Amid low growth forecasts and Eurozone uncertainty, job announcements represent a rare good news story for the Irish media to report on. So far this year, as was the case in 2011, it has been foreign direct investment (FDI) that has generated the majority of column inches.
According to the most recent IDA figures, there have been over 40 new FDI projects announced in Ireland so far this year. These range from the massive announcements from the companies such as Paypal, Amgen and Eli Lilly, to smaller scale projects from emerging technology firms. However, a key element they all share is job creation.
As such, it can be frustrating to read commentary around Ireland’s so-called reliance on FDI, or the persistent inference from some quarters that the Government and its agencies should be refocusing their agenda towards domestic industry.
FDI and indigenous industry: Not a zero-sum game
This is frustrating for a number of reasons. Firstly, as a result of its job-creating properties, FDI has never been more important to Ireland than it is now. Indeed, Ireland can and should compete for even more FDI jobs than it currently wins. Secondly, a focus on FDI should not be set against the domestic economy in some sort of either-or or zero-sum approach.
Certainly, no country or its government should be overly reliant on any one sector for job creation. However, companies do not invest in Ireland at the cost of domestic industry. In fact, they do the opposite. They support it. For every job directly created by FDI in Ireland, a multiplier effect of around two applies. As such, of the 13,000 new jobs announced by the IDA in Ireland last year, the real net job creation figure is closer to 25,000.
Take the gaming sector, for example. Ireland is now home to three of the top five global gaming companies, with these companies responsible for significant job creation in recent years. However, around this cluster, an estimated 20 new Irish gaming start-ups have also emerged, each of which have created employment.
This cluster effect, as it is known, is a key part of Ireland’s FDI success story, and belies the argument that growth in the FDI segment and growth in indigenous industry are mutually exclusive. The cluster effect is also entirely virtuous, where the success of the existing players (and the strength of the support industry around them) encourages others to join the cluster – thus creating more employment.
In this respect, instead of debating whether Ireland is becoming overly-reliant on FDI, Ireland should be asking itself how it can attract more investment, and more jobs, to its shores.
Every year, around one million new jobs are created annually through FDI. In fairness to Ireland, it already punches above its weight in this regard, with only Singapore winning more FDI jobs per head of population. Also, Ireland is the only country to have received external financial assistance to have a higher level of FDI now than before the economic crash, which indicates the resilience of the sector to the vagaries of the domestic economy.
However, if Ireland plays its cards right, it could win many more. For example, if Ireland could double the amount of FDI jobs created annually from 13,000 to 25,000, and apply the multiplier effect, the impact on the unemployment rate would be extremely significant. For Ireland to realistically aspire to this goal, it is essential that it genuinely understands the needs of international business.
The cornerstones of Ireland’s FDI success
According to a report published by MOP earlier this year, authored by the Economist Intelligence Unit (EIU), four key cornerstones support Ireland’s FDI proposition. These cornerstones, which represent the needs of international investors (and how Ireland meets them), are access to the EU Internal Market, a comprehensive tax offering, access to a pool of appropriate talent and legal certainty and ease of doing business.
If we assess each of these in detail, a number of key themes emerge. For example, the primary reason why international corporations establish a presence in Ireland is to access the EU Internal Market, which despite all its recent troubles, remains the single largest economy in the world. As such, in the context of other would-be ‘gateways’ to the EU market, Ireland must ensure that it does not do anything to discourage the efficient flow of goods and services through Ireland and into Europe.
International companies also set up here because they know that Ireland can provide them with the right mix of talented and qualified staff. Again, Ireland should be doing everything in its power to ensure that its university graduates possess the right skills to meet the needs of these employers.
Red tape is another big issue. The World Bank ranks Ireland as the tenth best country globally in terms of ease of doing business, which is an extremely respectable result. However, Ireland’s position dropped by two positions between 2011 and 2012, which provides cause for concern. To win in the global FDI race, Ireland must always be seeking to ascend the rankings.
Corporate tax: Ireland’s calling card internationally
Then there is the topic of tax. Ireland’s corporate tax rate is a key aspect of its attractiveness to investors, with the 12.5 percent rate acting as a calling card globally. However, as the EIU report outlines in significant detail, it is Ireland’s overall tax infrastructure, and not just the corporate tax rate alone, which gives Ireland its competitive advantage. This includes transfer pricing, double-tax treaties and tax on intellectual property.
