Policies towards foreign direct investment: Is Ireland an Example of Best Practice

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Policies towards foreign direct investment Is
Ireland an Example of Best Practice?

• Overseas Development Conference
• London March 2001.
• Frances Ruane

Trinity College, Dublin, Ireland.
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Summary of the Irish Success Story

• Phenomenal growth of economy in EU context
• Major FDI-owned sector export driven
• Development of key high tech sectors
• Presence of major companies within high tech
  sectors
• Development of linkages with indigenous companies
• Increased Irish value-added of foreign companies

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Key Periods in Irish Development Policy

• 1930-1960 - Protectionist period indigenous
  import-substituting manufacturing sector
• 1960-1980 Export led growth period
  foreign-based exporting sector in manufacturing
• 1980-2005 Traded-sector led growth
  periodtraded sector, both indigenous and
  foreign owned, in manufacturing and
  internationally traded services
• 2005 - Trade-neutral development period ???

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Key Elements in Policy post 1960

• Consistency- single (apolitical) policy for 40
  years!
• Gradual abandonment of attempt to protect
  declining industry
• Market-driven, export-led, FDI-led approach
• Generally sensible selectivity - matching of
  needs
• Performance-based incentives - fiscal and
  financial
• Investment in education and relevant
  infrastructure
• Appropriate macro policies at crucial time in
  1980s

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Key Policy Instruments for FDI

• Automatic Low corporate taxes designed to
• Encourage exporting
• Encourage FDI
• Discretionary (flexible) Grants designed to
• Promote investment
• Influence company location
• Incentivise company behaviour

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Evolution of Support structure (1950s)
IDA
Foras Tionscail
Trade Board
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Support structure (1969/73)
IDA
Foras Tionscail
Technology Board
Trade Board
IDA
Industrial Training Board
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Support structure (1993)
IDA
Foras Tionscail
Technology Board
Trade Board
IDA
IDA Ireland (FDI)
Enterprise Ireland (Indigenous)
Policy Board
Industrial Training Board
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Support structure
IDA
Foras Tionscail
Technology Board
Trade Board
IDA
IDA Ireland (FDI)
Enterprise Ireland (Indigenous)
Policy Board
Industrial Training Board
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Negative Aspects of Policy

• Zero tax rate was inappropriate /
• Is current tax rate (12.5) still too low?
• Over-emphasis on effects of direct (industrial)
  policies compared with general (macro) policies
• Inconsistency within policy formulation e.g.,
  capital/labour bias, anti-RD bias, anti-linkage
• Geographic concentration of investment by source
  and location
• Sectoral concentration???

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Positive Aspects of Policy

• Positive national attitude - promotional
• General consistency over time
• Emphasis on employment quality as well as
  quantity
• Company-focussed can do
• Transparent system corruption?
• Greenfield approach / Minimal crowding out for
  local firms

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What constitutes good government policy in a
developing context?

• Invest in labour (skills and education) as part
  of labour market flexibility policies
• Support changing industrial structures
• Facilitate geographical clustering, supported by
  relevant infrastructural investment
• Encourage entrepreneurship (via tax regime) and
  facilitate appropriate FDI
• Consistent approach to development strategy

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Ireland in an EU context

• Possibility for Ireland to grow importance of
  market access and access to FDI
• Specialisation and industrial restructuring with
  technological spillovers
• Outside benchmarking for business and competition
  standards
• Outside benchmarking for policy making
• Success by design or accident?

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Impact of EU

• Access to significant markets (attraction to US
  investment)
• Structural funds
• Single European market programme
  rationalisation of older industry / concentration
  of new industry
• Agglomeration economies
• Tax harmonisation issues
• State aid issues

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Irelands success - are there any lessons for
other countries?

• Policy consistency in Ireland - single
  (apolitical) policy for forty years!
• Globalization Market-driven, export-led,
  FDI-led approach - little desire to
  protectdeclining industry
• Appropriate degree of selectivity
• Performance-based incentives - fiscal and
  financial
• Importance of indirect policies policy chain

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Issues for Ireland

• Is the growth real and sustainable, or to what
  extent is it just catch-up?
• Can we continue to win FDI as the EU expands?
• Are we over-globalized?
• Did policy really matter or were we just lucky?
  Are new policies correct?
• Does Irelands success really have any
  implications for other countries?

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Readings on Ireland
Determinants of Firm Start-Up Size An
Application of Quartile Regression for Ireland,
Small Business Economics, Vol 14, pp 211-222,
2000 (with H Görg and E Strobl) An Analysis of
Backward Linkages in the Irish Electronics
Sector. Economic and Social Review, Vol 16, No
3, 2000, pp215-235 (with H Görg).
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Multinational Companies and Linkages
Panel-data Evidence for the Irish electronics
sector. Forthcoming in International Journal of
the Economics of Business, 2001 (with H
Görg) The tangible Contribution of RD-spending
foreign owned plants to a host region a plant
level study of the Irish Manufacturing Sector
Research Policy Vol 30, No 2, 2001, pp 227-244.
(with A Kearns)
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Irish FDI Policy and Investment from the EU".
In Barrell, Ray and Nigel Pain (eds.)
Investment, Innovation and the Diffusion of
Technology in Europe. Cambridge University Press.
1998. (with H Görg), pp 44-67. US Investment in
EU Member Countries The Internal Market and
Sectoral Specialisation Journal of Common Market
Studies, Vol. 37, No. 2, June 1999, pp. 333-348.
(with H Görg) European Integration and
Peripherality Lessons from the Irish Experience
World Economy, Vol. 23, No. 3, March 2000, pp.
405-421. (with H Görg)
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Integration and the Regions of Europe How the
Right Policies Can Prevent Polarisation. (with P
Braunerhjelm, R Faini, V Norman and P Seabright)
Centre for Economic Policy Research, London,
March 2000, 115 pp. "Globalisation and
Fragmentation Evidence for the Electronics
Industry in Ireland" (with H Görg). In Arndt,
Sven and Kierzkowski, Henryk (eds.)
FRAGMENTATION New Production Patterns in the
World Economy. Oxford University Press, 2001.