Published: January 2019
This report examines how the capacity of firms to absorb shocks can be assessed using detailed firm-level patterns of risk exposure across Ireland and Northern Ireland. Although we cannot make predictions on the response to cost or demand shifts for any individual firm, we can provide a broad sense of exposures by looking at combinations of some of the main measurable factors that determine firm performance and flexibility. Combining our shock absorption capacity indicators with information on cross-border and EU trade flows provides insight into how dispersed across firms a post-Brexit shock to trade costs might be. It also reveals the extent to which this might be clustered in firms that have varying abilities to deal with changes in their external environment.
The risk assessment method we adopt is a form of heat-map, which indicates the distribution of firms along two different dimensions, those performing strongly, and those that are most likely to be vulnerable to any negative shock to their demand or cost base. The dimensions used to categorise the firms are sales growth and profit margin. Firms are ranked by performance against these two factors from lowest to highest and divided into five groups according to their potential ability to absorb shocks to demand or costs. The five groups are:
|Grp|| Profit Margin +
|Risk Matrix Group|
|1||Lowest margin /
Capacity / Highest Risk
Capacity / High Risk
Capacity / Medium Risk
Capacity / Low Risk
|5||Highest margin /
Capacity / Lowest Risk
In the discussion which follows, firms in high risk groups are considered to be groups 1 and 2 from the summary graphic above, with group 1 being the highest risk group. When noting firms in all risk groups, we consider groups 1 to 3 combined. Lower risk firms are groups 4 and 5, with 5 being the lowest risk group.
The key findings of this report include:
- Goods firms tend to have higher levels of productivity than services firms and, amongst Irish firms, those which are foreign-owned show a much higher degree of productivity compared to domestic firms.
- Export participation is found to be a strong indicator of higher productivity for all firms in Northern Ireland and for services firms in Ireland.
- Irish goods firms have a productivity distribution similar to those in Northern Ireland when domestically-owned firms are considered. Foreign multinationals located in Ireland have considerably higher productivity.
- Firms exporting more broadly are systematically more productive.
See Sections 2.1 to 2.3
RISK BY FIRM SIZE
- A risk profile of firms based on profit margins and sales growth performance shows smaller firms tend to be more exposed to shocks.
- We find that the share of firms in the highest risk category (lowest absorptive capacity) is greater than the share of employment, meaning that smaller firms are more represented in this category. This pattern is found for both goods and services firms in Northern Ireland and Ireland.
See Sections 3.3 and 3.4
GOODS FIRMS SHOCK ABSORPTION CAPACITY
- 35.5% of Irish goods firms are in the lowest risk group, i.e. with the highest absorptive capacity, compared to 26.5% for Northern Irish goods firms.
- Conversely, 44.6% of Irish goods firms and 50.7% of Northern Irish goods firms are in an at-risk group.
- 5.5% of Northern Irish goods firms are in the highest risk category, with 7.4% of Irish goods firms in this highest risk group.
See Section 3.3
SERVICES FIRMS SHOCK ABSORPTION CAPACITY
- The proportion of services firms in at-risk groups is similar for Ireland and Northern Ireland (at 47.2% and 46.1% respectively).
- The share of Northern Irish service firms falling into the highest risk category is reasonably similar to that of goods firms, at 5.8%, although they represent a smaller share of the services employment at 3.6%. This suggests that in services, even more so than in goods, smaller firms are most exposed to shocks.
- Irish services firms show a slightly lower percentage of firms (4.4%) in the most at-risk category, accounting for 2.6% of employment in the sector.
See Section 3.4
CROSS-BORDER TRADE SHOCK ABSORPTION CAPACITY
- North-South trade is quite dispersed across almost all levels of shock absorption capacity. This implies that any disruption to this trade flow would be widely felt across firms.
- 48.8% of Irish goods exports to the UK come from firms in the lowest risk group, compared to 14.1% of exports from Northern Ireland goods firms to Ireland.
- 30.3% of Irish goods exports to the UK are in overall at-risk categories (groups 1-3), compared to 62% of exports from Northern Ireland goods firms to Ireland.
- 26.5% of Northern Irish services exports to Ireland are accounted for by firms in the higher risk categories and a further 48.5% are carried out by firms in the medium-risk group 
- 72.8% of Northern Ireland’s goods imports from Ireland are undertaken by firms in at-risk categories with 44.9% by firms in the higher risk categories, compared to 29% of Irish goods imports from the UK in overall at-risk categories (with 12.7% in higher risk categories). This suggests that any equivalent-sized shock would have more dispersed effects in Northern Ireland, with a greater share of firms exposed relative to Ireland.
See Section 4.3
EAST WEST TRADE SHOCK ABSORPTION CAPACITY
- Trade between Northern Ireland and Great Britain, and between Ireland and the UK is relatively highly concentrated in the lower risk groups of firms.
- 7.8% of Northern Ireland goods export sales to GB and 16.3% of imports are undertaken by firms in the higher risk categories. The data suggests that trade with Britain tends to be concentrated in firms with higher risk absorption, whereas cross-border trade is carried out across firms of all risk categories with a higher percentage in at-risk categories.
- For Irish goods firms, there is greater concentration of both exports and imports amongst firms with greater capacity to absorb shocks, with 48.8% of exports to the UK accounted for by the least at-risk group and 45.4% of imports accounted for by this highest capacity group.
- 12.7% of imports from the UK to Ireland are in the highest risk categories.
See Section 4.3
EU TRADE SHOCK ABSORPTION CAPACITY
- For NI goods firms, 43% of exports to the rest of the EU are accounted for by firms within the higher shock absorption capacity (lowest risk) groups. Firms in the lower risk absorption capacity (highest risk) groups, on the other hand, account for 10.9% of the exports of goods firms to the rest of the EU, with a total of 57% of exports to the rest of the EU being undertaken by firms in overall at-risk categories.
- The share of exports to the EU generated by NI services firms with a low-risk absorption capacity is greater, with 26.4% coming from higher-risk firms and 10.1% of exports coming from the lowest performance group. Overall, a total of 68.1% of services exporters to the EU are in an at-risk category.
See Section 4.4
The findings of the report imply that small, largely locally orientated firms with some cross-border trade are likely to be most exposed to any changes in trade costs.
 Equivalent service exports data for Ireland to Northern Ireland trade not available.
Click here to download the full report: ITI Capacity Report