CHAP…..20

ECONOMY AND BUSINESS

CHAPTER TOPICSSECT A - INDUSTRIAL SECTORS1. What are the main industries in Ireland?2. What is the role of agriculture in the economy?3. What is the role of the natural resource- based industries in

the economy?4. What is the role of manufacturing in the economy?5. What is the role of services in the economy?

SECT B - THE ECONOMY1. What are the main economic forces that impact on business?2. How does inflation affect business?3. How does interest rates affect business?4. How does unemployment affect business?5. How does the level of grants affect business?6. How does the level of economic growth affect business?7. How does the state of the natural environment affect

business?8. How does taxation affect business?

What are the factors of production?LAND

This comprises of everything supplied by nature (sea, rivers/lakes, forest, gas fields mines) to the development of businesses. People receive rent for the use of land.

LABOURThis refers all the human work that is needed to operate

a business. People receive wages for this work.CAPITALThis is all the finance, machinery, equipment that is

invested in the company by the investors. This gets the business started.

ENTERPRISEThis is the human activity and initiative that is required

for a business to succeed. Pat McDonagh provided the enterprise needed to make Supermacs a successful company. This factor is in limited supply as not all business people are blessed with a natural flair for innovation.

A – SECTORS OF INDUSTRY in Ireland

PRIMARY SECTOR – Natural based industries

• This refers to agricultural and extractive industries such as fishing, drilling and mining

SECONDARY SECTOR –Manufacturing industries

• This relates to the construction sector, the manufacturing industries such as chemicals, computers developments

TERTIARY SECTOR – Service industries • This is linked with retailing, tourism, transport

and finance industries etc

2. What is the role of agriculture in the economy?

97%

3%

OTHER INDUSTRIES AGRICULTURE INDUSTRY

BACKGROUND TO AGRICULTURE IN IRELANDTraditionally agriculture in Ireland mainly

consisted of tillage & livestock farming. This sector has dramatically changed due mainly Irelands inclusion in the EU’s common agricultural policy CAP. It was once the largest employer in this country but the numbers have since declined due to:

• Modernisation of machinery and huge strides made in technological developments has led to less demand for employees in the agricultural industry.

• Increases in the numbers of imports of meat and vegetables

Important issues & trends in Irish

Agriculture1) Overproduction

Membership of the EU meant that farmers were given a minimum price for their output. However, farm output levels far exceeded what was expected resulting in the EU having to buy up massive quantities of surplus beef, milk, cereals etc.

This out of control situation forced the EU authorities to introduce a annual quota system for all farmers. This effectively put a limit on the amount of farm output farmers could produce.

2) Diversification For farmers to generate a worthwhile income in

the agricultural industry diversification into other farm activities seemed a pro active way forward.

Examples of this type of diversification include:• Open farms – geared towards tourists,

community groups school tours etc• Farmhouse holidays – renovating old

building for modern usage, holiday package in a fishing location

• Organic farming – consumer awareness of food labels now is at major marketing tool

• Forestry – replanting of farm land with forestry. The government offer support and grant aid with this development - COILLTE

3) Consumer confidenceThe issue quality and safety of our foods has

been undermined in this country. Health scares such as

• “mad cow disease”, “angel dust” in beef, • “salmonella” in eggs • “Foot and mouth” disease on farmyard

animals in 2001 – This led to a European wide epidemic where disease could be passed from animal–humans alike. It had a drastic affect on the agriculture industry leading many farms being wiped out.

• “Bird flu” in poultry products and • Pesticide on fruit and vegetables.

3. Natural Resource based Industries

SECONDARY SECTOR

74%

26%Rest of Irishworkforce

SECONDARYSECTOR

26% of workforce in

• Fishing: The Irish government has seen the fishing

industry as a major growth areamajor growth area for the years ahead. The can be attributed to the decline in the need for red meat amongst consumers.

• Also fishing stocks have been greatly reduced for Irish fishermen due to other vessels (Spanish fishermen) ability to enter in our waters. This is termed as depleting our fishing stocks..

• This presents a serious threat to the livelihood of coastal communities that are dependent on fishing as source of income.

