After the contribution made by various classical economists that examined the business cycles from different angles like George (1879), Kondratiev (1925), Kuznets (1925), Keynes (1936), and Schumpeter (1939), just to name a few, the mainstream view on business cycle nowadays (Burns & Mitchell, 1946; Slutsky, 1925) mostly postulates that fluctuations of macroeconomic variables (e.g. GDP, employment, productivity) are mainly caused by aggregate shocks, since uncorrelated sector- or firm-level shocks cancel out if averaged over a large number of sectors or firms.

However, identified economy-wide shocks (inflation, wars, strikes, policy changes) are only able to explain a small fraction of the observed aggregate fluctuations (Cochrane, 1994). Recent studies (Acemoglu et al., 2012) provide the insight that in an economy where a few sectors serve as major input suppliers, specific shocks to these sectors can propagate (through input–output linkages) to generate aggregate fluctuations. Besides, the features of the business cycles have been proved to be usually non-linear (Morley & Piger 2006).

At a more microeconomic level, Gabaix (2011) made relatively recently a major contribution by positing theoretically (and proving empirically only for the US) the so-called “granular hypothesis”, which postulates that since modern economies are dominated by large firms, idiosyncratic (productivity) shocks1 to these firms may not cancel out on average. In fact, firm-level outcomes can lead to sizeable aggregate shocks that affect macroeconomic variables like GDP, employment and aggregate productivity.

This insight can have important implications for policies aimed at increasing economic resilience and competitiveness in countries with a large economic concentration, which are the ones where the granular effects are expected to be stronger than they would be in the US.

In this article we aim at testing (i) if granular hypothesis originally proven to the US economy, which is a large, sophisticate and diversified economy also holds in the case of Ireland, which is a small and largely open economies; and (ii) to what extent the economic structure of Ireland which has been featured by growth model strictly focused on attracting highly-productive multinational enterprises (MNEs) over the past decades. In this sense, we assume that the presence of a small cohort of large and productive MNEs within a narrow range of sectors in a small and open economy may had led to a large concentration of the Irish economy with significant impacts on aggregate performance.

For example, the unprecedented GDP growth of 26 per cent in 2015 (later revised to 34 per cent) was mainly driven by a few MNEs relocating their entire balance sheets to Ireland, containing intellectual property products. Associated with these relocations were significant increases in the contract manufacturing of goods exports attributable to Ireland. The unexpected increase in capital investment also had a knock-on effect on aggregate labour productivity, which went up by 23 per cent, and total factor productivity, which went down by 12 per cent, with respect to 2014 (Central Statistics Office, 2018).

Furthermore, the extreme granular impact of a few enterprises shows up in a number of other areas. Ireland's Revenue Commissioner's analysis reveals that 10 largest firms in Ireland account for almost 40 percent of corporation tax receipts in 2017. Ireland's export base in terms of the range of products and destinations, and the profile of exporters, also appears relatively concentrated. Furthermore, data from the Ireland's Central Statistics Office (CS) shows that the top five exporters accounted for almost one-third of all goods exports in 2016.

From a more granular perspective, recently published firm-level research (Papa et al., 2021) showed that the top 10 per cent of firms in Ireland, by gross output, account for 87 per cent of value added and 73 per cent of employment in manufacturing. In services, the contributions to value added and employment from the largest firms is higher than manufacturing, with a share of approximately 96 and 87 per cent, respectively.

Another measure of market concentration is the Herfindahl–Hirschman Index (HHI),2 where Ireland scored in 2011 the highest value in both manufacturing and services compared to other advanced economies like France, Germany, Italy, Denmark, Netherlands and Japan. Overall, value added, employment and the HHI are more concentrated in Ireland than in the other OECD countries for which comparable estimates exist.

The same research shows that the top performing firms in manufacturing (defined as those located between the 90th and 100th percentiles of the labour productivity distribution) account for 70 per cent (on average) of aggregate productivity over the period 2006–2014, and just under 80 percent in 2014. In services, the impact of the most productive firms on productivity is lower than in manufacturing but is nonetheless substantial. The top 10 per cent most productive firms in services account for 46 per cent (on average) of aggregate productivity over the period, trending upwards after the crisis from 37 per cent in 2008, to 56 per cent in 2014.

All of the above statistical facts and estimates point in direction to confirm the hypotheses mentioned above.

This productivity research based on a micro-aggregated approach, although one of the first ones in Ireland, was carried out on an original sample of surveyed firms operating in selected sectors (mainly manufacturing and non-financial services) over the 2006–2014 period. As such, it was not intended to be representative of all sectors in the Irish economy. Nor was it aimed to link firm-level shocks to aggregate fluctuations in Ireland.

Therefore, the main objective of this research paper is (1) to test granular hypothesis for the US, now in the case of an open and small economy like the Irish one; and (ii) to what extent (unexpected) productivity shocks to multinational businesses may have a stronger impact on macroeconomic variables like GDP and, more importantly, aggregate (multifactor) productivity than the ones observed in larger and more diversified economies.

Papa, J. (2024) “Looking Under the Carpet: Exploring the Unusual Productivity Growth in Ireland”. Transnational Corporations Review. Volume 16, Issue 3, September 2024, 200062, Elsevier B.V. Amsterdam.v https://doi.org/10.1016/j.tncr.2024.200062