78-National Costs in a Global Economy

When attracting Foreign Direct Investment, every country must think strategically. What unique advantages does the country offer over its competition? Has it built its economic model around those advantages? This blog describes two countries who have done this very well, even though they have followed distinctly different strategies. The Customer Buying Hierarchy lays out these two strategies and explains their success.

Posted 2/9/09

Dell Inc., the American computer manufacturer, is moving nearly half the jobs it has in Ireland to Poland. The move reduces Dell’s costs. It also sends a powerful message to the Irish and to other nations.

Ireland initially attracted Dell to manufacture in Ireland in 1990. Dell built a manufacturing facility in Limerick. Over the last few years, it has become the second biggest foreign employer in Ireland. Ireland’s low corporate taxes and well-educated workforce originally attracted Dell. Things have changed since 1990.

Ireland has now become a much costlier place to do business. (See the Symptom & Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) Yes, its corporate tax remains low, at 12.5%, but labor costs have increased and productivity has fallen. Energy costs have risen as well. The quality of the country’s infrastructure has slipped. And, very importantly, there is now more business regulation. All of these changes have reduced Ireland’s competitive status compared to other countries.

The result: more jobs in Poland and fewer jobs in Ireland. The Poles offer a lower cost structure than the Irish. In an international market, jobs can and do move. (See the Perspective, “Can We Raise Margins with a Price Increase” on StrategyStreet.com.)

As the U.S. contemplates changes in its labor regulations, it should heed the warning of this Irish situation. If labor prices go up faster than labor productivity, national jobs inevitably evaporate into the global ether.

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Update 2022:

Both countries continue to attract a significant amount of foreign direct investment, but Poland is the clear winner between the two.

At the end of 2021, the number of people in Ireland employed by multinational companies in that country hit an all-time high of 275,000, up 10% over its pre-pandemic level.  Just over 10% of Ireland’s entire workforce now works in the multinational sector, particularly the technology and drug sectors attracted in part by the low corporate tax rate of 12.5%.  Ireland has agreed to give up the 12.5% tax for large multinationals for a common minimum rate of 15%, although the implementation of that change may take years.

In 2020 Poland, foreign companies employed a total of 1.9 million people, more than 15% of total private sector employment and much higher than Ireland.  The country enjoys a dominant position in Central and Eastern Europe.  Foreign investors find it attractive for its deep market of 38 million people along with a positive view of the country’s infrastructure, business environment and stable economic growth.  Over the 15 year period ending in 2019, the average annual growth rate in capital invested in Poland by foreign companies was 7% per annum.

Countries are no different than companies when taking a price perspective. The total cost of doing business in the country is the “price” it charges for operating there. Poland offered a lower “price” than did Ireland and attracted more jobs.  In 2009, Poland was a relatively new entrant in the market for foreign investment. Ireland might have considered these Symptoms and Implications back then and done more to head off Poland.

Today’s market for international outsourcing is a non-hostile market. You can see this in the structure of the market compared to the structure of a hostile market. See HERE for an explanation. In this kind of nonhostile market, Poland is likely to continue to grow faster than Ireland.

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Update 3/26

In this blog, we will look at how Ireland and Poland compare for US companies planning to make a foreign direct investment.  In the last few years, Ireland has transformed itself to become a much more attractive home for foreign direct investment. It offers unique Function, Reliability and Convenience benefits. Poland offers a different set of benefits and overall lower operating costs (Price) than does Ireland. Ireland has become more important than Poland for US company foreign direct investments. We will use the four Customer Buying Hierarchy Components to analyze the ongoing competition between these two countries.

Early offshoring was dominated by labor arbitrage; today it’s a strategic portfolio decision balancing capability, resilience, and long‑term competitiveness. Ireland and Poland have both attracted substantial U.S. foreign direct investment (FDI) over the last decade, but each country has followed a distinct strategy. Ireland has consistently outperformed Poland for US FDI investors, driven by language, tax structure, talent depth in high‑value sectors, and its role as a European headquarters hub. Ireland wins on the three components of Performance: Function, Reliability and Convenience. Poland wins on Price, the long-term costs of operating in the country, especially in more labor-intensive markets. Poland has grown steadily as a cost‑competitive operations and manufacturing/services location, but without matching Ireland’s scale or strategic role.

