As a key pillar of Ireland’s economic model for almost 70 years, foreign direct investment (FDI) has unsurprisingly been a big contributor to the Irish economy. Approximately 20 per cent of all private sector jobs are directly or indirectly linked to it, while it also contributes more than 80 per cent of corporation tax and is responsible for the lion’s share of Ireland’s exports.
However, with the forces of deglobalisation growing ever stronger and the Trump administration’s “America First” policy causing US corporations to seriously reconsider their overseas footprint, is it time for Ireland to reconsider its economic model? Is the country too reliant on the FDI sector? Many economists would argue that yes, it is, with our colossal corporation tax receipts almost comically skewing our GDP.
The Irish Fiscal Advisory Council published a working paper in April of this year, pointing out that just three firms were estimated to account for 38 per cent of corporation tax receipts in 2023. “The Government should avoid using these unreliable receipts to fund long-lasting commitments,” according to the paper. “Ireland could do three things to protect itself from the risk that these receipts reverse: save more of its corporation tax revenues, diversify its economy, and prioritise investment in areas which boost long-term potential growth and make the wider economy more competitive.”
The IDA’s midyear report showed positive signs, despite the backdrop of global trade turmoil.
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A total of 179 investments were made by global companies into Ireland in the first six months of the year, a 37 per cent increase on the same period last year. Additionally, 52 of these investments represented new or first-time investments into the country.
It is evident that FDI as a cornerstone of our economic policy is far from dead and buried but should we be seeking to shore up our economy by diversifying? Dr Kate Hynes is an assistant professor of economics in Dublin City University’s business school. As an international trade economist, her research focuses on FDI. She argues that Ireland’s reliance on FDI is “heavy but unintended” and is not the result of a deliberate neglect of indigenous enterprise.
“State support for local enterprise, such as Enterprise Ireland, has been extensive and persistent,” Hynes says. “Despite long-standing policy support for domestic industry, the indigenous industry lacked the size, competitiveness, and innovation needed to drive national industrial growth.” This prompted a strategic pivot to FDI, not as a first choice, she says, but as an effective alternative, and the result is an economy where exports are predominantly driven by foreign-owned firms.
“This has come about because of our success at attracting FDI and our weakness in developing indigenous industry,” she notes. “While there are notable indigenous success stories – Ryanair, aircraft leasing, the bloodstock industry, Glen Dimplex – these are the exceptions, not the rule.”
Dr Iulia Siedschlag is associate research professor at the Economic and Social Research Institute (ESRI), and also an adjunct professor at the department of economics, Trinity College Dublin. As leader of the ESRI’s research on competitiveness, trade and FDI, she is more than qualified to emphasise the “crucial importance” of FDI as a big component of Irish economic policy for the past six decades.
“This is evident when looking at key business sector indicators,” Siedschlag says. “Foreign-owned enterprises are highly productive and account for substantial shares of gross value added, business expenditures on research and development (R&D), innovation outputs, exports, tax revenues and jobs.”
Siedschlag, however, cautions that over-reliance on foreign direct investment also poses challenges and heightened exposure to external shocks. “To respond to these challenges, a more balanced economic model with a strong, innovative domestic sector would be beneficial,” she says.
Hynes agrees. “In recent years we have perhaps placed insufficient policy focus on indigenous because FDI was doing so well but there is no guarantee of indigenous success at a scale which significantly reduces the need for FDI,” she says. “It would be unwise to assume we can quickly or easily build a domestic enterprise base capable of replacing or significantly reducing our reliance on foreign firms. The scale required is simply not realistic in the short term.”
Research shows that stronger linkages between multinational enterprises and indigenous firms can significantly enhance productivity, innovation, and skills development. According to Hynes, the key to unlocking these benefits lies in the absorptive capacity of domestic firms – or their ability to recognise, assimilate, and apply new knowledge, technologies, and organisational practices observed in multinationals, and to adapt and build upon them within their own operations.
“This capacity is especially critical for innovation,” she says. “Rather than treating FDI and indigenous enterprise as competing priorities, the more strategic approach is to foster deeper integration between them.”
Ultimately, this means equipping Irish firms and workers with the skills and capabilities needed to engage meaningfully with multinationals, enabling knowledge transfer and long-term ecosystem development. Creating deeper supply chain integration between multinationals and local SMEs remains a complex challenge, Hynes admits, but success here could yield meaningful productivity gains, knowledge transfer, and innovation diffusion. She says that, over the long term, Ireland must foster a pipeline of high-quality, innovation-led start-ups.
“This will require sustained investment in R&D, advanced skills development, and support for commercialisation. While inherently difficult, this strategy is critical to ensuring a more resilient and future-facing economy.”
Hynes also points out that this diversification can also be geographic; while the United States has historically dominated Ireland’s FDI inflows, attracting investment from a wider range of countries can help diversify risk and deepen global economic ties. “This effort is already under way but can be further intensified,” she says.
Economist Jim Power has long maintained that there is an “extreme concentration risk” in Ireland’s economic model. “Even before the second election of Trump, Ireland’s FDI model was under threat due to the failure to invest adequately in energy, particularly renewable energy, as well as water, housing, and public services such as health and education,” he tells Business Ireland magazine.
Power now believes the threat has increased “dramatically” during 2025. “Unfortunately, the US can no longer be regarded as a reliable partner,” he warns. “Even when Trump’s term ends, it is unlikely that we will return to the old relationship and global approach of the United States. We need to diversify our FDI offering to include Canada, India, China and the Arab world. This will take time and will not be straightforward.”
Hynes says we must be cognisant that foreign direct investment is inherently mobile and vulnerable to shifts in global politics and corporate strategy. “We should not dismantle what has worked so well, but we must strengthen what has not,” she says. “That means reimagining industrial policy not as a pivot away from FDI, but as a strategic investment in local capabilities that complement, rather than compete with, our multinational base.”
Dr Alison Hearne, a lecturer in international business at South East Technological University, is on the side of the Fiscal Council. She acknowledges that the issue of being too reliant on the foreign sector relates mainly to the high level of corporation tax receipts coming from the FDI sector.
“The Fiscal Council has been advocating that the Government should save these corporation tax receipts for a rainy day and use it to support Ireland’s competitiveness rather than use it for current spending, but the Government has not always listened,” she says. “So, the issue is not that we are too reliant on the sector, but rather that policymakers/Government need to accept that these levels of corporation tax receipts might not be sustained into the future, and that spending decisions made now, need to better reflect this. This is all the more important now, given the increased international focus on deglobalisation.”
But, according to Hearne, Ireland has “a good mix” of FDI and indigenous industry at the moment. “Far more money is spent on indigenous industry, via Enterprise Ireland, than on IDA-supported FDI,” she says.
Hearne agrees with Hynes that a cautious approach is needed when reviewing our foreign direct investment policy. “It is widely acknowledged that the growth of Irish living standards over the past decades can be in part attributed to our pro-FDI policies,” she says. “And given the current global geopolitical situation, now is not the time for Ireland to radically change its economic model. Any alternatives to the existing model would lead to job losses, so there are really no benefits to that.”
She adds that a continued focus on innovation and providing targeted supports for indigenous industry continues to be of fundamental importance.
“We wouldn’t be where we are today without FDI. The reality is that as a small open economy we will always be vulnerable to international shocks, but that is not, in itself, a reason to become more inward looking.”
