Engine of indigenous industry never fired during boom years

ECONOMICS:Ireland will continue to depend on importing entrepreneurialism in the form of foreign direct investment, writes DAN O'BRIEN

LET’S BE honest with ourselves: we are not a nation of gifted entrepreneurs. Talk that small and medium-sized enterprises (SMEs) will be the engine to power recovery amounts to the triumph of hope over expectation.

To see why this is so, consider 80 years of Irish corporate history. In the decades of protectionism from the 1930s, business folk endlessly entreated Seán Lemass to ratchet ever higher tariffs on foreign goods. Their argument was that such barriers would give them the time and space to become strong enough to compete internationally. They never did.

During the recent boom, home-grown companies collectively haemorrhaged world market share, the only metric that really matters for a small, open economy’s sustained prosperity.

This happened despite these companies having every possible advantage. Near perfect financing conditions existed to fund an assault on new markets as interest rates were historically low and a booming home market generated big profits. Taxes of all kinds were comparatively low. A trend decline was taking place in the costs associated with geographic peripherality, such as transport and communications (owing to technological and other developments). The workforce was flexible and increasingly educated. English was ever more dominant as the language of international business. Know-how and expertise continued to spill over from the foreign-owned high-tech sector. A global diaspora existed to facilitate market entry. Transactions costs fell as a result of adopting the euro.

Despite all these advantages, the engine of indigenous industry never fired. If much of what happened during the boom years makes one’s head shake in disbelief, what didn’t happen makes it hang in despair.

SMEs, it is true, will continue to provide most jobs and in no way do I wish to disparage them. However, the key to remaining a high-income state is specialisation. This cannot happen much in the non-traded sector, from restaurants to real estate, where productivity growth is low or non-existent. Ultimately, these sectors can only raise pay levels sustainably if other industries, where specialisation is possible, are making real productivity gains.

That is exactly what happened in the 1990s. Although the economic lift-off that took place was the result of many factors, it was supercharged by the ultra-strong rate of export and productivity growth. This was almost all down to foreign-owned multinationals. Indigenously owned companies can take very little credit (there are, of course, exceptions, but not enough to have impacted significantly).

Given the long, lacklustre history of indigenous industry, one is forced to the conclusion that the State will continue to have to depend on importing entrepreneurialism in the form of foreign direct investment (FDI).

Just as well, then, that the FDI outlook is good.

Yesterday’s annual World Investment Report by the United Nations Conference on Trade and Development, the bible on global FDI, shows that despite a sometimes spluttering recovery and a still profoundly weak western banking system, flows of investment internationally are picking up. By 2012 it expects cross-border flows of such investment to come close to all-time peaks, provided, of course, the world does not lurch back into recession.

Even more important for Ireland, the picture for the kind of FDI this State has excelled in attracting is also good.

FDI can be categorised as either “greenfield” investment or “merger and acquisitions”. The latter involves a company from one jurisdiction buying some or all of a pre-existing company in another jurisdiction. The former involves a foreign company setting up operations from scratch.

It is pretty obvious that the net gains of, say, Pfizer building a new plant in Cork would be greater than, for instance, Banco Santander buying AIB (gains in the latter would be through greater efficiency – existing senior management would, presumably, be booted out and replaced by people who have successfully run banks).

According to UNCTAD, the number of new greenfield projects globally stood at almost 14,000 in 2009 . Although this represented an annual decline of 15 per cent, by historical standards it is very high and shows that businesses are continuing to internationalise their production processes even in the face of great uncertainty.

The UNCTAD figures also show that Ireland secured more projects in 2009 than in 2008 and IDA Ireland’s figures for the first half of 2010 provide further reason for optimism. The number of new jobs in projects that it has backed reached more than 5,000 in the first six months of the year. This equalled the full-year total in 2009.

Another positive development noted by UNCTAD is the trend towards further liberalisation of investment regimes in 2009. This tallies with all other sources which show that there has been no marked rise in economic protectionism of any kind over the past two years (there were well-grounded fears at the height of the crisis that governments, in an effort to shield their economies, would resort to protectionism, as they did in the 1930s).

This is extremely important for Ireland. If the political (or intellectual) climate internationally moved against openness and liberalisation, the very basis of Irish prosperity would be in question.

With greater certainty about the commitment to openness and the global FDI pie expanding, the opportunities exist to lure more foreign investment. With Ireland’s cost base contracting, the chances of exploiting those opportunities is improving.