Speech by An Tanaiste and Minister for Enterprise, Trade and Employment, Mary Harney, T.D.,

To the American Chamber of Commerce/IDA Ireland Strategic Competitiveness Conference, Dublin,

On May 15 2003

I am delighted to be here today and have the opportunity to address this seminar, which as a joint initiative by the American Chamber and IDA is emblematic of the close relationship between "Ireland Inc" and the overseas companies that have invested in this economy. It is this close long-term partnership, and the responsiveness and flexibility that it facilitates, that has been at the heart of much of our recent economic success. The challenge we must address here today is how we keep this mutually beneficial partnership vibrant and relevant in the radically changed environment that confronts us going forward.

Foreign Direct Investment (FDI), and in particular US FDI, has been good for Ireland and Ireland has been a good and profitable location for investors. This relationship really blossomed in the 1990's with a massive increase not just in the quantity but also in the quality of investment. This in turn, in combination with a renaissance in Irish entrepreneurship, created the phenomenon of rapid growth that has been labelled the "Celtic Tiger".

It also made us the most globalised economy in the world according to a survey carried out in each of the last two years by Foreign Policy Magazine and AT Kearney. The good thing about achieving this status is that you benefit from the flow of goods and services ideas and investments and it is important to stress that we continue to benefit from substantial investment flows despite the worldwide economic downturn. On the other hand the potential downside is that your weaknesses get exposed and you can suffer the consequences much more quickly than in a more closed economy.

Today I would like considering what happened in the 1990's that took business investment in Ireland to new heights and how that formula needs to be adapted so that an internationally traded sector that is growing and innovative can continue to provide the basis for sustained economic and social progress.

Clearly we benefited from a favourable external environment that included the boom in high technology, the establishment and consolidation of the single European market and favourable exchange rates. Domestically, we had low corporation tax rates, good financial incentives and a growing and increasingly educated labour force. However, we had had many of these factors in place in the 1970's and 1980's and had not reaped similar benefits. I believe that the fundamental difference lay in the realisation that we needed a holistic approach to industrial policy that involved a coordinated approach across a wide interlocking range of factors such as overall fiscal climate, skills supply and infrastructure provision

The challenge now is how to refashion that approach to respond to a radically changed international environment and a domestic environment that is still coming to terms with the consequences of a decade of rapid growth. In the International environment apart from the cyclical downturn we are entering an era of real and intense global competition.

In these circumstances I need hardly tell an audience such as this that competitiveness is not an abstract concept to be debated by economists. Everyday you face not just competition from other companies throughout the world but also as managers you face constant competition for business and mandates from units of your own organisations located in other countries. Thus, recognising that ultimately it is companies that compete, the challenge for Ireland is to fashion an environment from which you and your staff can compete effectively in the global marketplace.

So how do we respond?

First we must recognise that competitiveness is a function of a range of factors and that is a dynamic process where ever higher levels of achievement are required to sustain success. If I might use a football analogy - you need a range of skills in your squad, they need constant realignment as you come up against different opposition, sometimes you need to acquire new talent as you go up the league and above all you need to remember that you are only as good as your last (or is it next?) game.

Finally, if I might push the analogy one stage further you certainly do not succeed in the big leagues by selling off your star players.

An attractive rate of Corporation Tax has been one of Ireland's star players and it is our intention that it will remain so. We have now successfully made the transition from a 10% regime for manufacturing and internationally traded services to a general rate of 12.5% while keeping our promise to existing investors that they could retain the 10% rate to 2010. We are equally committed to retaining the 12.5% rate until at least 2025. (In this there is a broad consensus across the political spectrum, for example, the leader of the labour party strongly supported the new rate last weekend).

However, it is more than corporation tax. We need to maintain the low taxation orientation of the economy in particular in relation to other taxes that impact heavily on the effort/reward equation for the workforce. We also need to put Ireland on a level playing field with regard to the tax treatment of critical areas such as R&D.

The biggest change that we have to confront is that we no longer have a surplus labour market. While our demographic situation is still superior to most other EU countries, it has passed its peak. Future economic growth, including the contribution FDI can make to it, will have to be derived more from productivity growth than increasing numbers in employment.

As a result largely of these labour market changes we are rapidly, and I would think irrevocably, being overtaken by other less developed economies, notably in Eastern Europe and the Far East, in terms of our cost competitiveness as a location for what might be called basic/moderate to low tech/ production only forms of investment. Moreover, I would contend that the space we occupied in the FDI market in the past will not meet our aspirations.

