OPINION:Foreign Direct Investment is great – but what about indigenous economic growth?
DURING THE boom years (of blessed memory) there were several obvious fault lines in the economy. All of them went unnoticed by government until it was too late. Now, with huge amounts of energy being devoted to political manoeuvrings, there is a real danger another major problem will be missed, one that could affect the economy for years to come.
The issue in question relates to Ireland’s ability to attract foreign investment. At the time of the two referenda on the Lisbon Treaty we were assured that Ireland’s veto on tax matters would fully protect this vital national interest. Those of us who doubted this assurance (on the grounds that there are different ways of skinning a cat) are, unfortunately, likely to be proved right.
Worrying sentiments are being expressed by senior European figures, including President Sarkozy, to the effect that Ireland, having taken advantage of the EU/IMF bailout, should give up its low tax regime.
Of most immediate concern, however, is the relentless determination of the EU to bring about a common consolidated corporate tax base (CCCTB). In essence, this would mean that multinational companies could only benefit from low taxes to the extent that profits were made on goods produced in the low-tax country. It would rule out transfer-pricing, that is, the ability of multinationals to allocate profits made elsewhere to the low-tax jurisdiction. This would clearly lessen the attractiveness of Ireland as a location for multinationals even though the rate of tax had not increased.
Because of this the Department of Finance has sent a document to the EU Commission (seen recently by Arthur Beesley of The Irish Times). The potential effects on foreign direct investment, economic growth, job-creation and the fiscal position are highly significant. Indeed, if one also takes account of the debt overhang related to the bailout of the banks, it is possible that the Irish economy would see little or no growth over the next 10 to 15 years. Emigration and/or unemployment would increase steadily and the quality of public services would deteriorate.
Does this not overstate the importance of foreign investment to the Irish economy? I don’t think it does. On a per capita basis we are used to receiving the lion’s share of such investment. No other European country comes close. The result is that up to 80 per cent of our exports come from multinationals (about 50 per cent from a mere five companies). At present the only bright spot in the economy is the output and exportation of pharmaceutical products.
It should be noted that it is not just the direct growth and employment effects that matter. Of equal importance are the indirect effects of this kind of inward investment.
In the first place foreign direct investment embodies the latest technology based on research undertaken in Silicon Valley and other reputable places around the world. Ireland benefits from this technology free of charge. That is one reason why our spending on RD has been the lowest in Europe.
Second, multinationals bring their own business plans with them and ready-made export markets. There is no need for Irish entrepreneurs to do this work and resources are freed up for additional domestic activities.
Third, the foreign companies are keen to source their inputs from domestic companies where possible. They will mentor Irish firms to bring this about. The result is a high degree of “second-round” effects or linkages which further increase national output.
Fourth, the multinationals are superb high-tech companies; this is one reason they have little difficulty accessing international markets. Irish people who are employed by them learn the very best business practices and technologies. This makes it relatively easy for those of an entrepreneurial disposition to set up their own companies.
Fifth, the reputation of the multinationals reflects well on the reputation of Ireland as a whole. Since companies like Intel and Google are happy here, then it can be inferred that Ireland is a good place to do business. International goodwill arising from this is hard to measure but is likely to be substantial.
Sixth, because of the substantial exports of multinational companies Ireland hasn’t had a balance-of-payments problem for years, even now when tourism is doing badly.
So, yes, these world-beating companies do have a major effect on the Irish economy. The multiplier effects go far beyond the strict Keynesian definition. It is probable that the 150,000 people employed directly by multinationals give rise to indirect employment of twice that figure.
In the early 1980s, the Telesis report suggested that it was time for Ireland to reduce its dependence on inward investment which in reality had been our only industrial policy since the late 1950s. That report also recommended the fostering of home-grown industries.
The failure of governments over the years to implement “industrial clusters”, suggests that little priority has been given to developing domestic industry. As far back as 1968 the Buchanan proposals were ignored by politicians. Much more recently the National Spatial Strategy 2002-2020 was scuppered by the abortive attempt at decentralisation. Little if any assessment was made of the state of domestic entrepreneurship, or of requisite educational and training needs. In short, foreign direct investment did all the heavy lifting for us and we sat back and divided up the spoils.
If the CCCTB, or some other spanner is thrown into the works, then there will be much hand-wringing and crying foul. There is never any question of examining alternative strategies or preparing contingency plans; unfortunately that is not how we do business in this country.
It is worth noting the EU Commission’s strong preference for a CCCTB was known before the second Lisbon Treaty referendum. It is significant that it was not debated then.
Michael Casey is former chief economist at the Central Bank of Ireland and member of the executive board of the IMF. His recent book, Ireland's Malaise; The Troubled Personality of the Irish Economy, is published by Liffey Press