1 FDI and Trade in Ireland (Barry & Bradley (1997)) FDI and trade: the experience since 1958 –The changing geographical destination of exports and the changing sectoral production structure (from traditional sectors (e.g. agriculture) to knowledge-based sectors (e.g. software) of the economy was an important consequence for Irish growth. FDI into Ireland –Statistics used by Barry & Bradley are manufacturing statistics for the year 1993 –Here, we will use statistics from the CSO Census of Industrial Production, 2003: –Only 13.4% of all manufacturing local plants are foreign-owned but they produce almost 80% of gross output and engage almost 47% of manufacturing employment

2 FDI and Trade in Ireland (Barry & Bradley (1997)) % of local manufacturing plants that are foreign-owned 15%13.4% % of total gross manufacturing output produced by FDI 60%80% % of total manufacturing employment in FDI firms 45%47%

3 FDI and Trade in Ireland (Barry & Bradley (1997)) FDI into Ireland –41.1% of foreign plants are US-owned, 19.7% are British and 11.7% are German –Foreign-owned firms are much more likely to import their raw materials and semi-processed material inputs than indigenous firms –Irish plants export, on average 47.6% of output, while foreign firms export 94%. US-owned firms export 96% of output –The domestic market is of little significance to the foreign-owned firms

4 FDI and Trade in Ireland (Barry & Bradley (1997)) FDI into Ireland –Three other differences between foreign-owned firms and indigenous firms in Ireland: 1.Foreign-owned firms tend to be larger 2.Foreign-owned firms are more productive 3.Foreign-owned firms tend to be more profitable –UK-owned firms tend to send most of their exports to the UK market, US-owned firms send only a small proportion of their exports to the UK market and most of their exports to the rest of the EU

5 FDI and Trade in Ireland (Barry & Bradley (1997)) FDI into Ireland – The overall health of the economy is dependent on the performance of the foreign-owned sector –FDI performance has economy-wide as well as sectorial implications

6 FDI and Trade in Ireland (Barry & Bradley (1997)) In the past Ireland competed with other countries for FDI on basis of: –A low Corporation tax: 12.5% (currently) –Young, educated and available labour –Low cost economy Ireland’s success in attracting FDI: –UNCTAD World Investment Report 2004 – Ireland ranked in top ten countries of the developed world in receipt of FDI (fourth in the world)

7 FDI and Trade in Ireland (Barry & Bradley (1997)) Success in attracting FDI (cont’d) Ireland: –Over 1000 foreign companies mainly in high-tech sector –7 of the world’s top 10 ICT companies –13 of the world’s top 25 medical technology companies –14 of the world’s top 15 pharmaceutical companies (Source: IDA Ireland & ESG Report) –Clusters of high-tech activity

8 FDI and Trade in Ireland (Barry & Bradley (1997)) Corporation tax: Ireland12.5% United Kingdom30% Belgium33.99% France33.33% Germany26.38% Poland19% Latvia15% Lithuania15% Cyprus10%

9 FDI and Trade in Ireland (Barry & Bradley (1997)) Corporation tax: –Ireland has been allowed to continue having a such a low corporation tax rate within the EU for two reasons: 1.It is a small economy within the EU – it produces approx. 1% of EU GDP. If France or Germany were to dramatically reduce its corporate tax rate to 12.5% (same rate as Ireland), this may break up the EU 2. It was the first country to offer foreign investors such tax concessions

10 FDI and Trade in Ireland (Barry & Bradley (1997)) –Ireland’s competitive position, in this regard, depends on others (or at least not many) not following suit. At the moment, just Cyprus has a corporation tax lower than Ireland at 10% –FDI into Ireland: –The mainly tax-based FDI incentive system and the fact that Ireland features as a production platform rather than as a market means that the opportunities exist for transfer pricing –Profit repatriation is also extensive: gap between GDP and GNP in Ireland

11 FDI and Trade in Ireland (Barry & Bradley (1997)) Aspects of the FDI inflow: Sectoral destination of FDI inflows: –FDI inflow into Ireland have not gone primarily into sectors in which Ireland had a traditional comparative advantage –The FDI inflows, in the 1960s/1970s were in sectors in which Ireland actually had a comparative disadvantage e.g. Chemicals, Metals and Engineering –FDI manufacturing inflows go primarily into sectors in which there are increasing-returns-to-scale

12 FDI and Trade in Ireland (Barry & Bradley (1997)) Sectoral destination of FDI inflows: –Key sectoral destinations of FDI inflow in Ireland: –Advanced manufacturing projects in the ICT, pharmaceuticals, Medical Technologies, Engineering and Consumer Products –Internationally Traded Services sectors – Software, Financial Services, Shared Services and Customer Support activities –IDA (Industrial Development Authority) Ireland has had great success in attracting large FDI projects into the country. IDA Ireland is responsible for the FDI sector in Ireland

