Multinationals spur local firms but are more likely to pull out

A new report says dependence on multinationals may leave us vulnerable, writes Jamie Smyth, Technology Reporter.

Multinational companies are 40 per cent more likely to exit an industry and pull out of the Republic than indigenous firms. But the presence of multinationals in the economy can encourage local technology firms to become more competitive, new studies by researchers show.

The findings, which are being published in the same week as IDA Ireland reports its second consecutive year of net job losses at its client firms, suggest the State's heavy dependence on foreign direct investment is likely to leave it vulnerable in a downturn.

It is hardly surprising that the new research, which is based on a 25-year study of the Irish economy in 1973-1998 by academics Dr Holger Görg and Dr Eric Strobl, concludes that multinationals are more "footloose" than domestic firms.

After all, figures published this week bear this out with employment at IDA-supported companies down 2.3 per cent at 133,246 during 2002. And this figure is languishing below the all-time high of 140,896 achieved during the technology boom in 2000.

"Indigenous firms are more familiar with the domestic environment and economy. They are usually run by domestic entrepreneurs and source materials from the local economy," says Dr Görg, a former PhD student at Trinity College Dublin who now works at Nottingham University.

This makes them more likely to remain based in the State than multinationals, most of which supply to international markets and don't sell into the Republic, says Dr Görg in a telephone interview with The Irish Times.

The study employed a range of sophisticated data collection and analysis techniques and is likely to prove controversial given the importance of the multinational sector to the Republic. However, Mr Frank Ryan, IDA executive director, doesn't believe the study's conclusions hold true for the Republic in recent years.

"It makes no difference what shareholding a company has," he says. "Ireland tends to be one of the last places that multinational firms cut because of the cash-flow implications of that... due to our low corporation tax rate."

The technology sector has lost just 7 per cent of jobs recently, a very small reduction overall when compared with the home countries of these multinationals, says Mr Ryan, who gives the example of the telecoms firm Lucent, which has cut 50,000 jobs worldwide since 2000 while retaining most of its Irish staff.

He also stresses the positive role that multinationals have played in the economy over the past three decades. It is also encouraging that many firms in recent years have established Irish-based venture capital interests, according to Mr Ryan.

"Many people forget that in the early days of Iona Technologies, Sun Microsystems bought a 30 per cent stake in the company and they did very well out of that."

Former staff working at multinationals, such as Mr Brian Long at ParthusCeva, have also played a crucial role in building up indigenous industry. It is a more sophisticated environment than even the one that existed in the late 1990s as the workforce becomes more skilled, says Mr Ryan. Many indigenous firms have grown up to serve the multinational sector. For every job the IDA creates in the economy, the agency estimates one extra job is created as well, he adds.

Separate research by Dr Görg, which is due to be published in the Scandinavian Journal of Economics, also highlights this positive influence that multinationals have played in recent years.

In this paper, Dr Görg argues that multinationals here have increased the efficiency of domestic companies in the high-tech sector through the crucial process of technology transfer.

"Domestic firms in high technology industries tend to gain from the presence of multinationals because they are able to learn new, efficient techniques," he says. "Multinationals tend to use better production, management and marketing techniques."

The "technology spillover" can result in an increase in productivity and reduce a host country firm's average cost of production. This will hold benefits for local firms' long-term survival, according to Dr Görg.

A study of the multinational firms that have remained in the Republic shows they are 10 per cent more likely to retain staff than indigenous companies. This is probably because multinationals tend to invest more in training and building knowledge among their staff. They are less willing to lose staff that they have invested in, says Dr Görg.

But the impact that multinationals have on indigenous companies is complex and generally only positive for those that are engaged in high-tech activities. In contrast, local companies in the low technology sector are less able to learn new techniques from multinationals and can be undermined by foreign entrants.

"Multinationals can crowd out domestic firms which sell similar products at home or abroad," he says. "Domestic firms generally don't have the same qualities or techniques so if multinationals come in they can take business away, reduce profits and make it difficult for them to compete."

The influx of multinationals can also raise wages substantially in the economy, making it difficult for domestic firms to afford to pay salaries, says Dr Görg.

Two-thirds of all the jobs to be created in IDA projects negotiated in the first quarter of 2003 will be for third-level graduates.

In addition, four out of very 10 of these IDA-supported positions will be worth a salary of more than €37,000 per year.

Clearly, this will be a welcome boost to the economy, as long as the multinationals commit to stay in the Republic for a significant period.