Ireland's Dependence on Foreign Direct Investment - A Warning from the US

Is the writing on the wall for US Foreign Direct Investment in Ireland? If it is, what are the alternatives for our economy - 90% of Irish exports are from FDI firms. Michael Hennigan reported on this today -

http://www.finfacts.ie/irishfinancenews/article_1015171.shtml

Quote :

Senior economic advisor to Barack Obama and former US Under-Secretary of Commerce for Economic Affairs, Dr. Robert Shapiro said on Tuesday: "Ireland must wean itself from dependence on FDI," while addressing a seminar 'FDI: What's the Forecast?' hosted by UCD Business Schools. Shapiro along with Irish and international experts from Wyeth, Intel, CRH, Citibank and UCD explored the challenges facing Ireland in its fight to retain FDI (Foreign Direct Investment) and the solutions we must embrace to remain an attractive investment location for international firms.

Shapiro predicted that a highly skilled, English speaking workforce is the key to giving Ireland an advantage over all other states competing for FDI. He said, "Ireland is the greatest economic success story in the last fifteen years and it will continue to be an attractive site for FDI as long as it continues to provide the caliber of graduate that foreign investors have come to expect."

Commenting on what lies ahead for FDI into Ireland, Shapiro said, "Ireland must wean itself from dependence on FDI. A low corporate taxation rate is not the most important factor moving forward, it goes beyond that. The next stage is not FDI but a series of policies that actively promote spillovers from FDI corporations to Irish indigenous firms. The best way forward is for young Irish people to become entrepreneurs and force existing business to compete and become the best in the world. If you look at the Chinese model, FDI is a transitional strategy, not an end game strategy, that creates a lasting impact. The key to Ireland's next stage is to make the entire economy a modern economy and not one that depends on the success of foreign companies."

About 10 years ago I was involved in research on what decides FDI locations: attractive taxation regimes and set-up grants were the main factors. EU competition law prevents us from using grants in they way we did formerly. The corporate tax rate is the main attractor, more so than ever now that Ireland is in other respects one of the least competitive locations in the EU.

The Culliton Report and previous studies from the pre-boom era recommended strongly that the indigneous Irish manufacturing sector should be developed as priority. That has not happened and we are more reliant on FDI than ever. With unemployment increasing at a faster rate than any time since 1975, where is our next generation of jobs going to come from?

Friends! Greetings from an internet cafe in Temple Bar!

This topic came up at the Leviathan discussion last night. It seems to be universally accepted that FDI is unquestionably a good thing. Does anyone know where the figures are reliably set out/?. I.e. after tax concessions, subsidies, grants and other inenctives are weighed up against jobs is it always the case that Ireland comes out ahead? It'd be interesting to see a sectory by sector - nay company by company analysis of exactly how much is given to 'investors'. Ireland is massively in a net loss situation with Shell etc, despite jobs, and I suspect it also the case with some pharmaceutical and other medical companies.

Aragon wrote:

Friends! Greetings from an internet cafe in Temple Bar!

This topic came up at the Leviathan discussion last night. It seems to be universally accepted that FDI is unquestionably a good thing. Does anyone know where the figures are reliably set out/?. I.e. after tax concessions, subsidies, grants and other inenctives are weighed up against jobs is it always the case that Ireland comes out ahead? It'd be interesting to see a sectory by sector - nay company by company analysis of exactly how much is given to 'investors'. Ireland is massively in a net loss situation with Shell etc, despite jobs, and I suspect it also the case with some pharmaceutical and other medical companies.

Very interesting question Aragon. I wonder if it is possible to answer. A substantial part of the Irish work force is taken up with FDI employment. If this was not the case, is there any possiblity that Irish manufacture would have developed more strongly? FDI is definitely responsible for population increase in Ireland, and to that extent, a larger tax take. But there are definitely costs, and the cost of having the lower corporate tax rate itself. I wonder has research been done on this ?
Hope you enjoyed Leviathan, btw.

It would be a very tricky question to answer and alot of research would be involved. I would be surprised if someone was not working on it for a thesis though. It is difficult to differentiate all the different monies floating around economies, particularly in regard to secondary fees, expansion of accountancy, legal services etc etc.

johnfás wrote:

It would be a very tricky question to answer and alot of research would be involved. I would be surprised if someone was not working on it for a thesis though. It is difficult to differentiate all the different monies floating around economies, particularly in regard to secondary fees, expansion of accountancy, legal services etc etc.

I've no idea how private companies have to account for how they use public money - but looking at the laxity with which the 450 billion has just been awarded with the banks in a country-destroying financial crisis, it makes the hair stand on end to think what must have been going on up til now. Just a few years ago, the government had to admit that 10 billion had gone 'missing' in roads overspend that they had no way of accounting for. That money has beyond question gone into the hands of private enterprise.

