Mary Harney
Question:5 Miss Harney asked the Minister for Enterprise and Employment his views on the wide differential between the performance and relative profitability of Irish and foreign owned companies as measured by Forfás surveys. [4625/96]
Ceisteanna—Questions. Oral Answers. - Profit Margin Differentials.
The differences in profitability between the Irish-owned and foreign-owned manufacturing sectors is significant and average profitability of Irish-owned companies is comparatively low.
The Forfás Irish economy expenditure survey collects data on the profitability of Irish-owned companies and this indicates profitability as a percentage of sales averaging about 4 per cent in recent years. By contrast, the return on investment in US owned companies in Ireland is estimated at about 25 per cent by the US Department of Commerce.
There should, however, be no a priori assumption that the performance of indigenous and foreign direct investment firms should be comparable. Foreign direct investment firms of their nature have self selected themselves as among the top performers in their home nations — that is why they wish to engage in foreign direct investment. We are successful in attracting many such companies to Ireland, which score highly on expected returns to the Exchequer, high levels of graduate employment and good growth prospects.
The appropriate question is not are we concerned with the apparent disparity, but rather, is the performance of indigenous industry good enough, and, if not, why not? In that context, in the aggregate the performance of indigenous industry is not as good as it should be.
The principal reason for this has to be sectoral positioning. Too many Irish firms are still operating in sectors, or more accurately segments — parts of sectors, which are involved with low technology, low value added commodity products which are subject to more and more competition in a globalised market place. Unless these companies can reposition themselves, their future continues to look bleak. It is also worth noting that in commodity sectors like paper, steel, clothing etc., the average profitability of the industry globally will tend to be low. The problem for Irish firms is that they lack the scale and the low input costs required to fund investment in industries with low average profitability.
Thus, many Irish firms, because of their historic positioning in low growth sectors, are disadvantaged. The profits they earn are often insufficient to allow them to make new investments or attract additional capital for this purpose. Accordingly, they cannot upgrade their products, processes, skills and technological processes. This means that the rate at which they introduce new products or processes is low, they tend to have low levels of technology, they devote insufficient attention to training and development and so find it difficult to sustain competitiveness.
On the other hand, the picture is not all black. A number of relatively successful Irish companies have been and continue to be established in growth sectors, for example, electronics, software and prepared consumer foods. However, most of these companies are relatively young and it is a well researched fact that young growing companies will tend to have low if not negative levels of profitability. This is where State supports, opening up of the private equity market etc. comes in.
This positive aspect should also be seen in the context of the record jobs and sales performance by Irish industry in 1995 recently announced by Forbairt. Among the key factors giving rise to this achievement, which saw new jobs created at the highest level in five years and job losses at the lowest level in ten years, was profitable sales growth.
It is precisely with a view to exploiting and capitalising on this turnaround that my Department is currently working with Forbairt on the development of a new strategy for indigenous industry which will have a particular focus on the profitability of indigenous industry in the context of company development, identify sources and type of funding needed to facilitate profitable development, and emphasise the importance of research and development to product and process development with a view to raising the general performance of indigenous industry on the innovation front. Overall, the objective will be to achieve a doubling in the rate of profitability of Irish industry from 4 per cent to 8 per cent by the year 2000.
The larger goals for Ireland's progress and growth will be realised only if the enterprise sector of the economy can compete successfully and profitably on local and export markets and for this to be achieved we have to replace the "industry" focus of policy by an emphasis on a wider "enterprise" policy, one that embraces all sectors of the economy.
I join Deputy O'Rourke in extending my sympathy, and that of my party, to you, Sir, on your recent sad bereavement.
I thank the Deputies for their kind remarks.
The Minister has not given the full picture. Will he accept that a 10 per cent profitability margin is considered high by international standards? Will he also accept that the profit margin of companies with subsidiaries here is also about 10 per cent? Furthermore, will he accept the reason profit is maximised through Ireland is that the CPT rate is low and that the wide disparity between Irish and foreign owned companies is purely because of transfer pricing?
Evidence shows that the profitability of companies is higher than the 10 per cent she suggested. Foreign companies here are making considerably more profit than that. I do not have available to me data which would confirm the extent to which transfer pricing adds to profits. This has always been an issue of some concern but there is no hard data from which one could conclude that we do not have very successful and high margin businesses. The evidence is that some of the sectors attracted to Ireland enjoy high profitability wherever they locate and they have been very successful here.
It would be remiss of me if I did not join other Deputies in expressing sympathy to the Ceann Comhairle on the death of his brother.
You are very kind, Minister.
I think the Minister misunderstood what I said. I did not say foreign companies had a 10 per cent profitability margin, I said they had a 25 per cent margin and that the group of companies with which they are associated had a 10 per cent profitability margin. Profit is maximised through Ireland to avail of our low tax rates. It is because of transfer pricing that there is this disparity. Will the Minister accept that we are engaging in the economics of self-delusion if we do not understand that the gap between GNP and GDP at £5 billion per year is caused by transfer pricing by transnational companies to maximise the effect of our low tax rates? That is why there is such a discrepancy between Irish and transnational companies.
I accept there is some element of transfer pricing but there is no evidence to back up the Deputy's contention. The evidence is that these companies are enjoying very strong sales and employment growth and making significant contributions to the Irish economy through the PAYE, PRSI and VAT elements of their activities as well as through corporation tax. The foreign sector, which employs approximately 100,000 people, is very important to the economy and it has opened up huge opportunities for linkage purchases from smaller Irish companies. There is a very successful niche of Irish operators trading with these companies and it is misleading for the Deputy to suggest that in some way there is false development in the foreign industrial sector. This sector has built on the quality human resources available.
I agree.
I say that from my experience of dealing with many of these companies. One of our big selling points is the quality of our people. We are not solely pursuing a taxed based strategy.
The time for dealing with Priority Questions is exhausted and the replies to Priority Questions Nos. 6 and 7 will be taken in ordinary time.
I, too, wish to extend my condolences to the Ceann Comhairle.
Thank you, Minister.