Example: Killybegs, Burton port, Kinsale

• Mining: This consists of extracting from the

earth, examples include metals, peat, coal, oil (kinsale in Cork), and gas where possible.

Note: January 2009 - TARA MINES in County

Meath are having on going talks on the possibility of downsizing their particular branch due to the on going economic crisis

• Forestry: This is a small-scale industry in Ireland

as this country has very little forest cover. In Ireland Coillte offer grant aid to farmers to switch their land over to that of forest produce.

COILLTE have been given the job to develop Ireland as a major wood exporting nation.

NOTE: Throughout the years from 2000 – 2007 this was a major growth market.

Tourism: Prior to the global meltdown TOURISM

was seen as the worlds fastest growing industry. Ireland is seen as a country of natural unspoilt beauty, as a result it has opened many employment opportunities in the development of hotels and catering facilities. Tourists (Especially Americans) are willing to spend vast amounts of money here.

Seaside towns in the likes of Galway, Westport, Clifden, and Killarney etc are seen as major tourism hotspots.

Construction: Is of major importance to the Irish

economy as it offers major employment opportunities anywhere houses, factories, schools, hotels, roads, bridges, hospitals, universities etc. are being developed. Irish materials are made readily available to help in the construction sector; this helps to keep money in this country.

NOTE: ECC, Clonbur, Co. Galway produce timber produce for use in this country.

NOTE: 2008-2009 As a result of the downturn in the Irish economy the Irish construction sector slumped dramatically.

• Renewable Energy: Over the past 5-6 years many developments have been made in renewable energy. Ireland has strong potential for all wind, wave and solar powered energy. The SEI (sustainable energy Ireland) offers grant aid to customers who install a renewable energy source to there house, business etc. The future may see the government offer a tax break incentive for customers WHO implement this environmentally friendly source rather than use other traditional methods such as oil, gas etc.

• Note: November 2008- Belmullet/Erris Region in north County Mayo being discussed as potentially the new headquarters of Sustainable Energy in Ireland (SEI)

4. Manufacturing Industry • This industry converts the primary

sector products into finished goods, examples include, computers, furniture etc

How Ireland targets foreign firms:• In the mid 1960’S the iris government

set up the IDA which went about modernising the irish economy and looking for foreign firms to set up here.

Advantages of locating in Ireland;

• LOW corporation tax – 12 ½ %• Availability of grants from IDA Ireland,

FAS etc.• Highly skilled educated work force for

which Ireland is noted• Access to SEM – EU market – 27

countries-population of over 400 million• Competitive wage levels compared to

other EU nations, japanese & US standards.

Top foreign businesses that have seen Ireland as their location include

• DELL, VODAFONE • INTEL, COCA COLA, • NORTEL, ERICSONS, • BOSTON SCIENTIFIC

• DFI - direct foreign investment

Promoting Indigenous Firms

In more recent years greater emphasis has been placed on encouraging the start up of indigenous firms.

Indigenous firms are “Irish owned and locally based”

This indigenous manufacturing is being promoted because the Irish government felt this country was overly dependent on foreign firms locating here. The Irish government wanted Irish firms not foreign firms to provide jobs and create wealth here.

The benefits of indigenous firms:• They are more likely to remain loyal

to this country, this will protect levels of employment

• They may inspire other local based entrepreneurs to develop similar businesses

• Indigenous firms tend to be labour intensive, this will create good employment opportunities for the Irish public.

Agribusiness This refers to manufacturing firms that

use agricultural products such as dairy products, meat, vegetables and cereals as their main source of raw material.

• This sector exports up to 50%-60% of its produce.

• 1/3 of the top 100 Irish businesses are from the agribusiness background

• EXAMPLES: Kerry Group, GLANBIA PLC

IMPORTANT ISSUES & TRENDS IN AGRIBUSINESS

• Retailing developments – selling products to large supermarkets (Dunnes Stores, Tesco and large symbol stores (Spar, Centra)

• Research & Development – (R & D) amongst agric firms have now become a must for these businesses to maintain their market share. RIVAL firms are investing time and money in R & D so agribusinesses must match this attitude to remain competitive.

• Mergers / Takeovers / PLC’s – for agribusinesses to compete on a global stage with large international business mergers/takeovers and co-ops converting into PLC’s.

