78-National Costs in a Global Economy

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 tax rate 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 rate 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 position 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.

Posted 2/9/09

Update:

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.

***