Written answers

Tuesday, 26 June 2018

Department of Finance

Contract Manufacturing

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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116. To ask the Minister for Finance when his attention was drawn to the potential effects of contract manufacturing on GDP figures in 2017; and if he will make a statement on the matter. [27776/18]

Photo of Paschal DonohoePaschal Donohoe (Dublin Central, Fine Gael)
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Ireland’s national accounts data, including GDP, are prepared by the Central Statistics Office which is independent. They are prepared in accordance with EU and international standards currently in place.

Contract manufacturing is a form of outsourcing whereby an Irish-resident firm engages a company abroad to manufacture goods on its behalf (and vice versa).  Crucially, for the purposes of calculating GDP in accordance with the standards, the inputs used in the production process, including the valuable intellectual property rights, remain in the ownership of the Irish-based entity and no change of economic ownership is deemed to take place during the production process.  

Putting it another way, the foreign-based contract manufacturer supplies a manufacturing service to the Irish-based company and the former never takes ownership of the product. When these goods are finally sold in a third country, a change of economic ownership is deemed to take place and the transaction is recorded as an export from the Irish-based entity for the purposes of GDP estimates. It is important to stress that while this activity inflates Ireland’s exports and GDP, it has almost no impact on Irish living standards as it generates little or no domestic activity/employment.

Contract manufacturing has been a feature of the Irish national accounts for over a decade.  However, the phenomenon has been especially noticeable since 2015 following the relocation by a small number of firms of their entire balance sheets to Ireland (with the balance sheets mainly consisting of high income-generating assets such as intellectual property). These firms appear to engage in outsourcing by way of contract manufacturing.

My Department has been aware of contract manufacturing for a number of years and in particular since the release of the 2015 national accounts which clearly illustrated the potential effect of contract manufacturing on GDP.

In this context, high frequency indicators such as industrial production have been poor leading indicators for contract manufacturing in recent quarters. As a result, the actual impact of contract manufacturing on the full year GDP figures last year only became apparent when the quarterly national accounts for the fourth quarter of 2017, incorporating preliminary full year GDP estimates for 2017, were released in March 2018. The final figures for 2017 will be contained in the National Income and Expenditure 2017 results expected to be published by the CSO in July.

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