Microsoft and Symantecwith 60% of indigenous companies and 70% of related

employment (ENTERPRISE IRELAND, 2000). began to outsource work to take advantage of externaleconomies of scale and the potential of shifting costsThe early identification of the potential contribution

of ICT and internationally traded services investment onto suppliers (O RIAIN, 1997). By decentralizingtheir localization and translation functions, Ireland25 years ago has played a very significant role in

Ireland’s recent economic performance (TRAVERS, became incorporated into the lower end of the softwaredesign ‘commodity chain’. A crucial factor for these1999). Beginning with the electronics sector in the

1980s, IDA Ireland shifted its targeting of FDI to MNCs was their ability to control the relationship withsuppliers while decentralizing production to Europe’ssoftware firms and personal computer manufacturers in

the 1990s, and to call centres and shared services from single market.Although Ireland’s localization market is far down1995 onwards. Despite the relative success in attracting

ICT investment, and also the encouraging growth in the software commodity chain, the region has gradu-ated from total dependence on MNCs to playing anindigenous high-tech activity, particularly in software,

Ireland’s ICT sector, however, is positioned at a rela- intermediary role in the global corporate chain throughmanaging relations between core regions. Some argue,tively low point in the value chain, since it deals

mainly in mature technology that has been developed however, that the goal of outsourcing by softwareMNCs is short-term cost reductions through the trans-elsewhere (FORFAS, 1999b).fer of some activities to suppliers which pay lowerwages and provide fewer benefits (O’SULLIVAN, 2000).

SoftwareAlthough O Riain has been somewhat pessimisticabout the prospects of obtaining access to the keyEmployment in the software industry grew at 15%

between 1991 and 1993, by 32% between 1993 and competencies of software development and marketing,there are some positive indications of foreign-owned1995, and by over 60% between 1995 and 1997, when

the industry employed almost 20,000 people (IRISH companies becoming somewhat more embeddedwithin the economy. A recent study of an embryonicSOFTWARE ASSOCIATION, 1998). There are 900

international and indigenous software companies in software cluster, however, has suggested that therestructuring of Digital’s operation in Galway revealedIreland, employing over 30,000 people and generating

a combined turnover of over 10·1 billion. In total, the a significant transfer of high technology and highquality business skills to the local workforce, whichsoftware sector is responsible for nearly 8% of Ireland’s

GDP and nearly 10% of its exports (HOTORIGIN, proved to be an important basis for a sizeable numberof indigenous start-ups, particularly in software2001). With the tightening of the IT labour market,

availability of skills has been problematic resulting in (GREEN et al., 2001). Some see the recent downturnin the ICT sector as an important transition periodconsiderable rivalry between firms, with the average

stay of a software engineer being only 18 months. Wage and an opportunity to alter strategy from a productorientation towards a ‘solutions orientation’, with com-inflation is also quite high at 15% per annum and staff

turnover rates are around 20%. panies like IBM already earning 50% of its revenuesfrom services. Some of the larger MNCs like Micro-Two different and relatively autonomous global pro-

duction or innovation chains dominate the Irish soft- soft, Oracle, IBM and Novell have already establishede-commerce hubs in Dublin to sell software over theware industry, with foreign owned multinational

companies focusing on localization, testing and distri- Internet. To date, 23 data harvesting centers,4 involvinga total investment of around 1·27 billion, have beenbution and Irish-owned firms specializing in niche

software products (O RIAIN, 1997). Other European established in Ireland, with 21 of these located inDublin. Thus, while the low corporate tax rates inregions, particularly Scotland and the Netherlands have

also developed significant IT agglomerations and com- Ireland together with the absence of special incentivesfor R&D investment is resulting in rather low levels ofpete with Ireland for operation hubs of multinational

companies (MNCs), but despite this intense competi- embeddedness in this respect, some subsidiaries areenhancing their operations by means of expandingtion, a significant number of software companies

interested in establishing European operations have their business planning and customer managementoperations.been attracted, helping to develop Ireland’s reputation

