Capturing the Value of Ireland's Global Connections

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Capturing the value of

Ireland’s global connections

September 2014

McKinsey Global InstituteMcKinsey & Company, Ireland



Copyright © McKinsey & Company 2014

The McKinsey Global Institute

The McKinsey Global Inst itute (MGI), the business and economics research

arm of McKinsey & Company, was established in 1990 to develop a deeper

understanding of the evolving global economy. Our goal is to provide leaders in

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on six themes: productivity and growth; natural resources; labour markets; the

evolution of global financial markets; the economic impact of technology and

innovation; and urbanisation.

This research is the product of a special collaboration between MGI and

McKinsey & Company Ireland. Special thanks go to Conor Jones, McKinsey

partner and location manager of the Dublin office; Sorcha McKenna,

Barbara O’Beirne, Peter Mannion, Daniel Corcoran, Patrick Callinan, and the

McKinsey consultant team based in Dublin; and MGI senior editor Lisa Renaud.We are grateful for the contributions of our research colleagues Carlos Molina,

Moira Pierce, Amber Yang, and Kimberley Moran, as well as the support of

our production and communications colleagues Marisa Carder, Treasa Cox,

Julie Philpot, and Andrea Smith. This report builds on MGI’s previous research

on global flows, and we thank Susan Lund and David Poulter for their insight in

applying this framework to Ireland.

The partners of McKinsey & Company fund MGI’s research; it is not

commissioned by any business, government, or other institution.

For further information about MGI and to download reports, please visit

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McKinsey Global Institute

Capturing the value ofIreland’s global connections

September 2014



Global flows . . .

€19 trillion+global flows of goods, services,and finance in 2012

14thIreland’s ranking on theMGI Connectedness Index

226%value of Ireland’s 2012 global flowsrelative to its GDP

1stIreland’s global ranking inservice flows in 2012

15%emerging markets’ share

of Ireland’s trade in goods



€700 billionfinancial flows through Irelandin 2007

€49 billionfinancial flows through Irelandin 2012

3%annual growth of Ireland’s tradein goods from 2002 to 2012

56%share of Ireland’s FDIoriginating in the United States

161,000 jobs created in Ireland

by multinationals

. . . by the numbers



Ireland’s recent history shows the huge economic potential of global flows—

but also their dangers. The country’s enviable track record for attracting the

operations of the world’s leading names in technology and pharmaceuticals offers

a textbook illustration of the value of openness. But at the same time, Ireland is

highly exposed to volatile global flows from which the economy extracts little real

value. With a modest recovery at hand, Ireland can reconsider how to carve out a

more sustainable and profitable position in the global marketplace of the future.

The McKinsey Global Institute (MGI) Connectedness Index assesses the immense

flows of goods, services, finance, people, and data and communication that move

in and out of 131 nations—and looking through this lens, Ireland ranks as the

world’s 14th-most-connected countr y. However, this pos ition is skewed by the

country’s number-one global ranking in flows of services, a number that accounts

for not only traditional foreign direct investment (FDI) by multinational companies

but also huge licensing and royalty fees that pass in and out of Ireland without

creating material jobs or investment.

Ireland performs exceptionally well in terms of FDI, but competition from across

Europe and around the world is intensifying. Irish policy makers and businesses

will need to step up their efforts to remain globally relevant. Excluding corporate

tax rates, Ireland places in the middle of the pack when measured against the

set of rivals we analysed on the critical factors of cost and quality that determine

a location’s ability to attract FDI over the long term. Perhaps even more telling,

too few Irish companies are scaling up and competing globally. When they do,

they focus heavily on traditional markets and trading partners. Faster growth

opportunities are being left on the table.

As Ireland returns to growth, it has a window of oppor tunity to shore up its

vulnerabilities and sharpen its strengths so that it is better prepared to compete in

an increasingly interconnected global economy.

For policy makers, the priorities include:

Deepening Ireland’s attractiveness as a location for multinationals beyond the

corporate tax regime

Creating a thriving environment for homegrown companies and encouraging

them to go global

Investing in people through quality-of-life and education initiatives

Capitalising on Ireland’s strength in technology and its still-untapped

digital potential

Continuing to enhance Ireland’s international credibility

Capturing the value of Ireland’s

global connections



2

To thrive in a more complex world, Ir ish businesses face several imperat ives:

Diversifying their customer base by capturing new high-growth markets while

maintaining ties with long-time partners

Adapting business models to an increasingly digitised world

Responding to an intense new wave of competition

Competing for global talent

Building Ireland’s global reputation for quality and professionalism

Recent research from MGI finds that in 2012, global flows of goods, services, and

finance alone reached $26 trillion (€19 trillion), and they could potentially triple in

value by 2025. Most important, these cross-border exchanges already drive some

15 to 25 percent of global growth, a share that will only increase in the yearsahead. To stake its claim on this future growth, Ireland will need to understand its

current position in global networks and take a long-term view towards capturing

the most promising opportunities.

WH AT ARE GLOBAL FLOWS, AN D WHY DO THEY MATTER?

We take it for granted that we live in a global world—but stepping back and

measuring the economic value that now flows across the world’s borders

reveals the sheer magnitude of the transformation that has taken place in just

a generation.

Global flows in a digital age, a recent study from MGI, examines new patterns in

the movement of goods, services, finance, people, and data and communication

across borders. It paints a complex picture of a world that is being rapidly

transformed by rising prosperity in emerging economies and by the disruptive

impact of technology.

Among the major findings of MGI’s research:

Global flows are rising rapidly in value. In 2012, the flows of goods,

services, and finance across borders reached $26 trillion (€19 trillion), or

36 percent of global GDP. That is 1.5 times as large relative to GDP as they

were in 1990. These flows could nearly triple by 2025.

