In the effort to reduce company risk while simultaneously expanding operations, the firm should consider expansion into a new geographic market. By taking advantage of the unique attributes of the Irish economy and aligning them with the characteristics of this company, the potential to maximize shareholder wealth improves while the risk exposure of the company declines. By expanding our information technology operations into Ireland, this risk/return strategy can be successfully accomplished.
Located just west of Great Britain, the Republic of Ireland is a small island state surrounded by the Atlantic Ocean. The population in 1999 was estimated at 3,632,944 people. The estimated growth rate each year was also estimated at .38% each year. Of this, people held the Nationality of being Irish, and their decent was mostly English and Celtic. Their has been a very distinct religious dominance in this country, with 92% of the population being Roman Catholic, and 3% Anglican, and the other 5% was comprised up of Jehovah’s Witnesses, Jewish, and Others. As for a language, the people of Ireland mostly speak English, but Irish, a unique dialect of Gaelic, is spoken mainly in areas located along the western coast.
In 1921, the pushes of Nationalism resulted in the Independence of Ireland from their mother country, the United Kingdom. Since then, much dispute about the status of Northern Ireland, which remains under the control of the British, have caused periods of severe conflicts between the Protestant control government and the Catholic population of Northern Ireland. Currently, peace talks are in progress between the Northern Ireland and British governments.
In terms of their governmental structure, Ireland is a republic, and they have had their Independence since December 6, 1921. Internally, the structure of their governing powers is as follows. There is a Chief of State (president), Head of Government (Prime Minister), a Cabinet, a Legislative Branch and a Judicial Branch. These governing offices do work together in order to establish a well functioning government for the country. Along the lines of politics, there are also practicing political parties that represent different areas of interest to the Irish people. There are active military branches including the Army, Naval Services and Air Corp., as well as the National Police.
The government of Ireland has worked very hard to boost its country’s economy. Over the past ten years, the government has implemented a series of national economic programs that have been designed to hinder inflation, reduce government spending, and to also promote foreign investments. Although Ireland is a small, modern, trade-dependent country, there have been some recent changes. The economy of Ireland is averaging a growth rate of 9.5% per year. For the last ten years, the growth rate of Ireland’s economy has been over three times the EU average.
Exports have remained the primary contribution to Ireland’s growth, but consumer spending, and the recovery of construction and business investments, have contributed to the economy’s performance. In 1998, the estimated GDP was $67.1 billion. In terms of per capita income, its estimate was $18,600. Ireland has an unemployment rate of about 5% – less than half the EU average.
In a recent article in the Irish Times, “Irish Unions Warn Gov’t Wage Pact Threatened By Inflation,” it was reported that the Irish government has recently made agreements with labor unions regarding a national pay agreement. They received warning by labor unions that this agreement may be threatened by rising inflation. Ireland currently is facing a very high inflation rate of 5%. This is the highest percentage in the whole EU. This new wage deal that had been agreed upon locked in cumulative pay raises totaling 15.75% over the next 33 months. According to many economists, over the past 10 years, the wage pacts have become a “cornerstone” for Irelands economic reversal. This reversal has seen GDP grow for an average of 9% per year between 1994 and 1999. The pact was called the Program for Prosperity and Fairness, and its purpose was to draw up a plan to make cost of living expenses reasonable in relation to inflation. Currently, Ireland is working to create a prospering economy, make sure that inflation is under control, and keep unemployment down.
Ireland’s information technology industry has developed rapidly in recent years. Since 1980, 40% of all investment in European electronics has been based in Ireland. It is the software capital of Europe – 60% of all software packages sold in Europe are produced in Ireland. Considering the IT industry is expected to rise by 117% before 2003, it would be beneficial to draw from the pool of IT knowledge that currently exists in Ireland and, by doing so, avoid creating and developing this industry from the ground up.
Another factor that may attract multinationals is the existing legislation regarding the tax system. Depending on the company, at the government’s discretion, they may not be obligated to pay taxes for the first three to five years of operations. So, new companies that want to expand into and explore the overseas market may choose to establish themselves in Ireland for this reason alone. This will allow them to get involved with the overseas market, while doing it tax-free, thus reducing the risk of the venture.
