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National Costs in a Global Economy

Dell Inc., the American computer manufacturer, is moving nearly half the jobs it has in Ireland to Poland. The move reduces Dell’s costs. It also sends a powerful message to the Irish and to other nations.

Ireland initially attracted Dell to manufacture in Ireland in 1990. Dell built a manufacturing facility in Limerick. Over the last few years, it has become the second biggest foreign employer in Ireland. Ireland’s low corporate tax rate and well educated workforce originally attracted Dell. Things have changed since 1990.

Ireland has now become a much costlier place to do business. (See the Symptom & Implication, “Some competitors seek price increases more aggressively than others” on StrategyStreet.com.) Yes, its corporate tax rate remains low, at 12.5%, but labor costs have increased and productivity has fallen. Energy costs have risen as well. The quality of the country’s infrastructure has slipped. And, very importantly, there is now more business regulation. All of these changes have reduced Ireland’s competitive position compared to other countries.

The result: more jobs in Poland and fewer jobs in Ireland. The Poles offer a lower cost structure than the Irish. In an international market, jobs can and do move. (See the Perspective, “Can We Raise Margins with a Price Increase” on StrategyStreet.com.)

As the U.S. contemplates changes in its labor regulations, it should heed the warning of this Irish situation. If labor prices go up faster than labor productivity, national jobs inevitably evaporate into the global ether.

Posted 2/9/09

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