13 FDI and Trade in Ireland (Barry & Bradley (1997)) Sectoral destination of FDI inflows: –IDA Ireland has focused on attracting investment that is of high value, requiring high skill levels and with investment that has the potential to develop and improve the innovative capacity of the country –IDA Ireland, in the past, has attracted FDI into the country on the basis of low corporation tax rate, the availability of skilled labour, the young, English-speaking workforce and a low cost base. –However, many of these competitive advantages are being eroded at the moment

14 FDI and Trade in Ireland (Barry & Bradley (1997)) Sectoral destination of FDI inflows: –Eastern European Economies joining the EU, following Ireland’s low corporate tax rate. Costs have increased in Ireland – no longer a low cost base. Skills shortages now characterise many of the high-technology sectors in Ireland. Skills, wages and R&D in foreign and indigenous industry –Total employment in the relatively ‘high tech’ areas of Chemicals, Electronics and Medical Devices amounts to just 8.7 percent of total indigenous employment (Source: Forfas Annual Employment Survey, 2004)

15 FDI and Trade in Ireland (Barry & Bradley (1997)) Skills, wages and R&D in foreign and indigenous industry: –42% of total FDI employment in Ireland is in relatively ‘high-tech’ areas of Chemicals, Electronics and Medical Devices (Source: Forfas Annual Employment Survey, 2004) –Generally, these high-technology sectors require high skilled labour (e.g. engineers, scientists etc.). –This implies that foreign-owned firms tend to employ more highly skilled labour than indigenous companies

16 FDI and Trade in Ireland (Barry & Bradley (1997)) Skills, wages and R&D in foreign and indigenous industry: –Because foreign-owned companies tend to hire more skilled labour, one would expect that the average earnings/wages in foreign-owned firms would be higher than in indigenous enterprises.

17 FDI and Trade in Ireland (Barry & Bradley (1997)) Skills, wages and R&D in foreign and indigenous industry: Average Earnings per week Manufacture of textiles Manufacture of Leather Manufacture of Wood & Wood Products Manufacture of Food Products Average471 Manufacture of Chemicals Manufacture of Medical Precision Instruments Manufacture of Office Machinery & Computers Manufacture of Electrical Products457 Average550 Source: CSO, Industrial Earnings & Hours Worked, Sept. 2005

18 FDI and Trade in Ireland (Barry & Bradley (1997)) Skills, wages and R&D in foreign and indigenous industry: –In the services sector: –Computing Activity, R&D and Telecommunications business services sectors are dominated by foreign- owned firms –The average weekly earnings in these sectors in 2005 was: Computing Activity, R&D Telecommunications Source: CSO, Earnings in Distribution and Business Services, January 2005

19 FDI and Trade in Ireland (Barry & Bradley (1997)) Skills, wages and R&D in foreign and indigenous industry: –Therefore, average earnings tend to be higher in foreign-owned firms –R&D: Again, because foreign-owned firms tend to be involved in high-technology activity, one would expect these firms to engage in more R&D than indigenous companies

20 FDI and Trade in Ireland (Barry & Bradley (1997)) Source: Forfas, Business Expenditure on Research and Development in Ireland, 2003/2004

21 FDI and Trade in Ireland (Barry & Bradley (1997)) Source: Forfas, Business Expenditure on Research and Development in Ireland, 2003/2004 Business Expenditure on R&D:

22 FDI and Trade in Ireland (Barry & Bradley (1997)) Skills, wages and R&D in foreign and indigenous industry: –In 1993 Irish-owned firms accounted for 33% of overall business R&D, with foreign-owned firms accounting for 67% of overall business R&D –In 2003 Irish-owned firms accounted for a falling 27.9% of overall business R&D, with foreign- owned firms accounting for an increasing 72.1% of overall business R&D

23 FDI and Trade in Ireland (Barry & Bradley (1997)) R&D Active Irish Owned Foreign Owned Total Total numbers of performing R&D Firms:

24 FDI and Trade in Ireland (Barry & Bradley (1997)) Linkages, spin-offs, and agglomeration economies: –Low level of backward linkages of the foreign industry in Ireland –80% of materials purchased by industrial foreign-firms in Ireland is imported, compared to 28% for indigenous firms (Source: CSO Census of Industrial Production) –Spin-offs: benefits of FDI may also be their role as ‘incubators’ for new entrepreneurs. –Little research exists on the backgrounds of entrepreneurs involved in new firm start-ups – but the research does point to FDI in Ireland having an ‘incubator’ role

25 FDI and Trade in Ireland (Barry & Bradley (1997)) Linkages, spin-offs, and agglomeration economies: –Foreign firms may be an important source of demand for new company start-ups – requirement for high standards –There may also be knowledge transfers from FDI firms to indigenous firms in terms of managerial practices, technical expertise, quality standards that indigenous firms Such knowledge transfer can occur via labour mobility or formal/informal linkages