The location of Ireland is something that may be unattractive to multinational corporations. When looking for a location to which to expand, many factors must be considered. Location, availability of resources and accessibility to those resources are just a few of the factors to be thought about. Ireland is an island located in the Atlantic Ocean, off the coast of Great Britain. There is a limitation in getting a variety of natural resources. Since this is true, the manufacturers in Ireland must go elsewhere to get the resources they need to service their production. Therefore, it makes it very expensive to transport materials by boat, or by plane. If they were inland, they would be able to get materials quicker and cheaper by train, or some other mode of transport.
As far as the multinationals that are established in Ireland, there are many. EMC is a huge, rapidly growing corporation that manufacturers and sells computer hardware, mainly data storage devices. Other computer manufacturers include Gateway and Compaq. In the area of telecommunications, AT&T has established itself there as well. In terms of banking and financial services, multinationals include, but are not limited to Mellon Financial, Brown Brothers & Harriman, and Anderson Consulting. In light of all the beneficial and not so beneficial factors of setting up a corporation in Ireland, these companies have and continue to prove their success overseas.
The Central Bank of Ireland is the institution in Ireland one must analyze when defining the characteristics of exchange rate regime in Ireland. The Central Bank of Ireland came into being in 1943 following the passing of the Central Bank Act in 1942. It replaced the Currency Commission, which functioned as the national currency issuing authority from the years 1927 to 1942. It is now a member of the European System of Central Banks. The primary objective of the bank is the maintenance of price stability in the Euro/Ireland area. The main responsibilities of the Central Bank of Ireland is to “define and implement the single monetary policy; to conduct foreign exchange operations; to hold and manage the official foreign reserves of the Member States; and to promote the smooth operation of the payment systems. With all such responsibilities the bank holds, the chance of an exchange rate crisis is low because of the stable Central Bank of Ireland in place in that country. If the bank performs all of its functions properly there should not be any kind of crisis concerning the Irish economy. The fact that the Central Bank of Ireland is also a member bank of the Europeans System of Central Banks also gives the bank credibility and a network of some other banks. Being part of this European bank network also gives the Central Bank a support system, where if there is any emergency or anything of that nature it has a number of European banks there for assistance. Again, with all of the aforementioned characteristics we feel that the likelihood of an exchange rate crisis occurring in Ireland with the Irish Punt is relatively low.
Observing the exchange rate chart in the Appendix, the first and most obvious feature of the chart is the overall decline of indirect quote of the Irish Punt. Over time the decline in the number of Irish Punts per United States dollar shows the appreciation of the Irish Punt over the dollar. In the past year, it has progressively taken less and less Irish Punts to purchase one U.S. dollar and this shows the appreciation of the currency. Much of this appreciation can be attributed to the booming Irish and European economy. One economic indicator is inflation. Over the past year, the inflation in the Irish economy has been rising. When the inflation is rising this means that many consumers, inside and outside the country, are purchasing goods and services from Ireland. In particular, when consumers are contributing goods from outside the country that means that Ireland is exporting goods and its trade surplus is increasing. Exports are growing more than imports, meaning there is more of a demand for Irish Punts, which is why the Irish Punt is appreciating. The problem in Ireland is that the economy is so good it may be getting out of control. When the inflation rate gets too high, the nominal interest rates will increase because of the inflation. When nominal interest rates increase, the Purchasing Power Parity says that in comparison to a country with less of inflation rate, the country with the high nominal interest rate will have depreciation in its currency. This scenario may be the case for the Irish Punt in the near future.
