Focusing on FDI is
a win-win approach
While Ireland has been extremely successful at attracting inward investment, some observers
suggest that too much focus has been placed on foreign direct investment (FDI), to the
detriment of the domestic economy. However, as Robert O’Shea of Matheson argues, the
importance of FDI to Ireland has never been greater.
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 these 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 likes of Paypal,
Amgen and Eli Lilly, to smaller scale projects from emerging technology firms. However, what they all
share, in common, 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 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 2 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 – all 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.
Focusing on FDI is
a win-win approach
Job creation opportunities
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 a bailout 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 Matheson 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 looking to move up the rankings.
Focusing on FDI is
a win-win approach
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% rate acting as a calling card globally.
However, as the EIU report outlines in significant detail (see graph 1), 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.
Source: "Investing in Ireland: A survey of foreign direct investors" report by the Economist Intelligence
Unit, commissioned by Matheson
This tells us two things. Firstly, it reinforces the absolute critical importance of the 12.5% 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.
Focusing on FDI is
a win-win approach
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% rate. However, at a wider level,
it is critical is that Ireland continues to be seen as fair and consistent in how it works with
multinationals.
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 set up here, its success story to date is quite impressive. Certainly, a track record which
includes 9 of the top 10 pharma companies, or 8 of the top ten global ICT companies, sends off a
strong 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
wisn, 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, as per graph 2 below, what is being done to fix them?
Focusing on FDI is
a win-win approach
Source: "Investing in Ireland: A survey of foreign direct investors" report by the Economist Intelligence
Unit, commissioned by Matheson
For those who argue (incorrectly) that the Irish economic strategy is overly FDI-focused, the
suggestion that 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. Up skilling the nation’s
workforce is something with wide societal and economic benefits, it is not just 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.
Moving forward
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
Focusing on FDI is
a win-win approach
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. The first European law
firm to establish an office in Silicon Valley, Matheson has offices in Dublin, London, New York
and Palo Alto. Matheson advised on a significant number of the new FDI projects in Ireland in
2011. Contact Robert at [email protected] or visit www.matheson.com/fdi.
This article first appeared in the Public Affairs Ireland Journal in July 2012