Sectoral Growth and Export Earnings

Abstract

This chapter analyses the contributions of different sectors to economic growth during the boom, focusing particularly on the contributions of sectors to exports because, in a small and very open economy, export growth makes an essential contribution that drives the rest of the economy. As an essential part of this, it examines the net foreign earnings accruing to the Irish economy after deducting the profit outflows and payments for imported inputs that were associated with each sector’s exports. Most manufacturing sectors looked less important in terms of net foreign earnings than they appeared when seen in terms of exports, while the reverse was true for market services and the food sector. Although export growth weakened substantially after 2000, the composition of exports was changing in a way that allowed the growth of net foreign earnings to remain strong for about the next five years. It was only in the final few years of the boom—2005–2007—that the pace of economic growth was not genuinely sustainable and became dependent on a debt-fuelled property and construction boom.

This chapter analyses the contributions made by different sectors to economic growth during the boom. It aims to clarify what was the relative importance of sectors such as manufacturing, construction or services in driving economic growth, and it examines how their importance changed over time. Since this book ultimately aims to explain why the boom occurred, it is useful at this stage to identify which sectors had particularly important roles in driving economic growth in order to establish the context for further inquiry in later chapters.

A significant factor that complicates consideration of this issue is the fact that there were very large outflows of profits from foreign-owned multinational companies. As was mentioned in Chapters 1 and 2, these outflows of profits from the country were the main reason why GNP was a good deal smaller than GDP. At the sectoral level, the profit outflows came disproportionately from certain sectors and this naturally raises the question whether those sectors were really as important for the Irish economy as they might have appeared to be at first sight. This chapter aims to clarify this issue as part of the process of identifying which sectors were the key drivers of growth.

Section 4.1 examines the changing contribution of the different sectors to the growth of output (taking account of profit outflows) and to the growth of employment. Section 4.2 then focuses on the contributions of different sectors to exports. As an essential part of this it also examines the net foreign earnings that accrued to the Irish economy after deducting the profit outflows and the payments for imported inputs that were associated with the exports of each sector.

4.1 Sectoral Growth

4.1.1 Gross Value Added (GVA)

Table 4.1 and Fig. 4.1 show each sector’s share of total gross value added (GVA) in 1986, 1993, 2000 and 2007. Since GDP is essentially the sum of all value-added in the economy, a sector’s GVA is similar to its contribution to GDP.¹

Table 4.1 Sectoral shares of gross value added (%)

Fig. 4.1

(Source Derived from Economic and Social Research Institute (ESRI) databank, based on data from the Central Statistics Office (CSO). Creative Commons Attribution BY 4.0)

Sectoral shares of gross value added (%)

A couple of sectors had generally below average growth as seen in their declining share of total GVA, namely agriculture, forestry & fishing and non-market services, which includes predominantly public sector activities such as public administration, defence, education, health and social welfare. Two other sectors had approximately average growth with no very strong trends in their share of total GVA, namely Distribution and Transport & Communications.

On the other hand, there were four sectors that had well above average growth at some stage during the boom although the timing of their particularly rapid growth varied. In the case of “other” market services there was relatively rapid growth throughout the two decades. Manufacturing grew exceptionally fast before 2000, especially in 1993–2000, but its share of total GVA then slumped in 2000–2007. Meanwhile, building & construction and financial services did not grow exceptionally fast in the earlier stages of the boom, but they then grew much faster than most sectors later on.

4.1.2 “Retained GVA”

The GVA figures depicted in Table 4.1 and Fig. 4.1 include the profits of any foreign-owned companies that were present in each sector. Since those profits generally did not accrue to residents of Ireland it is naturally of interest to ask what were the contributions of different sectors to the economy if the profits of foreign companies are deducted. There are no regular official data that show the value of each sector’s output excluding such profits, but it is possible to make reasonably good estimates. Table 4.2 shows estimates of “retained GVA” in 2000, by which we mean the GVA that is retained in Ireland after profit outflows from foreign companies are deducted.

Table 4.2 GVA adjusted to remove profit outflows, 2000

The first two columns of Table 4.2 show GVA by sector and each sector’s percentage share of total GVA. The third column shows estimates of profit outflows from foreign-owned MNCs in manufacturing and market services. As explained in Appendix, the total profit outflow figure of €22,298 million in the third column of the table is not an estimate since that is an official figure published by the Central Statistics Office, but some estimation was required for the purpose of allocating that total amount between manufacturing and market services. There are no estimates in the table for profit outflows from the other sectors because of a lack of relevant data, and because there are good reasons to believe that profits of foreign MNCs in those sectors would be so small that they can reasonably be ignored. (See Appendix for more detailed discussion of the derivation and interpretation of Table 4.2).

The final two columns of Table 4.2 show “retained GVA” by sector, and the sectoral proportions of the total, after deducting profit outflows from GVA. Whereas a sector’s GVA is similar to its contribution to GDP (apart from an adjustment for product taxes and subsidies), its retained GVA as shown in Table 4.2 is more like its contribution to GNP (see Appendix for more clarification).

Compared to the original GVA figures in the first two columns of Table 4.2, the greatest difference in the retained GVA figures is the large reduction in the size of the manufacturing sector after profit outflows are deducted, while the reduction in the market services sector is a good deal smaller. Most of the reduction in market services was because of profit outflows from financial businesses.

In the years before 2000, retained GVA grew significantly less than GVA in manufacturing, because profit outflows were taking a rising proportion of its GVA. This was because there was particularly rapid growth in a small number of sectors within manufacturing which were predominantly foreign-owned and highly profitable. The sectors concerned—namely pharmaceuticals, office & data processing machinery, electrical engineering, instrument engineering, and soft drink concentrates—were identified in the 1980s and early 1990s as being the source of most of the profit outflows from manufacturing (O’Malley and Scott 1987, 1994). Because of their fast growth these five sectors accounted for a rapidly increasing percentage of total manufacturing GVA in the 1990s, with a rise from 33.5% of total manufacturing GVA in 1991 to 59.8% by 2000.² Since these major sources of profit outflows accounted for a rapidly growing proportion of the manufacturing sector, profit outflows from manufacturing were rising as a proportion of its GVA.

In financial services, there had been a traditional presence of some foreign-owned companies long before the boom began in the late 1980s, but there was also a substantial new effort to attract foreign direct investment (FDI) into export-oriented financial service activities, beginning with the establishment of the International Financial Services Centre (IFSC) in Dublin in 1987. This effort had a good deal of success. Consequently, many of the foreign-owned financial businesses that existed by 2000 were relatively new and had developed quite rapidly over the previous 13 years or so—together with an associated profit outflow.