This tells us two things. Firstly, it reinforces the absolute critical importance of the 12.5 percent rate as a means of attracting investment to Ireland. Secondly, however, it highlights how a tax system needs to be responsive and dynamic across the board, and that relying on one core aspect (no matter how important it is) is not a viable long-term strategy.
Again, this is not a zero-sum game, or a situation where Ireland’s success in one area (such as corporation tax) precludes it from being innovative in another. The more attractive and pro-enterprise Ireland’s wider tax infrastructure is to international investors, the more investment Ireland will win. It is, quite bluntly, as simple as that.
Clarity and certainty of treatment
In many respects, the debate around Ireland’s pro-FDI taxation system highlights the importance of clarity and certainty to international investors. Companies making significant investments here want to know that the rules will not change overnight, with the recent state expropriations in Argentina demonstrating the shockwaves that can be created by a sudden change in government policy.
Certainly, on the topic of corporation tax, this so-called debate is a non-starter, as successive Irish governments have maintained their unequivocal support for the 12.5 percent rate. However, at a wider level, it is critical that Ireland continues to be seen as fair and consistent in how it works with multinational companies.
Expressed in its most simple form, it is a question of trust. International investors trust that Ireland is committed to supporting them, and this trust is then repaid in terms of continued investment and new projects. Again, the virtuous circle effect applies here, with the positive experience of the existing players encouraging new investors to pick Ireland over other potential investment locations.
Understanding mobile investment
With Ireland having a strong track record in attracting investment and supporting the multinationals that have established here, its success story to date is quite impressive. Certainly, a track record which includes nine of the top-ten pharmaceutical companies, or eight of the top ten global ICT companies, emits a strong, positive message to other would-be investors.
It is however important that Ireland does not become complacent. The vast majority of all the investment projects that take place here are what can be termed as mobile. This means that another location could have been chosen over Ireland at the time of establishment, or that if conditions change, they could relocate to another destination.
Ireland, to be fair, wins more than it loses, as its position on the FDI league table suggests. However, for every new project that is established in Dublin, Cork, Limerick or Galway, there is another which goes to Zurich, Rotterdam or London instead.
As such, understanding the needs of mobile investors means understanding not only why Ireland wins, but also why it loses. Why, for example, was Switzerland or the Netherlands deemed more suitable? Was it the result of labour costs, or transport links, or high personal tax rates? And if these are identified as problem areas, what is being done to fix them?
For those who argue (incorrectly) that the Irish economic strategy is overly FDI-focused, the suggestion that the Government should be bending over backwards to meet the needs of multinationals is not likely to be a popular thesis.
However, what this argument fails to recognise is that identifying areas where Ireland is uncompetitive, and working to address these, is a strategy which benefits both FDI and indigenous business.
Reducing red tape is a pro-enterprise strategy, not just a pro-FDI strategy. Upskilling the nation’s workforce is something with wide societal and economic benefits and not solely a sop to multinational investors. Making Ireland the best small country in which to do business, the mantra of our Taoiseach, is a goal which will benefit everybody.
Looking to the future, while competition from other jurisdictions is incredibly fierce, if Ireland can continue to develop its strengths and address its weaknesses, significant opportunities to attract more investment still exist. For example, with companies from Asia and Africa looking to access the EU market, Ireland can seek to replicate the success it has had in providing a gateway for US companies to Europe.
Ireland, too, is becoming more competitive. Although still considered high by European standards, rents continue to drop, meaning that potential investors now have access to a more realistic property market. Wages have also come down. Both of these factors will encourage more investment in Ireland in the coming years, both at an international and domestic level.
In summary, by recognising the further opportunities that exist, Ireland’s FDI success story can continue long into the future, and in turn, can help play a part in restarting the domestic economy.
Certainly, Ireland cannot be overly reliant on one strategy alone for future growth. However, the fact remains that the successes of the FDI sector in job creation are very real and very tangible, and have never been more important than they are now. In the ongoing debate about Ireland’s recovery, it is important that we do not lose sight of this.
Robert O’Shea is Head of the International Business Group at Matheson Ormsby Prentice.
This article appeared in the June edition of the PAI monthly journal. For more information on how to subscribe to the Journal and additional publications, click here.