Ireland’s inward-FDI sectors over the recession

Adele Begin and I have just issued a working paper (available here) on the performance of foreign-owned industry and services over the recession, and prospects for the future.

The non-technical summary reads as follows:

The current global downturn has been accompanied by a collapse in international foreign direct investment (FDI) flows.  Having reached an all-time high in 2007, worldwide flows fell by 14 per cent in 2008 and by a further 30 percent in 2009.  Given the FDI intensity of the Irish economy, this collapse might be thought to have particularly adverse implications for Ireland.  FDI inflow data however are the outcome of complex MNC financial decisions and bear only a very weak relationship to MNC employment, investment and export activities in FDI destination economies.

The analysis presented here of the recent performance of Ireland’s inward FDI sectors shows them to have played an important role in helping to stabilise the economy in the face of severe downturns in both export and domestic markets. A critical factor in this has been the particular sectors in which foreign-owned MNCs in Ireland operate.  Export demand for pharmaceutical products and medical devices in particular has remained relatively buoyant.  Employment in Irish-owned exportables (i.e. in Enterprise Ireland-assisted firms), on the other hand, fell more over the course of the downturn than did employment in the entire private sector, which is largely ascribable to the weakness of sterling

The paper also explores the country’s medium-term prospects in key foreign-dominated sectors such as ICT, pharmaceuticals and international financial services, which are experiencing substantial structural change.  The consequences of ongoing developments in the global FDI market – such as the growth of China – and in the international regulatory and corporation-tax environments – including recent and prospective policy changes on the part of the new US administration – are also assessed.

18 thoughts on “Ireland’s inward-FDI sectors over the recession”

  1. Exports of pharmaceuticals and medical devices have been buoyant.

    The trade data certainly looks good but employment in the pharma/med device sector has been in the low 40,000 in the past five years.

    Employment in IDA Ireland supported companies may fall to the 1998 level of 118,000 this year.

    Prof. Seamus Grimes of NUI Galway recently said that a major challenge which IDA Ireland faces is to move beyond the restrictions of the regional European/Middle East/Africa markets that they have been focusing on to date. The recent strategy document mentions the significance of the newly emerging markets such as China, but there are few ideas presented about how to engage with such rapidly growing markets. It is exceptionally difficult to convince Chinese companies that they should set up in Ireland in order to penetrate the European market.

    http://www.finfacts.com/irishfinancenews/article_1019221.shtml

  2. @Michael Hennigan

    ‘exceptionally difficult’ or not – China is the place to go.

    How many studying Mandarin at the mo in our 3rd level Unis/Institutes anyone? Chinese post grads now to be found in all Euro Universities … including here – and might be a good idea if we could convince the Chinese to buy a few of our bonds – I hear that they are into spreading their risks on the dollar … minor gesture from China could make a massive difference around here – not too sure they would be too impressed with our standards of Corporate Governance in the Financial, Semi-State and Quango sectors however ……..

    @Frank Barry

    .. will get to it later. You’re generally sound on this stuff …..

  3. When I did work for Glanbia a couple of years ago, the big emphasis was about getting parts of the food industry in Ireland organised properly, so that the US and China would find it acceptable to import product from Ireland. As it happened, one of Glanbia’s plants burned to the ground at Edenderry shortly after that, so it kind of put plans on hold. This is the reality though of food production based on the island of Ireland, trying to make some head way into markets abroad. What we are looking at in my opinion, is a distinct lack of interest, and sustainable investment levels in the food industry here on the ground. At a time, when Ireland was organising credit to build and buy 80,000+ homes per year. We had our priorities very screwed up. If Ireland had invested more in its food production system back then, we might have taken advantage of that sudden oil price spike in 2008, which made many look at the travel miles on their food. BOH.

  4. Frank,

    I don’t thing the EI performance can necessarily be attributed to sterling. EI firms sell mostly into the Irish market (as you know), while half of exports go to the UK. So sterling only accounts for perhaps one-fifth of the business of EI firms. For example, from the EI end of year statement 2008, 65% of job losses were construction related, which is probably largely domestic.

