Scottish Independence and Foreign Direct Investment

Thanks to readers for the valuable comments on my last post on Scottish independence. I have just received the transcript (here) of some brief remarks I made on the above topic at a recent conference in the UK.

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56 thoughts on “Scottish Independence and Foreign Direct Investment”

  1. also useful –

    Tricky Questions For Scots Lucky Enough To Have A Vote

    10/09/2014 by John Kay

    The first 150 years of union with England were a time of extraordinary economic and intellectual development in Scotland, which thrived on access to free trade across the British empire. Even during its 20th-century revival – and despite relatively poor economic performance as heavy industry in the west of the country collapsed – romantic nationalism failed to gain a significant foothold.

    Only in the 1970s, when the Scottish National party won parliamentary seats – thanks to an unromantic slogan: “It’s Scotland’s oil” – did the UK government respond with devolution plans. It has taken another 40 years for the SNP to win the chance to hold the referendum on independence that it has long pledged. Next Thursday voters north of the border will be asked whether Scotland should be an independent country. It is a deceptively simple question.

    http://www.social-europe.eu/2014/09/tricky%e2%80%89questions%e2%80%89for%e2%80%89scots%e2%80%89lucky-enough-to%e2%80%89have%e2%80%89a%e2%80%89vote/

  2. Very interesting set of comments and useful insight on national tax codes, especially the Irish practice of using old (pre 1988) British legal definitions of company nationality. It would be helpful to explain the advantages to Ireland of a system that allows an American company to park profits outside the U.S., especially those that are essentially letterbox operations with little engagement in the Irish economy. What does Ireland get out of this other than some very bad coverage in the American press?

  3. Gents, has anyone noticed? The rally in the polls has coincided with John The Optimist’s reported involvement in the Yes campaign. Coincidence? or is he that good?

  4. “A notable aspect of the current Irish crisis is that it is the export-oriented FDI sectors that have held the economy together: the rest of the economy was much flatter or experienced more substantial decline. The FDI sectors provided the macroeconomic stability that demand management tools can provide in large open economies.”

    I disagree with Frank on this point – however, I’m not disputing the importance of the FDI exporting sector.

    After the bust, changes in the FDI sector were good for international optics – there was a jump in drugs exports before the patent cliff impact with no impact on jobs, and not only was the rise in services exports spurious the big FDI services companies hired 70 to 80% of their payroll overseas.

    The fall in unit labour costs looked good.

    The problem in Ireland is that there is an overreliance on FDI compared with say Denmark and ready-made jobs have been easier to produce than developing the indigenous sector – Denmark, the most expensive country in Europe, exports double Ireland’s exports of food.

    There is no evidence of any change in innovation intensity in the FDI sector since the ‘Ahead of the Curve’ report in 2014 while Denmark’s cleantech sector with over 100,000 jobs that most governments aspire to, is a global leader of a small economy that is 100% energy self-sufficient.

    It’s likely that Google has 700 engineers employed in the UK to mute criticism of its Irish tax strategy.

    Scotland has had mixed fortunes with its Silicon Glen but apart from the current startup scene in East London, the UK has had little success in high tech.

    A study carried out by researchers at the universities of St Andrews, Glasgow and Stirling and published by the charity, National Endowment for Science, Technology and the Arts (Nesta), could have also been referring to Irish policy.

    Dr Ross Brown of the University of St Andrews said: “Our research clearly shows that there is a mismatch between the nature of high-growth firms and the policies which have been developed to support them.

    “The vast majority of high-growth firms are in fact well-established firms from traditional business sectors and do not equate with the hypothetical ‘techie’ view of these firms.

    “At present, through their interventions, policy makers may be over-subsidising technology-based firms who are incapable of growing.

    “In the main, public policy is largely ineffective in this area which could be undermining economic growth.”

    He added: “The UK has some fabulous growth-oriented firms (e.g. BrewDog and Skyscanner) but in the main these tend to be in consumer-oriented or service industries not R&D intensive sectors like life sciences.

    “This is particularly the case for regions such as Northern Ireland and Scotland which have less well developed high-tech sectors than the south of England.”

