Download FDI and Trade in Ireland (Barry & Bradley (1997))

FDI and Trade in Ireland
(Barry & Bradley (1997))
• FDI and trade: the experience since 1958
– The changing geographical destination of exports and
the changing sectoral production structure (from
traditional sectors (e.g. agriculture) to knowledge-based
sectors (e.g. software) of the economy was an
important consequence for Irish growth.
• FDI into Ireland
– Statistics used by Barry & Bradley are manufacturing
statistics for the year 1993
– Here, we will use statistics from the CSO Census of
Industrial Production, 2003:
– Only 13.4% of all manufacturing local plants are
foreign-owned but they produce almost 80% of gross
output and engage almost 47% of manufacturing
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employment
FDI and Trade in Ireland
(Barry & Bradley (1997))
% of local manufacturing plants
that are foreign-owned
% of total gross manufacturing
output produced by FDI
% of total manufacturing
employment in FDI firms
1993
2003
15%
13.4%
60%
80%
45%
47%
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• FDI into Ireland
– 41.1% of foreign plants are US-owned, 19.7% are
British and 11.7% are German
– Foreign-owned firms are much more likely to
import their raw materials and semi-processed
material inputs than indigenous firms
– Irish plants export, on average 47.6% of output,
while foreign firms export 94%. US-owned firms
export 96% of output
– The domestic market is of little significance to the
foreign-owned firms
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FDI and Trade in Ireland
(Barry & Bradley (1997))
•
FDI into Ireland
–
Three other differences between foreign-owned
firms and indigenous firms in Ireland:
1. Foreign-owned firms tend to be larger
2. Foreign-owned firms are more productive
3. Foreign-owned firms tend to be more profitable
– UK-owned firms tend to send most of their
exports to the UK market, US-owned firms send
only a small proportion of their exports to the UK
market and most of their exports to the rest of
the EU
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• FDI into Ireland
– The overall health of the economy is
dependent on the performance of the
foreign-owned sector
– FDI performance has economy-wide as
well as sectorial implications
5
FDI and Trade in Ireland
(Barry & Bradley (1997))
• In the past Ireland competed with other
countries for FDI on basis of:
– A low Corporation tax: 12.5% (currently)
– Young, educated and available labour
– Low cost economy
• Ireland’s success in attracting FDI:
– UNCTAD World Investment Report 2004 – Ireland
ranked in top ten countries of the developed world
in receipt of FDI (fourth in the world)
6
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Success in attracting FDI (cont’d)
Ireland:
– Over 1000 foreign companies mainly in high-tech
sector
– 7 of the world’s top 10 ICT companies
– 13 of the world’s top 25 medical technology
companies
– 14 of the world’s top 15 pharmaceutical
companies
(Source: IDA Ireland & ESG Report)
– Clusters of high-tech activity
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• Corporation tax:
Ireland
12.5%
United Kingdom
30%
Belgium
33.99%
France
33.33%
Germany
26.38%
Poland
19%
Latvia
15%
Lithuania
15%
Cyprus
10%
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• Corporation tax:
– Ireland has been allowed to continue having a
such a low corporation tax rate within the EU for
two reasons:
1. It is a small economy within the EU – it produces
approx. 1% of EU GDP. If France or Germany
were to dramatically reduce its corporate tax rate
to 12.5% (same rate as Ireland), this may break up
the EU
2. It was the first country to offer foreign investors
such tax concessions
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FDI and Trade in Ireland
(Barry & Bradley (1997))
– Ireland’s competitive position, in this regard,
depends on others (or at least not many) not
following suit. At the moment, just Cyprus has a
corporation tax lower than Ireland at 10%
– FDI into Ireland:
– The mainly tax-based FDI incentive system and
the fact that Ireland features as a production
platform rather than as a market means that the
opportunities exist for transfer pricing
– Profit repatriation is also extensive: gap between
GDP and GNP in Ireland
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FDI and Trade in Ireland
(Barry & Bradley (1997))
Aspects of the FDI inflow:
• Sectoral destination of FDI inflows:
– FDI inflow into Ireland have not gone primarily into
sectors in which Ireland had a traditional
comparative advantage
– The FDI inflows, in the 1960s/1970s were in
sectors in which Ireland actually had a
comparative disadvantage e.g. Chemicals, Metals
and Engineering
– FDI manufacturing inflows go primarily into sectors
in which there are increasing-returns-to-scale
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• Sectoral destination of FDI inflows:
– Key sectoral destinations of FDI inflow in Ireland:
– Advanced manufacturing projects in the ICT,
pharmaceuticals, Medical Technologies,
Engineering and Consumer Products
– Internationally Traded Services sectors –
Software, Financial Services, Shared Services
and Customer Support activities
– IDA (Industrial Development Authority) Ireland has
had great success in attracting large FDI projects
into the country. IDA Ireland is responsible for the
FDI sector in Ireland
12
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Sectoral destination of FDI inflows:
– IDA Ireland has focused on attracting investment
that is of high value, requiring high skill levels and
with investment that has the potential to develop
and improve the innovative capacity of the country
– IDA Ireland, in the past, has attracted FDI into the
country on the basis of low corporation tax rate,
the availability of skilled labour, the young,
English-speaking workforce and a low cost base.