Global flows drive global growth. MGI finds an overall positive correlationbetween each type of flow and GDP growth and estimates that global flows

contribute between $250 billion and $450 billion (€183 billion and €329 billion)

of growth every year to world GDP. In fact, economies that are more

extensively connected to global networks can experience up to 40 percent

faster GDP growth than less connected countries.



3Capturing the value of Ireland’s global connections


Digitisation is transforming and sharply accelerating global flows. The

pervasiveness of Internet connectivity and the spread of digital technologies

are not only powering huge flows of data and communication; they are also

transforming and enabling flows of goods, services, capital, and even people. Today there is growing trade in new digita l goods and services, from digital

movies and music to products manufactured by 3D printers. Even trade

in traditional manufactured goods is being transformed by digital tracking.

Digital platforms such as eBay, Amazon, and Taobao connect suppliers with

international customers and allow new players to participate in sectors ranging

from shipping to payments.

Emerging economies account for a growing share of global flows.

Emerging economies now account for 38 percent of global flows, nearly triple

their share in 1990. By 2025, 1.8 billion people—nearly all from emerging

economies—will join the “consuming class”, attaining incomes that allow for

more than the basic necessities of life. These new consumers will spend$30 trillion (€22 tr illion) annually, up from $12 trillion (€8.8 trillion) today.1

This is already creating enormous new hubs of consumer demand and

global production.

Knowledge-intensive flows are growing faster than labour- or capital-

intensive flows. Knowledge-intensive goods (such as high-tech products,

pharmaceuticals, and automobiles) and services (such as engineering and

business consulting) are the result of sophisticated R&D or highly skilled

labour. They dominate global flows in value and reached $12.6 trillion

(€9.4 trillion) in 2012, accounting for almost 50 percent of goods, services,

and financial flows. They are growing at least 1.3 times faster than labour- and

capital-intensive flows. Ireland happens to be exceptionally strong in this area,which bodes well for the future.

The patterns of par ticipation in al l types of cross-border exchanges are shif ting.

Advanced economies remain more connected to global flows, but some emerging

economies are rising rapidly. Where multinational giants once dominated cross-

border trade, small and medium-sized enterprises (SMEs) and even individual

entrepreneurs can now be global players, too. At the national level, there is now

growing foreign competition even in the domestic arena, while the opportunity

cost of not penetrating new markets abroad grows daily.

IRELAN D IS THE WORLD’S

14TH-MOST–CONNECTED COUNTRY MGI has tracked the flows of goods, services, finance, people, and data and

communication that move in and out of 131 nations. It evaluates participation

in each type of flow as measured by trade intensity and share of world total, as

shown in Exhibit 1. Ireland ranks 14th in the world on the MGI Connectedness

Index, a relatively high overall position that is driven by its number-one ranking

in global flows of services (particularly knowledge-intensive services such as

royalties and licences).



4

Exhibit 1

Ireland ranks 14th in the world for overall flows—high on the list,

but behind the largest Western European countries

SOURCE: Comtrade; IHS; UN World Tourism Organization; Telegeography; World Bank World Development Indi cators;McKinsey Global Institute analysis

Country connectedness index and overall flows dataRank of participation by flow as measured by flow intensity and share of world total

Rank Country

Change

in rank,

1995–

2012

Goods

(2012)

Services

(2012)

Financial

(2012)

People

(2010)

Data

(2013)

Flows

value

$ billion

Flow

intensity

%

Flow

intensity

change,

1995–2012

%

1 Germany 1 3 5 7 5 2 3,770 110 +53

2 Hong Kong, China n/a 1 4 3 14 n/a 1 ,437 546 n/a

3 United States -1 8 9 5 1 7 5,622 35 +2

4 Singapore 1 2 3 4 18 5 1,198 436 +8

5 United Kingdom -1 13 6 9 7 3 1,471 60 -26

6 Netherlands 2 6 7 15 29 1 1,213 157 +397 France -1 9 10 36 15 4 1,581 60 +8

8 Canada -1 16 22 13 9 18 1 ,381 76 -3

9 Russia n/a 19 30 16 2 21 1 ,277 63 n/a

9 Italy 0 11 20 31 16 10 1 ,187 59 +4

11 Belgium n/a 4 8 30 39 11 937 194 n/a

11 Spain 0 21 12 35 12 12 932 70 +14

13 Switzerland -1 23 16 11 28 17 851 135 +64

14 Ireland 2 29 1 23 23 24 476 226 +32

15 Sweden 0 28 15 17 45 6 573 123 +17

16 Saudi Arabia 19 20 29 19 8 44 729 103 +40

19 Poland 5 22 31 28 34 22 478 98 +41

20 South Korea n/a 7 14 25 58 34 1 ,393 123 n/a

21 Japan -1 14 24 10 82 15 2,652 44 +18

25 China 5 5 21 6 93 33 5,124 62 +8

30 India 16 27 13 26 47 64 1,131 61 +37

43 Brazil 15 39 40 18 115 38 757 34 +11

49 South Africa 4 43 50 49 56 73 242 63 +12

53 Morocco 26 57 42 79 41 63 91 95 +46

Developed Emerging 51+26–5011–251–10

Connectivity Index Rank

<7070–99100+

Flow intensityEconomy

The index builds on similar previous work measur ing the degree to which

different countries are connected to global activity. While other assessments of

globalisation have focused on a country’s level of trade or flows relative to GDP

(a measure called “flow intensity”), the MGI index evaluates the connectedness

of a country by looking at the size of both inflows and outflows relative to its

GDP or population, and its share of global flows. 2 Taking both measures into

account corrects the tendency for small countries to rank high on trade intensity

measures alone.