    An independent Scotland would compete with Ireland for new FDI and teh British government would likely be under pressure to provide NI with a low tax rate.

  5. Quoting myself

    “It would be helpful to explain the advantages to Ireland of a system that allows an American company to park profits outside the U.S., especially those that are essentially letterbox operations with little engagement in the Irish economy. What does Ireland get out of this other than some very bad coverage in the American press?”

    I should have added the following to my question for Frank Barry.

    “Moreover, why should the Scots care about being unable to foster this activity?. They would avoid the negative press that Ireland gets in facilitating the tax deferral strategies of large American companies? Or does Ireland get some substantial benefit from this profit parking strategy that is not obvious? I suspect that few of the billions involved are on deposit with Irish banks.

  6. There is no doubt that an independent Scotland would compete more aggressively for new FDI. That they made be precluded from using the more controversial avoidance schemes, as Frank Barry has pointed out, does not mean they will not try other strategies.
    Lets think of a few simple ideas.
    Cost of living, availability of good housing at reasonable prices, good transport, well educated population with probably more engineering graduates. [Not certain if Scotland has the edge in all these areas, but suspect it has]. Then of course there is the area of soft supports, ‘training’ grants, etc that manage to avoid EU scrutiny.

    At John Fitzgerald has recently pointed out, Ireland needs to improve on the poor performance of its indigenous industrial base, and not rely solely on FDI in good times and bad.

    @
    Thats Legal.

    Good video clip. Its makes a point. I note that the historical memory of Thatcher is cleverly (and deservedly) brought into the equation. That is an important card in the independence armoury. Not as important as the historical memory of the famine in Ireland but a powerful motivator nevertheless. Both undeniable in the devastation caused, under the watchful and unconcerned eyes of the governments of their time.

    Nevertheless Scotland is not going to become the Nirvana of the North, as the video clip suggests, independence or no.

  7. What benefit does Google bring to Ireland ? how much money do the tax breaks generate ? Would it be a big loss if it went to Scotland ?

  8. I really do hope the Scots vote yes. It would be fun to see Alex crash and burn as his tax base crumbles and the demands for free money rolls in.

  9. It strikes to me that stripping Scottish Citizens of EU citizenship or making their Scotland apply for re-entry into the EU is practically an invitation for Putin to invade Eastern Europe to set up more puppet half-states as he has done in Georgia and Ukraine.

    David Cameron and the UK Conservative party are really making a dogs dinner of the EU as well as their own political entities with all their threats and suppositions. They really are a dangerous bunch of complete clowns. Scotland should vote Yes to get as far away from them as quickly as possible.

  10. @ Geronimo,

    Under the terms of our Finance Act 1999, only Irish-incorporated companies that are (a) under the ultimate control of EU or US persons (or persons of other tax-treaty countries) and (b) that are related through ownership to a company with substantive activities in Ireland can be non-resident. If companies want to use the non-residency clause, they have to have substantive activities in Ireland. This is the main thing we get out of this (as well as corporation tax of course), and I think this is probably quite significant.

    @ Michael Hennigan,

    Table 5 of my paper with Adele Bergin of ESRI, in World Economy (2012), showed that employment in the foreign-owned export sector fell less than in the indigenous-owned export sector, and substantially less than in the overall private sector, over the period 2007-09. (This was the limit of data availability at the time we were writing). [More technical paper by Colm Kearney and myself in Jnl of International Business Studies a few years ago adopts a portfolio approach: shows that the foreign-owned sectors give us a higher (employment) return at lower risk.]

    And there have been substantial spillovers, beneficial to indigenous industry, from the foreign-owned sector: lots of econometric papers by Gorg and Strobl plus various co-authors; non-econometric papers by Majella Giblin and Paul Ryan on medical devices, plus my own work on indigenous software. And Google and the new social media have created an entirely new indigenous cluster in Dublin.