At the macroeconomic level, it was seen in Chapter 1 that GNP generally grew more slowly than GDP in the 1980s and 1990s, primarily because profit outflows were taking a rising proportion of GDP. Since about three-quarters of the total profit outflow was coming from manufacturing by 2000, with most of the rest coming from financial services, these must have been the main sectors that were giving rise to those macroeconomic trends.

The macroeconomic trends changed in the 2000s. Profit outflows stopped taking a rising proportion of GDP, and GNP no longer grew more slowly than GDP during much of the period up to 2007. This reflected some changing trends at the sectoral level. In particular, there was a substantial decline in the importance of profit outflows from manufacturing relative to GDP or total GVA. At the same time profit outflows increased quite significantly in market services—but the increase there was not sufficient to outweigh the declining importance of the outflows from manufacturing.

To be more specific, between 2000 and 2005, the total profit outflow from the whole economy declined from 23.8% to 21.4% of total GVA. At the same time our estimated profit outflow from manufacturing fell substantially from 17.7% to 11.3% of the whole economy’s GVA.³ This change in manufacturing was a result of relatively slow growth in that sector compared to the rest of the economy (as seen in Fig. 4.1), slower growth in foreign-owned manufacturing than in total manufacturing, and lower profitability within foreign-owned manufacturing.

While profit outflows from manufacturing were declining in relative importance in 2000–2005, the opposite trend was happening in market services, including a wider range of services apart from just financial companies. In all market services combined the estimated profit outflow increased from 6.1% of the total economy GVA in 2000 to 10.1% in 2005. This was a general reflection of the increasing involvement of foreign-owned MNCs in market services.

It is worth noting that the sharp change seen in the manufacturing sector’s share of GVA after 2000 (Table 4.1 and Fig. 4.1) looks less substantial when seen in terms of “retained” GVA after profit outflows are deducted. Much of the decline in its share of GVA, or GDP, reflected a decline in the profits and profit outflows of foreign-owned manufacturing MNCs, and this particular trend did not reduce manufacturing’s retained GVA, or its share of GNP.

In market services in the same period, 2000–2005, the opposite effect occurred, meaning that its share of retained GVA rose by less than its share of GVA because of the growing influence of profit outflows.

In the building & construction sector there was no significant influence of profit outflows and consequently the increase seen in its share of GVA was matched by a similar increase in its share of retained GVA,

4.1.3 Employment

Turning to trends in employment by sector, Table 4.3 and Fig. 4.2 show each sector’s share of total employment in 1986, 1993, 2000 and 2007. In some respects, the changing trends here are quite different to those seen in the case of GVA in Table 4.1 and Fig. 4.1.

Table 4.3 Sectoral shares of employment (%)

Fig. 4.2

(Source Derived from Economic and Social Research Institute (ESRI) databank, based on data from the Central Statistics Office (CSO). Creative Commons Attribution BY 4.0)

Sectoral shares of employment (%)

Probably the most striking difference is in the manufacturing sector. In terms of GVA, manufacturing had much stronger growth than the total economy before 2000 followed by much weaker than average growth in 2000–2007, so that its share of total GVA rose substantially before 2000 followed by a very sharp decline in 2000–2007. However, in terms of employment, manufacturing did not have a growing share of the national total before 2000. Furthermore, the decline in its share of total employment in 2000–2007 was much less than in the case of its share of GVA, with a reduction of 4.6 percentage points for its share of employment as compared to 10.8 for its share of GVA.

The trend in manufacturing’s share of employment after 2000 was actually quite similar to the trend in its share of retained GVA, rather than its share of GVA. This is not really surprising. GVA essentially consists of labour costs and profits. When profit outflows are deducted from GVA, most of the profits are removed (at least this was true in Ireland in the boom years). Thus, the retained GVA that is left consists very largely of labour costs—and one could reasonably expect trends in a sector’s share of total labour costs to show some relationship to trends in its share of total employment.

Looking at some of the market services sectors in Table 4.3 and Fig. 4.2, it is noticeable again that the changing trends in employment were somewhat different to the trends seen in GVA—at least in the period after 2000. There was a common tendency for the trends in their share of employment to be weaker than the trends in their share of GVA. The weaker trends in employment than in GVA tend to be consistent with the fact that the trends in their retained GVA were weaker than the trends in their GVA.

On the other hand, building & construction increased its share of GVA considerably in 1993–2007 and there was also a large rise in its share of employment. There was no significant rise in the influence or distorting effect of profit outflows in that sector.

4.1.4 Summary

To summarise, this Sect. 4.1 has aimed to examine the contributions made by different sectors to economic growth during the boom, in terms of growth of output (while taking account of profit outflows) and growth of employment.

Seen in terms of GVA alone there is a reasonably clear story whereby four sectors had well above average growth at some stage during the boom. “Other” market services had relatively rapid growth throughout the two decades. Manufacturing grew exceptionally fast before 2000, especially in 1993–2000, but it then grew much more slowly than average in 2000–2007. Meanwhile, building & construction and financial services had not grown particularly fast in the earlier stages of the boom, but they then grew much faster than most sectors later on.

However, part of this story breaks down to some extent when we take account of profit outflows and focus on “retained GVA” and also on employment. Seen in those terms, it is doubtful whether manufacturing grew significantly faster than average before 2000, and its growth in 2000–2007 was not as weak as it seems in terms of GVA. In market services, growth in the period after 2000 was weaker in terms of retained GVA and employment than it looks when seen in terms of GVA, because of the rising influence of profit outflows.

4.2 Sectoral Export Earnings

In examining the contribution of different sectors to a small and very open economy like Ireland it is particularly important to consider each sector’s exports and foreign earnings, because the sectors that export and have positive foreign earnings make an essential contribution that helps to sustain the rest of the economy.

4.2.1 The Importance of Exports

The importance of exports derives from the fact that a large part of the economy’s expenditure is used to purchase imports.⁴ Whenever the economy grows there usually tends to be increasing demand for imports, including imports of materials, equipment and fuel required as inputs for growing production sectors, and also imports of consumer goods to meet growing demand from consumers. When Ireland had its own national currency before 1999, it was quite clear that export growth was needed to pay for the increasing imports. If exports did not grow sufficiently, a balance of payments deficit tended to open up, and hence the value of the Irish currency tended to decline. A declining currency tended to result in inflation as prices of imports rose in terms of Irish currency, and at the same time it reduced the country’s purchasing power when it came to paying for the imports of inputs required for production, which became an obstacle to economic growth.