Example: Kerry Group• Consumer Pressure – health scares & food hygiene

expectations amongst consumers have led to agri businesses to focus in producing more natural and healthier food products.

Important issues & trends in the manufacturing

Industry in Ireland• DownsizingAdvances in technology such as CAD (Computer Aided

Design), CAM (Computer Aided Manufacturing) means that firm are able to produce more output but require less staff.

Example: GUINNESS BREWERY, Dublin

• Low wage countriesCountries in Asia and eastern Europe are offering large

TNC’s better wage terms in return for same output that could be found in Ireland. The only wage for Irish firms to remain competitive on a global stage is to find a niche market, high quality product

Example 1: tourist hot spots such as CONNEMARA, BURREN , RING OF KERRY

Example 2: Oct 2008 DELL announce that they are– Moving plant to LODZ in Poland

• High Tech CompaniesOVER the past 10-15 years, IDA Ireland has

been placing a strong emphasis on attracting high tech companies, such as those involved in computers, biotechnology and chemical production. These firms feature highly skilled, well educated employees. The firms often pay above the recommended wage prices to attract and retain these employees.

NOTE: This strategy is pursued to transform business in

Ireland from a low skilled, low wage economy (1960’s -1980’s) to a more technology based, high skilled high wage economy (1990’s – present day)

•Competition for DFICompetition between countries to attract

foreign investment is increasing. IDA Ireland is facing stiff competition from foreign nations who can offer bigger grants (e.g. the UK, Germany) or have low wage employees (e.g. Eastern Europe, Asia)

•Single European Market SEMSince the emergence of Ireland in the EU

trading block it has been easier for Irish firms to trade freely on the continent. To compete with these larger TNC’s Irish firms have opted to form alliances, mergers and takeovers to survive in the market place.

• Niche MarketingBusinesses that identify niche marketing in the

global economy where factors such as quality of design, image, innovation or customer service are of more importance than price.

Example: BAILEYS CREAM LIQUOR• Environmental issuesThere is a definite need for IRISH

businesses to develop environmentally friendly activities. This will help to promote the business name and keep the Ireland’s green reputation on the global stage. This also acts as a marketing tool to sell the produce.

5. What is the role of the services industry in the

economy?

Rest of Workforce

32%

Service Industry 68%

services industry

rest of workforce

1

Important issues & trends in the Services Sector

• Globalisation – for future development of the Irish services sector Irish companies must enter the international markets. This is already done by those firms in telecommunications and financial services.

• Tourism- over the last 25 years improvements in travel and living standards has led to the global tourism industry to expand massively. This development has seen the transport, retailing, communications and leisure sectors match the services of competitor countries.

NOTE: over 3 million tourists travel to Ireland every year

• Taxation – corporation tax for companies in the services sector pay a higher rate of tax than those in those in the manufacturing industry.

• Information Technology – IT has had a huge effect on the range of services available. People can now take out loans, buy products on the phone or on the internet.

• Cost Effective - Many companies are now are of the opinion that it is cheaper to have a employee trying to sell on the phone lines in a less glamorous or high cost base than in the middle of a highly modern expensive city.

EXAMPLE: NEW YORK medical clinics have some secretarial

bases in IRELAND. Teleworking - THE widespread availability of the IT and

communications (such broadband internet connections) is making the opportunity for teleworking from home very accessible to employees. This is useful for those employees that have young families and also in the event of a flood to particular area.

EXAMPLE: Counties Galway and a Clare were partially flooded for up on 2 weeks in late November/early December 2009

B- THE ECONOMY6. WHAT are the main economic

forces that impact on business? /ECONOMIC VARIABLES

Exchangerates

Economic growth

Environmental issues

Unemployment

Govt grants

Taxation

Interest rates

Inflation

Business

7. HOW does inflation affect business?

Inflation “is the rise in price of products from one year to the next”

Low inflation is associated with periods of prosperity

It is also good for • encourages business confidence• creating competitive prices for customers• Exporting product to foreign markets• Keeping unemployment levels low as

businesses are generating good profits

High inflation• damages business confidence• Reduces the willingness to invest• Reduces customer disposable income• Can lead to foreign investors

withdrawing their capital form in economy

• Causes interest rates to rise• Means exports are uncompetitive

8. Interest ratesInfluence the cost and supply of money. Low interest

rates instil confidence. Lower interest rates lead to • businesses borrowing large sums of money to

invest. This creates jobs. • More disposable income for consumers due to lower

mortgages, cheaper car finance deals etc.• The negative side of the low IR would be for savers

in banking institutions. They would be getting a low return on their savings.