  5. @Michael Hennigan
    “The trade data certainly looks good but employment in the pharma/med device sector has been in the low 40,000 in the past five years.
    Employment in IDA Ireland supported companies may fall to the 1998 level of 118,000 this year.”
    Our next disaster may not be in the IFSC. Instead it may come from our corporation tax avoidance/evasion system.

  6. @David O’Donnell

    Mandarin on the curriculum – why not?

    But as part of an export/FDI strategy, it would be just another armchair panacea.

    Taiwanese, Japanese and South Korean firms dominate China’s electronics industry and as regards more labour intensive sectors, recent hikes in the minimum wage to $150 a month compare with the Irish level of $2,000.

    We had a number of South Korean FDI projects over the years but what remains appears to be insignificant.

    Asia and North America are the main areas of interest for outbound Korean FDI.

    Japanese companies also have given Ireland a pass.

    In time, some Chinese companies may have an interest in setting up hq type operations in Ireland but while some costs have fallen, the charges of the likes of the professional services cartels would surely give them pause for thought.

    On the export side, the often used argument that all we need is to get a fraction of the 2bn+ consumers in Asia, is a nonsense.

    There are of course niche opportunities in Asia but the best opportunity for Ireland is the 330m common currency area which has been largely unexploited . Most Europeans would at least have heard of Ireland.

    If we want to spend €4bn on R&D annually, put the majority of it in the food area – – there will always be a demand.

    Ireland: A "smart" economy in food better than pie-in-the-sky aspirations?

    Last November, Irish companies were warned by several senior executives who run some of the country’s most successful companies, to be cautious about expanding into emerging markets and focus instead on developed markets.

    “More fortunes have been lost than made by getting in too early,” former CRH CEO Liam O’Mahony told a conference on making businesses international at UCD’s Michael Smurfit Business School.

    O’Mahony, who ran the world’s second biggest building materials company from 2000 to 2008 and now chairs IDA Ireland, said Irish companies should consider expanding into the US, UK and other mature markets before looking at countries such as China. “Some of these markets are very large and there is still scope to grow as long as you have value propositions,” he said.

    Mahony’s advice was repeated by Glanbia chief executive John Moloney and Glen Dimplex boss Sean O’Driscoll. “China is a long-haul, a slow-burn,” O’Driscoll said.

  7. The use of Ireland as the best English speaking country in the World, would be a useful way of employing a lot of graduates. The students could live in the ticky tacky boxes. Or the many Hotels. This would be targetted at the Chinese.
    The BHO tax crusade may help to push mid level jobs to Ireland as I have said before.
    The cuts in costs will impress as will the lack of blood in the streets.
    It is going to be a hard slog.

  8. @DOH
    @Michael Hennigan

    Agree completely with Ireland looking towards the food rout. I know food doesn’t appear to many as a “knowledge” based industry but let me give an example of what is happening in the real world. I work for a nutritional division for large pahrma company. We have a facility in Cootehill co. Cavan. that manufactures some of our nutritional products for the EU. One of our major ingredients is milk. Great protein source and Ireland is blessed with some of the best dairy country in the world. One positive of Ireland’s weather is that it’s great for producing high grade grass almost year long for dairy production. That in turn can produce a high quality milk that in turn can produce a high quality protein source that is used not just in making cheese and yogurts but in high margin products like infant formula, sport enhancing products and nutritional supplements.

    Dairy can support the spectrum from the farmer for milk production to the PhD scientist who comes up with innovative uses for milk proteins and it’s derivatives.

    I would like to see the Irish government work out a system that is much like New Zealand’s Fontera. They able to push to the for front NZ dairy industry in both milk production and innovative new products. But for that to happen in Ireland it would take a huge effort to organize and consolidate the Irish dairy industry but if Ireland is looking for good ideas to move forward that is kind of risks they will have to take.

  9. @Michael Hennigan

    Agree on most points – especially on the European Market. My main argument is that China is now taking global lead in certain industrial niches (their own R&D, IP etc) – as these niches develop over next decade – they will wish to export into Europe – hence they will look to EU locations and this is where Ireland might come in as suitable for Chinese FDI (including Financial Services).