  11. Zhou ,
    How can a free Scotland join the EU if it has already left a member state of the EU. It seems to me it has to take a ticket in the Q and negotiate entry. Whether it gets the same terms as UK is doubtful. It would probably lose the UK rebate, have to join Schengen & the Euro.
    Don’t see your Putin point. The CEE stAtes of the EU are members of NATO eccept the Finns & the Austrians so The CZAR not going there.
    Ironically, if Scotland leaves the UK and eventually joins the EU it swaps domination from London for domination from Berlin on worse terms.

  12. Ironically, maybe the only way for Scotland to be a member of the EC is to vote YES as the chances of David making a mess of the referendum in Britain after the next election are massive.

  13. @ Frank Barry

    There is no question that in the early years in particular the positive spillover effects were very important including technology transfer and management skills.

    An enduring benefit also has been the procurement standards for local suppliers.

    In a typical American foreign affiliate with the head as an employee like everyone else, workers were likely to be treated much better than a typical local company and it’s still the case in many countries in the world.

    However, we cannot ignore a fact that after 60 years of State supports and low employer and corporate taxes the indigenous sector can only produce annual exports of about €25bn including tourism and transport – 18% of GNP.

    In the period end 2007 to end 2012, there was a total employment loss of 307,000.

    The indigenous internationally tradeable sector had gained 10,000 jobs in 2001-2007 while the FDI sector lost the same number.

    In 2007-2012, the indigenous sector lost 23,000 while the FDI sector lost 7,000 – In total 10% of total job losses during the period.

    Total employment in industry was at 310,000 in late 1999; 320,000 in 2000, 285,000 in 2007 and 236,000 in Q2 2014 – and down 2,000 in 12 months.

    On the challenges facing indigenous exporters, it’s strange that the enterprise department does not see merit in longitudinal research tracking both successful and other companies it funds over a long period.

    Enterprise Ireland doesn’t know how many client companies it has (that’s what it said to me), which is a proxy for the number of indigenous exporters.

    The level of patent applications from Ireland including in respect of research done by FDI firms remains low.

    In 2013 there were 333 applications to the Irish Patents Office where the first applicant was an Irish resident (including foreign-owned firms in Ireland) down from 492 in 2012 – – this is the lowest since the early 1980s according to World Intellectual Property Organization (WIPO) data.

    European Patent Office grants to Irish residents covering 38 countries were at 121 in 2006 and 187 in 2013.

    Patent Cooperation Treaty (PCT) applications that could have been filed in up to 148 countries in 2013, amounted to 323 in 2004 and 432 in 2013.

    There are over 1,000 Irish-owned tech firms employing about 10,000 – 39% have less than 10 employees.

    They get priority public funding and the Government also provides 40% of VC capital – the ones with international potential will be acquired by the big overseas firms and the rest will remain small or die. The value added in Ireland will remain small

    Google has bought more than 150 startups since 2004.

    Ireland needs a strategy for its indigenous trading sector. What exists now are aspirations that are not supported by credible evidence.

    0verall there has been an exports surge since 2000 but total net jobs in 2013 were below the level 13 years before despite a 22% increase in the workforce.

    See chart here:

    http://www.finfacts.ie/artman/uploads/5/Ireland_jobs_FDI_exports_2014_July302014.jpg

  14. @Tullmcadoo

    “Ironically, if Scotland leaves the UK and eventually joins the EU it swaps domination from London for domination from Berlin on worse terms.”

    Excellent observation.

  15. JR,
    On balance it is better in the long run if they leave but the rebalancing of the Scottish economy will be painful for Smart Alec. Who knows the IMF may have to bail them out.

  16. I don’t buy this notion that if Scotland leaves the UK Labour would never win an election again. The Tories always ar%e it up and they’ll never get a permanent mandate. Perhaps a big shift in English politics is more likely with FPTP to go.

  17. Many thanks, Frank, for another very interesting contribution on the Scots Independence referendum. Whatever the medium/long term effects on our own economy of the emergence of a newly independent Scotland, the break-up of the UK ‘family of nations’ and the political crisis that will ensue in the immediate aftermath of a ‘Yes’ result must have implications for our own tentative economic recovery, which is tied to the fortunes of the UK economy, whether we like to admit it or not. So it’s not all , or even primarily, about economics, banking systems, currency options, North Sea oil revenues or taxes, deficits and borrowing capacities of a newly independent Scotland. A ‘Yes’ result will affect our own economy and its longer term prospects for FDI etc. It also has implications for our politics.

