Foreign Direct Investment in Ireland
“Foreign Direct Investment in Ireland: Policy Implications for Emerging Economies” is a scholarly journal article which is written by Peter J. Buckley and Frances Ruane of the University of Leeds and Trinity College in Dublin, Ireland. The article is well structured and starts off with an introduction explaining how the important role of multinational enterprises (MNEs) in the global economy relates to issues of how the foreign direct investment (FDI) they control impacts on overall economic activity in the receiving countries.
It explains that specific emphasis is centered on how the government can influence FDI policies and thereby attract more of an audience. The journal article focuses the entire paper on the FDI in Ireland because of two primary reasons: 1) because Ireland has consistently promoted export-platform inward investment into the manufacturing sector for over four decades, and 2) MNEs in the Ireland economy now account for fifty percent of manufacturing employment and are the focal point of restructuring of the Irish manufacturing sector over the past twenty years.
The introduction then goes on to explain that there are four sections of the paper (the first being the introduction itself). The second section examines literature that emphasizes the selective promotion of MNEs, as well as the DFI policies that have promoted MNEs on a selective basis in Ireland. The third section shows primarily how Ireland has attempted to establish industrial clusters in manufacturing, while the fourth and final section draws out some policy propositions for newly emerging economies, which are based on the Irish policy experience.
For the second section of the journal article, it explains that until the 1970s there was pretty much an implication of free mobility of capital across sectors. Then, it explains, the ‘Internalization School’ provided a strong connection between MNEs and development in general. In essence, the school argued that developing countries are inexperienced and lack resources, so FDI could essentially help developing countries through capital, technology, and management techniques as well as overall “know-how. MNEs have far better access to capital from the international banking sector, and this can make a dramatic effect on the development of countries. Technology transfer can also speed up development by “facilitating the production of goods with higher value-added content by increasing exports and improving efficiency. ” The article explains that MNEs posses most of the international patents and it would be much easier for developing countries to get access to these resources by inviting and encouraging FDI.
The article also points out that MNEs can also play a huge role in teaching the know-how of the newly emerged sector or enterprise to locals in the respective emerging economy. Finally what is also pointed out is that MNEs allow developing countries to penetrate foreign markets because they may make use of worldwide marketing outlets thereby allowing the selling of products where large marketing investments would have otherwise been needed.
Ireland starting shifting its policies from high rates of tariff protection and prohibition of FDI towards a free trade policy that comprised of encouragement and incentives for MNEs. More specifically, the incentives were given in the form of generous financial support for capital investment as well as through giving a tax holiday of fifteen to twenty years on the incremental profits generated by export sales. The journal article then goes on to further elaborate on the development of policy in Ireland.
It explains that Ireland realized huge benefits in the 1960s because it had very attractive FDI environment. This was furthered by Ireland’s entry in to the European Community in the 1970s. However, in the 1970s, policy towards FDI became much more selective in Ireland. More specifically, it encouraged investment into the production of high-tech goods by proactively seeking out electronics and pharmaceuticals enterprises and gave higher rates of financial assistance to these high-tech promoted sectors.
Another advantage to potential FDI was that there was no opposition or domestic competitors. In formulating this more selective approach, policymakers in Ireland developed a specific system of selectivity for influencing the pattern of MNE investment that was comprised of four stages: (i) finding niche high-value/volume product markets with European growth potential; (ii) identifying enterprises in these markets, which were already exporting large volumes into Europe likely, in terms of the product cycle, to con- sider a European production base; (iii) persuading these enterprises to consider
Ireland as an investment base; and (iv) agreeing an incentives package which would both secure the investment and ensure maximum benefit to Ireland as a host country. Since the 1980s, there has been continued evolving in the policy, largely because of limitations set by the EU which ultimately led to the replacement of the original tax holiday with an overall low corporate tax on all profits (trade-neutral). The article then shows how there is a parallel with Ireland concerning China. It explains that China is an attractive location for FDI largely because of its growing domestic industry as well as its low-cost exporting system.
It lists a problem that is associated with the aggressive FDI and MNE policy creation that often blocks local private companies from accessing capital thereby cutting them off from export markets. The third section of the journal article discusses the development of clusters in Ireland. It is explained that such development has evolved to be that enterprises now need to take account not only of the presence and costs of traditional factors (such as transport costs and demand levels or patterns), but also of distance-related transaction expenses.
There is a lot of theoretical history and implications made from different schools of thought, however this section (and the focus of the article in general) is more concerned with how this relates to Ireland and what developing countries can learn out of it. The article explains that there has always been an Irish effort to induce MNEs to locate in areas of high unemployment and depopulation via financial incentives, however the country only began attempting to build sectorial and spatial clusters since the 1980s. As previously mentioned, they were in two high-tech sectors: electronics and chemicals/pharmaceuticals.
Regarding the electronics sector, Ireland was primarily building an electronics cluster to service the European market because the domestic market was not as important. This cluster was built on Ireland’s attractive MNE incentive reputation as well as by collaborating with its existing network of established MNEs. The initial hope was to attract some key electronics investments and then leverage further MNEs who essentially followed suit from the established key MNEs by also establishing bases in Ireland to keep up with competition.