There is a massive amount of research, but a lot of it assumes that FDI is good for the host economy. From 2004 on, there has been a big global shift to locating FDI in developing economies.

http://www.finfacts.com/irelandbusinessnews/publish/article_10003456.shtml

http://www.oecd.org/dataoecd/4/7/34383945.pdf

http://www.merit.unu.edu/publications/pb/unu_pb_2006_10.pdf

There is lots of research on clear FDI, I think I even have an essay on it somewhere that I wrote during my undergrad, but is there much on the absolute value of FDI to Ireland? There are a huge amount of spin off industries from FDI - Legal, Accounting, Transport, Telecommunications, IT, Packaging etc all of which are domestic companies but heavily reliant on FDI in that if the FDI were to withdraw so too would their business.

johnfás wrote:

There is lots of research on clear FDI, I think I even have an essay on it somewhere that I wrote during my undergrad, but is there much on the absolute value of FDI to Ireland? There are a huge amount of spin off industries from FDI - Legal, Accounting, Transport, Telecommunications, IT, Packaging etc all of which are domestic companies but heavily reliant on FDI in that if the FDI were to withdraw so too would their business.

Some of the research I linked suggests that Irish indigenous industry might have declined as a consequence of the focus on FDI. The problem with this type of problem is that it involves "what if" thinking. Chaos theory says if you change one element, this may change everything else. It may have been the case that an alternative focus on developing indigenous manufacture would have been more sustainable, but can you think of any country comparable to Ireland that has built a strong indigenous sector in the last 20 years? Personally, I now think a much more balanced approach with more focus on local development, linked to FDI, would have been the right choice - but hindsight is brilliant, isn't it? Ten years ago I was convinced the FDI route was wrong-but I went on to change my mind in the light of what happened up to 2002. I was wrong.

Oh I'm not defending FDI, in fact quite the contrary. I think, and always have done, that we needed to use FDI which always has the potential to be transitory, to expand and diversify domestic enterprise. My point was merely that the Irish economy, as it currently stands, is perhaps even more dependent on FDI than bare statistics on FDI levels might suggest. That is not a good thing.

Hmm. Our politicians have concentrated on FDI, because that way you get to announce "400 new jobs in Ballymuck", which sounds good, wins votes, etc. To be fair to them, the Irish environment is pretty good for indigenous small businesses - the Revenue, for example, is much friendlier here than elsewhere, it's pretty straightforward to set up a company, and company taxation isn't onerous - but as a small Irish company you do have to compete with the foreign multinationals for talent, which is expensive and wearing, and, even more unfortunately, anyone with money to invest in the last 7-8 years has been putting it into property, not small businesses. I put £5K into a business back in 1997, and lost it when the company folded in the dot-com crash in 01. If I'd put that in property, I would have come out well ahead even now.

So we've been starved of people by the large FDI companies, and starved of capital by the property boom, because our politicians were concentrating on (our) easy votes and our people were concentrating on easy money.

ibis wrote:

I would have come out well ahead even now.

I have a neighbour, who back in the 70s set up a tech firm in the West of Ireland. Started out small, but by the 90s was employing 300 people. The biggest employer in town.

Last year he sold the company to a German firm. He was being undercut anyway by competitors in India, so it was probably best to get out now. He made a particular effort to ensure his staff were either retained or got generous compensation.
When the company was sold he got a few million and was happy.

Afterwards he found out another neighbour also got a million euro last year for selling a couple of acres of land he'd been left.

He related the story to me and told me he was quite bitter. Bitter that there is not enough support for entrepreneurs in Ireland.
And that there is something wrong with capitalism when apartments on a site is worth more than a factory on that site.

eoinmn wrote:

ibis wrote:

I would have come out well ahead even now.

I have a neighbour, who back in the 70s set up a tech firm in the West of Ireland. Started out small, but by the 90s was employing 300 people. The biggest employer in town.

Last year he sold the company to a German firm. He was being undercut anyway by competitors in India, so it was probably best to get out now. He made a particular effort to ensure his staff were either retained or got generous compensation.
When the company was sold he got a few million and was happy.

Afterwards he found out another neighbour also got a million euro last year for selling a couple of acres of land he'd been left.

He related the story to me and told me he was quite bitter. Bitter that there is not enough support for entrepreneurs in Ireland.
And that there is something wrong with capitalism when apartments on a site is worth more than a factory on that site.

Your neighbour sounds very like "the boss" on the other thread

I found this on finfacts today - it shows the extent to which Ireland is used as a tax haven by companies like Microsoft.

http://www.finfacts.ie/irishfinancenews/article_1015201.shtml

It seems the actual level of Foreign Direct Investment has increased in this country by over 10% to €131 billion last year. Services dominated the stock of inward investment with a huge increase from the United States driving the overall advance. Earnings also advanced in this period.

Full Report here.

eoinmn wrote:

ibis wrote:

I would have come out well ahead even now.

I have a neighbour, who back in the 70s set up a tech firm in the West of Ireland. Started out small, but by the 90s was employing 300 people. The biggest employer in town.

Last year he sold the company to a German firm. He was being undercut anyway by competitors in India, so it was probably best to get out now. He made a particular effort to ensure his staff were either retained or got generous compensation.
When the company was sold he got a few million and was happy.

Afterwards he found out another neighbour also got a million euro last year for selling a couple of acres of land he'd been left.

He related the story to me and told me he was quite bitter. Bitter that there is not enough support for entrepreneurs in Ireland.
And that there is something wrong with capitalism when apartments on a site is worth more than a factory on that site.

Was that **** by any chance ?

EDIT : Removed Company name based on johnfás post below, as it is not in public domain.

Let's not speculate too much on specific firms and their reasons for doing different things, unless it is in the public domain.