From 1999 onwards, Ireland had the euro as its currency and, given the small size of the Irish economy relative to the entire eurozone, its own balance of payments position could have no effect on the value of the euro. It was sometimes suggested that this meant that Ireland’s international trade performance and balance of international payments no longer mattered much. However, although the mechanism became somewhat different, a good performance in international trade continued to be essential for the health of the economy.

At any given time, a certain proportion of expenditure in Ireland is used to purchase products and services that can be traded internationally, and the rest is used to purchase “non-traded” products and services that generally have to be produced locally to meet domestic demand. If Ireland has a competitive and successful performance in international trade, its internationally traded sectors can grow, employment in those sectors can grow, and this increases demand for the products of the non-traded sectors which allows them to grow too and to increase their employment. Thus, in these circumstances total employment can grow, and emigration can decline or become net immigration. On the other hand, if Ireland imports a growing proportion of the internationally traded products and services that it requires, and if it fails to increase exports to the same extent, production and employment in the internationally traded sectors are reduced. As the internationally traded sectors decline, that in turn reduces demand for the output of the non-traded sectors which forces them into decline too, with adverse consequences for total employment and migration.

In his article on the Celtic tiger boom, Krugman (1997) outlined a similar view of the Irish economy as seen from an American perspective. He considered that the Irish economy had a good deal in common with a regional economy such as the Boston area rather than a large national economy such as the USA. In the US national economy, he argued, the size of the labour force is quite predictable looking, say, 15 years ahead so that economic growth over such a period is essentially determined by productivity trends alone. But at the level of a region such as the Boston area things are quite different:

“What, then, do economists trying to forecast growth in Boston (or any other metropolitan area) look at? The usual answer is that they look at the prospects for the region’s ‘export base’, the industries that sell to customers outside the region itself.” (Krugman 1997)

He explained further that a regional economy is more open to and dependent on external trade than the economy of a large nation and, even more important, factors of production—especially labour—move much more freely into and out of a regional economy than they do in most national economies. Consequently, if Boston’s “export” industries are successful this boosts employment in those industries, and hence also in other local sectors providing services to those industries and to their growing labour force, and this gives rise to inward migration of workers. Consequently, the success or failure of externally trading industries is a major determinant of the rate of growth of the labour force and of inward or outward migration of workers in a particular region.

In a similar vein, Barry (1999) considered that since the 1840s Ireland has,

… functioned more as a regional economy, whose population expands or contracts as economic conditions dictate, than as a national economy whose population size is largely determined by demographic factors. … The size of a regional economy … is crucially determined by its export base….

Consequently, Barry (1999) concluded that the fundamental economic issue for Ireland has generally been the need to achieve competitive success in internationally tradeable sectors besides agriculture.⁵

The view that the Irish economy is largely driven by the growth or decline of its internationally traded sectors is a common feature in a good deal of the analysis and research undertaken by Irish economists, although it may not always be stated and justified very explicitly. It seems worthwhile to spell it out explicitly here mainly because, after the introduction of the euro, it was sometimes claimed in Ireland that the country’s international trade performance and balance of international payments no longer mattered very much.

However, it should be acknowledged that there are some circumstances in which the particular importance of exporting sectors may not hold true, but such circumstances tend to be temporary or quite specific in nature. For example, growth of imports could be paid for by an inflow of loans or investment from abroad rather than by growing exports, but that would ultimately be unsustainable unless much of the inflow is invested in productive activities that generate foreign earnings. Alternatively, the importance of maintaining a strong performance in international trade could be reduced for a time if the composition of domestic demand is shifting away from purchasing internationally traded goods and towards non-traded products such as housing or locally oriented services. However, unless there is reason to believe that there will be a continuing series of shifts further in that direction, it will ultimately be necessary to have a good international trade performance.

4.2.2 Sectoral Export Earnings During the Boom

For the reasons discussed above it is usually essential for the Irish economy to have some competitive and successful internationally trading sectors. More specifically, some sectors must export sufficient amounts to pay not only for their own imported inputs but also for many other imports, because the non-traded sectors and consumers purchase imports without being able to contribute to exports. Thus, sectors that have a positive and growing surplus of exports in excess of their own import requirements make an essential contribution that helps to sustain growth in the rest of the economy. Conversely, sectors that do not export, or that export less than their own import requirements, may look vibrant in terms of strong trends in production or employment, but their continuing prosperity usually depends on the success of the sectors that have a surplus of exports over imports.

During most of the Celtic Tiger boom, Ireland’s exports grew very rapidly—much faster than the rest of the economy—although in the final six or seven years of the boom export growth slowed down. In 1986–2001, total exports of goods and services increased by 13.6% per year when measured in constant prices and by 15.6% per year in terms of current prices. In 2001–2007, the growth rate slowed down to 5.2% per year in constant prices and to 4.5% per year in current prices.⁶

From the start of the boom until the end of the 1990s, merchandise accounted for four-fifths or more of the value of total exports while services accounted for no more than one-fifth of the total. However, that pattern changed from about 2000 onwards as the share of services rose very rapidly up to 2007 (see Fig. 4.3). Both merchandise and services exports had grown rapidly before the 2000s as merchandise exports grew by 14.8% per year in 1986–2001 while services exports grew by 19.1% per year, in terms of current prices. The main change that happened after that was a very sharp deterioration in the growth rate of the value of merchandise exports to -0.6% per year in 2001–2007. The growth of services exports also slowed down somewhat compared with 1986–2001 but it nevertheless continued at a very high rate of 14.7% per year in 2001–2007, again in current prices.

Fig. 4.3

(Source Derived from Economic and Social Research Institute (ESRI) databank, based on data from the Central Statistics Office (CSO). Creative Commons Attribution BY 4.0)

Merchandise and services shares of total exports, 1986–2007 (%)

Products of the manufacturing sector accounted for the vast majority of merchandise exports—generally 95% or more—with some primary products such as live cattle and metal ores making up the remainder. However, the agriculture sector also made an important indirect contribution to merchandise exports since most of its output was processed through companies in the manufacturing sector, such as meat and dairy processors, before being exported. It can be seen in Table 4.4 that food accounted for 21% of merchandise exports at the start of the boom, with meat and dairy products accounting for 12%. The value of these exports increased during the boom, but their share of total merchandise exports declined substantially as some other categories grew much more rapidly.

Table 4.4 Composition of merchandise exports, 1986–2007 (%)

The strongest growth in merchandise exports occurred in chemicals, particularly in the two categories of pharmaceuticals and organic chemicals, which include finished pharmaceutical products as well as ingredients for pharmaceuticals. As shown in Table 4.4 these products combined accounted for 8.7% of merchandise exports in 1986 rising continuously to 38.5% by 2007. Electronic and electrical products also grew particularly fast before 2000 and they accounted for 37% of merchandise exports by that date. However, the value of these exports then declined substantially between 2000 and 2007 and their share of merchandise exports slumped back to below their 1986 level. The decline in this category of exports in the 2000s was a major reason why the growth of merchandise exports deteriorated so sharply in that period.