– However, many of these competitive advantages
are being eroded at the moment
13
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Sectoral destination of FDI inflows:
– Eastern European Economies joining the EU,
following Ireland’s low corporate tax rate. Costs
have increased in Ireland – no longer a low cost
base. Skills shortages now characterise many of
the high-technology sectors in Ireland.
• Skills, wages and R&D in foreign and
indigenous industry
– Total employment in the relatively ‘high tech’ areas
of Chemicals, Electronics and Medical Devices
amounts to just 8.7 percent of total indigenous
employment (Source: Forfas Annual Employment
Survey, 2004)
14
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Skills, wages and R&D in foreign and
indigenous industry:
– 42% of total FDI employment in Ireland is in
relatively ‘high-tech’ areas of Chemicals,
Electronics and Medical Devices (Source: Forfas
Annual Employment Survey, 2004)
– Generally, these high-technology sectors require
high skilled labour (e.g. engineers, scientists etc.).
– This implies that foreign-owned firms tend to
employ more highly skilled labour than indigenous
companies
15
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Skills, wages and R&D in foreign and
indigenous industry:
– Because foreign-owned companies tend to
hire more skilled labour, one would expect
that the average earnings/wages in
foreign-owned firms would be higher than
in indigenous enterprises.
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• Skills, wages and R&D in foreign and indigenous
industry:
Average Earnings per week
Manufacture of textiles
412.49
Manufacture of Leather
415.93
Manufacture of Wood & Wood Products
508.69
Manufacture of Food Products
548.54
Average
Manufacture of Chemicals
732.09
Manufacture of Medical Precision Instruments 508.39
Manufacture of Office Machinery & Computers 504.66
Manufacture of Electrical Products
457
Average
Source: CSO, Industrial Earnings & Hours Worked, Sept. 2005
471
550
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• Skills, wages and R&D in foreign and indigenous
industry:
– In the services sector:
– Computing Activity, R&D and Telecommunications
business services sectors are dominated by foreignowned firms
– The average weekly earnings in these sectors in 2005
was:
Computing Activity, R&D
709.67
Telecommunications
785.44
Source: CSO, Earnings in Distribution and Business
Services, January 2005
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• Skills, wages and R&D in foreign and
indigenous industry:
– Therefore, average earnings tend to be
higher in foreign-owned firms
– R&D: Again, because foreign-owned firms
tend to be involved in high-technology
activity, one would expect these firms to
engage in more R&D than indigenous
companies
19
FDI and Trade in Ireland
(Barry & Bradley (1997))
Other
16%
Softare &
Computer
35%
Pharma
18%
Electronics
20%
Instruments
11%
20
Source: Forfas, Business Expenditure on Research and Development in Ireland,
2003/2004
FDI and Trade in Ireland
(Barry & Bradley (1997))
Business Expenditure on R&D:
Source: Forfas, Business Expenditure on Research and Development in Ireland,21
2003/2004
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Skills, wages and R&D in foreign and
indigenous industry:
– In 1993 Irish-owned firms accounted for 33% of
overall business R&D, with foreign-owned firms
accounting for 67% of overall business R&D
– In 2003 Irish-owned firms accounted for a falling
27.9% of overall business R&D, with foreignowned firms accounting for an increasing 72.1% of
overall business R&D
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FDI and Trade in Ireland
(Barry & Bradley (1997))
Total numbers of performing R&D Firms:
R&D Active
1993
2001
2003
Irish Owned
595
978
873
Foreign Owned
225
286
252
Total
820
1264
1125
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• Linkages, spin-offs, and agglomeration
economies:
– Low level of backward linkages of the foreign industry
in Ireland
– 80% of materials purchased by industrial foreign-firms
in Ireland is imported, compared to 28% for
indigenous firms (Source: CSO Census of Industrial
Production)
– Spin-offs: benefits of FDI may also be their role as
‘incubators’ for new entrepreneurs.