    Our political parties, understandably, have avoided wading into the debate and our media coverage of the implications for Ireland of a ‘Yes’ vote in Scotland have been relatively muted up to this point. Just to take one aspect, I note that the Sinn Fein leadership has today come out and said that a ‘Yes’ vote in Scotland could have ‘profound implications’ for Northern Ireland. Martin McGuinness was talking about social welfare rates determination. Arguably, that’s a proxy issue for the ideological and continuing sectarian cleavages that cut to the heart of the current impasse in the government of NI and which threaten its continuing political viability (or what passes for ‘stability’ in the present NI post-agreement phase). Should SF decide that the time is opportune to place the issue of Ireland’s reunification on the agenda for the next GE here, it may have some ‘romantic’ appeal given the centenary of our fight for independence and all that, and it would definitely give rise to some political soul-searching among the establishment parties.

    The example may appear outlandish but we should not blind ourselves to the fact that whatever way Scotland votes will have political and economic repercussions in our state as well as throughout the UK.

  18. Seafoid,
    Is that a prediction or a wish. Without the 40 or so lumpen proles from west of Scotland, Red Ed is toast .

  19. @ Tull

    330 for a majority
    Labour got 418 in 97 . Minus 40 would make no difference if they had a repeat so the notion they would never win again is nuts.

    I think there’ll be a shakeup anyway regardless of the vote in Scotland. Farage is doing a lot of damage and the reliance on spin and focus on the marginals has put a lot of people off the big 3.

    The next election will probably lead to another coalition.
    Ed is as neoliberal as the rest anyway.

  20. David,

    Stunning piece of intellectual gymnastics which yields two conclusions
    *the Tories are more likely to win if Scottish seats are excluded…..wow.
    But if English and Welsh people decided not to vote for the Tories, they will lose. The man is a true genius. Do you get to be an academic intellectual if you produce such true shafts of genius.

  21. Seafoid
    650-59 Scots-5 shinners – speaker = 585/2= 293 is required. the Tories got 306 in England and Wales in 2010. The Labour party got 217 in england and Wales. Norn Iron is different.

  22. Tull

    The Tories increased their vote last time but they can’t sustain that over more than 3 elections , can they ? Labour were not going to win that one after Lehman. I bet the Tories won’t get a majority next time either.

  23. Tut, tut, Tull, thou dost protest too much. The point of the piece is to show that a Labour majority (without the Scots) does not require a swing of implausible magnitude.

  24. Prof Madden, Guardian reading lefties are scared to the point of constipation that the Tory vote might actually go up because they put the economy back on track after 3 terms of Blair & Incapability Brown misrule .

  25. Outside of London and SE England, Scotland is the wealthiest region in the UK – Scotland’s unemployment rate is the same as the UK’s – while Catalonia in Spain and Flanders in Belgium are in the same boat.

    All as independent nations would wish to join the EU but the quests for independence are at least partly motivated by their relative wealth and opposition to subsidising poorer regions.

    A striking aspect of the development of the EU from the original EEC Six was that no country was ever rejected for membership because it was poor.

    Martin Wolf says that while the SNP said it could refuse to accept the split of debt that would have it at 90% of GDP, Scotland could not unilaterally claim ownership of North Sea oil.

    Sterlingisation, without BoE approval, would also mean that reserves would have to be built up.

    A poll in Catalonia suggests support for independence would halve if there was no chance of joining the EU and the Rajoy government in Madrid would likely veto Scotland’s membership.

    Belgium as an independent nation since 1831 comprises two diverse groups and a split shouldn’t surprise – in what other country could a leading politician mistake a foreign national anthem for his own country’s?

    In 2007 Yves Leterme, head of the Flemish Christian Democrats and soon to be prime minister, when asked to sing the anthem, broke into France’s La Marseillaise. He also didn’t know the reason for the date Belgium’s national day, saying it marked the “proclamation of the constitution”. It actually commemorates the inauguration of Leopold I as the country’s first king on 21 July 1831.