As regards services exports, at the start of the boom they initially consisted largely of transport services (41% of total services exports) and lodging & catering (23%), with smaller contributions coming from business services (7%), financial and insurance services (4%) and a variety of other smaller amounts (totalling 25%).⁷ During the boom there was growth in the exports of the transport and tourism services which had initially dominated services exports but the fastest growth occurred in other areas—particularly computer services, business services, insurance and financial services—so that the share of transport and tourism in total services exports declined substantially.

It can be seen in Table 4.5 that the share of transport and tourism in total services exports was much reduced by 1998 compared with the mid-1980s, and this trend continued to the end of the boom. Meanwhile computer services, business services, insurance and financial services became the dominant categories of services exports and they accounted for 86% of total services exports by the end of the boom. It is noticeable in Table 4.5 that there was a particularly sharp rise in the share of business services in total services exports between 2000 and 2007. This was mainly due to a sharp increase in two types of business service that had been much less prominent before that time, merchanting/trade-related services and operational leasing.⁸

Table 4.5 Composition of services exports, 1998–2007 (%)

Tables 4.4 and 4.5 show data on exports, but we are interested here in looking deeper than this to establish the amount of net foreign earnings that accrued to the Irish economy from each sector. This means that it is necessary to deduct from each sector’s exports the value of its imported inputs as well as its profit outflows. For this purpose, it is necessary to use data from official input–output tables. These tables use the classification system that is used for production sectors, rather than the system that is used for international trade data as seen in Tables 4.4 and 4.5. The input–output tables include data by sector on exports as well as imported inputs.

Table 4.6 shows the changing sectoral composition of all exports using data derived from input–output tables, and Fig. 4.4 shows the same data leaving out the few sectors that had zero exports—electricity, gas & water, construction, and non-market services. Since the input–output tables were published infrequently—usually at five-year intervals—there is a limited choice of years available for this purpose, but the years 1985, 2000 and 2005 shown in Table 4.6 and Fig. 4.4 are reasonably suitable. The period 1985–2000 corresponds quite well to the phase of very rapid export growth during the boom, while the period 2000–2005 is quite similar to the final phase of the boom when export growth was slower.

Table 4.6 Composition of total exports, 1985–2005 (%)

Fig. 4.4

(Sources and Notes As for Table 4.6. Creative Commons Attribution BY 4.0)

Composition of Total Exports, 1985–2005 (%)

Despite the differences in classification systems and the details of time periods, most of the major trends seen in Tables 4.4 and 4.5 are also evident in Table 4.6 and Fig. 4.4. Thus, among the manufacturing sectors in Table 4.6 and Fig. 4.4 the strongest export growth was in chemical products. There was also relatively fast growth in metal products, engineering & electronics up to 2000 and its share of total exports then slumped after 2000; this sector would include most of the category “electronic & electrical products” seen in Table 4.4, as well as metal products and agricultural & industrial machinery. Exports of food, beverages & tobacco grew relatively slowly during most of the boom so that its share of the total dropped substantially.

Most other manufacturing sectors in Table 4.6 and Fig. 4.4 also had relatively slow export growth with declining shares of the total. An obvious exception to this was “other” industry which grew rapidly in 1985–2000—largely because it included the production of recorded media which in Ireland mainly meant software products. Exports of software were growing very fast. In 2000–2005 the growth of “other” industry exports slowed down to average pace, as software was increasingly being transmitted to customers by electronic means rather than being sold on a physical medium such as a disk. This change meant that software exports were increasingly being classified as exports of business services rather than manufactured products.⁹

Summing up all the categories of merchandise exports seen in Table 4.6 and Fig. 4.4, their combined share of total exports was 88% in 1985, declining slowly to 82% in 2000, and falling far more rapidly to 67% by 2005. This is similar to the trend seen above in Fig. 4.3, which is based on international trade data.

As regards exports of the services sectors, the main trends mentioned above when discussing Table 4.5 are also evident in Table 4.6 and Fig. 4.4. These trends include the particularly rapid growth of exports from financial services & insurance and from business services, and the decline in the relative importance of transport services and hotels & restaurants. In Table 4.6 and Fig. 4.4, business services include computer and related services, which were a separate category in Table 4.5. It is noticeable in Table 4.6 and Fig. 4.4 that there was a sharp increase in the share of exports held by wholesale & retail distribution between 2000 and 2005. This partly corresponds to the increase in the importance of “merchanting” in Table 4.5, which was mentioned above.

In order to look deeper than the data on exports to see how much net foreign earnings accrued to the Irish economy from each sector, it is necessary to subtract from each sector’s exports the value of its imported inputs and its profit outflows. This is a significant issue in the case of the Irish economy, because imported inputs and profit outflows can be quite large relative to exports, and sectors can differ substantially in terms of their import content and their outflows of profits. Table 4.7 and Fig. 4.5 show data by sector for the year 2000 on exports, net exports and net foreign earnings. To clarify the terminology that is employed here, a sector’s “net exports” is defined here as the value of its exports minus the value of the imported inputs that are used in producing the exports. Its “net foreign earnings” is defined here as the value of its net exports minus the profit outflows that arise from production of the exports. In 2000, total net foreign earnings were worth 34% of the value of total exports (Table 4.7).

Table 4.7 Exports, net exports and net foreign earnings, by sector, 2000 (€ million)

Fig. 4.5

(Notes “Net Exports” here means the value of a sector’s exports minus the value of the imported inputs that are used in producing the exports. “Net Foreign Earnings” means the value of its net exports minus the profit outflows that arise from production of the exports; “Metal Products, Engineering & Electronics” here includes metal products, agricultural & industrial machinery, office machinery & computers, other electrical and electronic products and medical, precision & optical instruments. Source As for Table 4.7. Creative Commons Attribution BY 4.0)

Exports, net exports and net foreign earnings, by Sector, 2000 (€ million)

Table 4.7 and Fig. 4.5 show that some sectors—construction, non-market services and electricity, gas & water—had no exports and no net foreign earnings, although these sectors all had imported inputs. These sectors depended on the success of other industries in international markets in order to facilitate growth of their imports, growth of the economy and growth of domestic demand for their output. Consequently, although the construction industry looked particularly vibrant in terms of strong trends in production and employment during most of the boom, it could not be seen as a significant independent driver of economic growth for this reason.¹⁰

The sectors that had the capability to be significant independent drivers of economic growth were those that had substantial exports and, more important, substantial net foreign earnings. It can be seen in Table 4.7 and Fig. 4.5 that the sectors with the most exports in 2000 were metal products, engineering & electronics, followed by chemical products, with market services, “other” industry and food, beverages & tobacco some way behind. However, in some of those sectors foreign ownership was very common and there were high levels of imported inputs and profit outflows. Consequently, net foreign earnings amounted to only 15–31% of the value of exports in metal products, engineering & electronics, chemical products and “other” industry. In contrast, net foreign earnings amounted to 70% of the value of exports in food, beverages & tobacco and 63% of the value of exports in market services. As a result, market services were a more important source of net foreign earnings than chemical products or metal products, engineering & electronics.

