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CHAPTER 4

 

THE RATIONALE

 

`This study is conducted to assess the effects of the information and communication technology sector of the Irish nation to its foreign direct investments. This study is conducted in consideration of the Ireland has been reaping the fruits of the successful implementation and continuous flourishing of the economy with special attention to the ICT sector. This study contains graphs and figures of the recent improvements in the Irish ICT section. Along with these are the specific interpretations of the said information. Using these data, the researcher shall be pinpointing the strong points of the Irish situation and specify the reasons of Ireland's successful ICT sector. Moreover, the study shall be a potent tool in providing other countries the specific strengths of the Irish paradigm in its pursuit in ICT excellence through its foreign direct investments. This study could be used as a benchmark for other developing countries as well as other first world economies who have been struggling with the affairs of gaining its respective FDIs. This study stresses that the ICT is a potent tool in improving the level of a nation's economic well being, thus should be regarded as one of the vital aspects of the market.

 

 

THE BENEFITS OF THE STUDY

 

This study shall be able to benefit the ICT sectors in general. This is because the study provides the course of action undertaken by the Irish ICT sector to be at par, or even superior, to highly industrialized countries such as the United Kingdom and the United States. These strong points could be used as a framework of both developed and developing nations in their quest for ICT supremacy. Moreover, the study also points out the shortcomings of the ICT sector, thus providing lessons for other nations in undergoing the process of strengthening of their ICT sector.

 

Moreover, the ICT sector of Ireland would also benefit from this inquiry. The provided analysis and recommendations would allow the sector and the national government to further encourage the entrance of foreign direct investments. This would also encourage local entrepreneurs to invest in the world of ICT. The more investments that the national government collects entail a much leaner growth in terms of the economic aspect of the Irish nation.

 

More importantly, this study would benefit the Irish population. The ensuing effects of the rise of the country's GNP and GDP brought about by the contributions from the FDIs from the ICT sector, begets a sort of assurance for the proper rendering of government services.

ANALYSING THE EFFECTS OF THE FDI

 

In an attempt to analyse the effects of FDI to the ICT sector of Ireland, the researcher would like to utilise Dunning's OLI theory to provide a more lucid interpretation of the study.

 

            Firm Specific Advantages

In terms of technological capabilities, companies that has invested in the country could be described as belonging to one of four different types, particularly, research performers operating with a specific R&D budget and typically having a formal R&D department; technological competents performing some element of product and process development; minimum capability companies adopting and implementing package solutions; and low technology companies with no meaningful technological capability. (Walsh, 2000) Moreover, most companies in Ireland fall into the lower two categories. In fact, there are only 500 from a total of 4,000 companies in manufacturing and internationally traded services (with >10 employees) in the country which can be described as 'research performers' spending at least IR£100,000 per annum on R&D. Even within that group, the top 50 R&D spending companies – those spending a minimum of IR£1 million each per annum on R&D – account for two thirds of business sector R&D activity. Only one in five foreign owned companies could be described as a 'research performer'. R&D, as a percentage of sales, trails behind other countries, particularly in high-tech sectors such as pharmaceuticals and office and computing machinery. Indigenous industry needs to build on national strengths in software and electronics and transform its approach to innovation. There is a low level of patenting by Irish-based companies in general and particularly in the US market. Irish industry must position itself higher up the economic chain in terms of the innovation, including R&D, and the value it adds to the products and services exported. This competitiveness shift is necessitated by the globalisation of markets and firms, the challenges faced by traditional cost-based industries, economic and monetary union, the progress towards greater tax harmonisation in Europe, and improving quality of labour supply and more cost effective manufacturing and exporting systems, particularly in Eastern Europe. The repositioning will also have to be underpinned by Government policy action in related areas as set out in the following section.

 

Aside, from the presence of foreign direct investments, a strong culture of innovation is an essential source of industrial competitiveness. (Walsh, 2000) Ireland must constantly seek to improve the capability and performance of its industrial base to cope with increasing global technology-based competition. To do this, Ireland will have to put in place a durable science and technology infrastructure which will create new, technology-based indigenous firms, establish an internationally competitive research base in universities, colleges and institutes, attract the R&D activities of MNEs to locate in Ireland and provide the physical infrastructure and environment to promote innovation.

