US FDI in Ireland

What is US foreign direct investment in Ireland up to? A lot of different things. Some firms are here to produce and ship to the EU, others are here for research purposes, and yes, some are here primarily for tax purposes. This latter group is the one that will be most sensitive to changes in tax policy, both in the US and elsewhere as they plan where to have their income accrue for tax purposes. In a previous post, I argued that the Obama administration’s recent proposals would not have a substantial impact on employment in Ireland. Some have taken this to mean that I am suggesting that there will be little impact on the value of FDI here. Not so. The combination of low Irish tax rates and US tax policy give firms a reason to declare their foreign earned income in Ireland and to reinvest those earnings in order to avoid costly repatriation taxes. Do firms take advantage of this? Anecdotal evidence surely indicates that they do. Data from the US Bureau of Economic Analysis gives us a better insight into how this combination makes Ireland a bit unusual. Using 2006 data (the most recent for which data were available on the website), I was able to construct the following table that gives the top eleven countries by the sales/employee, FDI position/employee, and assets/employee (all numbers are in 1000s of US dollars).

How does Ireland compare? In terms of sales per employee, we rank 4^th, behind the tax havens of Bermuda and Barbados and the capital intensive petroleum industry in Saudi Arabia. With nearly $2 million in sales per employee, we have twice that of the Netherlands, another country that has been called out by Obama but which has only $781,100 of sales per employee. Comparing Ireland’s numbers to either the world as a whole, Europe, or the EU25, it is clear that sales per employee here are rather impressive.

Turning to FDI (which is a measure of the stock of investment, including parent equity and – perhaps critical for this discussion – retained earnings) per employee, Ireland falls slightly to 6^th place, just behind the Netherlands but quite a bit lower than some of the more aggressive tax havens. Nevertheless, our FDI stock of $189,000 per employee is still far above these numbers for the world or Europe as a whole.

Finally, looking at assets (what you might think of as actual, physical stuff used to make things) per employee, Ireland now falls just out of the top ten with just over $2000 per employee. The top five are still dominated by low tax countries, but what is rather interesting is that Ireland is now just below the number for the world and about a third less than the numbers for Europe and the EU.

What does all of this mean? I can think of two stories that could yield such a pattern. First, US firms in Ireland are far more labor/human capital intensive than most. However, the assets per worker in the US are twice ours whereas the sales per worker are but a quarter of ours (UK sales per worker are $466,000). This would suggest that Irish workers are eight times more productive that a UK worker, something that doesn’t sound entirely correct.

The other explanation is that yes indeed US firms are declaring income here, quite possibly for tax purposes. If US tax policy limits the attractiveness of declaring income here, the sales attributed to Irish workers will go down, and will probably go down quite a bit. Again, however, I suggest that this does not necessarily imply a large reduction in the number of Irish employed by US firms. First, there are the arguments I made in my last previous post. Second, if as these numbers suggest FDI and sales levels are exaggerated for tax purposes, a reduction in them does not reduce the productivity of the Irish worker (who incidentally needs fewer assets than the typical EU worker). Therefore, the return to real activity, as opposed to financial activity, need not decline. This is the difference between declaring income and earning income. A reduction in income declared in Ireland does not necessarily imply a reduction on income earned in Ireland. Where it will matter is when Irish employees are engaged solely with the task of justifying income declaration. One industry with large amounts of investment but few employees is financial services, an industry that makes up 22.4% of Ireland’s US FDI position but has only  3.4% of US firms’ employment here (again illustrating the high numbers per employee that may be resulting from profit shifting). If all of this FDI were lost due to US policy changes, it would not be the employment Armageddon some fear.

So why worry? First, even the loss of 3.4% of employment by US firms still amounts to 3200 jobs, a number that although not crushing certainly hurts. However, the more critical reason to worry is that if there is a decline on income declared in Ireland, this could erode our already worsening budget. That is a serious issue, but one which is beyond this particular post. However, my point here is that the focus on jobs is perhaps misplaced, but most certainly detracts from more important issues such as the revenue implications.