From 1990 to 2007, combined flows of goods, services, and finance both in and

out of Ireland grew from $64 billion to $1.4 trillion (€47 billion to €1 trillion). This

represented an annual growth rate of approximately 20 percent—twice the global

growth rate. The tremendous spike after 2002 was primarily driven by a real

estate market that attracted huge inflows of foreign capital, which plunged in the

wake of the financial crisis.





Today Ireland’s flows of goods and services have stabil ised, but capital flows

remain far below their pre-crisis level (Exhibit 2). Although Ireland’s population

was only 4.6 million in 2012, its GDP was $211 billion (€154.5 billion), making it the

world’s 48th-largest economy. The value of all flows across Ireland’s borders wasworth $476 billion (€348.5 billion) in 2012, which was equivalent to 226 percent

of GDP.

Exhibit 2

1003

1,273

357

866

1,401

206

64

509

81

469430

1,068

432

132

478

74

409

85

774

60

144

476

347

709

94 97 98 0695 2000 05 20121990 07 0996 01 02 0804 119391 92 99

Service flows

Financial flows

Goods flows

Goods, services, and financial flows, 1990–2012$ billion, nominal

SOURCE: Comtrade; IMF Balance of Payments; World Trade Organization; McKinsey Global Institute analysis

Ireland’s flows of goods, services, and finance were just shy of $500 billion in 2012, but financial flowsremained well below their 2007 peak

UNDERSTANDING IRELAND’S PARTICIPATION IN EACH TYPE

OF FLOW

As a small, open economy, Ireland is largely a “waypoint” for global flows rather

than a source or a final destination. Waypoints act as conduits that channel

and redistribute flows from many sources to many destinations. Acting as a

waypoint can generate significant economic output and high-quality jobs, and

it helps a region accumulate knowledge, with positive spillover effects on the

broader economy.

Despite its high level of connectedness, however, a key question for Ireland iswhether it is successfully extracting value from the flows that move in and out

of its borders. The challenge for policy makers will be to deepen Ireland’s ties

with the rest of the world while striking a more sustainable balance—one that

harnesses the economic potential of global flows while minimising the volatility

they can sometimes bring.



6

Flows of goods

An exporter of machinery and equipment, computers, chemicals,

pharmaceuticals, and agricultural products, Ireland ranks 29th in the world for

inflows and outflows of goods. Between 2002 and 2012, however, its 3 percentannual growth in trade lagged well behind the Western European average of

8 percent. R&D- and knowledge-intensive goods constitute the vast majority of

Ireland trade flows (Exhibit 3).

Knowledge-intensive products such as chemicals, medical equipment,

electronics, and transportation equipment dominate Ireland’s goods trade

Exhibit 3

200

0

220

160180

140

120

100

80

60

40

20

090807

Resource-intensive

Capital-intensive

R&D/knowledge-intensive

Labour-intensive

201211100604 05032002

Components of goods flows, 2002–12

$ billion, nominal

SOURCE: Comtrade; McKinsey Global Institute analysis

Ireland’s plateau can be at least partly attributed to the country’s limited trade

ties to emerging markets during a period in which they generated unprecedented

demand growth. In 1992, emerging markets accounted for 5 percent of Ireland’s

goods trade and 18 percent of Germany’s. By 2012, Ireland was trading

15 percent of its goods with developing countries, while Germany had increased

its share to 37 percent.

Emerging economies were the major force that drove global trade from 2002 to

2012, posting 16 percent annual growth—twice the pace of advanced economies,

where markets for many products are already mature. By 2025, emerging markets

will account for half of global consumption. With their lower costs of production,

emerging economies tend to manufacture more labour-intensive goods, but asincomes rise, consumers in these countries will begin to buy more sophisticated

imported products. Given its strength in knowledge-intensive flows, Ireland could

be poised to benefit from this trend.

Whether they sell at home or abroad, Irish manufacturers have to be

internationally competitive. Ireland’s agriculture and food sector has shown the

way in this regard, as companies such as Kerry Group, Greencore, and Glanbia

have transformed themselves from locally focused producers to global market

leaders. Additionally, Ireland’s exports of pharmaceuticals and medical devices

outpaced the global growth rates in these categories from 2000 to 2012. These

sectors could position themselves for further growth as emerging economies

around the world build out their health-care systems.





Flows of services

Traded services can be considered in four categories: knowledge-intensive,

labour-intensive, capital-intensive, and public services. Ireland is heavily weighted

towards knowledge-intensive services, while the share of labour- and capital-intensive flows remains much lower (Exhibit 4).

Service flows grew strongly over the last decade,

with knowledge-intensive services accounting for

more than 90 percent of the total

Exhibit 4

99.6

28.4

113.3

93.1

71.7

116.1

93.9

98.4

41.9

52.760.0

Components of services flows, 2002–12$ billion, nominal

SOURCE: Comtrade; McKinsey Global Institute analysis

Knowledge-intensiveservices

Health, education,and public services

Capital-intensiveservices

Labour-intensiveservices

65.4

03

80.2

107.3

201205 10

115.7

08

71.6

04

103.6112.0

11

110.9

0907

94.7

06

41.9

54.5

2002

Exports

Imports

Ireland’s knowledge-intensive service flows grew in value at an annual rate of

almost 24 percent f rom 2002 to 2007, although they have posted just 5 percent

compound annual growth per annum since then. Ireland exports more than

$45 billion (€33 billion) worth of computer and information services annually

(Exhibit 5). Major multinationals, including Google, Facebook, PayPal, and others,

have established back-office operations in Ireland for servicing their broader

EU operations. The “other business services” exports shown here for Irelandwere predominantly made up of business, professional, and technical services

(36 percent); merchanting and other trade-related services (35 percent); and

operational leasing services (29 percent), which were a factor of Ireland’s strong

position in global airline leasing.