To be clear, the “market services” sector in Table 4.7 and Fig. 4.5 combines together all of the service sectors that were separate categories in some previous tables and charts, with the exception of non-market services. They are grouped together here because of data constraints when estimating profit outflows from service sectors (see Appendix).

Box 4.1: How Reliable Are the Estimates of Net Foreign Earnings?

It may seem surprising that the estimates of net foreign earnings for some sectors in Table 4.7 and Fig. 4.5 are so low relative to their exports. How reliable are these estimates?

All the figures presented for net exports were derived using only official CSO data—so no estimation was involved in deriving those figures. When deducting profit outflows from net exports to arrive at net foreign earnings, the total profit outflow figure was also obtained from official CSO data, without requiring any estimation. The need for making estimates arose only when allocating the total profit outflow among the different sectors to derive sectoral net foreign earnings.

There is a way to check the estimates for some of the most important sectors. The Annual Business Survey of Economic Impact (ABSEI) published by Forfas presented figures, by manufacturing sector, on “direct expenditure in the Irish economy”, which was defined as expenditure on total payroll costs, Irish-sourced material inputs, Irish-sourced services inputs and the profits of Irish-owned companies (e.g., see Forfas 2006). Thus, a sector’s sales minus its “direct expenditure in the Irish economy”, from that survey, should be almost equivalent to the sector’s total “outflows” from the economy in the form of expenditure on imported inputs plus profit outflows, as derived for Table 4.7 and Fig. 4.5.

Comparing sectoral outflows as a percentage of sales derived from the Forfas ABSEI data with figures for outflows as a percentage of production derived by our own estimation procedure produces the following results for the year 2000:

Chemical products: 86% from ABSEI and 85% from our own estimates.

Metal products, engineering & electronics: 74% from ABSEI and 79% from our own estimates.

Food, beverages & tobacco: 27% from ABSEI and 28% from our own estimates (after an adjustment to ensure that excise tax is counted as an expenditure in Ireland in both cases).

Total manufacturing: 66% from ABSEI and 69% from our own estimates.

Since there ought to be some small differences between figures from the two sources, these results from two independent sources look close enough to give some assurance that both sets of figures are quite reasonable. However, it should probably be assumed that there could be errors of up to about four percentage points in our sectoral estimates.

(The ABSEI survey did not cover most services, and its definition of “other” industry was very different to that in Table 4.7).

The three “modern” or “high-tech” manufacturing sectors—metal products, engineering & electronics, chemical products and “other” industry—accounted for a dominant 70% share of exports in 2000. However, their share of total net foreign earnings was a good deal lower at 43%. At the same time market services and food, beverages & tobacco combined accounted for just 26% of exports but as much as 50% of net foreign earnings.

It is clear that a sector’s contribution to exports does not necessarily give a good indication of the relative importance of its contribution to net foreign earnings, which actually matters more than exports for sustaining the growth of the economy.

To show the trends in net foreign earnings over time, Table 4.8 presents estimates of net foreign earnings by sector in 1985, 2000 and 2005, together with the increases in net foreign earnings in 1985–2000 and 2000–2005. Figure 4.6 shows the increases in net foreign earnings compared to increases in exports for selected sectors in 1985–2000, while Fig. 4.7 similarly shows the increases in net foreign earnings and exports in selected sectors in 2000–2005. The selected sectors that are included in Figs. 4.6 and 4.7 are all the sectors that had significant increases in exports or net foreign earnings or both, in at least one of the two periods.

Table 4.8 Net foreign earnings, 1985–2005, million Euros, current values

Fig. 4.6

(Note “Net Foreign Earnings” here means the value of a sector’s exports minus the value of the imported inputs that are used in producing the exports, minus the profit outflows that arise from production of the exports. Source Exports and imported inputs data derived from CSO, Input–Output Tables for 1985, and 2000 Supply and Use and Input–Output Tables. Profit outflow figures by sector for 2000 were estimated using the method discussed in Sect. 4.1 and in Appendix. For 1985 profit outflow figures by sector were estimated using a different method which is outlined in a separate section in Appendix. Creative Commons Attribution BY 4.0)

Increase in the value of exports and net foreign earnings, selected sectors, 1985–2000, million Euros

Fig. 4.7

(Note “Net Foreign Earnings” here means the value of a sector’s exports minus the value of the imported inputs that are used in producing the exports, minus the profit outflows that arise from production of the exports. Source Exports and imported inputs data derived from CSO, 2000 Supply and Use and Input–Output Tables, and Supply and Use and Input–Output Tables for Ireland - 2005. Profit outflow figures by sector for 2000 and 2005 were estimated using the method discussed in Sect. 4.1 and in Appendix. Creative Commons Attribution BY 4.0)

Increase in the value of exports and net foreign earnings, selected sectors, 2000–2005, million Euros

Table 4.8 shows that there were some sectors—namely electricity, gas & water, construction, and non-market services—that had very low or zero exports throughout the period. The imported inputs required by these sectors generally grew as their production grew. Thus, positive growth in net foreign earnings was required from other sectors in order to make the growth of these sectors sustainable.

In 1985–2000 the greatest increase in net foreign earnings came from market services. This was followed by metals & engineering, “other” industry, chemical products and food, beverages & tobacco (Table 4.8 and Fig. 4.6). This was different to the pattern of contributions to the growth of exports since metals & engineering and chemical products had by far the largest increases in exports (Fig. 4.6).

The three “modern” or high-tech manufacturing sectors—metals & engineering, chemical products and “other” industry—accounted for 76% of the total increase in exports in 1985–2000. However, their share of the total increase in net foreign earnings was a good deal lower at 50%. At the same time, market services together with food, beverages & tobacco accounted for just 24% of the total increase in exports but they accounted for as much as 48% of the total increase in net foreign earnings.

