Over the past decade Ireland’s economic growth has been characterised by increases in the number employed and by growth in productivity. As the potential for employment growth wanes due to demographic change and the limits of migration, productivity growth will be the most important long-term driver of improvements in national living standards. However, the requirements for success in promoting productivity growth can vary across markets and can be subject to rapid change. The ability to work flexibly, and to redesign and change institutions as required, will be critical in driving Irish productivity growth in the future.
Ireland faces two productivity challenges going forward:
Ireland’s economic development strategy over the last number of decades has been multi-faceted, characterised by the attraction of green-field investment, the investment in physical and human capital, the adoption of a competitive taxation regime and the creation of an attractive business environment. While these policies will continue to be critical going forward, competition will play an important role in boosting productivity performance.
The link between competition and productivity is driven by a number of factors.
First, competition stimulates innovation as firms invest in the development of new products and production methods.
Second, competition encourages efficiency improvements. As firms face competition they must reduce costs in order to compete for customers. This is achieved by finding quicker or more efficient methods of production.
Third, competition promotes diffusion of technology as firms seek to improve productivity by adopting processes or products that may have been developed by market leaders. This diffusion process is prominent in markets that are open to international competition.
Information and Communications Technology (ICT) is generally accepted as being one of the drivers of productivity growth in modern economies and academic literature supports this. There is also strong evidence that increased human capital and skills development boosts growth, individual earnings and firm level productivity. Science, research, technology and innovation also play a critical role in creating knowledge in modern economies and driving improvements in welfare. Therefore, policies which promote ICT, human capital development and innovation and R&D will significantly determine Ireland’s productivity performance in the years ahead. Development of physical infrastructure will continue to be important for productivity growth with the type of infrastructure changing alongside changes in technology.
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