8

The main components of services flows are computer/information exports,

business services exports and imports, and royalty imports

Exhibit 5

Components of services flows, 2007–12$ billion, nominal

SOURCE: Comtrade; IMF Balance of Payments; World Bank World Development Indicators; McKinsey Global Instituteanalysis

NOTE: Components may not sum exactly to top-down measurements of goods, services, or capital flows due to differingcollection methodologies.

ExportsImports

2007

2012

8.6

0Construction services

23.9

9.8

6.3

2.8

1.1

0.1

Computer and informationservices

0.9

Government services, n.i.e.

0.2

Communication services

40.8

Travel

Other business services

Financial services

Personal, cultural, andrecreational services

Transportation

Insurance services

Royalties and license fees

6.1

0.2

0

28.2

29.7

0.7

1.2

12.0

0.7

10.2

4.0

5.9

2.2

42.1

0.2

0

5.9

45.7

1.4

8.0

0.4

0.1

Royalties and license fees

Financial services

Computer and informationservices

Transportation

Insurance services

Government services, n.i.e.

Construction services

Travel

Communication services

Other business services

Personal, cultural, andrecreational services

11.5

45.9

0

0.3

3.9

0.4

5.9

33.3

9.1

0.8

5.0

One important element of Ireland’s service flows is royalty and licence fee

imports, which are three times higher than those of any other importer in

the world.3 Ireland has become one of the leading jurisdictions of choice for

establishing special-purpose vehicles for intellectual property securitisation.





Flows of nance

The chart of Ireland’s financial flows tells the story of the economy’s roller-

coaster ride over the past 15 years (Exhibit 6). Growing from a base of $39 billion

(€28.6 billion) in 1995, financial flows reached just over $1 trillion (€0.7 trillion) in2007 before plummeting to negative $30 billion (€22 billion) in a wave of capital

flight in 2009.

Financial flows fell off sharply after 2007 and have not recovered since

Exhibit 6

298

9239

11

202

274257

2412 86

249

43

936

756

466

-30

490

9

444

93

1,004

66

9895 110904 05 0691 96 07 102000 0199 0394 201297 02 08921990 93

Equity

Debt

Reserves

Loans and deposits

FDI

Components of financial flows, 1990–121

$ billion, nominal

SOURCE: IMF Balance of Payments; McKinsey Global Institute analysis1 Flows represents the sum of net inflows and net outflows.

The recession saw foreign investors withdraw significant capita l from the countr y.

Like most of Europe, Ireland experienced a contraction in lending during this

period. Even in 2012, total loan and deposit flows out of Ireland still stood at some

$185 billion (€135 billion), essentially unchanged from 2009.

While bank lending is generally the most volatile type of financial flow, FDI is

the most robust—and indeed, Ireland’s inflows of FDI held steadier during the

recession. Ireland punches above its weight in attracting FDI. In 2012, Ireland

represented 2 percent of global FDI, ranking among the top 15 recipient

countries globally. It has been especially effective in attracting foreign operationsof multinationals in the pharmaceutical, software, and information and

communication technology (ICT) service sectors.

The main sources of Ireland’s FDI inflows in 2012 were the United States

(56 percent), the United Kingdom (18 percent), Germany (8 percent), Australia

(5 percent), and Canada (2 percent). Pfizer, GlaxoSmithKline, Boston Scientific,

Facebook, Microsoft, Intel, Citi, and Zurich are just some of the major names with

operations in Ireland. Together the operations of multinationals account for more

than 161,000 jobs.4



10

Ireland’s FDI performance gained new momentum after 2000. Policies such as

the Business Expenditure on Research and Development were introduced to

encourage spending in knowledge-intensive areas; the estimated expenditure on

R&D through this scheme for firms in Ire land was €1.96 billion in 2012.

5

Ireland’s Industrial Development Agency (IDA Ireland), the government entity

responsible for securing FDI, has successfully promoted the country as an

attractive place to invest, marketing its natural appeal as an English-speaking

country in the Eurozone with a well-educated labour force. In fact, Ireland has

capitalised on the presence of multinationals to cultivate specialised skills and

expertise in high-value fields such as technology, pharmaceuticals, medical

devices, and finance. However, it will need to continue building on this foundation,

as government agencies around the world are chasing foreign investment. They

have studied the IDA playbook, and the bar is moving ever higher.

Flows of labourSkilled migrants are vital to innovation. Attracting highly skilled foreign workers—

and retaining homegrown talent—is a key enabler of growth. Migrants account

for 12 percent of Ireland’s population; this is a large share by EU standards, and

it is slightly up from its pre-crisis level, when 11.5 percent of the population was

born outside of Ireland. Moreover, Ireland tends to attract well-educated foreign

citizens: 45 percent have third-level qualifications, which is the second-highest

proportion in the European Union (after the United Kingdom).6

Ireland has a highly educated workforce overall. Approximately one-third of

the population possesses a third-level qualification (substantially higher than

the EU-27 average of 23.5 percent and second only to the United Kingdom at

about 34 percent).7 This makes Ireland an attractive place to do business fromthe perspective of companies seeking talent, although the pool of highly skilled

workers is smaller on an absolute scale.

But when economic circumstances change, labour flows are quick to rebalance,

demonstrating the increasing ease with which people “vote with their feet”.