• High interest rates can lead to less spending and if continued could lead an economic recession

NOTE: 2008 –2009 Ireland is amongst one of the worlds leading countries that are in an economic recession

9. Levels of unemploymentWhen unemployment is high• it reduces the amount of disposable

income, which can have negative implications for business

• means higher taxes as well as high crime levels

• People find it difficult to get work and may have to be retrained. For many there would be a confidence factor as well as there world of work having changed.

10. Government Grant AidThe grants offered to Irish businesses are a huge incentive to develop company’s in this country.

• These grants act to encourage indigenous (home grown) firms to set up here. (O’ Brien Sandwich Bar, Bewleys café)

• It also helps to attract large TNC’s (Boston Scientific, Nortel, Google) to locate in this country.

This in turn helps to boost levels of employment and increases the wealth of the state.

Grants that from a particular sector of the economy, (i.e.) agriculture, enterprise, environment, technology & science etc. receive financial support from that area

NOTE:Grants for expansion can be sourced from FORBAIRT,

CEB’s, IDA Ireland.

11. Level of economic growth

Economic growth refers to an increase in the amount of goods and services produced from a country’s resources.

• GNP – gross national product• GDP – gross domestic productA decline in economic growth/GNP may signal a

recession. A recession occurs “when economic growth

slows down or ceases”A depression is a “severe and prolonged period

of negative growth”, the govt starts to shrink instead of grow. Depressions are accompanied by very high levels of unemployment.

Economic growth can affect business in the following ways

1. Confidence & sales: If GNP increases this has a knock on effect to the production and sales in the economy. This leads to confidence being instilled in consumers, businesses etc.

If GNP falls there will be a fall of in sales and this leads to business failures and possible unemployment/redundancies

2. Profits• One negative of excessive levels of GNP

would be workers demanding wage increase in line with wealth of economy.

• This could see increases in prices of goods and in turn high levels of inflation.

• Also a decline in GNP will see increases taxes

12. Environmental IssuesElectronics, agriculture, tourism and services are

Ireland’s main wealth generating industries and all stand to gain from a healthy environment. However the confidence of these areas may decline if the government continues in their belief to introduce “green taxes” .

The continued awareness of green products is hugely beneficial for Ireland as it already has a clean, healthy green image. This led the way for Irish firms to turn to the green way of thinking and as a result improve sales.

Product areas that were to the forefront of these sectors include, organic food, recycled products, eco-tourism, bottled water etc.

13. Taxation • Low corporation tax has played a prominent

role in attracting foreign businesses to this country.

• High corporation tax reduces the amount of profits the owners of a business can earn

• If prices of goods are increased, the VAT added can discourage sales i.e. the price is to expensive

• High employers PRSI contributions increase the cost of employing staff, therefore it may discourage businesses from employing new staff

• ALSO the reduction in capital gains tax CGT from 40% to 20% has stimulated investment in the Irish economy.

14. Exchange RatesExchange rates are the “prices of one

countries products expressed in terms of another currency”

• Having strong currencies attracts overseas capital into an economy. A strong currency may lead to exports being over priced in foreign markets.

• When a currency weakens it favours exporters, whose produce becomes cheaper.

• A weak currency results in imported inflation. This could lead to industrial unrest, with workers demanding higher pay levels.

KEY DEFINITIONS

• Downsizing• Inflation• Direct Foreign Investment - DFI • Manufacturing Industry• Recession• Depression • GNP

LC EXAM QUESTIONS2004 20 marksUsing examples analyse the role of the Irish

government in creating a suitable climate for business enterprises.

2001 25 marks

Analyse how the economic variables in the Irish Economy have an impact on a local economy?

2001 10 marksIllustrate your understanding of the term

“inflation”?

LC EXAM QUESTION

LC EXAM QUESTION

LC EXAM QUESTION