As regards the period after 2000, it was noted earlier in this chapter that a feature of that period was a weakening in manufacturing exports in contrast to the strong growth of services exports. The most important reason for the weakness in manufacturing exports was because of a sharp decline in exports of electronic & electrical products. Accordingly, Fig. 4.7 shows a large decline in exports of metals & engineering products (a broader category than electronic & electrical products) in 2000–2005. Since net foreign earnings were low relative to exports in that sector, Fig. 4.7 also shows that the decline in its net foreign earnings was far less significant than the decline in its exports.¹¹ The small decline in net foreign earnings in metals & engineering was outweighed by some other trends among the manufacturing sectors—an acceleration in the growth of net foreign earnings in the food, beverages & tobacco sector as a result of acceleration in its exports, while there was also continuing substantial growth in chemical products.

As regards the strong growth of market services exports in the period after 2000, net foreign earnings were tending to decline somewhat as a proportion of exports as the relative importance of foreign-owned MNCs in the sector increased, but the increase in net foreign earnings in market services was still much greater than in any other sector.

To focus on the overall outcome of these sectoral trends, it was already noted above that the growth of total exports slowed down very markedly after 2000. However, this weakening trend in exports did not result in a similar weakening of the trend in total net foreign earnings. Table 4.9 shows that the rate of growth of exports was 14.0% p.a. in 1985–2000, declining to just 5.6% p.a. in 2000–2005, valued in current prices. At the same time, the rate of growth of net foreign earnings was 9.9% p.a. in 1985–2000 and virtually the same rate at 9.6% p.a. in 2000–2005, again in current prices.

Table 4.9 Growth rates of exports, net foreign earnings and GNP (% p.a.), current values

The explanation for these contrasting trends in exports and net foreign earnings lies in the sectoral developments outlined above. In 1985–2000 net foreign earnings grew much more slowly than exports mainly because most of the export growth at that time was occurring in sectors where net foreign earnings were a relatively low proportion of exports. Then, after 2000 exports grew a good deal more slowly than net foreign earnings mainly because most of the weakness in exports occurred in a sector where net foreign earnings were a relatively low proportion of exports, so that the dramatic decline in its exports was of limited significance for the overall trend in net foreign earnings.

The opening part of this Sect. 4.2 outlined the reasons why it would be expected, in a small and very open economy, that the growth of exports would be the main determinant of economic growth. That view is a useful first approximation and it would generally be valid whenever net foreign earnings are growing at about the same rate as exports. However, it seems clear that, if there are periods when net foreign earnings and exports are growing at very different rates, then it is net foreign earnings rather than exports that have the main influence on economic growth. Table 4.9 indicates that Ireland’s GNP growth tended to be similar to the growth of net foreign earnings rather than exports when the growth rates of net foreign earnings and exports diverged because of rapidly changing sectoral composition.

There is a common view which holds that the sustainable export-led boom that had been occurring in Ireland up to about 2000 really came to an end at around that time, because export growth became so much weaker, while economic growth became very dependent on unsustainable factors such as the speculative housing boom.

The findings of this section indicate that this view is not tenable with respect to the first four or five years after 2000. The weakening of export growth after 2000 was not as serious for the economy as it appeared to be. The continuing growth of net foreign earnings accruing to the economy from export growth in 2000–2005 was quite capable of sustaining the economic growth that was occurring, which continued to be relatively fast economic growth by international standards.

Property-related lending and the growth of construction probably did start to become excessive and unsustainable some time during 2001–2004.¹² However, it is not clear that this activity increased the growth rate of the economy in those years over and above the growth rate that was going to happen anyway if there had been no such property boom. In that period, 2001–2004, the property boom was still very largely financed by Ireland’s own domestic savings rather than by additional funding sourced from abroad. This indicates that economic growth could have happened at about the same rate if the excessive investments that went into property had been spent instead in more usual ways. Also, balance of payments current account deficits were small in the period 2001–2004, averaging just 0.7% of GNP. In that sense, the overall rate of economic growth was not too high to be sustainable.

However, the final few years of the boom were different. In 2005–2007 the growth of our estimated net foreign earnings did slow right down—to 3.8% p.a. in current values—which was not sufficient to sustain GNP growth which continued at a high rate of 8.1% p.a. in current values. In those years the banks sourced large amounts of additional funding from abroad, mainly for property-related lending which increased very rapidly. This was reflected in a rise in the current balance of payments deficit from 0.7% of GNP in 2004 to 4.1% in 2005 and 2006 and 6.2% in 2007. Thus, in those years it was the case that a large inflow of finance from abroad for property-related lending was making it possible for the economy to grow at a rate that was unsustainable and that would not have been attained otherwise.

To sum up, the pace of growth of net foreign earnings was sufficient to sustain the growth that was occurring in the economy from 2000 to 2004 or 2005 (even if the property and construction boom was already heading towards serious problems). It was not until about 2005 that the growth of net foreign earnings ceased to be sufficient to support the growth that was happening in the economy.

4.3 Conclusion

The sectors that were most influential in driving economic growth were those that had the most substantial increase in net foreign earnings.

To concentrate first on the period from the mid-1980s until 2000, those most influential sectors were, in the following order: (1) market services—including business services, computer-related services, financial services, distribution, etc.; (2) metals & engineering—including electronic products; (3) “other” industry—including software products; (4) chemical products; and (5) food, beverages & tobacco.

This was different to the pattern of contributions to the growth of exports since metals & engineering and chemical products had by far the largest increases in exports. The three high-tech manufacturing sectors taken together accounted for 76% of the total increase in exports in 1985–2000 but their share of the total increase in net foreign earnings was a good deal lower at 50%. At the same time market services together with food, beverages & tobacco accounted for just 24% of the total increase in exports but they accounted for as much as 48% of the total increase in net foreign earnings.

Thus, the high-tech manufacturing sectors were considerably less important for growth than they appeared to be in the period up to 2000. Nevertheless, it must be recognised that, even after taking full account of the high levels of their imported inputs and their large profit outflows, they did make a very large contribution to the growth of net foreign earnings and hence the economy. They were an essential part of the Celtic tiger boom in the period up to 2000, although their role was not as dominant as it seemed.

Staying with the period before 2000, the building & construction sector had relatively fast growth in 1993–2000, whether its growth is considered in terms of GVA or in terms of employment. However, that sector did not export, so that it depended on the success of other industries in international markets in order to facilitate the growth of the economy and hence growth of domestic demand for its output. Consequently, although the growth of construction looked particularly vibrant, it could not be seen as a significant independent driver of economic growth.