Ireland’s labour flows in many ways track its financial flows: at the height of

Ireland’s boom times, it seemed that the age-old story of a growing diaspora

had been reversed once and for all. The country became a net importer of some

522,000 people between 1996 and 2009, thanks in part to the growth of the

EU labour base through new entrants and increasing connectedness through

advanced and inexpensive transportation links. But as the global financial crisis

was succeeded by the euro crisis and a protracted slump, Ireland again became anet exporter of labour, losing 122,000 workers over the past four years, of whom

more than three-quarters were native. As unemployment spiked, many young Irish

once again left home to find better opportunities.





Flows of data and communication

Today, one-third of the planet is onl ine, and a torrent of data travels around

the world. Between 2005 and 2012, cross-border Internet traffic grew by

more than 50 percent annually. This surge of data and communication movinginstantly across borders constitutes a massive flow in and of itself, and it is also

transforming the other types of flows, as it speeds and enables the movement

of goods, services, finance, and people. This shift is occurring at a remarkable

pace: some 10 percent of all goods are now traded electronically, from a base of

virtually zero just ten years ago.

Global data and communication flows also play a role in innovation. Individuals,

researchers, and companies can now collaborate seamlessly across borders.

International co-authorship of academic papers has surged over the past

two decades, as has collaboration in open-source software projects, clinical

trials, and other types of scientific research. The value of these cross-border

collaborations is difficult to measure, but their rapid adoption hints at the value ofbringing together the best ideas and talent from across the world.

Surprisingly, although nine of the top 10 US tech firms (including Google,

Facebook, Microsoft, Apple, Hewlett-Packard, and Intel) have a presence in

the country, Ireland ranks relatively low on flows of data (Exhibit 7). In terms of

broadband connectivity, Ireland ranks 14th out of the 34 OECD countries, with

gaps outside the major metropolitan regions.

Ireland lags other Western European countries in Internet traffic per capita

Exhibit 7

Total Internet traffic by country

Megabits per second per capita

SOURCE: Comtrade; IMF Balance of Payments; World Bank World Development Indicators; McKinsey Global Institute

analysis

0

50

100

150

200

250

300

350

400

Ireland

Czech Republic

France

Germany

United Kingdom

Netherlands

Russia

Poland

Spain

0806 10 11092005 201207



12

In part, this apparent deficit is due to Internet topology. Firms seeking to minimise

latencies (that is, time delays between one networked point and the next) tend

to route their traffic through the most connected locations. Within Europe, the

Netherlands, for example, has a large number of submarine cables coming ashoreand is host to several critical Internet exchange points. The Netherlands hopes

to take advantage of this infrastructure to further accelerate high-tech growth. A

cooperative initiative of local government, industry, and the Eindhoven University

of Technology, “Brainport” is meant to develop the knowledge economy of the

Eindhoven region.

Ireland can generate economic growth and jobs by continuing to enhance its

digital infrastructure. Investment in high-capacity, low-latency connections to

the United Kingdom, for example, now allows data to move rapidly between

Ireland and London—a critical capability for Ireland’s financial services firms.8

Ireland could also benefit from becoming the preferred routing exchange and

hosting point for content creators and distributors, especially in an age of digitalentertainment and digital goods.

While more capacity, lower prices, and less latency are always desirable, the

location of Amazon Web Services, Google, and EMC data centres in Ireland

suggests that speeds and bandwidth are more than adequate for current

business levels (although it will be important to monitor this issue as the recovery

takes hold and economic activity picks up). Ireland’s speeds average over

10mbps and have risen dramatically since 2012.9

Although the country’s residential broadband prices are higher than European

averages, its business broadband prices are lower than the benchmarks, so cost

is not necessarily an inhibitor. If capacity, latencies, and price (representing the

supply side) are not the primary barriers to data flows in Ireland, then it stands to

reason that there are issues on the demand side.

Ireland’s SMEs have been relatively slow to digitise or make the leap into

e-commerce.10 One recent study found that almost half of all Irish SMEs surveyed

have not migrated any services or processes to the cloud.11 Companies may

need to gain confidence in the strength of the recovery before they make capital

investments and launch new business lines. Other factors, such as a lack of tech

and digital marketing capabilities, may be at work.

The explosive growth of data and communication flows is indicative of how rapidly

global markets are changing as new users and geographies come online. These

forces are accelerating change and intensifying global competition. Sustaining

Ireland’s leading position in knowledge-intensive flows will require robust digital

infrastructure, including comprehensive penetration of high-speed Internet, data

centres, and high-quality mobile networks—as well as a commitment to helping

SMEs understand and harness the full potential of the Internet to connect with

customers both at home and abroad.





Box 1. Ireland’s partner regions

While Ireland’s flows have grown significantly in

both volume and value over the past decade, itsprimary connections have not changed substantially

(Exhibit 8). The rest of the European Union accounted

for 62 percent of Ireland’s total flows in 2002—a share

that fell marginally to 60 percent in 2012. The North

Amer ican share fell f rom 22 to 20 percent over the

same period. These two most significant “trading

partners” have collectively shifted from 84 percent of

Ireland’s total flows to 80 percent.

Maintaining such deep connections with the world’s

most lucrative markets has been a clear advantage for

Ireland—but this lack of diversification also proved tobe a vulnerability when most of the world’s advanced

economies experienced a simultaneous downturn.

In addition, it is harder to claim a unique niche within

these mature markets.

While Ireland has focused on its traditional partners, the

world has been rebalancing towards Asia and emergingmarkets around the world. Emerging economies have

gained importance as both consumers and producers.

They accounted for 38 percent of global flows in 2012,

nearly triple their share in 1990.

Irish exports, including agricultural products and

pharmaceuticals, match up well with areas of growing

demand in China and other emerging economies.

And indeed, Ireland is taking steps to gain a foothold

in new markets by establishing trade offices in 60

countries and conducting frequent trade missions.