When evaluating the financial risk in Ireland, we believe that it is relatively low. Many of Ireland’s economic indicators show that Ireland’s economy is healthy, and as aforesaid, maybe too healthy. The real GDP Growth in 1999 in Ireland has been 8.6%. This is a remarkable figure in comparison to its European peers: U.K. 1.7%, France 2.4%, Germany 1.3%, the Netherlands 3.0%, Spain 3.7%, and Portugal with a Real GDP Growth of 3.1%. Ireland has even outgrown the U.S. and Japan in real GDP growth, with the two having growth rates of 3.8% and 1.4 %, respectively. Ireland will continue to grow in its real GDP with one 2000 projection of 7.5%. A projected figure also higher than the mentioned countries. Another indication of Ireland’s low financial risk is the unemployment number. Most recently, this statistic has been at an annual low. This shows that there are many opportunities in the Irish economy. One may look at this number from an executive MNC perspective and say that there is not a very large pool of perspective employee candidates for an emerging MNC. A statistic that combats this concern is that 47% of the population in Ireland is between the ages of 15 and 44. An overlapping figure, also, is that Ireland has the youngest population in Europe, with over 40% under the age of 25 years.
There should not be much of a big worry as far as the future exchange rate of the Irish Punt. In general it should stay relatively stable with some slight everyday volatility overall. One thing someone may be cautious of is in the near future with regards to the exchange rate. The economic boom is huge in Ireland and with inflation rising, there is a probable chance of nominal rate rising, and consequently, a short-term depreciation of the Irish Punt.
Currently, the Irish government offers concessions to multinational companies who expand operations into Ireland. This has led to expansion within the country and contributed to the impressive economic performance of Ireland. The most effective means of attracting international expansion has been the tax advantages offered to multinationals. Depending on how it is categorized, multinationals are exempt from filing income taxes for the first three to five years of operations. Considering the average marginal tax bracket of large firms is upwards of 40% in the U.S. and nearly 55% in Ireland, a company stands to benefit financially from operations in Ireland.
Considering international expansion into Ireland requires the allocation of resources and capital while providing many benefits to the local economy, certain concessions must be required on behalf of the Irish government. It would be requested that the profits derived from international operations be exchanged at a previously established rate. It would be arranged that such a rate would be the spot rate at the time of conversion less a discount. This floating rate will protect the firm if rates either rise or fall while not locking in a rate that could become unfavorable if rates drop substantially in the future.
It would further be required that the upper management and other key personnel be imported from abroad to provide consistent managerial techniques within the company’s corporate structure. However, entry and low level employees may be hired from the surrounding communities. This will serve the interests of both the company as well as the local community and economy.
Despite the favorable political and economical factors in Ireland, certain aspects of the Irish culture must be considered when managing the workforce. Certain attitudes and cultural differences exist that may render the traditional American management style relatively ineffective. Ireland’s beliefs and values that Americans would consider “old-fashioned.” Until recently Ireland has had a history of economic and political despair.
As the effect of properly functioning capitalism has not been fully experienced, Irish citizens regard as priorities: religion, family and humor, rather than the American ideals of prosperity, success and the notion of “more.” However, they are not a people adverse to hard work. Rather, the Irish demand a certain level of recreation particularly that found in the local pubs. In other words, managers can expect Irish employees to work diligently and effectively during the required times of operations. However, managers should realize that Irish workers generally will not work late hours striving for success, but instead will utilize this time spending it with family or socializing in the pubs. Considering this, management must understand the work ethic of the traditional Irish workforce, and integrate this factor into their managing techniques in order to more effectively utilize their employees.
In terms of religion, the Irish culture is quite homogenous. Over 90 percent of the population is Roman Catholic. As a result, the Vatican has particularly strong level of influence within Ireland. Managers will find it difficult to deal with employees if they are expected to participate in genetic research, developing biotechnology, or anything pertaining to abortion. As the Irish tend to be stubborn, managerial tactics may prove to be ineffective when managing under these types of conditions. Considering this, companies that participate in any ethically or morally questionable operations specifically those opposed by the Vatican and the Pope, should be carefully considered and not haphazardly ventured into.
In order to produce a more cohesive workforce, mangers must understand the philosophy of pub-life in Ireland, which is inherent to the culture. In America, people frequent bars with the intent to drink alcohol. Pubs in Ireland, however, are the focal point for social interaction. It is not uncommon for priests, nuns, grandparents and families with young children to be found at a pub in Ireland. By understanding its function, managers can improve the group-dynamic by promoting social interaction and thus improving a workforce’s effectiveness through the philosophy of synergy.
