Home-grown business is driving the recovery more strongly than multinationals

For half a century the attraction of foreign investment to Ireland has been a key feature of the Irish development strategy. It has proved successful, with a large number of foreign multinationals coming to Ireland and prospering here. These firms have helped transform the economy by bringing capital, technology, skills, and access to foreign markets.

The skills developed by the Irish staff managing and operating these multinationals have, in turn, had a major impact on Irish firms through staff mobility. In the 1990s, foreign multinationals were a particularly important contributor to the rapid economic growth and, in the current recovery, they are again playing an active role.

A recent Central Statistics Office publication on Business in Ireland in 2012 shows that, while foreign multinationals accounted for about 14 per cent of all employment in Ireland in 2012, they were particularly important in the manufacturing sector, where they accounted for almost half of all jobs.

However, the publicity about new investment by multinationals may be overemphasising their impact on the economy in the current recovery, and underplaying the very important role that indigenous Irish business is playing.

Last month, IDA Ireland and Enterprise Ireland published their job creation data for 2014. In the case of the IDA, which supports foreign multinationals investing in Ireland, there was a net increase in employment of 7,000; in the case of Enterprise Ireland, which supports Irish-owned firms, there was a net increase in jobs of 8,500. However, private sector employment last year increased by about 30,000 compared to 2013, which means that less than one-quarter of the net increase in jobs came from foreign-owned firms. The rest of the net jobs created in the economy occurred in Irish-owned businesses. This success in the current economic recovery bodes well.

One of the features of many foreign multinationals operating in Ireland is that they have a very large turnover and value added, but a rather smaller footprint in terms of employment.

In the case of manufacturing, while 50 per cent of employment is accounted for by foreign multinationals, they account for over 80 per cent of value added in the sector. However, while the value added (and exports) from such firms is very high, the true value to the economy is significantly smaller, as it is only the wage bill and the corporation tax they pay out of their value added that ultimately benefits the Irish economy. Their high profits all flow abroad.

Also, in recent years, the share of the turnover and exports that remains in Ireland has fallen. That is why economists prefer to use gross national product rather than gross domestic product as a measure of welfare, because GNP excludes profits of the multinationals that are repatriated.

Adding value

Last September, the CSO also published very interesting data on the value added in the economy from multinationals and from domestically owned firms. In the case of Irish-owned firms, all of the value added in the sector adds to Irish GNP whereas only the wage bill and the corporation tax paid do so in the case of the foreign multinationals.

Figure 1 shows the contribution of the domestic sector to growth in GNP between 1996 and 2013, as well as the residual contribution, primarily from multinationals. Over the period 2007-2013, the output of the domestic sector fell and this reduced GNP by a cumulative 0.6 per cent. While the value added of the multinational sector showed little change over the same period, if allowance is made for net factor income, the contribution to GNP fell by a cumulative 6.7 per cent, reflecting changes in structure.

More recently, there was substantial growth in the output of domestic firms in both 2011 and 2013, whereas the output in the rest of the economy (including multinationals) fell in 2011, and did not recover the lost ground in 2012 and 2013.

This suggests domestic firms are proving quite successful in growing output and employment, possibly because they are more reliant on the growing British market.

The role of Irish firms in growing the economy needs fostering. It is not that Ireland does not need multinational investment; it most certainly does. However, Ireland also needs to wean itself off its dependence on the multinational sector for growth.

For half a century, one of the attractions of Ireland for foreign firms has been the low rate of corporation tax. However, as other countries have reduced their rate, Ireland’s advantage has been eroded. Where foreign firms engage in substantial investment and employment in Ireland, it is easy to rebut criticism of the Irish tax regime. However, the revelations of how Ireland is used as a vehicle for reducing taxes on activity that really takes place outside Ireland has done the State significant damage.

Tax loopholes

The Government has moved to close these loopholes. Even if this action were to result in some loss of employment, it is still very necessary. If Ireland had ignored the understandable anger of our neighbours, it would have invited more drastic action that could have resulted in collateral damage to the majority of the multinationals operating in Ireland which make an important contribution to this economy.

In the longer term, Ireland needs to evolve its industrial strategy to reduce its dependence on low tax rates as the crucial arm of competitiveness. Greater reliance on innovation by domestic business and on developing skills and expertise will provide a more secure long-term strategy. If the Taoiseach comes back from the 2025 European Council in Ankara saying she has saved corporation tax, Irish industrial policy will have failed!