Inward investment will be key to recovery

Thu, Dec 16, 2010, 00:00

ANALYSIS:The importance of relentlessly fighting to keep existing investment and to win a significant level of new investment is clear

FACED WITH one of the toughest budgets in decades and with a high level of personal debt, and the collapse of consumer confidence, it is hard for Irish people to see a path to economic recovery. Higher taxes on all income levels, reduced welfare benefits and significant cuts in infrastructural investment contribute to ongoing concerns for employment.

Even with an understanding that there is no option for any government but to take decisive action to reduce the growing gap between spending and fiscal revenues, domestic confidence is still extremely low and there is a danger of believing there is no future for Ireland.

Without underestimating the challenges facing a small country with such high levels of national debt, there are strong reasons for belief in the Irish economy, largely due to the fundamental strengths in the internationally traded sectors, and these will underpin economic recovery.

Ireland has remarkable strengths as a location for foreign direct investment which are not fully understood domestically as, for many people living in Ireland, interaction with the foreign-owned sector is limited. These strengths, which have contributed to a dramatic increase in per capita incomes and provided the basis for growth in the period prior to Ireland’s recent obsession with speculative property, are all still in place.

Despite some spurious suggestions that Ireland is losing significant foreign investment, the reality is that Ireland has continued to secure a growing and exceptionally high level of inward investment, especially from the United States. The level of US investment in Ireland is greater than total US investment in China.

Ireland has also attracted multiples of the levels of foreign investment recorded in many other EU countries.

For example, the stock of US investment in Ireland is more than 81 times the level in Greece, and multiples of the level in Portugal and the Czech Republic. This has not happened by accident, and reflects the cumulative impact of Ireland attracting foreign investment for over five decades.

While other countries, both within and outside of the EU, have even higher levels of US investment, such as the UK, Switzerland, France and Germany, these are all larger, more industrialised countries.

The scale of foreign investment in Ireland is a reflection of the fact that Ireland has significant advantages as a location. Ireland’s position vis-a-vis some other countries is presented in the enclosed table, and shows how successful Ireland has been and continues to be.

The growth in the stock of foreign investment to Ireland reflects the country’s distinctive comparative advantages for certain types of foreign direct investment, particularly for mobile investment in high-tech manufacturing and in internationally traded services. This investment has mainly been in projects which are seeking a location as an export platform to European markets, require relatively skilled labour and generate high profit ratios.

The reasons these companies have come to Ireland and have decided to stay and develop here include access to European markets as well as exchange rate stability within the euro zone countries. This is combined with the ability to access skills from the integrated European Union labour market, including from the UK.

Ireland also offers a highly educated labour force. The percentage of the Irish population aged 25-34 with third-level education is 44.8 per cent, the second highest of any EU country and more than double the levels in a number of other EU member states.

The sacrifices of many Irish parents, as well as public investment, are what have resulted in this. In this context, it is useful to remember that the underlying basis for sustainable economic growth and high living standards is fundamentally determined by the core resources of people and labour force skills. The skills, abilities and education of the Irish population will be the foundation for our economic recovery.

Everyone knows that Ireland also has a competitive advantage arising from its 12.5 per cent corporate tax rate. New estimates indicate that because of the impact of the tax rate, the after-tax cost of capital for multinationals investing in Ireland is the lowest of any of the OECD countries examined.

The corporate tax level on its own would not, however, explain the success of Ireland in foreign investment, but is an important component when combined with the underlying strengths of Ireland as a location.

These include an English speaking population. The common language with the United States is estimated to have a tax equivalent cost advantage for Ireland of about 7 per cent. The availability of high quality professional services constitutes an advantage for certain sectors. World Bank estimates rate Ireland as the most attractive location in Europe in terms of ease of starting a business.

In recent years, the exceptional acceleration in Irish growth rates undermined the cost competitiveness of Ireland as a location, particularly in terms of labour, energy and housing costs. This disadvantage has, however, been reduced significantly during 2010, and ongoing adjustments to comparative costs are continuing.

The demonstration effects of Ireland as a location for profitable foreign investment over a long period and the support for such investments are important in increasing confidence in investing in Ireland. This has resulted in a process which has reinforced Ireland’s initial advantages.

Ireland has recently, in some ways, become a more attractive location for foreign investment, as cost competitiveness and labour market skills availability have improved, although ongoing adjustments to costs will be required.

Given the scale of the challenges facing the Irish and European economies over the next decade, and the policy errors made in other areas, the importance of relentlessly fighting to keep existing investment and to win a significant level of new investment is clear. If priority is placed on developing Ireland’s advantages, it can remain as the premier European host to inward investment. These overseas firms and indigenous companies selling on world markets will underpin economic recovery.


Alan Gray is managing partner of Indecon Economic Consultants and co-author of a major new book, Economic Analysis of Ireland’s Comparative Advantage for Foreign Investment