Ireland How the Celtic Tiger Became the World's Software Export Champ

No country exports more software than Ireland. The country’s success is based on a combination of geographical factors, state subsidies and a clever fiscal policy.
Von Kevin Hoffmann

Seamus Gallen grabs one of the chocolates served after a three-course, €70 meal at Dublin's L'Ecrivain restaurant. He shrugs his shoulders: "Ireland literally napped its way through the industrial revolution." Gallen laughs. But that won't happen again, he says. In this digital age, Ireland is among the world leaders. In fact, these days, even Chinese officials want to get the inside scoop from Gallen: What's Ireland's recipe for success?

Gallen, a slim computer scientist with a full white beard, is an expert on the software industry and works for Enterprise Ireland, a government agency responsible for industrial development. Just two years ago, Gallen says proudly, guests from the Far East probably wouldn't have found his country on a map, even with a magnifying glass. Now they're coming in droves, "trying to find out why we are the world's largest software exporter".

When it comes to sales of computer programs, either on CD or purchased by download, Ireland has surpassed the United States, the new Asian giant India as well as up-and-coming information technology superstar China. In 2003, Ireland exported bits and bytes worth €14 billion -- and, according to industry observers, that figure is increasing.

What makes this success even more surprising is the fact that Ireland is about half the size of Germany's Bavaria, the state of laptops and lederhosen, and that its population of 3.7 million is just a little bit larger than that of Germany's capital, Berlin. As such, there's no significant domestic market that could help explain Ireland's booming software sales.

So why are masses of investors pouring in, and why is Europe's Silicon Valley emerging here, on the Emerald Isle, of all places?

About 20 years ago, right at the start of the IT sector's emergence, the inherent advantages of Ireland's location and business-friendly climate attracted US investors. Geographically and in terms of language and culture, Ireland's one of the European countries closest to the United States.

Gallen seems to be mentioning all that in passing. He prefers to tell the visiting Chinese, Hungarians, and Latvians about young people in Ireland, who are currently enrolling for degress in technology en masse. Gallen also cites low taxation and the government's active economic policy as reasons for Ireland's booming software industry.

Ireland's rise as a big player in the software business began in 1985, when Microsoft was looking to get a foot in the door in Great Britain, Germany, and France. "But those countries only viewed software as a sort of appendix of the hardware industry," says Terry Landers, spokesman for Dublin's Microsoft office.

The Ireland of the mid-1980s was still trying to come to terms with the "difficult heritage" of its collapsed steel and automobile industries, says Landers. Ireland was open-minded about new technologies and focused on them, he says. Employers were also in an excellent position at the time because there were plenty of well-educated, English-speaking unemployed people hungry for jobs and willing to learn new skills.

"At that time, the Celtic Tiger hadn't been born yet," Landers adds. The days when Ireland was a low-wage country have long since passed, and Microsoft now increasingly outsources less-sophisticated programming tasks to countries with cheaper wages.

The 1,200 Microsoft employees in Dublin hail from 44 countries and work in a huge building made of light-colored concrete and flooded by bright lights. The workers here have little fear of losing their jobs and little reason to. Many of the "localized" products, which are translated from English and adapted to the markets in mainland Europe, Africa, and the Middle East, are produced in Dublin.

In total, there are now nearly 1,000 software companies in Ireland. About 200 of them are from abroad and those firms account for 90 percent of the country's total software-related revenues. But more than anything else, Gallen's Chinese guests want to know how domestic high-tech companies are emerging in this environment dominated by international software players.

Part of the answer lies deep inside Ireland's capital, at the Digital Depot, which has been installed in the rennovated offices of the former Guinness printing press. It's about 10 minutes by foot from downtown Dublin, right in The Liberties, a somewhat run-down district. The small firm Havok is also based here. Among other products, it also develops software for Xbox gaming consoles made by Microsoft. Visitors coming to The Liberties can see what an "active economic policy" really means: Dying industrial sites are revived with state funds, and semi-public business institutes lure in small firms with venture capital. In addition, five- and 10-year economic plans, are intended to prevent the government from pulling out at the first sign of setbacks.

