Ireland's labor productivity grew by 63 percent from 1995 to 2002,¹ making it the economic star of Europe. Yet our research finds that 70 percent of this growth came from foreign-owned companies. Although dynamic, such companies contribute just under a quarter of Ireland's GDP and employ only 15 percent of the country's workforce (exhibit).

Most of the Irish find employment in services for domestic consumption, where productivity is far from stellar. In retailing, for instance, it falls below the average of the EU-15.² In retail banking, our research found that productivity in Ireland stood at roughly half the level in Belgium and Sweden—the two countries with the highest productivity in this sector. Service providers may argue that they can't exploit economies of scale in Ireland's relatively small economy. But Finland, with a comparable GDP, exceeds the EU-15's overall average service productivity by 26 percent. Ireland beats it by just 7 percent.

Services are the best source of long-term employment and economic growth for developed economies. Ireland's performance may be less starry in the future unless policy makers reform the service sector. Examining product market regulations that discourage new competitors from entering it would be a...