Client companies of Enterprise Ireland, the governmentorganisation responsible for the development and

growth of Irish enterprises in world markets, grew

their exports by 8 percent in 2013, with the strongest

increase in the Asia-Pacific region; food products

accounted for more than half of these exports.12 As

incomes continue to rise in the developing world,

capturing the consumer markets of the future will

become even more important to Ireland’s economy.

Most of Ireland’s goods and services trade is within the European Union

Exhibit 8

Irish trade flows1 of goods and services by partner, 2002–12

% of total goods and services consumed/provided by each partner region

SOURCE: Comtrade; McKinsey Global Institute

60

20

40

80

70

90

10

30

50

100

0

1008 201209 11052002 04 0603 07

1 Includes exports and imports.

EU

North America

Asia Pacific

Latin America

Other

China

Other Europe

Africa and Middle EastNorth America’s share of Irish goods and services flows

fell from 22% in 2002 to 20% in 2012

EU share of Irish goods and services fell marginally

from 62% in 2002 to 60% in 2012



14

IMPLICATIONS FOR IRELAND

Ireland’s recent history is a case study in the huge economic potential of global

flows—and the dangers they can sometimes pose. Now that a modest recovery

seems to be at hand, Ireland has an opportunity to strike a more sustainablebalance between minimising volatility and seeking out growth. Policy makers who

relentlessly focus on creating the right enablers for long-term growth in this new

environment will attract, develop, and retain greater economic opportunities for

their citizens.

Global flows are transforming not only the way that countries trade but also

the way that companies operate. Businesses will face an intense new wave

of global competition for market share, resources, and talent. Those that

spot potential new markets and move quickly to fill the gaps, and those that

create new platforms for cross-border trade and traffic, can realise enormous

economic rewards.

Priorities for policy makers

Deepen Ireland’s attract iveness to FDI

Ireland is already home to the foreign operations of a prestigious roster of

leading multinationals, and IDA Ireland continues to build momentum. In fact,

Ireland topped the Forbes list of the best countries for business in 2013. But in

an increasingly competitive world, policy makers cannot afford to rest on these

laurels. In the words of former Intel CEO Andy Grove, “only the paranoid survive”.

Policy makers will need to double down on their efforts to raise Ireland’s profile in

the business communities of the emerging world. A recent MGI report predicted

that the next decade is likely to usher in a dramatic increase in the number ofmajor companies based in emerging regions that will join the ranks of the world’s

true corporate giants. The big new opportunity in the coming decade will be

to attract the regional head offices of rising multinationals from the developing

world.13

Ireland has already attracted foreign names in high-value, knowledge-intensive

sectors. But efforts to attract FDI should not focus solely on large multinationals;

they can also target high-potential startups and companies just starting to scale

up their international operations. Ireland can benefit by making it as easy as

possible for foreign entrepreneurs to start and grow businesses on its shores

through incentives, streamlined visa processes, and support for finding high-

quality work space and housing.

When companies compare alternative locations for their foreign subsidiaries

and operations, they consider both cost- and quality-related factors. McKinsey

has developed a “Global Locator Tool” to help companies take a quantitative

approach to this process and to help governments seeking FDI understand how

they stack up. It compares thousands of data points on issues such as energy

and property costs, regulatory and business environment, sector linkages,

infrastructure, talent, and quality of life. It is important to note that this tool

consciously excludes corporate tax rates. Because they can be easily replicated

or undercut by any other country, they are not in and of themselves a long-term

strategy for FDI.





Using the Global Locator Tool, we analysed Ireland’s relative attractiveness across

key sectors in which it should outperform its peers, given its current investments

and clustering strategies, and found that Ireland posts merely average cost and

quality levels.

14

This result puts Ireland squarely in the crosshairs of competitors.

We compared Ireland with a subset of other leading destinations for FDI (including

the United Kingdom, Poland, Switzerland, Denmark, and Israel) and found

that each competitor’s attractiveness scores typically spike on one or more

dimensions of cost or quality across different sectors (Exhibit 9). Ireland, by

contrast, scores in the “middle of the road” on both counts. While this may be

seen as a balanced position for Ireland today, these spikes in competitors’ scores

point to strengths that will become important for companies looking to achieve

distinctive and specific advantages as global connectedness intensifies.

Current tax regimes and traditional ties will not be enough to win future

investment and retain it over the long haul. In order to continue its strong

performance in FDI, Ireland must focus on improving its value proposition to

international businesses. A more detailed examination of FDI attractiveness

reveals a short list of factors that would begin to move Ireland from the “middle

of the road” towards either cost or quality “spikes”. The highest priorities

include ensuring the availability of scientists and engineers, developing

physical infrastructure, and controlling the cost of living. In addition, Ireland

would benefit from a greater focus on developing specific industry clusters.

The number of people employed and the number of companies in a particular

industry are important drivers of future FDI decisions, as they indicate both scaleand expertise.



16

Create a thriving environment for homegrown companies and help them

go global

FDI can be a critical enabler of growth, but it is equally important to help Irish

companies become global players in their own right. In recent years, Irelandhas conducted multiple trade missions to dozens of countries and established

trade offices in 60 countries in an effort to open new markets for Irish products.

Continuing and expanding these outreach efforts will be crucial if Ireland is to ride

the wave of growth in emerging economies.

Ireland’s small businesses, in particular, have large untapped export potential—

and new digital platforms can dramatically lower barriers to entry in international

markets. Many SME owners assume that exporting will involve too many

challenges, unknowns, and burdensome requirements, but the Irish government

has programmes available to help them learn the landscape and navigate the

challenges. Ireland may need to build awareness of the growth potential in

foreign markets among SME owners—and raise their aspirations to pursuethese opportunities.

