THE IMPORTANCE OF FDI CANNOT BE OVER-ESTIMATED
This Article appeared in the Irish Examiner August 1st 2014
The key to Ireland’s future is to build a sustainable diversified economic model, and not end up putting most of our eggs in one basket, as we did in the not too distant past. Sectors such as agri-food, tourism, fisheries, indigenous medical devises and IT companies, and the arts can all play a significant role in Ireland’s future if properly managed. The sector I have ignored thus far is the foreign owned sector. It currently plays a key role in the economy and hopefully will continue to do so.
The facts about foreign direct investment in Ireland are very impressive. At the end of 2013, the IDA had over 1,100 client companies in Ireland, directly employing 161,112 people. The IDA has also taken responsibility for 55 companies in the Shannon region, bringing total direct employment up to 166,184. This is equivalent to more than 8.7 per cent of total employment in the economy. Of course those companies buy goods and services in the local economy and so are directly responsible for many more indirect jobs. The IDA estimates that for every 1 job in a multi-national company, another 0.7 of a job is supported elsewhere in the local economy. This phenomenon was highlighted in very stark fashion in Limerick a few years back when Dell re-structured its operations, with very negative consequences for haulage companies and the like who were heavily dependent on the company for its business. Of course retail and hospitality businesses are also heavily dependent on a large employer in an area. Based on the IDA’s employment multiplier, another 116,000 jobs are supported by IDA client companies, bringing total direct and indirect employment up to over 282,000 jobs, or almost 15 per cent of total employment in the economy. This is very significant and needs to be protected and nurtured to the greatest extent possible.
In the first six months of this year, over 100 investments were secured by the IDA. This represents an increase of over 40 per cent on the first half of last year. Over 40 per cent of the investments secured are from companies investing here for the first time, with the remainder coming from existing companies. It is estimated that those investments will lead to more than 8,000 extra direct jobs in the economy.
Some observers have a tendency to denigrate the role of multi-nationals in the economy, based on the amount of profits they repatriate back to the home country. They do repatriate profits, but an assessment of what they contribute in terms of direct and employment; payroll taxes; corporation taxes; non-wage expenditure in the local economy; and work practices is very worthwhile. Multi-nationals represent a very significant and valuable part of Ireland’s economy, and if for some reason, the positive investment trends of recent years were to be reversed, Ireland would be in a very dark place.
For multi-national investment in Ireland, the biggest threat is posed by the issue of corporation tax. The OECD is currently undertaking a Base Erosion and Profit Shifting (BEPS) exercise to see exactly how companies pay and avoid tax. Amongst others, Ireland is a key focus of attention, given the whole debate about effective tax rates and various taxation practices that are very difficult to understand. The OECD’s task is not an easy one, but at the end of the whole process it is likely that there will be a much greater focus on ensuring that tax is paid in the jurisdiction where the economic activity occurs. That is only fair, but it will not work to Ireland’s advantage. How much damage might be done to Ireland is anybody’s guess at this juncture because the issues involved are very difficult to comprehend, not least by the OECD. Apparently the Revenue Commission and Department of Finance are inputting strongly to the whole exercise.
The message for Ireland seems clear to me – it would not be sensible to build our FDI model on a continuation of the current taxation system. It will be eroded to some extent and one way or the other, Ireland’s situation will be less advantageous than it is at the moment. It is really just a question of degree. Consequently, we must ensure that other key attributes for attracting investment are nurtured. These attributes include the quality of the education system and the labour force it produces; physical and IT infrastructure; suitable high-quality commercial accommodation; the quality of public services such as health and education; and the personal tax burden. At a general level we need to be as open and pro-business as possible, and easy legitimate access to those in power should be preserved.
Ireland is still punching way above its weight in terms of attracting FDI, but inevitably we will have to run faster to stand still in the future.