Economics:Ireland is losing its sheen in the eyes of foreign investors. The State has failed to win any major new foreign investment projects thus far in 2007, writes Paul Tansey
The overall stock of foreign direct investment in Ireland in 2006, at €171 billion, was lower than in 2003. Moreover, for the first time on record, there was a substantial €5.8 billion withdrawal of equity from Ireland by foreign business investors during 2006.
The new National Irish Bank/OCO Investment Performance Index, published earlier this week, ranked Ireland 13th out of 30 countries in terms of attractiveness to foreign investors. India came first, with Poland second. It is of little consolation that the countries rated ahead of Ireland were developing nations in Asia and eastern Europe.
The value of foreign direct investment (FDI) in Ireland, represented by direct injections of equity capital and by reinvested earnings of existing foreign businesses, fell by more than €13 billion to €171 billion last year, according to data published last week by the Central Statistics Office.
These data are of key importance since they represent the value of the stock of foreign business investment in the Irish economy.
The components of the decline are shown in the table. As can be seen, Ireland is not performing too well in the race to attract new foreign direct investment. The waning attractiveness of Ireland as a location for foreign investors can be attributed to two factors: deteriorating competitiveness and increased competition from lower-cost investment locations for available investment funds.
The decline in Ireland's cost and price competitiveness is now showing up in broadly-based rankings of international competitiveness.
In 2000, Ireland was placed fourth in the world competitiveness league published by the Institute for Management Development. By 2007, Ireland's position had slipped to 14th in a field of 55 countries.
Similarly, in the World Economic Forum's Global Competitiveness Report, Ireland's ranking declined from 5th in 2000 to 21st of 125 countries in 2006.
At the same time, globalisation has drawn many new runners and riders into a race for the available pool of FDI. These newly-industrialising countries can offer foreign investors much lower operating costs than Ireland. Moreover, global tax competition has ensured that Ireland's 12.5 per cent rate of corporation tax is no longer a unique selling proposition.
At any time, a decline in Ireland's stock of foreign direct investment would be disquieting. In current circumstances, it is deeply disturbing, and for two reasons. First, inflows of FDI during the 1990s triggered the Irish boom. While many domestic developments - enhanced policy credibility, low tax rates, easy availability of reasonably skilled labour and a "super-competitive" economy in terms of costs and prices - set the stage for the boom, FDI was the principal actor in this economic drama.
In essence, inflows of high-technology projects, principally from the US, provided Ireland with an off-the-shelf modern industrial sector at a low direct cost.
These incoming firms kick-started the boom, turbo-charging the growth in output, exports and productivity. The withdrawal from the economy of direct investment by this key segment does not augur well for Ireland's long-term growth prospects.
Second, the economy is in a tricky transition period. The boom in domestic spending, which provided the impetus to economic growth in the years after 2003, is running out of steam.
It will become increasingly apparent as growth slows over the next year that a revival of the export drive offers the only real prospect of raising Irish living standards in Ireland over the long haul. Even allowing for the sterling performance of services exports, accelerating the rate of export growth will prove extremely difficult in the face of weakening foreign direct investment flows into Ireland.
Two areas are in need of urgent attention: regaining competitiveness and refashioning the national effort to raise inflows of foreign direct investment.
