Information and Communications Technology: A Value Chain Analysis 2019

This chapter explores the investment in the capital assets that are used to produce ICT services, and how that capital investment is funded. It also looks at how these corporations invest their funds in other enterprises.

It is easy to envisage the capital investment needed for industrial manufacturing: this requires large initial outlays on the buildings and machinery to make goods. The ICT sector demands relatively little physical machinery, but it needs significant capital investment in know-how, the intellectual property (IP) to provide rapidly adapting high-value services. We can think of a manufacturer getting a machine in three ways: buying it, renting it, or making it themselves. ICT acquires its 'tools' in similar ways:

• Buying IP outright, often from abroad.
• Renting it: in the case of ICT this means paying royalties and licence fees to use the patents and other IP which remains the property of another company. Again, this is often an import or export.
• Making it themselves: for ICT companies, research and development (R&D) is the means by which they create new ideas and products that generate revenue.

The first of these, outright purchase by the ICT sector, has a significant impact on the total economy of the country. Technology companies based in Ireland have purchased large capital assets of IP which they use to produce the services they export all around the world. They invested €46bn in fixed capital assets in 2019. This brought their total non-financial assets to €103bn by the end of that year. Of this €103bn, the vast majority (€88bn) was 'intangibles', such as IP. This still left a significant €15bn in tangible assets, such as telecommunications fixed lines and masts, but this substantial physical infrastructure is dwarfed by the scale of IP assets held in this country.

By the end of 2019, 10% of all the fixed capital assets in Ireland (which includes all road, rail, buildings, and machinery) were held by the ICT sector. Most of this IP has been produced in other countries and imported here. In those cases, it is treated like any other import: it is a negative in our Balance of Payments as money goes abroad to pay for it. In most cases, the imports of IP are within a corporate group, so the group has no net cost in moving the IP: the payment goes from the Irish company to the foreign company but stays within the group. So, while the transfer is a cost in the Irish Balance of Payments, it is not a cost to the company, and may even produce a tax advantage.

In the calculation of Gross Domestic Product (GDP) for the country by the expenditure method, the imported IP is a negative in the net exports but the investment in IP is added to capital formation: it is subtracted and then added back, so has an overall neutral effect on GDP.

Intellectual property for many ICT services is high in value but this declines fast as new technologies replace the old rapidly. Thus, depreciation on this IP is very high (we use the term 'depreciation' to cover 'amortisation' and the similar national accounts concept of 'consumption of fixed capital'). This depreciation is a cost, but it is a cost to the owners of the IP, that is, the foreign-owned corporation. For this reason, when we calculate 'modified GNI' (a measure of the domestic economy), we exclude the depreciation on imported intellectual property.

The second way of getting access to the capital assets needed to produce services is to pay the owner to allow you to use them. For ICT companies, this is usually through a licensing agreement on which they pay royalties to the owner of the IP for its use. These are used up in production, they do not appear on the company's balance sheet. They are a large part of the intermediate consumption in the production of ICT services. Intermediate consumption, or ‘uses’ are discussed further in the chapter on Consumers. In the case of ICT in Ireland, often the royalties are paid to another company in the same corporate group, but located in another country. Royalty payments amounted to €51bn in 2019 for ICT companies. Figure 3.2 shows all the imports and exports of services for the ICT sector and the significance of royalties (‘charges for the use of intellectual property’) is clear.

Licensing can work both ways: as well as importing IP, companies holding IP assets in Ireland also sell the rights to use it abroad: as we see in Figure 3.2 this earned €4.8bn of royalty exports for ICT companies in 2019. Royalties are a small part of total exports, which are driven by telecommunications, computer and information services. Royalties do make up a large part of the total imports as mentioned above. The category of Other Business Services imports includes the outright purchase of large IP assets discussed earlier. For confidentiality, this group also includes Professional and Management Consulting Services, and Technical, Trade-related and Other Services. Imports are explored further in the Producers chapter.

Spending on R&D

The third way of obtaining the assets needed for production is for the enterprise to produce the assets themselves. When the asset is IP, then it is created by Research and Development (R&D).

This section draws on the BERD survey (Business Expenditure on R&D) to highlight how much firms in the ICT sector are spending and how they are financing it. As innovation involves the transformation of new ideas into products or services, spending on R&D by companies can highlight this. Critically, the data used in this section captures spending in the domestic economy on R&D and excludes the inter-affiliate imports of intellectual property.

 

Capital Funding

As we have seen, the production of ICT services requires large investment in fixed assets, both tangible and intangible. This section looks at how that investment is funded.

The largest ICT companies in Ireland are part of global groups headquartered elsewhere. These subsidiaries are wholly owned by a foreign parent. Foreign Direct Investment (FDI) into Ireland in ICT activities was €150bn at the end of 2019. This was up €29bn compared to the position at the end of 2018 (€121bn). Most of this investment (87%) comes via Offshore Centres for tax reasons, however FDI data published by CSO indicates that most of this investment originates in the US. The USA directly invests 6%, and 4% comes from the EU.

The entire balance sheet of the ICT sector in 2019 is summarised in Figure 3.9. This shows the liabilities and the assets, both financial assets and non-financial. For example, these ICT companies have large equity liabilities, that is the shares in them are very valuable, but these are generally not publicly traded shares (they are unlisted). These corporations also have large ‘trade credit and advances’ liabilities, many of which are with companies within the same group.

On the asset side, as we saw, ICT corporations have large IP and other intangible assets that they use to produce the high-value services they export all around the world. They also have very significant equity assets in subsidiaries themselves. Their subsidiaries may also be here in Ireland or in the rest of the world.

Company Supports

Much of the FDI in Ireland has been supported by the Industrial Development Authority (IDA), while many domestic exporting firms are supported by Enterprise Ireland (EI). The section below gives a count of companies by Foreign and Domestic ownership and gives an indication of the type of supports these companies are receiving from Irish agencies.

International investment in the ICT sector in Ireland has been developed over many years. The sector uses large assets in its production of services. These assets are acquired in three ways: through R&D, ‘rented’ for use through royalty payments, or purchased outright. Most of the capital involved in ICT is imported, and then used to produce services that are exported. The high value of the capital assets is balanced by large financial liabilities, and these too are mainly cross-border.