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Foreign Direct Investment: The Motor in Ireland’s Economic Recovery

Foreign Direct Investment: The Motor in Ireland’s Economic Recovery

Since TK Whitaker first began advising governments of the benefits of open trade in the late 1950s, Ireland has set out its stall as an outward-looking, open economy. We certainly box above our weight when it comes to Foreign Direct Investment (FDI) gaining more than twice as much as you would expect for a country of our size.

Through IDA Ireland, successive Irish governments have actively promoted a foreign direct investment strategy that has fuelled economic growth since the mid-1990s. The main drive behind Ireland’s investment promotion has been job creation with notable early success in attracting big hitters including Intel, Pfizer, GSK and HP. In recent years, governments have looked to increase Ireland’s international competitiveness by encouraging FDI in research and development (R&D) activities thus delivering higher-value goods and services.

As IDA chairman, Frank Ryan commented recently, most countries and jurisdictions would “give their right arm” for the level of FDI Ireland gets, in particular from the US. Over the past 20 years Ireland has become the prime location for US companies who are looking to expand their operations outside North America, developing an enviable reputation as an FDI hub.

FDI and Economic Recovery

As with many European economies, Irish trade contracted significantly at the height of the global economic crisis. While austerity measures certainly played their part, the economy’s recovery has been driven by our success in attracting foreign direct investment. The IDA estimates that, for every ten jobs generated by FDI directly, another seven are generated in the wider economy.

The last few years has also seen a significant increase in investment into Ireland by Asian companies, particularly from China. Data from international law firm Baker McKenzie revealed that foreign direct investment (FDI) from China into Ireland surged to $2.9bn (€2.4bn) in 2016, up from only $10m the year before.

FDI securement of the magnitude seen over the last 20 years has been among the State’s great economic policy successes, if not the greatest. When a foreign company lays down new foundations in Ireland, it creates work not just for its industry sector, but also for construction, retail and hospitality, making FDI a hugely important focus for the Irish economy.

foreign direct investment inward flow in usd

While FDI inflows have been irregular over the past few years, investor interest in Ireland has remained robust. In Ireland and the UK, FDI skyrocketed in 2015 due to the substantial increase in mergers and acquisitions, up 68 per cent year-on-year from 2014 levels. According to Ernst and Young’s 2015 European attractiveness survey, a 10% increase in FDI projects and a sharp fall in energy prices also helped bolster this surge. Following a normalisation of figures in 2016, FDI into the Republic rose considerably to $29 billion in 2017, up 131 per cent from $12.5 billion a year earlier.

According to IBM’s 2018 Global Locations Trends report, Ireland is first in the world at providing value from foreign direct investment. In fact, over the last seven years Ireland has led global figures for attracting high-value investment. Our strength in generating inward investment in key high-value sectors such as ICT, financial and business services, and life sciences sees us outperforming countries like the UK, Singapore, the Netherlands, India, Denmark, and Australia.

It’s worth pointing out that Irish-based multinationals have proven exceptionally ‘sticky’, a fact borne out by the percentage of profit they have reinvested in their local subsidiaries. OECD figures show that this component of FDI has continually grown in the last 5 years. In 2017 Ireland accounted for 15% of total reinvested earnings of foreign affiliates in OECD countries – an impressive number. This level of reinvestment is a testament to the strong value proposition that Ireland has offered foreign investors in recent years.

Corporate Tax is only part of the attraction

Many assume Ireland’s ongoing success in attracting investment to its shores is due to its low corporate tax rate. While a 12.5 percent corporate tax is certainly a healthy incentive, there has been a disproportionate emphasis placed on our tax regime nationally and internationally. Tax is just one part of the value proposition for FDI and there are many other factors in Ireland’s favour including a Common Law jurisdiction and less stringent employment laws. Research has shown that US firms in the ICT sector – our most successful investment area in terms of FDI – are attracted to Ireland predominantly for its access to the EU’s highly skilled, multilingual labour force.

Ireland has the youngest population in Europe with a median age of 35.5 compared to a Eurozone average of 42.8. Fifty-two per cent of the country’s 25 to 34-year olds have a third level qualification, 10 per cent higher than the OECD average. These factors, along with being the only native English-speaking country in the Eurozone make it easy to see why FDI is continuing to grow.

Ireland’s EU membership has become an increasingly important selling point following Britain’s decision to exit the EU. With access to talent playing such a huge role in attracting FDI, Ireland may well benefit from any future UK Visa restrictions. OECD and United Nations data for the UK, which includes mergers and acquisitions, showed a collapse in FDI between 2016 and 2017 of more than 90%.

Positive Outlook for Continued FDI

The Republic remains one of the most attractive locations for foreign direct investment globally, according to a new study which finds 79 per cent of investors are intending to increase their FDI in the next three years. The 2018 Foreign Direct Investment (FDI) Confidence Index from consulting firm A T Kearney ranks Ireland in 19th place overall, up one place versus 2017 and compared to 23rd spot two years earlier.

Overall, the economic outlook is bright for Ireland. GDP growth in 2018 is projected to be 3.5 per cent – dramatically higher than the 1.9 per cent growth expected in the eurozone. From the foundations of Whitaker’s policies to a new era of globalisation and digital disruption, economic development, driven by FDI, will continue to enable the Irish economy to prosper.