The success of the company pivots on the performance of the management selected to undertake the venture. Considering a manager’s performance is directly correlated with his or her enthusiasm and eagerness towards the endeavor at hand, it is important to select appropriate individuals that will exert these characteristics in a foreign country. Normally, the selection process is an evaluation of the individual’s abilities to perform in a business setting. In this case, it must be determined if the individual can, not only survive, but also thrive in the foreign culture. Therefore, a certain level of “convincing” must be done to persuade the candidate to move to a foreign country.
The simplest and most obvious solution would be to offer additional compensation such as a substantial salary increase or a relocation bonus. However, this is merely a temporary solution for a permanent situation. Other factors should be evaluated and considered before offering an individual the position. Several traits and competencies should be considered when selecting expatriate managers for international assignments. In a recent study of expatriate managers, the most successful individuals had similar personality structures. These included people skills, adaptability and flexibility, tolerance, emotional maturity, self-confidence and industry experience. (Shay, 33) Human resources should search for individuals who fulfill this profile. Further considerations should include an individual with little or no domestic attachments. A manager would be more likely to relocate if s/he has to sacrifice less in order to do so. Younger people tend to it this description as well as being more open to new experiences and possessing the ability to learn quickly.
Recently, the performance of female expatriate managers has received a growing level of attention. Apparently, they are able to do their jobs well and able to “perform in the most difficult situations. Numerous studies indicate that women would make excellent expatriates and their openness, strength in relationships, and flexibility could be decided advantages on an international assignment.” (Dollins, 1)
Some individuals are apprehensive towards the idea of working for prolonged periods of time overseas because they feel as if they will become trapped and be denied the opportunity to return home because they were one of the few to accept the position. In response, the idea must be reinforced that this is not a permanent transition. By creating an accelerated promotion program, the idea that international assignments are only temporary, can be fostered. Through this tangible program, the individual will come to understand that the position is a necessary “stepping stone” for future advancement. It is a means, not an end, and therefore not a final destination. Hopefully, this will encourage managers to become involved in overseas ventures as well as gaining experience in a different aspect of the company’s operations.
After the manger is selected, proper cross-culture training is necessary. Focused efforts must be made to develop a program that prepares expatriate managers and their families for the challenges they and their families will face abroad. Obvious topics should include currency, government system, architecture, language, etc. It should emphasize the “objective aspects of culture help managers understand what to expect in their daily routine and the social dynamics they will encounter.” It is not enough, however, for expatriates to learn about the objective characteristics that distinguish the host culture from that of their home country. They must also understand the more “subjective characteristics,” such as customs, values, beliefs and norms. Cross-cultural training programs that incorporate subjective cultural characteristics help develop a better understanding of the values and beliefs that influence behavior in the foreign country.
Respondents to a survey reported that “such training can improve job satisfaction and performance and provides a competitive advantage over other global players. Thus training has the potential of making a significant impact on international ventures.” (Shay, 35) With a previous understanding of the country and the culture, the expatriate manager will feel more comfortable in the new environment and, therefore, improve their performance.
The expansion of our IT operations into Ireland will prove to be beneficial for the company as well as to its shareholders. In addition to the increased revenues, this project offers the advantages of diversification. Ireland will provide the company with an existing “technically literate” population, which requires minimal training. Little resources are needed to be imported into the island country for the purposes of software manufacturing. In terms of exporting, the software can be delivered over the Internet thus reducing transportation costs. While foreign expansion is cost intensive and requires additional coordination and management, the current tax laws of Ireland temporarily suspends income tax obligations of multinational companies for a minimum of the first 3 years of operations. Overall, the benefits of expanding into this market offset the potential risks of the expansion.
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“Irish Unions Warn Gov’t Wage Pact Threatened By Inflation” Dow Jones NewswiresApril 26, 2000.