    Yes, building relationships will take time, but St. Pat’s day celebrated in a park in Beijing, Riverdance went down a storm, and they have real respect for our boxers after the Olympics – Kenny Egan would certainly have more impact than most of our ‘Ministers’ and Michael Flatley could run rings around the lot of them in a warm-up before breakfast ……… on FDI Berlin, Boston and Beijing is the AAA way to go.

    As the very informative paper by Barry & Bergin makes clear (on a reasonable scan through) – The FDI sector is a parallel universe around here (thankfully largely independent from local political/financial idiocy) and an essential one. There are some areas, methinks, where certain inter-linkages are best left un-explored – and on emvironment and framework conditions to take note of Craig Barrett – and Barry & Bergin highlight the more postive aspects in this paper.

    I’m ready to roll – does anyone blog in Beijing?

  10. @ Flyover

    Excellent post.
    However it may be too realistic!
    Pol’s may be interested in something further away and potentially inspiring.

    As an aside, do you think that agri practise would have to evolve a little here towards more industrialised methodology?

    Al

  11. @ David O’Donnell: Not sure whether on not you really have a grasp of the Mercantilist mindset of those east of the 90th Meridian.

    ‘exceptionally difficult’ or not – China is the place to go. You sure???

    ‘My main argument is that China is now taking global lead in certain industrial niches (their own R&D, IP etc) – as these niches develop over next decade – they will wish to export into Europe.’

    What in the name of all that is holy would we, either in EU or US, want to import from the East when we can, Opps!, we used to make? We behaved like complete fools in free-gifting our advanced technologies. Now we should add insult to injury and import! “You can’t be serious!”

    We should slap a 100% tariff on everything from China that reaches our ports! Everything! They’re economic and commercial pirates, thieves, fakers and fraudsters. If you fail to grasp their absolutist Mercantilist mindset – you (we) will be crushed!

    B Peter

  12. @Brian Woods

    Which advanced Irish technologies did we free-gift to the Chinese? You might help me out here and name just three …. I’m always open to correction on me ‘errors of judgment and/or fact’.

    On niches – fact is that China is developing world leadership …. and little_irelanders would do well to face such facts ……. as for ‘pirates, thieves, fakers and fraudsters’ – take a look around you at the local Irish variety … and clean house closer to home before castins aspersions on the humble Chinese …

    Ireland, imho, is a suitable location for Chinese FDI.

  13. Just on where EI clients sell to … based on the Annual Business Survey of Economic Impact for 2008

    40.9% of sales of manufacturing companies were exports
    52.4% of sales of services companies were exports

  14. http://www.washingtonexaminer.com/opinion/blogs/beltway-confidential/16500-more-IRS-agents-needed-to-enforce-Obamacare-88458137.html

    I previously suggested that the BHO impetus against tax avoidance in tax havens would be a toothless tiger until the staffing levels were increased.
    Unlike in most democracies, the republic of interests that is Federal USA includes a ragbag of provisions in each Bill, despite the name attached to the Bill. Thus HealthCare includes tax provisions and staffing increases.

    This augurs well for Ireland if it retains its low tax provisions. Many tax haven companies will have to relocate to a sunny well governed country. But they will settle for a low tax regime in cold wet Ireland. Jobs!

  15. I should add that a lot of the sales by EI client companies within Ireland are in subsupply of inputs to exporting businesses, so the total share of EI client sales destined for export is significantly higher than the share exported directly, as reported in the ABSEI.

  16. David O’Donnell
    Brian Peter Woods
    I think China will be a big player and the idea that they will be investing in Ireland makes eminent sense. There are entrepreneurs in China who will fall out of favour. Think of the Russians who fled Putin? Where is the world’s capital? Guess! All those investments in China by the west. All those closed factories. This is a process and China is less than half way there!

    Hyperbole, most of the capital is in Swiss accounts and floating through the US bond market now. But the Chinese have real savings and they will invest elsewhere once the chaos starts. They will have 600 million workers in factories. Very few other countries will be able to out compete and they will not be Ireland or any other EZ country.

    So Peter, I have to agree with David, this time.

Comments are closed.