Olivier Godart, Holger Görg and Aoife Hanley write on the Irish experience in this paper.
Abstract: Starting from the observation that all firms in Ireland (foreign and domestic in manufacturing and services industries) were hit by the crisis, the paper asks whether there is a difference in the behaviour of foreign and domestic firms. One hypothesis is that foreign multinationals are less linked into the Irish economy, so more likely to leave once the economy is hit by a negative shock. The paper discusses background hypotheses before giving empirical evidence from firstly aggregate data, and secondly firm-level observations. The analysis of the latter suggests that foreign firms are not more likely to leave during the crisis than Irish firms. Some policy conclusions are offered in the paper.
7 replies on “Surviving the crisis: Foreign multinationals vs domestic firms”
“Starting from the observation that all firms in Ireland (foreign and domestic in manufacturing and services industries) were hit by the crisis…”
Is that a fair starting point? If we consider the FDI sectors that are predominantly in Ireland – pharmaceuticals and ICT (permit me to shove finance under the carpet for the purposes of this point) – the demand response to those sectors has shown them to be largely unaffected, either due to acyclical demand (for drugs) or ongoing growth (for technology). Hence the tiny impact on Ireland’s exports of the world’s great crisis in trade and finance for 70 years. Add to this the fact that many of Ireland’s FDI companies are sitting on big piles of cash.
In contrast, domestically trading firms have faced a contraction in national income of one quarter, on top of which banks have stopped issuing working capital loans or indeed most forms of credit.
Just some initial thoughts in response…
The paper reaffirms some unsurprising developments.
Maybe somebody could do a paper on mantras.
On Monday, an IBEC economist referred to a “a significantly improved export performance due to Irish businesses winning new customers and capturing market share following years of regaining competitiveness.”
For ‘Irish’ companies selling into global supply chains, that evidence cannot be very obvious while food companies are benefiting from a global food commodity boom.
The Kiel paper says “O’Toole ascribes this service sector export growth to a shift from low value-added manufacturing activities to better quality services jobs.”
Possibly partly true.
In contrast with for example Germany, there appears to be a national tendency to believe that a mind-numbing job at a desk trumps factory work but maybe just some.
In the Dept of Jobs etc, the toolkit of vacuous superlatives has two common terms, ‘quality’ and ‘high calibre,’ for its jobs announcements.
The results of the paper could be summed nicely as:
“..foreign multinationals do not behave any differently in terms of exit behaviour from comparable Irish firms during the crisis… (and) do not introduce additional instability into the economy”.
This is an important finding. While the paper only concentrates on one particular episode (the recent collapse in world trade in 2008/09), it adds to the body of evidece which finds that foreign multinatioanls are not footloose.
In terms of policy prescription:
“Hence there is no reason to suggest that government efforts need to be targeted differently to doimestic and foreign-owned firms”.
Off course, this study also only looks at one aspect of the interaction between MNCs and the local economy, namely their footloosedness (ahem). There are obvious more important first order considerations such as job creation, local spend, tax take etc. However in these areas foreign owned MNC exporters generally contribute far more in aggregate than indigenous exporting firms. We should of course continue to support domestic firms, though recognise what our most obvious strength is in terms of exporting in a globalised world, and continue to build on that success.
@Michael, can I ask you again to explain what your very strong preference for indiegenous firm growth over MNCs is based on?
As for the comment “national tendency to believe that a mind-numbing job at a desk trumps factory work but maybe just some”, I suggest you read Kevin O’Rourkes Barrington Paper from a 100 years ago when he described those who innately distrust services jobs as “neo-physiocrats”.
@ Ronnie O’Toole
Ronnie,
You appear to have grabbed the wrong end of the stick here.
I have worked many years in MNCs and pray tell where in my post is there evidence of an animus against multinationals.
Was I blaming MNCs for official spin?
As for the mantras that become ‘fact’ through repitition, I will continue to rail against them, as I did when too many fools followed conventional wisdom during the bubble!
@ Ronnie O’Toole
I should add also that I’m in more of a position than you as a bank economist would be, to express independent views.
@Michael,
Apologies if I have misrepresented you. As I’ve said before, you’re one of the very few posters on here who takes time to seriously look at the export figures.
@Ronnie
You wrote: “Michael, can I ask you again to explain what your very strong preference for indiegenous firm growth over MNCs is based on?”
Id like to take the liberty to comment on this as it has been asked more than once:
As someone well-placed to know what R&D and knowledge-related activity is actually performed in Ireland by both MNC’s and indigenous firms (mostly small SME’s) in my opinion the answer essentially comes down to sustainability.
It is well established (refer Ocean Tomo and others) that the relative value of intangible assets has shifted from sub-20% (in 1971) to ~ 80% (in 2010) of the valuation of the S&P500. These intangibles, mostly off balance sheet, are dominated by patent portfolios. Patents are also of critical importance to the valuation of small tech startups.
The critical capability today and in the future is capacity to create, capture, protect and monetise intangible assets. This is obvious in the case of firms such as Apple, where manufacturing, logistics, distribution and elements of sales and marketing are outsourced, while research, invention, design of product, process, service, brand and customer experience, and finally IP management are core.
Outside certain medical device operations, few Irish MNC subsidiaries are substantially involved in these IP-related core activities. The dominating focal activities in Ireland tend to be manufacture, localisation, customer service centres, logistics and distribution and global tax planning. This is one reason why publicly funded science, FDI business and indigenous business have so little interaction in Ireland.
There is no particular mystery about what needs to be done. Since 20 years of FDI investment has led to little innovation and IP management capacity being established in Ireland, despite generous state incentives, it is time to try another tack. Committed innovation capability-building and training in IP management for SME’s, STEM graduates and enterprise agency staff is required. Building upon Ireland IP monetisation attractions and establishing an international IP trading centre should be investigated in detail. And so on.
In short, sustainability requires Irish enterprise policy to focus on how we attract, create and retain the intangible 80% value-adding activity. This needs more constructive engagement between the various stakeholders operating in Ireland than can be delivered by the flawed Smart Economy policies, but also requires retention of knowledge and skills. Lavishing scarce state supports on indigenous businesses seems a more likely way to ensure the 80% stuff gets done.