The most important pillar of the Irish economy are the exports of multinational corporations, which have turned the former poorhouse of Europe into a “Celtic (growth) tiger” in recent decades. When Ireland got sucked into the European debt crisis in 2010, people in Dublin feared that the golden days were already over.
But the Irish economy has recovered from the shock faster than other countries and has become a high-tech island thanks to low tax rates, a well-educated workforce and its geographical position as a bridgehead to the European single market.
However, what seemed like a “one-way ticket” to growth and prosperity could prove to be an economic cluster risk in the current tech downturn. The announced mass layoffs at large tech companies such as Meta, Amazon, Twitter, the payment service provider Stripe and computer manufacturer HP have fueled fears of a “tech lash” on the Emerald Isle.
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The company logos of Google, Amazon, Paypal, Siemens, SAP and Microsoft are lined up in Dublin’s “Silicon Docks”. The foreign tech companies aren’t just a job engine – around 140,000 IT professionals work on the island, and since the beginning of last year alone almost 25,000 have been added.
The highly paid techies and their high-earning employers also ensure that the Irish government’s tax revenues are bubbling up, despite the corporate tax rate of just 12.5 percent, which has often been criticized internationally.
Side Effects of Tech Addiction
According to John McCarthy, chief economist at the Irish Treasury, more than a third of all taxes paid on the island come from just 10 multinationals. “There is certainly a risk for 2023,” says the economist with a view to the accelerating tech recession.
McCarthy isn’t alone in warning against over-reliance on the tech sector. Alan Barret, director of the Economic and Social Research Institute (ESRI) think tank, is also concerned about the side effects of tech addiction on the island.
The government in Dublin seems aware of the danger: while 20 years ago it was only a question of attracting as many foreign investments as possible to Ireland, today people have become selective and pay more attention to the “qualitative” effects that such investments have on employment and productivity across the board bring to the Irish economy.
At the same time, Ireland is looking to spread its risk more broadly, building on an already strong position in the life sciences space. Pharmaceutical and biotech companies from Pfizer to Eli Lilly to Amgen have been researching and developing on the Emerald Isle for years. In May, the German Merck Group announced that it would expand its capacity at the Cork site for EUR 440 million.
In general, foreign investment does not seem to have suffered either from the pandemic or from the geopolitical tensions: According to Tommy Fanning, chief strategist at the Irish business development agency IDA, the past six months have been the “most successful in our history”.
Three warnings for copycats
However, the Irish model of success has three warnings for potential imitators. First, being too dependent on just one economic sector is dangerous. Even high-tech is not a one-way street. Second: A small, open economy remains vulnerable if it does not succeed in transferring the high productivity of foreign companies to other parts of the economy. Ireland shows how difficult that is.
And thirdly: Tax incentives are important in international competition, but they are often not decisive. Geography and talent are more important today. Low tax rates are also not forever: Ireland has to adapt to the minimum corporate tax rate of 15 percent planned by the OECD due to international pressure.
In addition, digital services are to be taxed more heavily in the future where they occur – and not where tech companies have their offices. Both will reduce Ireland’s tax advantages.
More: Fight against tax dumping: Ireland’s departure from the tax rate of 12.5 percent was overdue