    On Irish FDI, the European Commission on Thursday gave ministers fresh propaganda material arising from falling unit labour costs in the drugs sector and tax avoidance.

    Bruton linked it to his Action Plan for Jobs and Dara Murphy, minister for European affairs said: “this report serves to highlight that the strategies we have been implementing are achieving results” – both claims are laughable but reported unfiltered in the media.

  26. “in what other country could a leading politician mistake a foreign national anthem for his own country’s?”
    nornIron 🙂

  27. Seafoid,
    The Wolf article would drive you to the nearest whisky bottle. With freedom comes responsibility and there is no sense that Smart Alex has any of that. I read in another article he used cheat at pinball. A man capable of that is capable of anything.
    I see we have another example of the single transferable speech from MH in KL. It starts with a broad perspective on the EU, touches on the shortcomings of regional nationalism and via a circuitous route ends up in the same place as all the other contributions.

  28. @ Tull Magoo

    From your past comments, I guess you don’t like my facts even though you apparently cannot refute them 😆

    You may well be making a good living from some racket that finds questions on conventional wisdom a little inconvenient.

    As during the bubble, I can understand why dissent gets a bit tiresome 😯

    The tradition is to snuff it out.

  29. MH,
    You were indeed a dissenting voice in the bubble and that is to your credit. However, you failed to spot the trough and now you find yourself torturing the data until it confesses. Much more of this and you will start to resemble a stopped clock.

  30. @ Tullmcadoo

    My father used to say that self-praise is no praise and therefore I will try some modesty.

    To me the toxic addiction to spin at official level whether in boom, bust or recovery is against the public interest.

    1. It should be possible to acknowledge a recovery while pointing out that much of Irish data are polluted by FDI sector distortions including massive tax avoidance. It is in fact stupid to accept several indicators at face value and ministers don’t point to caveats when material can be used for political propaganda purposes.

    2. I commonly see commentary about the impact of rising exports while past experience of surging exports and no jobs added is ignored.

    3. Last February when the CSO reported that 61,000 jobs were added in 2013, ‘5,000 jobs are being created each month’ became a ministerial mantra and several commentators were running out of superlatives about this extraordinary development.

    I think it helps to have been an employee for many years in multinational manufacturing and services operations to wonder about data showing a jump in new jobs from a flat situation in 2012.

    Based on a look at sectors, my estimate was about 30,000 annually – still a good rate. The June 2014 12 month total was 31,000.

    I put it to Bruton directly last April that the 2013 data was not reliable but he stood 100% behind it.

    On May 26 in a note, Alan McQuaid of Merrion Capital wrote: “We are looking for an annual rise in jobs of 65,000 in the first quarter of 2014.”

    4. It’s not talking down the economy to highlight that in non-summer months that the Live Register numbers exclude about 85,000 unemployed who are in public funded schemes.

    5. On FDI policy, the Government published a brochure last July and why does it need the likes of McKinsey to point to some challenges as well as positives?

    6. On July 31 last I suggested in a post that the annual report of the Irish Patents Office was being held over for publication for the quiet August period.

    The enterprise dept published it on the same day following my post, but with no accompanying press release.

    It works of course as it has in recent years, to bury bad news – and this is central to the flagship enterprise policy?

    7. People who don’t like dissent tend to ignore positive commentary from the same sources and wonder now is dissent anymore welcome than it was a decade ago?

    When some found value in advocating default citing the positive experiences of Russia and Argentina, my own position was motivated by what I believed to be right not what the public would cheer for.

  31. @Tull

    To add to your difficulties with being geo-radar challenged – you are becoming seriously ‘facts’ challenged –

    To the best of my knowledge, I (& maybe seafoid) supported Diarmuid O’Flynn of the ‘Ballyhea say NO’ group on this blog; I also endorsed Liadh Ni Riada in the same thread (to which MH contributed) –

    http://www.irisheconomy.ie/index.php/2014/05/20/austerity-economic-political-and-social-perspectives/

    @all

    Ballyhea ‘still’ says NO.

    p.s.