Ireland has a vibrant startup scene, but the challenge for fledgling companies has

always been scaling up to the next level of growth. Both government initiatives

and private business incubators are available to support entrepreneurs. Ireland

may need to complement these efforts with a greater emphasis on “accelerator”

programmes that are geared to the next stage in the business life cycle. These

programmes help small firms scale up by assisting them with putting institutional

systems in place, creating strategic expansion plans, and securing deeper

financing. Building export capabilities into both incubator and accelerator

programmes can embed a more global mindset into the next generation of

Irish companies.

Invest in people through qualit y-of-life and educat ion initiatives

Advanced and emerging economies alike will face an acute shortage of highly

educated workers in the years ahead.15 The most skilled and specialised

among them will be able to choose among global opportunities. Ireland needs

to consider how it is positioned to compete for top talent, taking into account

factors such as housing, the ease of obtaining work visas, and the amenities and

environment it offers immigrating families. This is an important area of focus, as

skilled migrants have been critical to the growth of some of the world’s leading

technology hubs. In fact, recent research has found that one-quarter of all US

high-tech startups have an immigrant founder.16 Flows of high-skilled migrants

between countries and other types of cultural ties also facilitate cross-border

venture capital deals.17

Capitalising on global flows of people, ideas, and collaboration often starts with

students—in fact, international students who undertook the enormous personal

and financial challenges to study at California’s top universities have played a

major role in building Silicon Valley. While most international students in Ireland

once hailed from the United States, it is notable that China has now become the

leading country of origin.18 Welcoming more students from Asia and across the

developing world can have a significant long-term payoff.





However, in order to attract the world’s best students and to deliver more qualified

homegrown graduates, Ireland must rapidly address the erosion of its education

system. Irish universities do not place atop international rankings.19 Even more

fundamentally, Ireland’s performance on the Programme for International Student Assessment (PISA) test, which assesses educational achievement among

second-level students in OECD countries, has been lacklustre. With competing

countries making rapid gains, Ireland urgently needs to turn its attention to its

educational standards.

Capitalise on Ireland’s ICT strength and digital potential

Ireland has a considerable advantage in the ICT sector, but it is one that could be

quickly eroded by neighbouring regions. As home to operations of nine out of the

top 10 global ICT companies, Ireland has an excellent supportive base from which

to create a thriving digital ecosystem and launch new digital enterprises. But

other governments are not standing still: they are putting substantial investment,

infrastructure, and policy support behind startup hubs such as Tech City inLondon, Brainport in Eindhoven, and the new Google-backed Factory complex

in Berlin. Ireland will have to keep pace with these regions and should focus

on building its own tech cluster with global reach and global connections. This

will involve greater coordination and outreach, indigenous and foreign capital,

enhanced digital infrastructure, and a supportive policy environment that includes

streamlined visa issuance and tax incentives for startups.

There are long-term benefits to promoting more sophist icated use of the

significant bandwidth and cloud infrastructure already available in Ireland.

Examples could include securing a higher proportion of the shared back-office

services business from multinationals and broadening the definition of “back

office” to include big data analytics or information security. In order to go afterthis type of niche, Ireland will need a well-defined strategy that emphasises skill

development within its education system.

Continue to enhance Ireland’s international credibility

Through the proper ty boom and bust and financial cr ises, Ireland suffered a

reputational blow; at one point it was even dubbed the “Wild West of European

finance”.20 Ireland’s strong performance against the demands of its bailout

agreement has shown the world a new sharpness of focus and ability to deliver.

While its regulatory approach has now changed substantially, Ireland will

have to continue to build its profile as a country of disciplined compliance and

professional prudence. Moreover, as growth in data flows continues, compliancewith international data protection standards will become ever more important.

Ireland’s capacity and willingness to enforce international best practices in this

area will be an important reputational pillar. Ireland’s standing as one of the

best countries in which to start a business should be cherished and enhanced,

but the world needs to know that discipline is part and parcel of its business-

friendly climate.



18

Implications for Irish businesses

Understanding the flow of goods, services, finance, labour, and data will help Irish

businesses position themselves for the next wave of global growth.

Build on current markets and capture new ones

Ireland is a waypoint for multiple types of flows and is well positioned as a

strategic gateway between its two biggest trading partners, the United States

and the European Union. Businesses, both large and small, should go after

the opportunities this creates. But the developing world continues to grow in

strength and importance—and as the global economy rebalances in its favour,

Irish business needs to rebalance with it. Businesses must now look to emerging

economies not just as sources of cheap inputs, but rather as sources of new

customers, talent, innovation, and partnerships.

Greater connectedness, lower costs of trade, and digital platforms are lowering

barriers to entry in the up-and-coming markets of the developing world. Butin order to seize these opportunities, most firms need to do more to structure

themselves to operate in a genuinely global fashion. This may include tailoring

their products and services in new ways and even lowering price points to

compete in volume-driven markets. B2B companies will need greater sales force

mobility to serve a much more diverse and dispersed customer base. Gaining

deep knowledge of local markets is essential; Irish firms may need greater

numbers of senior executives based in Asia. At the very least, Irish firms need

to add a greater proportion of long-haul flights to their international business

development itineraries. While the United Kingdom will likely remain Ireland’s

strongest and most important local trading partner for many years to come, Irish

firms should also seek to build more distant relationships rapidly.

Adapt business models to an increasingly digitised world

Companies in every sector need to give their full attention to digital technologies

and their impact on global flows of all kinds.