as a software localization centre (COE, 1999). Although the indigenous and foreign-owned sectorsdeveloped simultaneously there are few direct linkagesWith 34% of the global market, Ireland has already

overtaken the US as the world’s largest exporter of between them (O’GORMAN et al., 1997). There are atleast 250 local companies engaged in the developmentsoftware products (OECD, 1999). The great bulk of

these exports, however, come from companies like of software products, more than half of which havebeen set up since the beginning of 1999 (HOTMicrosoft, which is primarily involved in localization,

packaging, logistics and distribution mainly for the ORIGIN, 2001). The small Irish market contributed tothe success of the indigenous sector, by forcing it toEuropean and Middle East markets. The Irish software

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10 Seamus Grimes

become export-oriented and product-led from an early hardware and software companies, which already hadsubsidiaries in Ireland, and more recently the shift hasstage, and turnover in the indigenous sector has been

increasing by between 30% and 40% per annum. The been towards shared services operations, many of whichare involved in centralized finance, administration andbirth of many of these companies results more from

spin-offs from later-stage successful indigenous com- transaction processing (BREATHNACH, 2000). Themove towards establishing shared services operations ispanies and from campus companies than from the

many international companies in Ireland. The financial being stimulated by the need for companies to achievesignificant savings in increasingly competitive marketsservices industry is the main target for indigenous

companies, closely followed by the telecommunications resulting from reductions in trade barriers. Companiesare consolidating and outsourcing support functionsand high technology industries. Assuming current

growth rates, the indigenous sector has the potential to and processes such as accounting, procurement, cus-tomer administration, taxation, treasury, humandouble in size every two years (HOTORIGIN, 2001).

Because of the increasingly uncompetitive environ- resources, IT, indirect marketing and propertymanagement.ment, there is a growing tendency for indigenous

firms to subcontract abroad. Software companies are Unpublished data provided by IDA Ireland’s Inter-nationally Traded Services Division, accounting forcurrently outsourcing 72·4 million worth of business

to cheaper locations like Poland, the Philippines and 220 companies employing 23,239 people in the year2000, offer some insights into a number of character-even Northern Ireland, resulting in a loss of up to

1,000 jobs (IRISH SOFTWARE ASSOCIATION, 1998). istics of the foreign owned component of this sector.It is important to bear in mind that these data accountSuch off-shoring of activity together with the need for

Irish software companies to establish themselves in for 46·5% of the total sector, as in addition to excludingindigenous companies, they also omit some softwareglobal markets is resulting in a trend whereby the

careers of software developers in Ireland are increasingly and teleservices companies that are classified withinother divisions of IDA Ireland’s database. Since theconverging with those of their counterparts in high

technology regions like Silicon Valley, or in global cities employment data for these companies have been pro-such as New York or London (O RIAIN, 1997). The vided in aggregate form for each subsector rather thanemergence of Ireland as a critical space for innovation by individual company, the analysis is focused morefacilitates mobility within the sector, as employees find on the number of companies rather than on theirit easy to job-hop within the region, while others employment significance.migrate to the region attracted by the high concentra- Table 2 shows the breakdown of the 220 companiestion of high technology jobs. by sector, the largest being the 89 software companies

and the smallest the 19 ‘other’ companies. Overall,53·2% of these companies were US-owned, with 69%

From back offices to shared services in software services/data processing, and 41·6% in thesoftware products category. The second most significantBetween 1996 and 1999 almost 16,000 new jobs werecountry of ownership was the UK (18%) and the thirdcreated in the internationally traded services (ITS)was Germany with 11%. In software services/datasector, accounting for one-third of IDA Ireland sup-processing, the other main countries represented wereported jobs. From the 1980s, Ireland has been attractingGermany and the UK (both 10%) and Canada (7%).a significant proportion of overseas-owned teleserviceThe other key nationalities of foreign-owned softwareoperations locating in Europe, although it should becompanies in Ireland, apart from the US, were the UKnoted that some of the operations are focused on the(23·6%) and Germany (12·3%). In telemarketing, theUS market. Initially many of the operations wereUK with 23·5% of companies was the other main non-traditional back offices involved in insurance-relatedUS country involved. The main non-US countriesdata processing. Later the focus was on attracting call

centres involved in technical back-up for computer involved in software contractor companies were the