Our only real option, (and indeed the most desirable one), is to adapt to a world where the key competitive advantage is the ability to rapidly translate ideas into goods and services. However, this in no way absolves us from the necessity to do everything possible to maintain cost competitiveness since even higher value added goods and services will only be developed in places which are competitive across a broad range of costs and services

In order to maintain our competitiveness we need to

• Ensure that pay increases are linked to increased productivity and performance
• Drive productivity in the sheltered sectors of the economy through increased competition and regulatory reform
• Continue to invest in key infrastructure particularly in the areas of transport, broadband telecommunications and energy.
• Strongly focus on increasing the quality of our education and boosting investment in Research Technology and Innovation

Pay and Productivity

We must ensure that we do not price ourselves out of jobs. As we make the transition to a high wage high skills economy it is vital that our wage costs do not move too far out of line with the countries with which we compete on international markets.

Yes, we can pay ourselves wage increases above the rate of inflation - that is how we raise living standards after all. But we must make sure that those wage increases are matched by improvements in productivity: otherwise, pay rises cannot be sustained and jobs will be lost.

The new partnership agreement and the benchmarking process will provide substantial pay increases for our public servants. It is vital that those pay increases are matched by improvements in efficiency and improvements in the quality of service delivered to the public.

It is also vital that as we make the transition that we continue to retain the advantage of the labour market flexibility that has been critical to enabling us to achieve productivity growth in the past. In this regard the government attaches the utmost importance to ensuring that subsidiarity is maintained at EU in terms of regulation and that where there is a common approach it respects our voluntarist tradition in labour relations.

Promoting Competition

The internationally traded sector of the economy has a level of productivity that is right up there with the best in the world and has been growing at a rapid rate. However the overall productivity growth rate in the economy has not been spectacular. This is because of poor productivity growth in the sheltered domestically traded services sector.

These are the sectors of our economy which are not, by and large, exposed to international competition. These sectors have the capacity to impose inflationary price increases which can pose a threat to the exposed sectors and undermine our economic success.

It is important that all these sectors are subjected as far as possible to competition. Along with my government colleagues I have set out to tackle the problems in the insurance sector. And I am confident that we can make real progress and that we can deliver real reductions in premiums for policyholders.

But we must be prepared to look at all areas of economic activity. If there are anti-competitive practices in the professions which are hurting consumers and damaging our economy then we must identify them and root them out.

If there are laws and regulations that prevent real competition and deny consumers a real choice then they will have to go.

The Competition Authority now has the resources and the powers to investigate and to prosecute. And I am sure that it will use them where it is appropriate to do so.

Competition works. Look what has happened in Irish aviation. Ryanair opened up a whole new market for flying with its low-fares strategy and is now a great Irish international success story. But Aer Lingus has gained too. It has responded to the changing market and under dynamic leadership it is now in a stronger position than it has been for years.

Investment in Infrastructure

A modern economy needs modern infrastructure. And it's one of the things which Ireland needs if it is to provide a platform for enterprise and innovation. Improvements are being made and the next three years will see exciting developments as our new national road network begins to take shape and we roll out the broadband Metro Rings to 19 regional centres.

In addition, a major programme of investment in rail is continuing. And the first steps in the planning and building of the Dublin Metro will be taken before the end of the current year.

However the rate of change is far too slow. We need to adopt a much more aggressive approach to eliminating the infrastuctural deficiencies that have emerged as a result of the boom in areas such as transport, energy, housing, and sanitation. This will require a willingness to learn from the private sector and other countries and be prepared to adopt radical approaches to regulation, financing and management structures if we are to get the job done. (Recently, I met with a company already in Ireland that was considering a new project. They informed me that one of the advantages of Ireland vis-à-vis the competing locations was that they could be up and running 6 to 12 months faster than in the other locations. So there is nothing in the air in Ireland that says projects cannot be brought in on/under budget and on/ahead of schedule. We simply have to apply the practices and disciplines that companies apply every day to public sector projects)

Clearly in addition to new approaches we will need to invest more. It is recognition of this need that led me to call recently for a recasting of the Stability and Growth pact to allow low debt countries greater flexibility. Let me be clear about this such borrowing would only be used to fund productive investment and would be contingent on measures to improve efficiency in the supply of infrastructure including involving more foreign contractors so as to ensure the necessary level of competition in the market.

Science, Technology and Innovation

I made the point earlier that the era of labour surplus and rapid labour force growth had ended. However, the good news is that the more slowly growing labour force will be increasingly better educated. However, this is not a reason to rest on our laurels.

