On July 20, computer maker Gateway announced it was considering moving its European headquarters outside Ireland. The move would relocate 900 jobs from Dublin -- a meaningful figure in a country with a working population of just 1.7 million. The reason: The increasing costs of doing business in the Emerald Isle.
The news was the latest in a series of announcements that underscore the bittersweet transition of the Irish economy from a low-cost toehold in Europe to a high-tech Mecca. In December, Motorola sold a plant to Canadian company Celestica, which led to a loss of 750 jobs. Gateway, 3Com, and Nortel also have made modest cutbacks.
AT THE CROSSROADS. Intel, the largest foreign investor in Ireland, delayed construction on a $2 billion plant outside Dublin that would have created 1,000 new jobs. In May, Intel Ireland's General Manager John McGowan told an industry task force that "the advantages of operating out of Ireland are slowly but surely being eroded. Our wage costs are moving ahead faster than in many competing countries, and we do ourselves no favors in making decisions that further erode our competitiveness."
With the U.S. downturn showing no sign of abating, Ireland finds itself at the crossroads. For 10 years, a blue-chip list of U.S. technology companies -- including Intel, IBM, and Dell -- have fueled Ireland's phenomenal growth. Since 1995, annual growth averaged 9.6%, making it the fastest growing economy in Europe and earning Ireland the nickname, the Celtic Tiger.
Now, government planners and economists say the country urgently needs to wean itself off low-end, PC-centric manufacturing and software customization and begin to establish itself as a center for cutting-edge research and development. "Simply counting job numbers is no longer the best measure of success in the economy. We've got to recognize that things are different now and begin a sharp focus on the real issues of sustainable, high-value development," says John Dunne, chairman of the Irish Development Assn., a government task force charged with attracting foreign investment.
TECH DEPENDENCE. In the '90s, U.S. technology outfits came to Ireland in droves -- attracted by a skilled, English-speaking workforce, low corporate tax rates, and cheap labor. Today, Ireland attracts one-third of all U.S. electronics manufacturing investment in the European Union. According to the Organization for Economic Coordination and Development (OECD), the computer/electronics sector employs about 44,000 people and accounts for 22.8% of total exports. Software, too, has boomed. Ireland produces 40% of all the PC software sold in Europe. Microsoft sales alone add up to almost 3% of Irish gross domestic product and 4% of exports.
The rapid contraction of the U.S. technology sector has highlighted Ireland's tech dependence. Since January, 2,500 high-tech jobs have been cut, mostly by U.S. multinational companies. Those numbers likely foretell a wholesale move of many low-end manufacturing plants to cheaper markets in Eastern and Central Europe. "In the long run, all the vectors in the economy show it will not be a low-cost place. We need to move up the product life cycle to the earlier stages that require extended experience and credibility, which Ireland has built with foreign firms over the past 10 years," says John Bradley, an economist at Dublin's Economic and Social Research Institute.
Government agencies already have swung into action. The 2000 to 2006 spending plans earmark $2.3 billion for investment in education and research. Of that, $600 million is being distributed to universities for advanced research in the areas of biotechnology and information and communication technology.
FOSTERING ALLIANCES. The government also is shelling out $58.2 million to start the European branch of Massachusetts Institute of Technology's famous Media Lab. Housed in a former Guinness storehouse in Dublin's New Media district, the much-touted program is slated to employ 250 researchers and students. Such moves represent a major policy change. In the early 1990s, the gross expenditure on research and development accounted for less than 1% of GDP, vs. an average of 2.3% for other OECD countries. The first awards, totaling $55 million, will be announced on July 27.
Leading indigenous companies also are finding ways to encourage innovation. For example, Iona Technologies, a Dublin-based software vendor, has set up a software CEO forum where key managers get together to address common problems and challenges. "If you go to the Valley or Rt. 128, you find a natural community and cross-pollination between tech companies. That isn't the case in Ireland today. There needs to be more natural partnering and alliance building and learning from each other," says CEO Barry Morris. Iona would know. One of Ireland's oldest technology firms, it was founded in 1991 by a handful of academics at Trinity College in Dublin. The company has spun out 18 startups over the past 10 years.
No one expects investments in R&D and community building to produce instant results. For many, the slowdown comes as a blessing that will provide breathing room to build out Ireland's overburdened infrastructure. Dublin has become one of the most expensive cities for housing in Europe -- outpacing Amsterdam, Brussels, Madrid, and Rome. In 2000, housing prices rose 16%, according to real estate agent Sherry Fitzgerald. This year, they are expected to rise 10%.
NEED TO INNOVATE. Slower growth also could help ease traffic, which chokes Dublin's main thoroughfares seven days a week. Since 1996, 321,000 cars were added to Dublin's roads -- 100,000 last year alone. According to the Dublin Transportation Office, the average speed during morning rush hour is about 7.5 miles per hour. "This is a natural ease-off in growth. And it's not all bad to have a little less insanity," says David Mulville, executive vice-president of corporate development at RiverDeep, an Irish e-learning company.
Will the Celtic Tiger continue to roar? The Irish economy is faring better than Europe and U.S. Economists expect Irish GDP to grow 7% in 2001 and 6.4% in 2002. But to keep growing, Ireland needs to prove it can do more than produce tech goods on the cheap by making the transition into knowledge creation. The government has set the course, as it did to attract IT investment in the '80s. Now, the Emerald Isle needs time -- and a little luck of the Irish. By Jane Black in Dublin