Table 2. Foreign-owned internationally traded services companies by sector, 2000

TotalNo. of % in East % 1995 employment,

Sector companies % US owned region or after 2000 % employment % temporary

Software products 89 41·6 78·6 64·0 7,004 30·2 5·2Software services/data processing 42 69·0 40·4 57·0 4,285 18·5 6·4Software contractors 36 58·0 77·0 55·5 4,097 17·6 13·4Telemarketing 34 59·0 61·0 79·0 6,495 27·9 12·1Other 19 52·6 63·0 26·3 1,358 5·8 30·2Total 220 53·2 70·0 60·4 23,239 100·0 11·0

Source: IDA Ireland, 2001.

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Table 3. Internationally traded services employment ( foreign- Within this population of 220 internationally tradedservices companies, there have been 31 closures (14%),owned companies) in relation to total employment by region,

1999 with telemarketing being the least affected (8·8%) andsoftware contractors (22·2%) the most affected sector.

InternationallyThe spatial pattern of closures, with 64·5% in the EastTotal traded servicesregion, was little different from the overall distributionemployment (%) employment (%)of internationally traded services companies. Only six

Dublin 31·5 73·2of the companies that closed had been in existence forBorder 11·4 3·110 years or more, while 16 of them had closed withinMid East 8·9 4·5

Mid West 10·9 5·6 five years of their start-up date.Midlands 4·4 1·0 Taking the 31 closures into account, the remainingWest 9·1 4·8 117 internationally traded services companies employedSoutheast 9·6 1·3

23,239 persons in 2000, with 11·4% of these beingSouthwest 13·9 7·8temporary employees (Table 4). Software has consis-

Source: Forfas Employment Survey, and IDA Ireland, 2001. tently been the most important sector in terms ofemployment, growing from 3,000 in 1995 to 6,635 in2000. Telemarketing has been one of the more recent

UK (11%), the Netherlands and Germany (both 8%), subsectors in internationally traded services, and grewand Canada and Japan (both 6%). to employ 5,793 by 2000. Both software services/data

The Dublin region had the lion’s share (73·2%) of processing (4,010) and software contractors (3,547)internationally traded services employment, which was have also experienced growth during this five-yearmore than twice its share of total employment sup- period, while the 15 companies in the ‘other’ categoryported by the various development agencies (Table 3). employed only 948 by 2000. Overall, only 11% ofThis resulted in considerable under-representation of workers in internationally traded services companiesITS employment in the regions, with the more urban- were part-time, but this ranged between softwareized regions such as the Southwest having the largest (5·2%) and software services/data processing (6·4%)concentrations. In terms of the regional distribution of with the fewest part-timers and 30·2% in the ‘other’ITS companies, software services/data processing with category. Part-time work, while remaining low overall,40·4% in the East region, was the only sector with less has also shown some decline in the past year in tele-than 60% of companies in that region. Other regions marketing, software and software services/data pro-with a relatively good representation of this subsector cessing. Telemarketing, with around 700 part-timewere the Southwest and Southeast (both with 14%), workers in 2000, had only 12·1% of all its employeesthe West with 12% and the Midwest with 7%. Software in this category, while the next largest number of part-was the most highly concentrated sector with 78·6% time workers was in software contractor companies,in the East, while software contractors were equally which employed only 13·1% of its workforce in aconcentrated with 77% located in the East, reflecting temporary capacity. Data were also provided by thethe widespread pattern internationally for more com- IDA for a related subsector, ‘electronic teleservices’,plex activities to be found in the larger urban areas. consisting of 12 companies employing around 5,000

There has been consistent growth in the number additional workers. The only non US-owned companyof internationally traded services companies since the in this group was the German company GEA, while1970s, with the main period of growth occurring after Compaq was the only teleservices company within this1994, during which 60·4% of these companies were group that was not located in the East region.established. Telemarketing was clearly the sector withthe most recent evolution with 79% of operations

The IFSCbeing established after 1994, while the sector with thelongest established companies was the small ‘other’ The International Financial Services Centre (IFSC),

located in the Dublin docklands, is the mostcategory with only 26·3% of start-ups since 1994.