 

            Location Specific Advantages

 

Ireland has built a strong reputation as a location for high quality manufacturing and internationally traded services. (Walsh, 2000) This has been achieved because of a mix of attractive fiscal arrangements, a plentiful supply of skilled and adaptable labour, the recent emergence of technology entrepreneurs, English as the main spoken language and access to European markets. However, the underlying base driving output and exports is quite narrow and the long-term performance of industry in Ireland continues to be hampered by a weak commitment to technological innovation. Exports grew from IR£15 billion in 1991 to IR£46 billion in 1998. Half of the country's exports are accounted for by 50 companies, of which only 13 do any research and development (R&D).

Government-supported Programmes in Advanced Technology in the areas of software, power electronics, optoelectronics and telecommunications, as well as the National Microelectronics Research Centre, carry out research and provide postgraduate opportunities in the ICT field. (Walsh, 2000) However, the level of existing funding for these organisations does not permit them to generate the scale and activity necessary to build up and maintain world-class centres of expertise. Whether from public or private or both sources, support at a higher order of magnitude is needed. In the context of Ireland's ambition to become a knowledge-based and technology driven economy an infrastructure, which develops and transcends what is already in place, must be developed to cope with the rising standards provided by FDIs.

 

In addition, the Information and Communications Technologies have made a major contribution to recent economic growth in all developed countries. Ireland has benefited very significantly from these technologies, in terms of employment and wealth generation. These technologies will continue to be at the core of economic and social progress in the years ahead.

 

Ireland is justifiably proud of its performance in the ICT area. (Walsh, 2000) It has attracted many of the world's leading companies to establish bases in the country and have been convinced, by the quality of people and the industrial climate, to broaden the scope of their operations. The national government has built a vibrant indigenous industry and a number of indigenous companies have achieved very significant success on world markets. Nonetheless, these successes there are several weaknesses in the current industry structure that must be addressed if the industry is to prosper in the coming years and realize the potential benefits for Irish society. In general, the ICT industry in Ireland is positioned at a relatively low point on the value chain: it deals in relatively mature technology that has been developed elsewhere. In the years ahead, there will be intense competition at this end of the value chain. The main competitive factor will be cost and particularly labour cost. Ireland is unlikely to be able to compete on this basis: we need to increase the value-added component in our ICT products and services.

 

In order to carry this out, the industry will need a cadre of world class professional researchers in the ICT disciplines – people who can contribute original marketable ideas, who can form the nucleus of new, world class companies, and who can attract a new kind of multinational investment. (Walsh, 2000) The current output of postgraduates (approximately 60 per annum with pertinent skills) is quite inadequate for this kind of development. Likewise, state investment in research is significantly lower than in most developed economies. As we move from an economy based on relatively low skill levels to one based on knowledge and expertise, our continued prosperity depends on substantially increasing this investment. Moreover, the efforts of the PATs (Programmes in Advanced Technology) and other RTI (research, technology and innovation) programmes have led to measurable benefits, but the current structures are incapable of developing teams with 'world class' scale or expertise. They are therefore unable to conduct the type of research that will attract international attention, bring in significant industrial investment, or routinely spin off high technology, market-leading enterprises.

 

The development impact of ICT has two distinctive aspects. The first is the benefits of enhancement of the infrastructure and applications to users of information and communication services, who can be distinguished according to whether they use these services for production, distribution or consumption activities. The second is the benefits derived by the economy from changes in the supply of communications network infrastructure and applications.

 

Furthermore, improvements in ICT lower the cost of information, the cost of dealing with others in the market (such as suppliers and customers) and the cost of business start-ups. Through both of these processes, transaction costs in society drop, which improves overall efficiency and growth. Complementing this, the ability to transmit data on communications networks contribute to increases in the quantity and quality of information available to service and productive enterprises, which opens up new opportunities and enables more thorough evaluation of the risks and returns associated with these opportunities. In many instances, the additional information that becomes accessible will contribute to the spatial expansion of markets, assisting producers to move from local into regional or national markets, and from domestic into international markets. Access (or the lack of it) to cheap and sufficient information is an important determinant of firms', sectors' and countries' competitive advantage.