Turning to the period after 2000, export growth weakened substantially then but the growth of net foreign earnings arising from exports remained strong enough for another four or five years to sustain the economic growth of that period, which continued to be relatively fast growth by international standards. Thus, relatively fast economic growth was still sustainable until about 2004 or 2005.

The most important sectors in terms of growth of net foreign earnings at that time were, in the following order: (1) market services; (2) chemical products; and (3) food, beverages & tobacco. Thus, the contribution of the high-tech manufacturing sectors was much less important than it had been before 2000, with only chemical products still having substantial growth of net foreign earnings while there was a decline in metals & engineering.

In the final few years of the boom, the economy continued to grow relatively fast but the pace of its growth was not genuinely sustainable. It was dependent on an excessive property and construction boom which was heavily supported by an inflow of debt finance from abroad.

It is clear from the findings of this chapter that there can be a good deal of variation between industries in terms of the scale of profit outflows and imported inputs. It is necessary to take account of these factors in order to recognise different industries’ true contributions to the Irish economy. These variations between sectors are often related to differences between Irish indigenous companies and foreign-owned MNCs in Ireland, and the relative prevalence of these two groups within different sectors.

The distinction between indigenous and foreign-owned companies, and differences in their activities and their economic impacts, is a basic theme running through the next two chapters. Paying attention to this distinction will help to shed further light on some of the sectoral developments outlined in this chapter.

Appendix: Estimation of Profit Outflows, Retained GVA and Net Foreign Earnings

4.1.1 Profit Outflows and Retained GVA

Table 4.2 shows estimates of “retained GVA” in 2000, in which outflows of profits from the country are deducted from GVA in the sectors where the profit outflows mainly arise. The first two columns show GVA by sector and each sector’s percentage of total GVA. The third column shows estimates of profit outflows from foreign-owned MNCs in manufacturing and market services.

While there are no estimates in the table for profit outflows from the other sectors because of a lack of relevant data, there are good reasons to believe that profit outflows from foreign MNCs in those sectors would be such a small proportion of sectoral GVA that they can reasonably be ignored. Thus, profits of foreign MNCs could scarcely be a significant proportion of GVA in Irish agriculture. In the case of the building & construction industry, it is known, from the Census of Building and Construction, that profits (after deducting capital expenditure) of firms employing over 20 people in that sector accounted for just 10% of the whole sector’s GVA in 2001. Since it is likely that profit outflows from foreign companies would be only a small fraction of that 10% of GVA, this is not a significant issue in the building & construction sector. The “other industry” sector accounted for a very small proportion of total GVA, and the vast majority of its GVA came from Irish public sector activities in supply of electricity, gas, and water as well as peat extraction. Hence there was no scope here for substantial profit outflows from foreign companies. Finally, it is also clear that profits of foreign MNCs could not have been a significant part of GVA in non-market services such as public administration, defence, education and health services because they were generally part of the Irish public sector.

In the third column of Table 4.2, the total profit outflow figure comes from the official Balance of International Payments for 2000, published by the Central Statistics Office (CSO). To be precise, it is presented in the current account of the balance of payments as the debit or outflow side of “Direct Investment Income on Equity”.

In order to determine profit outflows by sector, first a figure for profit outflows from financial businesses was obtained from Riordan (2008, Chapter 4 including Table 4a, and Table A.4). Riordan says that the profit outflow data in the balance of payments are subdivided into financial and non-financial businesses, without further sectoral detail. Although the financial/non-financial distinction does not actually appear in the official balance of payments publications for that period, Riordan presents the relevant figures for non-financial businesses in 2000–2005, which allows one to calculate figures for financial businesses since the total profit outflow figures are readily available.¹³

To derive estimates of profit outflows from manufacturing and non-financial market services, the total profit outflow from non-financial sectors was distributed among those sectors in proportion to estimates of the amount of profits of foreign-owned companies arising in those sectors. These estimates of profits of foreign companies were based on data from the Census of Industrial Production (CIP), in the case of the manufacturing sector, or the Annual Services Inquiry (ASI), in the case of services. The estimates of profits were based on GVA of foreign-owned firms minus their total labour costs.

This procedure was applied to estimate profit outflows from eight individual sectors within manufacturing and from three individual sectors in non-financial market services. These detailed estimates for individual manufacturing sectors are used in some of the later tables and charts. However, in all the later tables and charts, as well as in Table 4.2, the results for all market services including financial services are combined together. This is because the figures for profit outflows from financial businesses, obtained from Riordan (2008), partly arise from service companies which would be outside the financial services sector as defined in the NACE classification system used in the ASI and input–output tables. Consequently, there could be quite significant errors in our initial figures for “retained GVA” and net foreign earnings particularly in financial services and, to a lesser extent, in other services. Although it is not possible to say exactly how great are these errors, it is quite clear that they are reduced to a level that is not important for our purposes when the market services sectors are combined together. Incidentally, we did not have the option of estimating the profit outflow from financial services in the same way as for other service sectors, because financial services are not included in the ASI.

The method used to derive our estimates of sectoral profit outflows gave rise to a few issues. First, the data required from the ASI were not actually available classified by nationality of ownership in 2000, although the necessary data classified by nationality of ownership were published from 2001 on. We needed estimates for 2000 in order to link them with data from the input–output tables for 2000. Therefore, we first derived the necessary estimates of profits of foreign companies from the ASI for 2001, and then assumed that foreign profits would be the same proportion of a sector’s GVA in 2000 as they were in 2001.

A second issue concerns interest, tax and depreciation. In view of the estimation methodology used (profits being equal to GVA minus total labour costs), our estimated profits of foreign companies were profits before deducting interest, tax and depreciation. We then distributed the relevant total profit outflow (which would be after interest etc.) across sectors in proportion to those estimates of profits. Consequently, this procedure involves an implicit assumption that interest, tax and depreciation would be proportionately about the same in each sector, or at least that differences between sectors in this respect would not be so large as to result in substantial errors to the estimates of “retained GVA” or net foreign earnings that are presented in this chapter.