    Blind Biddy & Paddy Zhukov are enjoying the de Lacy weekend in Sevastopol!

  32. @ Tullmcadoo

    I endorsed Diarmuid Flynn because I admired his leadership in citizen activism on an national issue – it has been a contrast with conventional parish pump protests.

    I tend to be unconventional myself and the smug status quo needs a jolt of firepower, not as in Europe where vulnerable groups such as immigrants are targeted as scapegoats for national governance failures.

    Conservatives of course would cry ‘instability’ but if the world economy faces a ‘new normal, tugging the forelock to American business bosses will lose its potency over time.

    In respect of D. Flynn, I did point out that most of the public support for Anglo was a bailout of depositors and my view was that he would likely be a better representative of Cork and Munster constituents than a rich man’s daughter.

  33. One Leadership in These Islands

    ‘Calmly, cravenly, and with no fuss at all, last Tuesday our Government lined up to protect some of the most predatory financial vultures on the planet. This is the Government that prides itself on making “tough decisions”.

    The decision was whether it should defend the long- term welfare of citizens in this country and elsewhere or side with the financial vultures.

    For Enda, it wasn’t a tough decision at all.

    http://www.independent.ie/opinion/columnists/gene-kerrigan/big-boy-mammy-and-the-vulture-funds-30585153.html

  34. @Tull

    You clearly have no understanding whatsover of the postmodernist take on Hegel; why not start by trying to get to the other side of The Liffey and then finding yourself also at home!

  35. @ Tullmcadoo

    Default wasn’t an issue this year; the claimed promised bank bailout refund remains an official issue – I wish someone would ask Enda Kenny a simple question: name the leader or leaders at the June 2012 summit who had made the promise.

    Seamus Coffey campaigned for D. Flynn and he hadn’t supported default.

    Introducing Grover Norquist style purity tests would hardly improve Irish politics.

  36. MH,

    Yes, I see you are correct. One of the sanest commentators on this whole debacle did indeed endorse DOF. However, I remain sceptical that sending another devotee of the Magic Money Tree to join Ming, Nessa and the 3 Shinners to Brussels was a good idea.

  37. @ Mickey Hickey

    Guardian: “Germany, the EU’s largest economy and a major holder of Irish bank debt, encouraged Dublin to prevent bondholders from losing their shirts.”

    This statement is not accurate.

    German banks’ funding of Irish domestic banks amounted to 1% in 2007 according to Central Bank research. UK banks had the biggest exposure.

    German banks had units in Dublin’s offshore centre but this had nothing to do with bondholder debt.

  38. @ Michael Hennigan

    To quote Mark Twain, “a lie can travel half way around the world while the truth is putting on its shoes.” In this instance, however, it is more of a half-truth. The policy followed by the ECB under Trichet in relation to the protection of senior bank bondholders clearly had the full support of the major players, notably Germany and France.

  39. The Portuguese in particular were enraged at the precedent set by Kildare St. The major creditors of the fragile banks in what later became the PIIGS carefully groomed the guinea pig that was Ireland. What did Ireland do, they retained Goldman Sachs as an “advisor” who were more concerned about their major clients than in the minnow (in their eyes) that was Ireland. Couple that with the influence of the Irish oligarchy and a gutless government and here we are in a 30 year slump. Not as long as the post 1932 slump. What a relief.

    Useful idiot that was our role, where is Brendan Behan now when he is needed.

  40. Can anybody tell me how Irish bond yields have got to below 2% and we are now in a position to refinance IMF debt? Would organs of the EU had anything to do with it?
    Anybody care to speculate what might happen to the book value of the equity in Irish pillar banks if the ECB presses the big red button on Draaghi’s desk. Anybody care to spec how the market might value that equity.

  41. It will not be all peaches and whipped cream for post independence Scotland.

    econbrowser.com/archives/2014/09/forecasted-north-sea-oil-production

  42. @David O’D
    I was actually thinking of Dostoevsky. In keeping with Irish sensibilities more Wildeish than Marxish.

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