In the 1980s, the article explains, there were four key segments: microprocessors, software, computer products and printers. Namely, Ireland succeeded in attracting two key enterprises: Intel and Microsoft. Their initial hope had paid off soon because Hewlett-Packard followed suit, and then a bunch of other smaller electronics and software enterprises all of which wanted to utilize and link with the larger key enterprises. Regarding the chemical/pharmaceutical sector, Ireland followed much of the same leveraged approach, and got similar results even though this sector was much more footloose.
However, there is little evidence of production links between the subsequent and key enterprises as there is in the electronics sector. There is also the subsector of medical devices (mainly in West Ireland) where significant grants can still be granted under EU law. The article explains that this is a much less concentrated sector and thus the average enterprise size is much smaller (unlike the electronics and chemicals/pharmaceuticals enterprises). Within this section of the paper, the author notes that there is a specific parallel with India.
The article states that like Ireland, “India had a switch from a protectionist (and dirigiste) regime to a more open one, this process beginning with the Indian software industry. ” India’s most successful FDI is the software cluster in Bangalore. The software cluster in India has the support of universities and colleges as well as returning Indian immigrants to strengthen the pool of available skilled labor for these MNEs. As previously mentioned, the fourth and final section of this journal article is all about the implications for FDI policy in newly emerging economies.
The article starts off by saying that there are similarities with developing and newly-emerging economies and Ireland in the late 1960s/early 1970s. The article suggests that Ireland’s strategy is particularly appealing to emerging economies that have no strategic power in trade. Ireland was exceptionally successful in attracting MNE investment in the past decade “is at least in part due to its consistently positive stance towards MNEs over four decades. The article also says that a key reason why Ireland was so successful was because they see government as assisting rather than constraining them. More specifically, however, the paper lists the following implications that are extracted and gathered from the experiences of the success of the Ireland policy. First, it says “host countries can never stop being pro-active. ” There needs to be some serious effort in attracting MNEs. Secondly, “a package of incentives is superior to a single incentive. This is based on MNE surveys, which illustrate the fact that they do not prefer single incentives. They prefer a package of incentves. Thirdly, “host countries should adopt an enterprise-centered approach. ” This means that host countries need to makes sure that they understand the global strategies of MNEs, not only as it would relate locally and regionally. Fourthly, it contends, “sectoral direction requires project selectivity. ” The article explains that many emerging countries are insufficiently selective in attempting to attract MNEs.
Other implications include the fact that policy consistency matters to investors – that there should not be any room for uncertainty as to an abrupt policy change; the fact that performance-based incentives are a good idea; as well as the fact that projects need to be monitored. That is, clear goals and reporting requirements need to established early on. Now that the summary of the paper has been established, I can now give my own commentary. To begin with, I feel that the paper was well written.
It was definitely well organized and cited many references that added credibility to the author’s points. I am in agreement that there are huge advantages to attracting foreign direct investment and MNEs. They are especially useful to emerging economies, because as the paper mentioned, I also agree that there are many resources that would otherwise be unavailable. There is the advantage of global marketing, the advantage of penetrating into external markets. There is also the advantage of the MNEs having access to international financing.
However, I feel that there are also disadvantages and problems to FDI and enticing MNEs. If incentives are offered to these organizations, it often causes the local businesses and entrepreneurs to either struggle or fail because they are not able to compete. So in order to solve this problem, I feel that there needs to be many factors that are considered before diving into FDI and changing policies to entice MNEs. Among the considerations that I feel should be made is how under-developed the economy is, as well as a plan of how long these incentives should last.
If a country is beyond the initial stages and there are solid businesses that are thriving and all that is needed is more growth, I think the country should be careful about introducing MNEs at least in those same sectors of those thriving businesses. That is, because if they are in the same sector, those very businesses that started the economy are likely to fail. Another consideration as I mentioned is how long these incentives should last if implemented. In essence, there should be a moderation of policy in which there attracts healthy investments but also that doesn’t hurt at home.
I also feel that there are other problems with MNEs and FDI in general. For example, when the host country is in dire need of FDI to spur economic growth, they are essentially at the MNE’s mercy and there are often rules that are broken. For example if a country has environmental protection laws and the MNE breaks them, is the country prepared to enforce the laws, or succumb to the threat of a worsened economy if the MNE’s leave or are forced out? These issues need to be solved by considering them before any agreements are made. As the article says, proper planning is key to successful MNE recruitment.
Other problems are that like in Ireland, the EU might pass laws disallowing certain incentives. These need to be researched to see whether deals can be grandfathered or not (before the passing of the law), otherwise this can prove detrimental to the whole FDI recruitment plan. At times the governments of the host country face issues with foreign direct investment. This is because it has less control over the functioning of the company, as it is functioning as the wholly owned subsidia ry of an overseas company. This has the potential to lead to serious issues.
The MNE might not have to be completely submissive to the economic policies of the host country. It is not unheard of that there have been instances of adverse effects on the balance of payments of a country, for example. The solution to these issues is again proper planning and legal strategy. Attorneys well learned in international business law need to be familiar with all aspects of the law in both the host country as well as the MNE’s home country. Without proper planning, disasters can occur which would undermine the original intent of enticing MNEs and FDI in the first place.