In the past, executives largely viewed technology as a way of cutting costs

and boosting productivity. That remains the case, but digitisation is shaking

up the business landscape in much more fundamental ways—most notably by

dramatically accelerating the pace of change and by making it possible for an

unprecedented range of players to participate in global commerce. There is a

major opportunity for Irish companies of all sizes to create the platforms to enable

production, exchange, distribution, and consumption across borders. SMEs nowhave the ability to source and export globally, and they can take advantage of

new online platforms to go anywhere in the world to tap into expertise they may

not have in-house. Indeed, this is fast becoming a necessity. Today international

retailers dominate e-commerce within Ireland. Irish companies need to devise

their own growth strategies to capture these revenue streams—and this will

undoubtedly start with acquiring capabilities in technology and digital marketing.





Get to know new competition

The expansion of global flows is opening up a ll companies to a wider range of

competitors, including companies from new geographies and new sectors—not

to mention fast-moving startups. Business leaders will need to watch for newsources of innovation and potentially disruptive change. And it is only a matter of

time before the most successful companies in the emerging world set their sights

on international expansion. Companies from emerging regions are growing faster

than their counterparts from developed regions—both in their home markets and

overseas. As Irish companies find new challengers arriving in their own backyard,

they will need to be prepared to compete not only for customers but also for

talent, capital, and resources.

Compete for global talent

Irish companies have a tradition of “jobs for the boys”. This can take many

forms, but the end result is often a relatively homogenous workplace, especially

at senior levels. In an increasingly global market, this penchant for local talent

limits the potential of Irish business. Ireland has a great advantage as the only

native English-speaking member of the Eurozone, but it cannot afford to let that

translate into general complacency. As mentioned earlier, improving the quality

of life is important for attracting international talent. However, this is a relatively

passive “build it and they will come” approach. Irish companies must take a more

proactive role in attracting, developing, and retaining global talent if they are to

conquer world markets. It may take relevant local experience and relationships to

crack specific markets, and building them may require investment. Irish business

can take a page from some of the global players located on its shores: Google,

PayPal, and Facebook aggressively recruit talented employees with international

languages, perspectives, and knowledge to increase workplace diversity.

Professionalise, focus, and deliver

Irish businesses need to show that they are ready to rise to the challenge

as genuine global leaders in their fields. The German model of Mittelstand

companies has long been seen as one of the driving forces in that country’s

remarkable and broad-based economy. These enterprises are typically SMEs, but

they have staked out niche markets and become true global leaders within them.

Within Ireland’s agriculture and food sector, Alltech has become an international

name in animal nutrition and health, driving its valuable R&D from its base in

Dunboyne, Co. Meath. Dairymaster has done the same in dairy technology, from

its base in Causeway, Co. Kerry. Both of these companies have demonstrated

an ability to rise to the top through a combination of professionalism, focus, anddelivery. Aspiring Irish companies would do well to follow this model of bringing

distinctive niche offerings to an international stage.

* * *

With recovery taking hold, Ireland now has to ask how it can capture growth from

the high-value flows that are the hallmark of the new global economy. Ireland will

have to open its doors more widely to the world and venture far beyond them

to stake its own claim in fast-growing emerging markets. Now is the moment

for leading Irish players to expand their global presence and for Ireland to play a

bigger role in the world’s flow of innovation and ideas.



1 Urban world: Cities and the rise of the consuming class , McKinsey Global Institute, June 2012;

Yuval Atsmon, Peter Child, Richard Dobbs, and Laxman Narasimhan, “Winning the $30 trillion

decathlon: Going for gold in emerging markets”, McKinsey Quarterly , August 2012.

2 This approach builds on methodology developed by Jay Squalli and Kenneth Wilson in A new

approach to measuring trade openness, Economic Policy Research Unit, Zayed University,

Dubai, working paper number 06– 07, May 2006.

3 These include payments for the authorised use of intangible non-produced, non-financial

assets and proprietary rights such as trademarks, copyrights, patents, processes, techniques,

designs, manufacturing rights, and franchises; and the use, through licensing agreements, of

produced originals or prototypes (such as manuscripts and films).

4 “IDA Ireland reports 13,367 jobs were created in 2013”, IDA Ireland (Industr ial Development

Agency) press release, January 2014.

5 Department of Jobs and Innovation, Ireland.

6 Eurostat, 2011.

7 Eurostat, 2011.

8 “New low-latency route from Colt puts Ireland at the heart of Europe’s network structure”, Colt

Telecom press release, June 2012.

9 Akamai’s state of the Internet , Q1 2014 report, volume 7, number 1.

10 John Mulligan, “Value of an online presence still not clicking”, Irish Independent , July 30, 2014.

11 Marian Carcary, Eileen Doherty, and Gerard Conway, “The adoption of cloud computing by

Irish SMEs: An exploratory study”, The Electronic Journal of Information Systems Evaluation,

volume 17, issue 1, 2014.12 Enterprise Ireland, Annual repor t & accounts 2013.

13 Urban world: The shifting global business landscape, McKinsey G lobal Institute,

September 2013.

14 Biomedical device manufacturing, biopharma manufacturing, consumer electronics, food

manufacturing, software development, customer support, and fund administration.

15 The world at work: Jobs, pay, and skills for 3.5 bill ion people, McKinsey Global Institute,

June 2012.

16 Vivek Wadhwa, AnnaLee Saxenian, and F. Daniel Siciliano, Amer ica’s new immigrant

entrepreneurs: Then and now , October 2012, Ewing Marion Kauffman Foundation,

October 2012.

17 Sonal Pandya and David Leblang, Deal or no deal: The growth of international venture capital

investment , University of Virginia, November 2011.

18 International students in higher education in Ire land 2011–2012, Education in Ireland,November 2012.

19 Times Higher Education, World Reputation Rankings 2014.

20 Brian Lavery and Timothy L. O’Brien, “Insurers’ trails lead to Dublin”, New York Times,

April1, 2005.

Endnotes

Capturing the Value of Ireland's Global Connections

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