 

Evidence suggests that countries that have invested in communications network infrastructure have attracted high levels of foreign direct investment as well as domestic investors into other sectors. The value of the infrastructure is in the linkage effects to other sectors, more than in the infrastructure per se. Economic benefits also arise from changes in the supply of communications network infrastructure, which contributes to the emergence and growth of specialist firms, or new branches of existing firms, in a range of service sectors to take advantage of new market opportunities in the production and distribution of information itself. On one hand, these will include software production firms and Internet service providers, who provide essential pieces of machinery for information production and distribution. On the other hand, there are firms who provide the content of the information, such as web marketing agencies, electronic news media and so on. The changes in information and communications technology have broken down barriers between different manufacturing and service sectors in the economy, and opened up competition between them. This enhances efficiency in these sectors, and contributes to overall growth.

 

Much of existing economic data point to a high correlation between ICT and economic growth. And in the past several decades this has been confirmed by the revolutionary impact of ICT on country economic performance, particularly in the areas of production, trade & market access, employment, and public and corporate governance. Converging and emerging technologies have allowed countries to accelerate economic growth, empower people and alleviate poverty through expansion in private and public business opportunities, extend services to socially disadvantaged groups, and pervasively use and develop ICT for revenue and income generation purposes.

 

            Internalisation Advantages

 

Foreign direct investments increased the productivity rate of the Irish ICT sector. One of its effects is the provision of higher standards on the ICT industry. The government recognized that the capabilities in information and communication technologies must be developed in order that Irish society can participate in economic, cultural and educational activities and that Irish business can take advantage of the opportunities arising in this field. (Walsh, 2000) Information and communication technologies impact on society and the economy in a number of different ways. First, ICT is an underlying and necessary technology for society in general and for business in particular. ICT also functions as an enabler/facilitator for industry, for example, in electronic commerce, logistics and telematics. Secondly, looking outward, organisations will increasingly use ICT to link their stock of tacit knowledge to that of other organisations so as to develop cross-discipline solutions in areas of emergent need e.g. in bio-informatics, smart products, supply chain management. Thirdly, in recent times the ICT sector has been the engine of growth for all developed countries. Ireland has been particularly successful in this area both in attracting foreign direct investment and in developing a select number of companies with a global reach. Currently 40 per cent of all Irish exports come from the ICT sector and employment in this sector is forecast to double by 2003.

 

The encouragement of foreign direct investments is as well subjected to a stiff level of competition among Ireland's neighbouring countries. This provided the Irish government the realization that if Ireland is to compete in an era of rapid development of ICT products and services, appropriate state-of-the-art infrastructure must be put in place. (Walsh, 2000) Furthermore, if Ireland is to fully meet the future societal and economic challenges posed by the rapid developments in ICT, a number of general capabilities will be required. Moreover, raising the levels of IT and computer literacy in the population became the top priority action. The high potential for job creation in this area provides an opportunity to tackle the existing situation where significant numbers of young people are excluded from the job market because of lack of training and skills. The extremely high cost of research into future technological developments will place a premium on sophisticated modelling and simulation systems, which can substantially reduce the risks involved. There is an opportunity for skills to be developed in this area and tradable services commercialised. For the foreseeable future the need for top class electronic engineers and computer scientists will continue and the enhancement of mathematical and fundamental engineering principles will be critical to maintaining Ireland's position as a global player in these industries.

 

According to Dorgan (2002), the surge of FDIs provided major contributions in the country. First, it provided a very strong export-led contribution to economic growth. Moreover, unlike other decades, the investments provided the employment sector an intensive growth. It has been a key driver of business friendly infrastructure, human resource development and regulatory change, which has benefited the economy as a whole. Concurrently, FDIs has both forced and sustained flexibilities in the economy, which might otherwise have gone the way of much of Europe, in developing rigidities and protections for existing economic agents. Moreover, it has been a key source of new technology, skills, management and business know-how, and a global orientation. It has also provided a breeding ground for Irish entrepreneurs, for example, in the indigenous software sector. Furthermore, it has given Ireland scale and critical mass in new technologies, far faster than that could otherwise be achieved. A good example is the advent of critical mass in the bio-pharmaceutical sector in Ireland when Wyeth decided on a major new facility in Grange Castle, Dublin. Another effect was the collection of Substantial Corporation Tax revenues (1.9bn in 2001 alone), and additional tax revenues from income tax and indirect taxes, have helped the country to be able to afford the cost of new infrastructure and human resource developments, envisaged under the National Development Plan, so important to sustaining economic growth in the future.


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