Foreign investment hopes hinge on treaty poll result

Thu, Apr 26, 2012, 01:00

OPINION:The long-term direction of Ireland’s relationship with Europe is a key consideration for foreign direct investors

LAST YEAR was the best year in more than a decade for foreign direct investment (FDI) into Ireland, with 148 individual investments from many of the world’s leading multinational, second-tier and emerging companies.

FDI companies created 13,000 jobs in 2011. The strong flow of FDI has continued in the first quarter of 2012, with significant investments from companies such as Eli Lilly, Abbott, Allergan, Paypal, Mastercard and HP.

However, foreign investors like to partner with countries that can guarantee stable economic conditions in the future. Stability rests on a number of factors – a stable currency, a stable political system and a stable regulatory system. It is in that context that one must consider the implications of the forthcoming vote on the fiscal treaty.

This treaty is chiefly about ensuring that countries adhere to sound fiscal discipline and balanced budget rules in an attempt to prevent the economic excesses of the past.

With the passing of these changes Ireland will be embracing a set of common European rules and economic principles that should make the euro zone a more durable economic entity. Ireland will very much be seen to be part of ‘‘core” Europe by signing up, and that will give outside investors confidence.

Ireland, by voting Yes, will be eliminating any conceivable doubt about its relationship with Europe into the future. Why is this important? Global companies come here because they view Ireland as a springboard, or gateway, to the wider European market, which has 500 million potential customers.

In only a tiny number of cases do FDI investors come here to tap the domestic market – it is Ireland as a gateway that keeps them returning to these shores. That gateway proposition remains as attractive as ever, and at meetings I attend investors make this point very forcefully – Ireland is an attractive location because it is a member of the euro zone and intends to stay that way.

Investors realise that nothing in the strict text of the treaty would trigger an exit from the euro zone, but like all rational investors they tend to concentrate on the longer-term horizon and longer-term relationships. In that context the long-term direction of Ireland’s relationship with Europe is an important consideration for this vital constituency.

Also vital is the more pressing issue of day-to-day economic stability. Outside investors tend to link Ireland’s membership of the euro zone to our long-term economic stability and access to outside support, if ever needed. As long as those pillars remain in place, investors are likely to be convinced that Ireland and Europe are moving in the same direction.

These issues are important because, as we all now know, nobody owes Ireland a living.

FDI investments are hard-fought and hard-won. An increasing number of competitor countries are seeing the benefits that come from attracting inward investment.

This new level of competition is something IDA Ireland accepts as a norm. The record of FDI into Ireland, this year and last, shows that Ireland is up to the challenge in this environment. But past success is emphatically no guarantee of future performance.

Those who control FDI decisions, particularly those at large multinationals, are a discriminating group of people. They have reason to be. The boards they report to and the shareholders who employ them expect them to make sensible long-term decisions about how the company’s capital will be deployed. Risk aversion is abundant and investments are carefully considered.

As a result, the score card that accompanies any FDI decision is an extensive one. While no single location ticks every single box, the countries that are successful in attracting FDI inflows are those with an all-round offering, that is based on long-term certainty and a pro-business culture.

Ireland continues to tick both of these boxes. At meetings I attend regularly with leading decision-makers in the US, Asia and Europe, Ireland’s ability to offer investors visibility into the future is regarded as a key attraction, alongside a skilled labour pool, low corporate tax, our track record and investment in RD infrastructure.

The reason long-term visibility and questions about investment climate arise is because the life cycle of many FDI projects is so long.

At any one time the IDA needs to have a pipeline of more than 100 mobile investments in play to meet its targets. The projects won last year and in the first quarter of 2012 demonstrate Ireland’s attractiveness as a leading FDI location. A significant challenge for the IDA is to backfill the pipeline on a continuous basis.

While the top line investment gains are welcome, one should not underestimate the secondary effects of FDI inflows. There are the jobs generated in supplier companies, the demand created by employees seeking accommodation and, of course, the spending of wages on local services, such as restaurants, bars and retail outlets.

A particular benefit of the current flow of FDI is that a number of capital expenditure projects announced and shortly to be announced have a significant construction element. Investments recently started or planned by 12 IDA clients will require construction of more than 139,000sq m (1,500,000sq ft) of buildings. This should translate into a requirement for about 2,000 construction workers over 24 months, a significant fillip for a challenged sector.

As IDA Ireland always makes clear, these spin-off effects and the investments themselves will not on their own revitalise the Irish economy. However, FDI does represent a significant engine to power Ireland through a recovery over the next three to five years.

The signal Ireland sends out next month will have a significant influence over the climate for attracting further FDI in the period ahead. A positive outcome will ensure the continued strong performance in this vital area of our economy.

Barry O’Leary is chief executive of IDA Ireland

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