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Capturing investment - why foreign direct investment is key in boosting Ireland’s economy

AUTHOR(S): Robert O’Shea, Pat English
PRACTICE AREA GROUP: Corporate, International Business
DATE: 06.04.2011

The contemporary Irish lawyer spends more time than ever in cross-border environments in patriotic defence of Ireland's reputation in international circles.

In this context, we recently were in a meeting with a London law firm colleague in which the trusted colleague lamented the turbulent times in which we live. The confluence of recent events was, he said, one we could scarcely have expected, much less be prepared for. We are in uncharted waters at a time of quite unparalleled challenge where reputations in international circles have been subjected to extreme and brutal force. The real challenge, he wisely concluded, lies in winning our way back to the fore and in restoring our reputation in the process.

While the London colleague may have been referring to England's recent losses to Ireland on the rugby as well as (heavens above) on the cricket field, he could just as easily have been referring to the battle the Irish economy and the Irish Government have faced on the international front during the last 18 months. Ireland's profile and reputation have taken a real battering during the period in the midst of an unprecedented global economic and financial crisis. And yet while the domestic and international press have inevitably focused on the negative, this does not tell the full story.

Foreign direct investment (FDI) in Ireland has remained very active. In fact, it increased significantly in 2010 (the best performance in seven years) and that trend has continued so far in 2011. Recent independent surveys have confirmed this, with the number of projects coming to Ireland increasing by 15% in 2010. This was in spite of the turbulent global economy in which, according to figures from the Organisation for Economic Co-operation and Development (OECD) and coupled with increased competition, global FDI declined by 8%.

There has been a steady increase in the number of companies investing in Ireland for the first time - in particular in the software and medical devices sectors as well as in customer support. Existing investors have also continued to expand and diversify their operations. Among those investing in Ireland for the first time in 2010 were: Dun & Bradstreet, Telefonica, Warner Chilcott, LinkedIn, Electronic Arts, Riot Games, Webroot, Spencer Stuart, Genband, Synchronoss, Aspect Software and Streamserve.

This year to date has also seen projects announced by Amgen and American Medical Systems. Ireland's inward investment agency, the Industrial Development Agency, secured a total of 126 investments in 2010, creating almost 11,000 new jobs (well in excess of 2009's outcome of 4,615 jobs), while many of Ireland's existing and new clients are actively recruiting in Ireland, including HP, Microsoft, Accenture, Citi, Google, Facebook, Eli Lilly and Merck & Co.

The numbers also show that FDI remains a key growth driver in the Irish economy. FDI accounts for over 75% of total Irish exports. There are over 960 foreign companies doing business in Ireland employing over 138,000 people. There are eight of the world's top 10 information communications technology companies located in Ireland; as well as eight of the top 10 pharmaceutical companies and 15 of the top 25 medical technology companies.

Over 50% of the world's leading financial services companies have operations in Ireland. Importantly, the activity carried out by a number of the large multinationals is now also moving towards higher value-added services such as research, development and innovation (RD&I). This is an exciting trend in RD&I, evidenced, for example, by IBM's decision announced during 2010 to locate its €500 million (£440 million) smarter cities project in Dublin.

Why Ireland?

Despite the period of global recession over the past two years, Ireland's offering to multinational clients either operating in Ireland or choosing to establish in the country for the first time remains one of the strongest in the world. A lot of what makes Ireland attractive is not news.

Ireland has access to a highly skilled workforce, while cost-competitiveness has improved. For example, business costs including energy, private rents, office rents, services, construction and labour have all become more competitive. Both gas and electricity prices are now below the European Union average, and the cost of living has also fallen. Office rents have decreased sharply - typically by up to 40%, while the EU has forecasted that from 2008 to 2012, Ireland's labour costs will have improved 13% relative to the EU average (27%). The improvement in competitiveness has been key in securing new FDI for Ireland and a continuing focus on improving this is essential.

Ireland has also built a critical mass of firms in a number of important industries such as pharmaceuticals, internet services (including, most recently, cloud computing) and financial services, which in turn makes Ireland attractive for further investment in these areas. Its 12.5% rate of corporation tax is absolutely critical. Low corporation tax has been the foundation stone of Ireland's industrial policy since the mid-1960s, and the 12.5% rate has been in place since the mid-1990s, during the country's most successful-ever period in terms of attracting high-value inward investment. There is a lot of attention currently on Ireland's corporation tax rate, much of it baseless political opportunism in certain quarters of Europe. And yet ironically, many of the countries we compete with - Singapore, Switzerland and Luxembourg - have an effective corporation tax rate lower than Ireland.