26 FDI and Trade in Ireland (Barry & Bradley (1997)) Linkages, spin-offs, and agglomeration economies: –Agglomeration economies: surveys of executives of newly arriving foreign companies in the computer, instrument engineering, pharmaceutical and chemical sectors indicate that their location decision is now strongly influential by the fact that other key market players are already located in Ireland

27 FDI and Trade in Ireland (Barry & Bradley (1997)) Possible adverse effects of FDI –A number of adverse effects of FDI inflows on welfare or employment in the host country have been identified in the literature –Barry & Bradley (1997) studies whether any of these adverse effects have arisen in the Irish case: 1.FDI and the decline in market share of indigenous firms –International-trade literature states that national welfare can be reduced by FDI inflows if MNCs capture market share from indigenous firms and thus reduce the indigenous firms’ profits

28 FDI and Trade in Ireland (Barry & Bradley (1997)) Possible adverse effects of FDI 1.FDI and the decline in market share of indigenous firms –This argument most likely does not apply in the Irish case because: –Irish-based MNCs (i.e. FDI in Ireland) do not serve the home market and –Domestic industry in Ireland pre-free-trade had a comparative disadvantage in precisely those sectors in which foreign industry grew

29 FDI and Trade in Ireland (Barry & Bradley (1997)) Possible adverse effects of FDI 2. Disequilibrating wage developments –A more plausible effect is that the strong FDI inflows could generate disequilibrating wage developments if all the high productivity growth of the foreign sector were passed on into manufacturing sector wage demands –i.e. High productivity growth of the FDI sector would result in higher wages in this sector. This may result in higher wage demands in other, more traditional sectors, where productivity growth is slower

30 FDI and Trade in Ireland (Barry & Bradley (1997)) Possible adverse effects of FDI 2. Disequilibrating wage developments –This would lead to a rapid decline and an increase in unemployment in these traditional sectors –Is there any evidence to support this? –Average weekly earnings in the high-technology sectors (which are dominated by FDI) tend to be higher than in the more traditional sectors. However, the growth in average weekly earnings in both sectors has been almost identical. –High-technology sectors tend to be more productive than the traditional sectors

31 FDI and Trade in Ireland (Barry & Bradley (1997)) Possible adverse effects of FDI 2. Disequilibrating wage developments –In terms of employment: within manufacturing, employment has been declining in textile and clothing, metals, paper/printing and publishing (traditional sectors) –While there is excess labour demand and skills shortages in the areas of engineering, Information Communications Technology, Software (high- technology sectors) Source: Expert Group on Future Skills needs (Forfas) – The National Skills Bulletin 2005

32 FDI and Trade in Ireland (Barry & Bradley (1997)) Possible adverse effects of FDI 3. FDI and the neglect of indigenous firms –The attention of policy-makers may have been distracted from the requirements of the indigenous sector by the high profile attached to the attraction of multinationals –Reports reviewing industrial policy in Ireland in the 1980s and 1990s concluded that a more energetic attempt should have been made to assist indigenous industry in Ireland –The Telesis Report published in 1982 criticised what it regarded as an overemphasis on foreign industry in policies to promote industrial development in Ireland. It concluded that reform was needed in the indigenous sector

33 FDI and Trade in Ireland (Barry & Bradley (1997)) Possible adverse effects of FDI 3. FDI and the neglect of indigenous firms –The Culliton Report in 1992 restated the need to direct more resources to indigenous enterprise development –In 1993/1994 the Industrial Development Agency (IDA) in Ireland was restructured with IDA Ireland now focusing on the FDI sector and Enterprise Ireland now focusing on the indigenous sector –In more recent times - specific needs of the indigenous sector have been addressed by policy initiatives – more resources are directed towards the development of the indigenous sector. Initiatives have been implemented to assist indigenous companies, especially in exporting, marketing and R&D –Such initiatives have helped the development of the indigenous sector

34 FDI and Trade in Ireland (Barry & Bradley (1997)) Possible adverse effects of FDI 4. Potential instability from over-reliance on multinationals –The over-reliance on FDI may be a source of potential instability for the Irish economy –Large multinationals a few high-technology sectors producing a large proportion of total output in the economy –One perceived danger: external circumstances could change in such a way that the economy - over a short period of time – loses its attractiveness as a base for multinational investment Lower corporate tax rates of Eastern European countries Lower cost economies Skilled labour shortages in Ireland

35 FDI and Trade in Ireland (Barry & Bradley (1997)) Possible adverse effects of FDI 4. Potential instability from over-reliance on multinationals –Another perceived danger: economic downturn in high-technology sectors – these are very dynamic sectors, highly competitive and are more susceptible to shocks –It can be argued that Ireland has a absolute advantage rather than comparative advantage in these high-technology sectors –A country can lose its absolute advantage over night while comparative advantage may change but can never be obliterated