Table 4. Permanent and temporary employment in foreign-owned internationally traded services companies, 1995–2000

Sector 1995 1996 1997 1998 1999 2000

Software services/data processing 1,515 (135)1 1,551 (483) 2,058 (245) 3,280 (242) 3,966 (444) 4,010 (275)Telemarketing 461 (13) 1,315 (122) 2,126 (224) 3,405 (535) 4,270 (850) 5,793 (702)Software contractors 1,040 (198) 1,451 (457) 1,807 (720) 2,256 (647) 2,742 (553) 3,547 (550)Software 3,064 (390) 3,829 (225) 4,523 (416) 5,209 (720) 5,679 (553) 6,635 (369)Other 760 (314) 729 (141) 766 (224) 930 (85) 871 (358) 948 (410)

Note: 1. Temporary employment in brackets.Source: IDA Ireland, 2001.

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12 Seamus Grimes

concentrated cluster of internationally traded services high technology niche areas, helping them to overcomethe limitations of a small domestic market.in Ireland. It was established in 1987, at a time when

the financial services industry was beginning rapid Analysis of Ireland’s internationally traded servicessector and related ICT activities such as softwareglobal expansion as markets deregulated. The primary

objective of the IFSC was to promote the development indicates that much of this activity is still found at thelower levels of the value chain, although efforts to raiseof a well-regulated financial services industry to provide

quality, sustainable jobs. While factors such as a rela- the quality of investment is also showing some positiveresults, including indications of higher levels of embed-tively cheap labour force accounted for the attraction

of labour intensive banking activities such as cash dedness of foreign investment than heretofore. This ispartly explained by major improvements in overall skillhandling, preparing financial statements and administra-

tion to Ireland, factors such as access to high quality levels of the labour force and in the quality of businessinfrastructure, which the country now offers foreignbroadband telecommunications infrastructure, the

availability of a large pool of skilled workforce, and owned companies. Despite the success of the Irishdevelopment model relative to other European peri-special incentives for leasing property in the centre

help to explain the concentration of these activities in pheral regions, policy makers are keenly aware of thedangers of complacency, particularly in areas such asDublin, while the policy objective to create a critical

mass of financial services activity in the IFSC was also the provision of competitively priced broadbandtelecommunications infrastructure, an area in whichimportant (MURPHY, 1998). Although such activities

may be termed ‘back office’, some of the 500 Irish and Ireland has experienced slippage relative to some of itscompetitor regions. They are also aware of both theforeign companies are relatively sophisticated, such as

the European administration headquarters of Citibank, opportunities, but also the more intensified competi-tion for FDI that will accompany European enlarge-which employs almost a quarter of the 8,500 employees

in the IFSC. Projects in the centre cover corporate ment, particularly from highly skilled workforces incountries like Hungary and the Czech Republic.treasury, international banking, collective funds man-

agement and administration, life and non-life insurance, There is little disagreement among economic com-mentators in Ireland that the attraction of FDI willcaptive insurance management, and futures trading and

broking. In 1999 the IFSC accounted for 65·7% of continue to play a major role in Irish industrial policy,even if net employment growth from such investmentFDI inflows into Ireland, and contributed 24% of total

service exports (FORFAS, 2000b). Most of this inflow in the future is likely to be much less than in the pastdecade. The need, however, to replace less competitiveto the IFSC entails large movements of capital by

foreign-owned companies to their treasury, fund man- operations, dating from earlier stages in technologicaldevelopment, by more productive, more highly skilledagement and other financial subsidiaries at the IFSC,

mostly to be reinvested in overseas assets, and thus has and more profitable investment, is an ongoing policychallenge, which has been highlighted by the recentlittle impact on the productive potential of the domestic

economy. downturn in the ICT sector. With Ireland’s changingdemographic profile towards lower levels of depend-ency, and the significant improvement in overall eco-nomic performance and management of the economy,