Increasing corporation tax rates is consistently regarded as counter-productive - witness the view of the OECD - and it is not surprising in this context that we are now seeing other countries, including the UK, taking active steps to review and, where they deem appropriate, reduce their headline corporation tax rates. Ireland cannot afford any uncertainty around its corporation tax rate and the Irish Government has been very clear that it is not for changing. It is critical that this stance is maintained.

All the negative publicity and attention cannot disguise the fact that there have been real achievements in the Irish economy over the last 20 years. The difficulties now faced by Ireland illustrate more than ever that these achievements were almost entirely dependent on its ability to attract FDI. More specifically, these achievements were primarily due to Ireland's success in becoming the best business environment in Europe for US companies to access the EU internal market. In that sense, Ireland created a 'Celtic habitat' rather than a 'Celtic tiger', and that is something that should not be forgotten.

Export-led recovery

It is sometimes said the phenomenal growth Ireland achieved in the 1990s on the back of FDI was a jobless growth. This is fiction. In 1993, unemployment in Ireland stood at nearly 16%. In 2003, before the credit-fuelled construction bubble, it was under 5%. Ireland needs to grow its enterprise base but, specifically, Ireland knows that its future economic success depends on achieving export-led growth.

Over 75% of Ireland's exports are now accounted for by foreign-owned companies. By contrast, the export performance of indigenous Irish companies, with the exception of the software sector, has been relatively poor over the last 20 years. The figures for January 2011 show the manufacturing sector growing at its fastest pace in 11 years. Employment also increased in the manufacturing sector for the second month in a row - and there is further good news. These cost reductions and productivity gains have seen Ireland's exports reach new highs.

The Irish Exporters Association's review of 2010 shows that exports in the fourth quarter of 2010 grew by 18%, bringing total exports of goods and services for the year to €161 billion (£142 billion), the highest export figure ever recorded for Ireland. This €161 billion export figure represents full-year growth of 6.7% over the previous year. The projection for 2011 is for further growth of 7.2%, which will push total exports to a new record of €172 billion (£151 billion).

Better still, another study carried out among business leaders, revealed that the overwhelming majority - some 85% - of multinational representatives in Ireland intend to maintain or increase their investment in Ireland. This is all positive news for the Irish economy - but it just doesn't sell newspapers like bad news!

The FDI sector - both in manufacturing and services - accounts for €110bn (£97 billion), or almost 75% of total exports in the Irish economy, 240,000 jobs, 55% of corporation tax, €19 billion (£17 billion) in direct expenditure, €7 billion (£6.2 billion) in payroll costs and 73% of business spend on RD&I. These numbers tell the real story.

Ireland's future success

The growth and development of multinationals, with their strong focus on high-value goods and services exports, is fundamental to the Irish economy and is an essential component of Ireland's economic recovery. Ireland's future economic success, just like its past economic success, will depend entirely on its ability to sustain an attractive habitat for FDI. This time, however, Ireland will also need to create a business environment which is attractive to more than US companies.

Ireland is now focused on targeting companies from the emerging trading blocks that are seeking to access the EU internal market. Global FDI is predicted to grow by up to 30% by 2012. This will bring significant opportunities for future investment. The global outlook for FDI in 2011 remains challenging but a continuing focus on improving competitiveness will place Ireland in a favourable position to win further significant FDI and contribute strongly to Ireland's export-led economic recovery. It is also encouraging that many investments secured last year will be recruiting this year, feeding further employment growth.

Ireland's focus will continue to be on high-end manufacturing, global services and RD&I across a wide range of sectors. And with that focus, if it continues to address its cost base and restore its international competitiveness, Ireland can continue to seize the FDI opportunities that are there to help it emerge from the economic predicament it finds itself in.

Henry Ford's mantra comes to mind: you can't build a reputation on what you are going to do. That is true today in a more direct way than ever before - where results not only speak for themselves, they're also the only ones that are entitled to speak. Ireland's reputation in the FDI world goes back decades and has been built on solid foundations. Despite the challenges the country continues to face in domestic and international circles, the Ireland Inc proposition continues to make sense for a growing number of FDI clients.

Ireland is not only open for business, it's very much doing business and with the appropriate levels of tenacity in business and government, including where sensibly required on the European stage in particular. There is no reason to believe that Ireland will not continue to be a leading preferred jurisdiction of choice for the international investor client. The numbers don't lie, and the key number is number one. When it comes to FDI, that's where Ireland will always strive to be.

This article first appeared on the website (5 April 2011).



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