Institutional Sector Accounts Non-Financial and Financial 2021

In recent years, Ireland's gross domestic product (GDP) has been driven by foreign-owned non-financial corporations (sector S.11a), as illustrated in figure 2.1. In 2021, more than half of Ireland's GDP was value added by this small cohort of foreign-owned companies. To provide better insights into the Irish economy, this publication shows non-financial corporations in three subsectors: foreign-owned (S.11a) domestic (S.11b)  and redomiciled PLCs (S.11c) sub-sectors.

As can be seen from their value added, these large multinationals in Ireland continued to grow in 2021, in spite of the pandemic. Figure 2.2 breaks down the main direct contributions of foreign-owned corporations (S.11a) to GDP (they also contribute indirectly through purchase of goods and services from domestic corporations). The largest part of their impact is net profit, which flows out to the rest of the world as dividends and reinvested earnings. The next largest element is consumption of fixed capital or depreciation, which is included in Ireland's GDP (B.1G) and Gross National Income (B.5G) even though the owners of the capital which is being consumed are not in Ireland. Modified GNI adjusts for the depreciation on intellectual property and leased aircraft and so excludes most of their depreciation. The taxes and wages are small relative to the overall GDP impact but large in national terms (€12 billion and €31 billion respectively in 2021). As we saw in the Households chapter, the share of total wages paid to Irish households by these corporations continues to grow.

Removing the Distortions of Foreign NFCs

Since 2015, capital investment in Ireland has grown at a very high rate. This is illustrated in figure 2.4, which shows investment in constant prices from the Annual National Accounts. This increase has been driven by foreign-owned NFCs moving intellectual property (such as patents) to Ireland, usually as a company here purchases it from another company which is in the same group but in a different country. This adds very significantly to Ireland's imports, specifically imports of services. These products remain on the balance sheet in Ireland and their depreciation (consumption of fixed capital) is, as mentioned, part of Ireland's GDP.

These imports of intellectual property (IP) by foreign-owned corporations significantly affect the balance of economic transactions with the rest of the world (the current account balance, the negative of B12 of S2 in the sector accounts), which is an important economic indicator. These imports have made this balance very large and volatile, so it is difficult to interpret what it means for the Irish economy. For this reason, the CSO has developed a Modified Current Account for Ireland. This modified current account removes the large IP imports and other globalisation effects, to give a new current account that is more representative of the domestic economy.

It is helpful to see the current account in terms of investment of capital. Our current account with the rest of the world is the total saving (B8G) of the domestic economy less what is invested in capital formation (P5). 

Gross Saving - Investment = Current Account Balance.

This is an equation that holds for the economy as a whole, and since we can calculate saving less investment for each subsector of the economy (such as government or financial corporations), we can estimate the contribution of each sub-sector to the current account balance. 

When we remove the large foreign-owned corporations from saving and investment we have the saving less investment of domestic sectors. This gives us an approximate current account balance, as illustrated below. This is not exactly the same as the modified current account for the balance of payments. The sector accounts are based on the transactions of institutional units (such as a household or a company), while the modified current account approaches the adjustment using asset types (such as intellectual property or aircraft), and so the two approaches yield similar but slightly different results.

We can see from the figure that in recent years, households and corporations have saved more than they have invested in fixed assets in Ireland, so they contribute to a positive current account balance. This is particularly noticeable in the last two years as households have saved more. However, in 2020 and 2021, government saving was less than investment and this dragged down the current account balance.

In our data bank tables, gross value added at basic prices is broken down by institutional sector, economic activity (A21 sections of NACE Rev.2) and by component (compensation of employees and gross operating surplus at basic prices). (Basic price gross operating surplus is after the addition of taxes (D.29) and the subtraction of subsidies (D.39).) This allows for analysis within each sector and sub-sector. For example, figure 2.6 shows the compensation of employees paid by non-financial corporations by economic activity in 2021. As we might expect, most of the wages in Manufacturing and ICT come from foreign-owned corporations, but they also pay a significant minority in the wholesale and retail trade sector, and in Administrative and Support Services. On the other hand, in sectors such as Construction and Accommodation & Food Services, relatively little of the wage bill is paid by foreign-owned corporations.

The data by economic activity provides many insights into the structure of domestic corporations (S.11b).

• The sectors with the most value added for Irish-owned non-financial firms are in Wholesale & Retail Trade (18% of the total GVA in the sector in 2021); Manufacturing & Mining (13%); Professional, Scientific & Technical activities (13%) and Administrative & Support Services (13%).
• Administrative & Support Services, while adding more value overall, pays less in compensation of employees than Construction 
• In 2021, with the wage subsidy, many domestic sectors paid more in compensation of employees than they did before the pandemic. In the Professional, Scientific & Technical sector, employee pay was €878m (21%) higher than in 2019. However, in contrast, the Accommodation & Food Service compensation of employees was €666m (21%) lower than in 2019.  
• Corporations add more value than households in all sectors except Agriculture and Real Estate Services. Agriculture is dominated by family-owned farms, and most households are also owned by owner-occupiers. 

Both the gross profit (B.2g) and the wages (D.1) decreased in 2020 for domestically-owned corporations. In 2021, both of these rose back above their 2019 level.  The bar graph (left axis) in Figure 2.7 below illustrates the values of profits earned and wages paid in the sector. The line graphs (right axis) show the profit share, that is, the share of total GVA that is profit. The profit share of domestic-corporations rose during the pandemic, having been below the ratio for the overall Euro-area in earlier years. This rise was driven by higher profits in domestically owned Manufacturing and ICT companies. For Foreign-owned NFCs in Ireland (S.11a) the profit share is extraordinarily high, around 87% in recent years, reflecting the profit recorded in Ireland that arises from these companies' global operations. By separating out these firms, we can see that domestic corporations are within European norms. (Profit in Figure 2.7 is shown at factor cost (as in table ISA03) not basic prices (as in table ISA05), because the basic prices adjust for subsidies. In 2020 and 2021 changes in these subsidies were driven by the EWSS, which flowed straight through to workers and did not directly affect profit). 

Capital investment is an important indicator of likely economic growth since it is the acquisition of assets to be used in production in this and future years. The investment rate is calculated as the ratio of gross fixed capital formation (P51G) to gross value added (B1G). As we noted above, foreign-owned corporations have been bringing large capital investments to Ireland in recent years and this has driven up capital investment sharply. An investment rate for the NFC sector (S.11) as a whole reached 70% in 2019: this reflects the movement of Intellectual Property by multinationals within their group, and distorts any estimates for Irish NFCs. When we remove these corporations, the remaining domestically-owned corporations have been developing their fixed assets at a slower steadier rate. Figure 2.8 illustrates this investment rate for domestic corporations. In 2021, their €10bn invested in capital assets represents an investment rate of 17%. The EU-27 rate has been significantly higher at 24% in recent years. 

Return on equity is a measure of profitability of corporations in relation to the capital invested in them. A higher return on equity indicates the owners are getting a better return on their investment. For this indicator, 'profit' is gross entrepreneurial income (B.4G) less tax on income and wealth (D.5). This is divided by the balance sheet value of equity and investment fund shares (AF.5).

For non-financial corporations, the value for the Euro Area is around 20% in recent years (for Germany it averages over 50%). In Ireland it is much lower: 6% in 2021. There has been a trend for Irish-owned NFCs of high growth in equity value, while profits have grown also, but at a much lower rate.