I share the concern expressed by many in industry and education at the decline in the numbers taking natural science subjects and believe we must give priority reversing the trend by both implementing the recommendations of the Task Force on the Physical Sciences and above all conveying effectively to young people the exciting developments in the Natural Sciences in Ireland and the opportunities to which they give rise.

Historically we have under invested in Science Technology and Innovation. A major boost to the level of basic and applied research is clearly needed if we are to move to a new development paradigm.

In terms of basic research we plan to invest nearly $700 million over the next few years through Science Foundation Ireland. It has the ambitious aim of establishing world-class Irish research programmes in niche areas of two of the most important growth sciences, information and communications technology and biotechnology.

Since 2000 SFI has been recruiting and retaining world class research scientists and engineers in ICT and Biotechnology to academic appointments in Ireland.

The Foundation is investing in academic researchers and research teams who are most likely to generate new knowledge, leading edge technologies, and competitive enterprises in these strategic fields. SFI makes its grants based upon the merit review of distinguished scientists in order to ensure excellence.

It has recruited the expertise of approximately 80 first-rate research scientists and engineers-and their teams-in Ireland. Among the researchers and research teams that have relocated to Ireland are nationals from Belgium, Canada, England, Japan, Scotland, Slovakia, and the United States.

Recently, I had the pleasure to announce that Science Foundation Ireland (SFI) had made its first three awards of €42 million under its programme to create new world class research Centres for Science, Engineering and Technology (CSET).

These awards go to researchers in Irish universities who can make Ireland an international leader in key strategic areas through collaborations with scientists and engineers in industry.

These investments will create an extraordinary set of research partnerships connecting Irish universities with their counterparts from world leading research corporations and some of Ireland's most promising ICT and biotechnology companies. The Centres will link faculty at universities in Cork, Dublin and Galway with their counterparts from HP, Procter and Gamble and Servier. Irish companies involved in these partnerships include Surgen, Alimentary Health and Allegro Technologies.

Through these initiatives we aim to position Ireland on the international map as a centre of research excellence and in doing so encourage more companies to undertake more corporate R&D in Ireland

Role of the IDA

These initiatives will thus dovetail with the new focus by the IDA on encouraging companies to locate higher value added activities including product and process development capabilities here in Ireland.

This will have to be done in an era where because of our recent success our scope for offering substantial grant packages will diminish significantly in the coming years although we will retain the ability to continue to provide targeted support for priority areas such as R&D and regional development.

IDA has put in place a series of initiatives designed to these challenges including

• An overall shift in policy priorities and a broader vision of what constitutes FDI. This includes somewhat less emphasis on job numbers and more of a focus on job quality, and making Ireland a center for innovation and the strategic management of value chains, rather than just a manufacturing or basic service location.
• A stronger emphasis on forming close links with a wide range of public institutions and other institutions at all levels so as to achieve the type of coordinated development I have been talking about.
• A much stronger regional presence designed not simply to increase investment into the regions, but also to increase the links between the organisation and local public bodies, clients and educational institutions etc.
• The launch of the Strategic Competitiveness Programme, which is aimed at helping clients existing clients to deepen their roots in the Irish economy, move into higher value added activities and increase their strategic importance within their Corporation.
• The launch of several new grants based initiatives all focused on fostering the development of existing IDA Ireland clients. These include:
• • A new R&D Capability Grant scheme to encourage clients to put in place or substantially expand an R&D function.
  • A new Training Grant scheme aimed at helping clients to undertake large-scale training initiatives that allow them to move into new higher product areas and services.
  • A new SCP Training Grant that encourages clients to acquire the expertise required to help them successfully implement the sort of initiatives I mentioned above.

The key objective of all these new initiatives is of course to facilitate foreign owned companies in Ireland as much as possible to both adapt effectively to the new environment I have outlined, contribute even more than they already are to the future development of the economy, and play a vital part in achieving and exploiting the strategically competitive economy we intend to develop.

Conclusion

Looking to the future, for companies, there will be a number of key factors, which will determine how they achieve competitive advantage, these include

• the speed and efficiency by which they are able convert intellectual property into marketable products and services.
• Their capacity to manage supply systems.
• And the depth of their relationship with existing and potential customers

I note that all of these are on the agenda here today and I believe that they are just as vital to countries as they are to companies. Let me end by focusing on the depth of relationship with existing and potential customers. Earlier I alluded to the need to keep your star players as you moved into the big leagues spoke about tax. I believe that another key competitive advantage has been our flexibility and responsiveness to the concerns of our clients. I therefore welcome the opportunity to meet with you here today. My door is always open to you either individually or through bodies such as the chamber. I am sure that together we can successfully tackle the new challenges and maintain our successful partnership.

ENDS