Another issue that is worth considering concerns the relationship between the amount of profits of foreign-owned companies that arise in a sector and the amount of profits that flow out of the country from that sector. To clarify this, it must be pointed out that all the profits of foreign-owned companies (after interest and tax) were officially defined as debits or outflows of profits in the current account of the balance of international payments. Even if foreign-owned companies chose to reinvest some of their profits in Ireland, the full amount of their profits (after interest and tax) was still officially defined as a debit or outflow. The reinvestment was then treated as a separate matter and it was counted as a credit or inflow called “reinvested earnings” in the financial account, rather than the current account, of the Balance of International Payments

For the purpose of making our estimates, and in the associated discussion in this chapter, we followed this official practice in treating all foreign-owned companies’ profits (after interest and tax) as being profit outflows, regardless of any reinvestments that might occur. This does not mean that we have simply ignored the contribution that their reinvested profits make to the Irish economy. The fact is that, if the reinvested profits of foreign MNCs contribute to maintaining or increasing their production in Ireland, that effect is automatically reflected in the size of their GVA. The GVA of such companies in any given year is the product both of their original investments and of their reinvestments to date. Thus, their GVA incorporates the contribution made by all their investments to generating income in Ireland and, in deducting their profits from their GVA, we are deducting the part of that income that does not accrue to residents of Ireland. While some of their profits in the current year may be reinvested in Ireland and may increase Irish incomes in the future, that will be reflected in future GVA, and it would not be appropriate to take it into account as an aspect of current Irish incomes if it does not contribute to current GVA.

Finally, it was stated in Sect. 4.1 that a sector’s GVA is similar to its contribution to GDP (apart from an adjustment for product taxes and subsidies), whereas its “retained GVA” in Table 4.2 is more like its contribution to GNP. In saying this, it should be acknowledged that the difference between GDP and GNP is the net flow of factor incomes from or to the rest of the world. Such factor incomes consist of various items such as interest payments, profits, dividends and some wage payments, and they flow both into and out of the country. Consequently, there is more to the difference between GDP and GNP in Ireland than just profit outflows from foreign MNCs in Ireland. However, in Ireland these profit outflows have been the major component of the difference between GDP and GNP, and in fact the profit outflows were greater than the difference between GDP and GNP throughout most of the boom. Furthermore, many of the other factor income flows, such as interest on government bonds, are not associated with specific sectors of the Irish economy, whereas the profit outflows from foreign MNCs clearly do arise in specific sectors. For these reasons, it seems fair to say that a sector’s “retained GVA” is quite like (but not exactly the same as) its contribution to GNP.

4.1.2 Net Foreign Earnings

Tables 4.7–4.9 and Figs. 4.5–4.7 present estimates of net foreign earnings for each sector, which is defined as the value of the sector’s exports minus the value of the imported inputs that are used in producing the exports, minus the profit outflows that arise from production of the exports.

For this purpose, the sectoral export data were taken from the official input–output tables for the year concerned. The input–output tables also provided data on each sector’s imported inputs. It was assumed that the percentage of each sector’s imported inputs that were used in producing the sector’s exports was equal to its exports as a percentage of its total output.

Each sector’s profit outflows were estimated in the manner already outlined above (except for 1985, which is discussed separately below). It was assumed that the percentage of each sector’s profit outflows that arose from producing exports was equal to the exports of foreign-owned companies in the sector as a percentage of the foreign-owned companies’ total output.

A couple of further issues arose in estimating profit outflows by sector for Tables 4.7–4.9 and the associated charts, arising from the fact that they include a more detailed breakdown of sectors than Table 4.2.

First, in the food, beverages & tobacco sector, the drink and tobacco companies pay a substantial amount of excise tax, which is included in the sector’s GVA in the Census of Industrial Production. Therefore, it was necessary to deduct the excise tax from foreign-owned companies’ GVA in that sector when estimating the profits of foreign-owned companies for the purpose of estimating profit outflows.

A second issue arises from the fact that we obtained exports and imported inputs data from input–output tables, whereas the CIP or ASI were our basic data sources for estimating profits of foreign-owned companies. There are some differences between the input–output tables on the one hand and the CIP or ASI on the other hand as regards their definitions of what exactly they include in which sector. For the most part these differences were not significant for our purposes, but there was a substantial difference concerning the food, beverages & tobacco sector and the chemical products sector. The CIP classifies some products in the food sector which are counted as chemical products in the input–output tables, so that the CIP’s food sector is relatively large compared to the input–output tables’ food sector, while the CIP’s chemicals sector is relatively small compared to the input–output tables’ chemicals sector. Therefore, after estimating profit outflows from those sectors, using CIP data, we transferred part of the estimate for food to chemicals. In 2005 the amount transferred in this way was 15% of the initial estimate of profit outflows from food, beverages & tobacco and 4% of the initial estimate for chemical products.

4.1.3 Profit Outflows for 1985

In order to produce Table 4.8 and Fig. 4.6 estimates of profit outflows by sector had to be made for 1985. These estimates had to be based on a different method to the method for 2000 and 2005 outlined above, because data on GVA and labour costs of foreign-owned companies by sector were not available from either the Census of Industrial Production or the Annual Services Inquiry in 1985.

Instead, the estimates for 1985 used data on profits as a percentage of sales, for foreign-owned companies by sector, from the “Irish Economy Expenditures Survey”, which was undertaken annually by the Industrial Development Authority (IDA) in the 1980s. (This survey later came to be organised by Forfás and became known as the Annual Business Survey of Economic Impact, or ABSEI; it was referred to in Box 4.1). The relevant 1980s profits data that were used here were originally provided for the study reported in O’Malley (1995).

The figures on profits as a percentage of sales from the survey were multiplied by data on foreign companies’ gross output, by sector, from the 1985 Census of Industrial Production to give estimates of foreign companies’ profits by sector. In a similar manner to the estimates for 2000 and 2005, the total profit outflow figure was taken from the official Balance of International Payments for 1985, and then that total profit outflow was distributed across the sectors in proportion to the estimates of foreign-owned companies’ profits in each sector. In order to estimate the amount of profit outflows that arose from production of exports in each sector, it was assumed that the percentage of a sector’s profit outflows that arose from producing exports was equal to the exports of foreign-owned companies in the sector as a percentage of the foreign-owned companies’ total output.

The main defect of these estimates for 1985 as compared to the estimates for later years is the fact that they do not include any estimates for service sectors, because the Irish Economy Expenditures survey concentrated on manufacturing. Thus, in using these estimates there is effectively an assumption that profit outflows from service sectors were negligible at that time. In reality, that is probably not far from the truth since the flow of FDI into very profitable internationally traded services nearly all came later. Even as late as 2000, our estimates indicate that only about 6% of all profit outflows came from non-financial services and the figure for 1985 must have been a good deal lower. A larger amount of profit outflows was coming from financial services by 2000, but that would have been largely a result of a surge of FDI into the International Financial Services Centre (IFSC), which started after 1985.

Nevertheless, there is some bias here towards underestimating profit outflows from service sectors in 1985. That means that we overestimate net foreign earnings in service sectors in 1985 and hence underestimate the increase in net foreign earnings in service sectors in 1985–2000 to some extent. It is very unlikely that this bias could be large enough to invalidate the statements made when discussing Table 4.8 and Fig. 4.6.