FUNCTION:  the characteristics of the product or service that affect the way the country is used by the FDI investor. Function includes all the features of the service.

Both countries offer unique Functions. Ireland offers tax advantages, English language, deep specialization in high‑value sectors, and its role as a European headquarters platform. Ireland wins on most Function benefits.  It has developed strong clusters in cloud computing, digital media, medical technology and electronics. It offers a deep talent pool in software and data operations. These factors appeal especially to U.S. multinationals in high value-added industries such as tech, pharma, and finance.  These industries generate the bulk of U.S. outward FDI.

Poland offers different, though still valuable, Function benefits, especially operational benefits.  Poland has optimized its infrastructure for operations (manufacturing, shared services, IT). It is particularly strong in engineering centers, cybersecurity teams, software development hubs and shared services for tech companies. It also enjoys a strong logistics position for reaching the EU market.

RELIABILITY: the consistency with which the country delivers on the promises made, or implied, to the FDI investor by its service package.

As an English-speaking country based on English common law, Ireland offers a US-based investor natural Reliability advantages over Poland. The country provides strong IP protection and a business-friendly regulatory environment. Its taxes and regulations, through its EU membership, make it highly predictable and comfortable for US based investors.

Poland also offers the benefit of EU membership and regulation. However, it demands far more language and local logistics and regulation support than does Ireland. It is less predictable for a US investor.

CONVENIENCE: the ease with which the FDI investor may establish the local subsidiary. Essentially, this is the order cycle time, the elapsed time between the moment and investor decides to invest in a local subsidiary and the moment he passes all the regulatory hurdles.

Ireland is the hands-down leader in Convenience. The country has streamlined its entire economic model around attracting investment in foreign subsidiaries, especially from the US. Its regulatory environment is fast, English-based and predictable. A foreign direct investor can clear all the investment regulations in a matter of days.

Poland’s process is much more bureaucratic and time-consuming. Setting up local subsidiaries and banking relationships takes many levels of applications and requires local translation and legal support. Its compliance and translation requirements are increasing and add to the burden. It takes several weeks for an FDI investor to clear all the regulatory hurdles.

PRICE: the long-term cost of operating a subsidiary in the country.

Here is Poland’s strong suit. It’s labor costs fall significantly below those of Ireland, making it especially attractive for labor-intensive, scalable operations. It does have two Price disadvantages relative to Ireland. Its corporate tax levels are higher. Ireland’s have been stable at 12.5% for years. It is moving to 15% with the new OECD agreement, where it is expected to be stable for quite some time. Poland’s currency, the zloty, has also been more volatile than the euro, adding some uncertainty about long-term cost predictability in Poland.

In summary, U.S. companies do not choose Ireland because it is cheap—they choose it because it is strategically efficient for high‑value functions. Ireland attracts high‑value, IP‑intensive, and headquarters‑type U.S. investment, even though it has higher operating costs. Poland attracts operational, engineering, and manufacturing investment, where cost efficiency and scale matter more than regulatory simplicity.

Let’s ask one more question about these two countries. Is there any way they could reverse their relative positions? Could Poland dominate the Performance advantages of Ireland? Could Ireland achieve a lower cost of operations than Poland? The answer is almost certainly not. Ireland’s top advantage is its English language and English common law tradition, overwhelming Reliability advantages. Poland will not be able to duplicate those two advantages. On the other hand, Ireland is a mature Western economy with high labor costs. It will never be a low cost (Price) European operational competitor. Each country has tailored its approach to FDI to use its clear Customer Buying Hierarchy advantage.

A good grasp on the Customer Buying Hierarchy makes strategy much easier to envision. We recommend that you read this article to learn more about how the Customer Buying Hierarchy works and then this article to see how its components change as industries mature.

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