Mr.

Introduction

Foreign Direct Investment has had a profound effect on the Irish economy since 1990. In this essay I will examine the role of foreign direct investment in Ireland since 1990. I'll examine what policy the Irish Government has implemented in order to attract this investment and other factors which have helped Ireland in attracting FDI. I'll also examine quantifiable changes in the Irish economy which are related to rising FDI. Undesirable characteristics of increased FDI in the economy will also be tackled as well as the miserable performance of indigenous industry and I'll question indigenous' industries ability to achieve economic goals in the past and going forward.

What has Ireland done to attract FDI since 1990?

Ireland has been really successful at attracting FDI since 1990. Here I will demonstrate how Ireland's economic policy has successfully led to increased investment and how some factors outside our control have also had a positive effect in the Irish economy.

1. Corporate Tax Rate

Ireland has a very favorable corporate tax rate of 12.5% following a reduction from 16.5% a number of years ago. There was a rate of 10% for companies locating in the IFSC or involved in manufacturing but this has now been phased out except for a very limited class of business in the IFSC, trading internationally. A comparatively low tax rate has led to companies locating as much of their profit as possible in Ireland through the use of transfer pricing. This may be good for Ireland but we currently face pressure from the EU & the US to clamp down on transfer pricing. Increased regulation may be a challenge for Ireland going forward.

2. The Irish Development Authority

The IDA was established in the mid 1950's after economic policy changed from protectionist in nature to a policy focused on attracting FDI. The IDA attracts FDI by targeting organizations that can operate successfully in Ireland and help in achieving Ireland's economic goals. They ensure necessary skills are available through links with 3rd level organizations and provide grants and develop infrastructure to make Ireland more attractive to FDI. The IDA has been successful in attracting high-profile companies such as Wyeth, Intel and Microsoft. IDA supported companies paid 2.8B corporation tax in 2006 and spent 15B in the economy.

3. EU Membership

Ireland's membership of the EU has helped us gain access to larger European markets. It has also made Ireland more attractive to FDI because we have easy access to the UK and other European markets. Net Transfer payments received from other EU countries also helped develop Ireland's infrastructure and education system making us more attractive to high value-added FDI.

4. Other Factors

Ireland had a young, well-educated workforce in the 1990's which helped attract FDI. We also had an advantage over other EU countries such as Spain or Portugal because we are an English-speaking country which is important to US companies.

Another factor which has been critical to Ireland's success at attracting FDI since 1990 has been the US' economic position. An increasing $ and sustained growth over the 1990's led to US companies expanding into new markets such as the EU. Ireland's position as a low-tax economy committed to foreign trade was attractive to US companies and helped us significantly increase FDI in the economy in this period.

FDI related changes since 1990

Here I will examine some quantifiable changes in the Irish economy since 1990 which can be related to rising foreign direct investment.

Exports & Trade

Ireland has experience rapid growth in manufacturing exports since 1990. FDI has been crucial to increasing exports and 50% of manufacturing employment is now provided by foreign-owned companies. Over 50% of manufacturers in Ireland are involved in exporting. Foreign-owned companies have been using Ireland as a base for exporting into the EU. Gross output exported increased from 72% to 87% between 1991 and 2001. Higher export propensities of foreign companies were mainly responsible for this increase because their export propensities increased from 88% to 94% while Irish companies' remained at 49%.

Evidence suggests that Irish companies with higher productivity are more likely to export to the EU and the US. This indicates that a lot of Irish companies are not capable of competing internationally due to poor productivity. Between 1991 Irish manufacturing exports increased by 33% but we did not succeed in reducing our dependency on the UK market. Ireland's share of exports fell from 25% to 10% during this period while EU companies in Ireland doubled their exports and US companies quintupled their exports. Increased exports to the EU and the US suggest that foreign owned companies use Ireland as a base for global exports and not just as a route to the UK or EU markets.

Internationally traded services also increased dramatically in Ireland since 1990. Foreign-owned firms dominate exports of internationally traded services. International financial services (IFS) and software/computing services (S/CS) are Ireland's biggest internationally traded services categories. Employment in these categories grew 300% between 1991 and 2001. Foreign-owned firms now employ 80% of people working in the IFS sector. S/CS sales grew 610% in 8 years during the 1990's. Foreign-owned firms accounted for 94% of sales in the S/CS sector in 1999 but Irish firms saw an increase of 400% in sales between 1991 and 1999 although they were starting from a very small base. Export intensity in the S/CS sector has increased from 79% to 92% since 1991 due to foreign companies exporting 94% of sales. Irish company's exports were lower at 62%. Other services Ireland has attracted include call centers, education services and general engineering. Foreign-owned firms account for 70% of sales in these sectors also.

Employment & wages

After a period of decline in employment growth from 1980-86, Ireland experienced an average employment growth rate of 4.2% from 1991-2001. Employment grew by 27% from 1991-2001 and there was a 42% increase in foreign employment. Unemployment fell from 18% in the late 1980's to just 3.5% in 2001. This was the first time in history that Ireland achieved full employment. Most other EU countries & the US experienced a growth rate