In recent years, Ireland's gross domestic product (GDP) has been driven by foreign-owned non-financial corporations, as illustrated in figure 2.1. To provide better insights into the Irish economy, this publication shows non-financial corporations in three subsectors: foreign-owned (S.11a) domestic (S.11b)  and redomiciled PLCs (S11.c) sub-sectors^[1]. The latter are Irish by the internationally accepted definition, but their large positions and transactions have little interaction with the rest of the domestic economy, and for this reason the redomiciled group are presented separately from the domestic non-financials as sub-sector S.11c.

 

The proportion of Ireland's GDP that is due to foreign-owned corporations here is unusually high, as illustrated in figure 2.2. However, as the figure also illustrates, throughout the European Union, a significant proportion of a country's value added is typically generated by foreign-owned enterprises. This data comes from Structural Business Statistics, which has slightly different definitions to non-financial sector, but the boundaries are similar. 

As can be seen from their value added, these large multinationals in Ireland continued to grow in 2020, in spite of the pandemic. Figure 2.3 breaks down the main direct contributions of foreign-owned corporations (S.11a) to GDP (they also contribute indirectly through purchase of goods and services from domestic corporations). The largest part of their impact is net profit, which flows out to the rest of the world as dividends and reinvested earnings. The next largest element is consumption of fixed capital or depreciation, which is included in Ireland's GDP (B.1G) and Gross National Income (B.5G) even though the owners of the capital which is being consumed are not in Ireland. The taxes and wages are small relative to the overall GDP impact but large in national terms (€9.1 billion and €29.0 billion respectively in 2020).

Since 2015, capital investment in Ireland has been out of proportion to the long term trend. This is illustrated in figure 2.4, which shows investment in constant prices from the National Income and Expenditure publication. This increase has been driven by foreign-owned NFCs moving intellectual property (such as patents) to Ireland, usually as a company here purchases it from another company which is in the same group but in a different country. This adds very significantly to Ireland's imports, specifically imports of services. These products remain on the balance sheet in Ireland and their depreciation (consumption of fixed capital) is, as mentioned, part of Ireland's GDP.

These imports of intellectual property (IP) by foreign-owned corporations significantly affect the balance of economic transactions with the rest of the world (the current account balance, the negative of B12 of S2 in the sector accounts), which is an important economic indicator. These imports have made this balance very large and volatile, so it is difficult to interpret what it means for the Irish economy. For this reason, the CSO has developed a Modified Current Account for Ireland. This modified current account removes the large IP imports and other globalisation effects, to give a new current account that is more representative of the domestic economy.

It is helpful to see the current account in terms of investment of capital. Our current account with the rest of the world is the total saving (B8G) of the domestic economy less what is invested in capital formation (P5). 

Gross Saving - Investment = Current Account Balance.

This is an equation that holds for the economy as a whole, and since we can calculate saving less investment for each subsector of the economy (such as government or financial corporations), we can estimate the contribution of each sub-sector to the current account balance. 

When we remove the large foreign-owned corporations from saving and investment we have the saving less investment of domestic sectors. This gives us an approximate current account balance, as illustrated below. This is not exactly the same as the modified current account for the balance of payments. The sector accounts are based on the transactions of institutional units (such as a household or a company), while the modified current account approaches the adjustment using asset types (such as intellectual property or aircraft), and so the two approaches yield similar but slightly different results.

We can see from the figure that in 2020, household saving increased while government went in the opposite direction. As households' wealth increased more than government's declined, this raised our current account balance.

In our data bank tables, gross value added at basic prices is broken down by institutional sector, economic activity (A21 sections of NACE Rev.2) and by component (compensation of employees and gross operating surplus at basic prices). (Basic price gross operating surplus is after the addition of taxes (D.29) and the subtraction of subsidies (D.39).) This allows for analysis within each sector and sub-sector. For example, figure 2.7 shows the compensation of employees and gross operating surplus for domestic non-financial corporations by economic activity in 2020. 

The data by economic activity provides many insights into the structure of domestic corporations.

• The sectors with the most value added for Irish-owned non-financial firms are in Wholesale and Retail Trade; Manufacturing and Mining; Administrative and Support Services (which includes recruitment, leasing, and head offices but excludes the Redomiciled head offices); and Professional, Scientific and Technical activities (which includes accounting and law). Each of these sectors have more GVA than Irish-owned Financial Corporations (S.12b)
• Administrative and Support Services, while adding more value overall, pays less in compensation of employees than Construction 
• Domestic corporations in Health and Social Care paid €2.3bn in compensation of employees in 2019. This is 18% of all compensation of employees in Health and Social Care, far less than the 66% paid by the Government sector. Nonetheless, before the pandemic, private health and social care corporations provides more compensation of employees than Arts and Entertainment (which includes gambling) and Other Services (which includes hairdressing and other personal services), combined. In 2020, which was an outlier, pay to employees in Health and Social Care companies exceed that in Accommodation and Food Services companies.
• Corporations add more value than households in all sectors except Agriculture and Real Estate Services. Agriculture is dominated by family-owned farms, and most households are also owned by owner-occupiers. 

Both the gross profit (B.2g) and the compensation of employees decreased in 2020 for domestically-owned corporations. The compensation of employees here includes the wage subsidy (EWSS), and so this figure does not decline as sharply as the operating surplus. The bar graph (left axis) in Figure 2.2 illustrates the values of profits earned and wages paid in the sector. The line graphs (right axis) show the share of total GVA that is profit. The profit share of domestic-corporations is slightly less than the ratio for the Euro-area as a whole of 40% in recent years. This reflects the more labour-intensive nature of these domestic enterprises.

As we noted above, foreign-owned corporations have been bringing large capital investments to Ireland in recent years and this has driven up capital investment sharply. When we remove these corporations, the remaining domestically-owned corporations have been developing their fixed assets at a slower steadier rate. The investment rate is calculated as the ratio of gross fixed capital formation (P51G) to gross value added (B1G). For domestic corporations in 2020, their €11bn invested in capital assets represents an investment rate of 20%. The EU-27 rate has been higher at 23% in recent years. The investment rate of foreign-owned non-financial corporations here reached 83% in 2019: this is for Ireland only and not representative of those corporations' total global operations, and it distorts any estimates for Irish NFCs.

Return on equity is a measure of profitability of corporations in relation to the capital invested in them. A higher return on equity indicates the owners are getting a better return on their investment. For this indicator, 'profit' is gross entrepreneurial income (B.4G) less tax on income and wealth (D.5). This is divided by the balance sheet value of equity and investment fund shares (AF.5).

For non-financial corporations, the value for the Euro Area is around 20% in recent years (for Germany it averages over 50%). In Ireland it is much lower: 7% in 2020. There has been a trend for Irish-owned NFCs of high growth in equity value, while profits have grown also, but at a much lower rate. 

Go to the next chapter: Private Sector