CONCLUSIONthe scope for much greater selectivity in the attractionof future inward investment has been enhanced, andIreland’s embryonic information economy expanded

considerably during the 1990s, with significant employ- this is reflected in the policy shift towards encouragingexisting foreign-owned companies in the country toment growth in sectors such as software, financial

services and a variety of teleservices including shared expand their operations in areas like shared services,thereby increasing their level of embeddedness.services. This resurgence in the Irish economy was

associated with the successful attraction of inward The continued importance given in industrial policyto the attraction of FDI, however, will not take awayinvestment, which reflected the restructuring of inter-

national capital as multinational companies developed from the crucial challenge of promoting the indigenoussector of Irish enterprise. The relative success of thenew business models within an increasingly globalizing

economy. The disadvantages of Ireland’s peripheral indigenous software sector has been the most encour-aging aspect of recent developments to date, but closinglocation within Europe was overcome to some extent

by providing the necessary infrastructure and human the productivity and export performance gap betweenindigenous and foreign-owned companies, remains aresources to enable global corporations to exploit its

comparative advantage by means of extensive use of major challenge. The investment of 2·54 billion bythe Irish government into research and development, asinformation and communication technologies.

Through becoming more integrated, not only within part of the current 50·8 billion National DevelopmentPlan, is a clear indication of the commitment bythe European single market, but also into markets

dominated by US multinationals, opportunities for policy makers to encouraging the development ofa knowledge-based economy, constructed aroundindigenous enterprise were opened up, particularly in

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Ireland’s Emerging Information Economy 13

deepening networks between third level education and regionalization of information economy investment.The overheating of both the labour and housingenterprise.

One of the obvious imbalances, which has character- markets in the Dublin region, associated with the rapidpace of development in recent years, together with theized the recent expansion of information economyreduction in quality of life standards arising fromactivities in Ireland, has been the marked concentrationextreme urban congestion have presented new oppor-of much of the investment in the Dublin region. Theretunities for regional urban centres. These developmentsare few sectors in internationally traded and ICT-coincide with the restriction of Objective 1 status forrelated activity with more than 30% of their investmentregional funding from the EU to the western andoutside the Dublin metropolitan area. This patternborder regions of the country. In addition to ensuringconfirms the findings of other studies already referredthat future inward investment is higher on the valueto such as GILLESPIE et al., 2001, and LEAMER andchain, the second most significant policy goal to beSTORPER, 2001, showing that the more complex areasidentified in the past few years is that every effort willof information activities are highly concentrated inbe made to ensure that the Objective 1 region ofurban areas, while those which have become morethe country will receive at least 40% of the overallregionalized are predominantly routinized operations.investment. Taking these converging developmentsIt also reflects the findings of Dunning’s eclectic model,together, and notwithstanding the poor record to datewhich notes that despite the decentralization of assetin encouraging information economy activity to locateaugmenting investment to peripheral regions, the over-in the regions, there is some scope for optimism thatall effect has been to exacerbate regional differencesthe future spatial pattern of the Ireland’s informationwithin the periphery. While FDI theory, which haseconomy will be more evenly distributed.been dominated by authors like Dunning, has much to

contribute towards our understanding of the Irish FDIexperience, the more recent shift among a small num- NOTESber of scholars towards a greater emphasis on trans-

1. These centres allow business processes to be broughtnational production networks, rather than on individualtogether in a single location, which supports multiplesubsidiaries and on subsidiary evolution over time, willbusiness entities on a customer–supplier basis.provide a more innovative framework for evaluating

2. This is the national high-capacity network that linksinformation economy-related FDI in regions like together other networks of lower capacity, usually localIreland. area networks.

A number of important recent developments within 3. A Gigabit is 1,000 Megabits.Ireland and within the EU generally, however, have 4. These centres provide facilities for co-location, Web andensured a major policy shift in recent years towards a server hosting, network and support services such as the

construction of marketing databases from websites.greater emphasis on bringing about a higher level of

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