Five years ago, Prime Minister Bertie Ahern's business-friendly, conservative government launched one of the country's largest urban redevelopment projects, creating the Digital Hub. Using €130 million worth of taxpayer money and backed by private sponsors, the government bought entire city blocks. Then, in 2004, it built a 3.5 kilometer fiber-optic network, which enabled faster Internet connections. Today, 40 small businesses are based in the area.

"Everyone here pays rent, the project is self-sufficient and our space is completely booked out," says Hub manager Stephen Brennan. Just recently, Brennan had to turn down an application from Google, one of the biggest Internet success stories. The company wanted to open an office for 200 employees in the Hub. But currently, only one in four applicants vying for space there can be accepted.

By 2010, some 200 small businesses are expected to have moved into the Digital Hub, creating as many as 5,000 new jobs. A construction company has already begun demolishing and rebuilding some of the other Guinness buildings in the area.

Ireland's success story is by no means limited to the software industry -- software is only the glamorous front to the country's fast-growing economy. In 2004, the domestic economy grew by nearly 5 percent, and unemployment is almost non-existent.

Over the past three decades, the country has come a long way: In 1973, Ireland joined the European Union as its poorest country. It was a country dominated by agriculture, and economically dependent on a neighbor which traditionally has hardly been popular in the Irish Republic: England.
Much to the disgruntlement of other EU states, Ireland's government went straight to work on its fiscal policy. The most important move: Ireland slashed its corporate tax, which is now 12.5 percent. At the same time, the country invested heavily in education, a move that's had a massive effect, as six out of ten high-school graduates now complete a university degree.

Low taxation and well-educated young people are attractive conditions for IT companies and chip-makers like Dell, Hewlett-Packard and IBM. Intel alone is currently investing $2 billion and is building its largest chip plant outside the US in the Irish town of Leixlip. Software giants like Microsoft, Oracle and SAP also value the business environment here. Germany's SAP, for example, came to Ireland in 1997. It runs a Global Support Center in Dublin and in the university town of Galway on the Atlantic coast.

Many corporations not only tap into the competence of the country's English-speaking IT specialists; they also take advantage of the numerous and legal tax shortcuts. Some software companies have the pre-stages of their product programmed in Bangelore in India and then pass it on cheaply to their Irish subsidiary, which then gets the product ready for market entry, before burning it on CDs and shipping it around the globe.

But there's more to the Irish success story than investments by U.S. and German software giants. Domestic start-ups are increasingly experiencing an upswing as well. Take Fineos, a company that makes software for banks and insurance companies. In 2004, founder Michael Kelly was named Ireland's "Exporter of the Year". Kelly belongs to the generation of Irish who are in their early 40s and left the country after their university studies -- or even before. In those days, they had no choice. There was no work for them. That's a different story now. However, as Kelly points out, "fortunately" many young Irish still leave their home country for a few years and then return with some valuable, additional experience gathered abroad.

Kelly himself worked in Australia in 1980 before moving on to the Netherlands and Denmark. The entrepreneur still benefits from the contacts he built up early in his career: Fineos' customers include Zurich Financial and the Allianz Group. In 2004, Kelly's company recorded revenues of €17 million, netting a profit of €500,000.

Largely, it is small companies with up to 200 employees, headed by software entrepreneurs who have returned to the Emerald Isle that are successful on the global scale. And many focus on highly specialized business areas. Managers at these companies feel inspired by "Ireland's entrepreneurial spirit," says Kelly. That includes the desire to get a good education, to gain some experience abroad, and the will to get back on their feet after a project may have failed.

Paul Kerley is a good example: the entrepreneur had reached the end of the road. Two weeks before the date set for the Initial Public Offering of his company Norkom Technologies, he cancelled it. When the dotcom bubble burst, years of state funding seemed to vanish into thin air. Kerley fired employees and then started a slow rebuilding process. He managed a turnaround: These . They are used by companies like VISA and government agencies such as the US Department of Homeland Security.

From his office, the sturdy manager squints into Dublin's springtime sun and starts waxing philosophically. Currently, Ireland's economic masterminds and leaders are trying to determine the best future course for the country: should it adopt the free-market approach of other technology centers like Boston or should it adopt the controlled economy, export-oriented approach favored by Germany, the world leader in exports?

With self-confidence in his voice, Kerley advocates the third way: "And that's the road through Dublin." In other words, the country seems well on its way to establishing its own economic model.

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