As pointed out in a previous post yesterday, “the Irish financial sector appears diverse enough to weather the storm, with a range of companies in the IFSC compensating for a weakened domestic banking sector.” The financial sector in Ireland looks like it’s not doing as bad as we thought, and, there are some signs that the same goes for a variety of related advanced producer services related to the financial sector such as consulting, accounting and auditing, legal services …etc. One of the sub-sectors that has developed in Ireland parallel to the financial and banking sectors during the boom years and that seems to still be going strong despite the financial crisis and the recession is that of financial software. This is an increasingly key element of the financial industry, in particular with respect to activities that generate most benefits such as trading (where it’s all about how fast you can get the best information on markets and how fast you can buy and sell bonds, shares, futures, currencies … i.e. ‘things’ that only exist in a virtual manner… with money that you only virtually possess – that may be a bit of a caricature, but not so far from reality). Hence the importance of specialised financial software packages to manage the flow of information upon which financial industries rely as well as the flow of trades.
The reason for the growth of the financial software industry in Ireland since the 1990s and in particular in the 2000s has to do with agglomeration economies and is mainly two-fold: on the one hand it is obviously linked to the boom of the financial sector including through the creation of the IFSC in 1987 dedicated to the provision of a wide range of financial services such as banking, asset financing/leasing, corporate treasury management, asset management, custody and administration, securities trading and international insurance and assurance activities (including a highly favourable corporation tax regimes for companies that decided to locate there until December 2000 when the 12.5% corporation tax was applied to all companies across the Republic); on the other hand it is linked to the earlier development of a broader software industry since the 1980s (based itself on the growth of foreign direct investment in electronics manufacturing in the previous couple of decades, encouraged and facilitated by a national policy) which set up the conditions and fostered the expertise for the growth of the subsector of financial software.
The sector grew strong throughout the 2000s, and does not look as if it has been weakening since the beginning of the financial crisis in 2008. If one looks at recruitment websites, there are many job opportunities advertised in this sector. And this is not only in those firms that were present in Ireland before the crash; new firms have established operations in Ireland in the past couple of years, for example BSB in September last year (2009), which created 20 jobs, or Fi-Tek just a month ago (September 2009), which is establishing its European headquarters in Dublin and is to create 50 jobs there in the next 5 years.
Although the growth and strength of the financial software industry in Ireland should be seen as an asset for the country and for its economic recovery – which is why they have been targeted by strategic IDA investments (even though, admittedly, the sector is very unlikely to create thousands of jobs directly… but has the potential to continue to generate some employment and links with other industry so as to enhance Ireland’s profile as a world leader in that sector – see, for example, Sean O’Riain’s book on high-tech growth for more details — it is important to note that the geography of this economic sector in Ireland is highly uneven. On the one hand, the majority of, if not all, financial software firms are located in Dublin, mostly very close to the IFSC where some of their clients (banks and other financial institutions) are based, although with the weakening of the sector in Ireland, most of their clients are now firms based in the UK and continental Europe. We should note here that the broader software industry itself is highly concentrated in and around the Dublin metropolitan area, both in terms of number of firms and employment (see maps below).
So the financial software industry is very unlikely to help address regional imbalance in the distribution of growth and employment in Ireland. On the other hand, most of these firms are not Irish. A lot of them are US multinationals with operations in a few European cities including Dublin to cater to their European clients – e.g. Fi-Tek, ITG …etc – but also European companies – e.g. BSB is a Belgian company (although operating through Luxembourg), Murex is a French firm with offices in Dublin …etc. One is left to wonder: why are Irish software companies absent from the field? Why don’t we see indigenous software firms tapping into that subsector of the economy that is almost entirely left to US and other European companies?