– Little research exists on the backgrounds of
entrepreneurs involved in new firm start-ups – but the
research does point to FDI in Ireland having an
‘incubator’ role
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FDI and Trade in Ireland
(Barry & Bradley (1997))
• Linkages, spin-offs, and agglomeration
economies:
– Foreign firms may be an important source of
demand for new company start-ups – requirement
for high standards
– There may also be knowledge transfers from FDI
firms to indigenous firms in terms of managerial
practices, technical expertise, quality standards
that indigenous firms
• Such knowledge transfer can occur via labour mobility or
formal/informal linkages
25
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Linkages, spin-offs, and agglomeration
economies:
– Agglomeration economies: surveys of executives
of newly arriving foreign companies in the
computer, instrument engineering, pharmaceutical
and chemical sectors indicate that their location
decision is now strongly influential by the fact that
other key market players are already located in
Ireland
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FDI and Trade in Ireland
(Barry & Bradley (1997))
•
Possible adverse effects of FDI
–
–
A number of adverse effects of FDI inflows on
welfare or employment in the host country have
been identified in the literature
Barry & Bradley (1997) studies whether any of
these adverse effects have arisen in the Irish
case:
1. FDI and the decline in market share of
indigenous firms
–
International-trade literature states that national
welfare can be reduced by FDI inflows if MNCs
capture market share from indigenous firms and
thus reduce the indigenous firms’ profits
27
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Possible adverse effects of FDI
1. FDI and the decline in market share of
indigenous firms
–
–
–
This argument most likely does not apply in the
Irish case because:
Irish-based MNCs (i.e. FDI in Ireland) do not
serve the home market and
Domestic industry in Ireland pre-free-trade had a
comparative disadvantage in precisely those
sectors in which foreign industry grew
28
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Possible adverse effects of FDI
2. Disequilibrating wage developments
– A more plausible effect is that the strong FDI
inflows could generate disequilibrating wage
developments if all the high productivity growth of
the foreign sector were passed on into
manufacturing sector wage demands
– i.e. High productivity growth of the FDI sector
would result in higher wages in this sector. This
may result in higher wage demands in other, more
traditional sectors, where productivity growth is
slower
29
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Possible adverse effects of FDI
2. Disequilibrating wage developments
– This would lead to a rapid decline and an increase
in unemployment in these traditional sectors
– Is there any evidence to support this?
– Average weekly earnings in the high-technology
sectors (which are dominated by FDI) tend to be
higher than in the more traditional sectors.
However, the growth in average weekly earnings
in both sectors has been almost identical.
– High-technology sectors tend to be more
productive than the traditional sectors
30
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Possible adverse effects of FDI
2. Disequilibrating wage developments
– In terms of employment: within manufacturing,
employment has been declining in textile and
clothing, metals, paper/printing and publishing
(traditional sectors)
– While there is excess labour demand and skills
shortages in the areas of engineering, Information
Communications Technology, Software (hightechnology sectors)
Source: Expert Group on Future Skills needs
(Forfas) – The National Skills Bulletin 2005
31
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Possible adverse effects of FDI
3. FDI and the neglect of indigenous firms
– The attention of policy-makers may have been
distracted from the requirements of the indigenous
sector by the high profile attached to the attraction of
multinationals
– Reports reviewing industrial policy in Ireland in the
1980s and 1990s concluded that a more energetic
attempt should have been made to assist indigenous
industry in Ireland
– The Telesis Report published in 1982 criticised what it
regarded as an overemphasis on foreign industry in
policies to promote industrial development in Ireland.
It concluded that reform was needed in the
indigenous sector
32
FDI and Trade in Ireland
(Barry & Bradley (1997))
•
Possible adverse effects of FDI
3. FDI and the neglect of indigenous firms
–
–
–
–
The Culliton Report in 1992 restated the need to direct more
resources to indigenous enterprise development
In 1993/1994 the Industrial Development Agency (IDA) in
Ireland was restructured with IDA Ireland now focusing on the
FDI sector and Enterprise Ireland now focusing on the
indigenous sector
In more recent times - specific needs of the indigenous sector
have been addressed by policy initiatives – more resources
are directed towards the development of the indigenous
sector. Initiatives have been implemented to assist indigenous
companies, especially in exporting, marketing and R&D
Such initiatives have helped the development of the
indigenous sector
33
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Possible adverse effects of FDI
4. Potential instability from over-reliance on multinationals
– The over-reliance on FDI may be a source of potential instability
for the Irish economy
– Large multinationals a few high-technology sectors producing a
large proportion of total output in the economy
– One perceived danger: external circumstances could change in
such a way that the economy - over a short period of time –
loses its attractiveness as a base for multinational investment
• Lower corporate tax rates of Eastern European countries
• Lower cost economies
• Skilled labour shortages in Ireland
34
FDI and Trade in Ireland
(Barry & Bradley (1997))
• Possible adverse effects of FDI
4. Potential instability from over-reliance on
multinationals
– Another perceived danger: economic downturn in
high-technology sectors – these are very dynamic
sectors, highly competitive and are more susceptible
to shocks
– It can be argued that Ireland has a absolute
advantage rather than comparative advantage in
these high-technology sectors
– A country can lose its absolute advantage over night
while comparative advantage may change but can
never be obliterated
35