Ireland\'s Transformation Through Foreign Direct Investment

FDI and Ireland

Which factors have been important in driving Irish growth?

Following several years of significant disruption to Ireland on the heels of the civil war, including the protectionism that characterized the post-depression economic stance of many countries and the economic nationalism that Ireland favored under De Valera, the need for a pro-market orientation slowly dawned on a stagnant Ireland. The passage of a series of business-friendly acts designed to jumpstart the economy provided some lift and -- perhaps more importantly -- signaled Ireland's readiness to articulate national economics differently. The creation of the Industrial Development Authority (IDA) provided opportunity for an adaptable mechanism designed to position Ireland as a lucrative location for multinational corporations to establish international facilities and operations. Despite strong shocks from two oil crises in the 1970s and high unemployment, the IDA was able to reinvent itself and pursue aggressive recruiting of foreign corporations. But an economic balance proved elusive as Ireland's formula for increasing employment and building up their country's industrial base did not dovetail with the constellation of incentives offered in exchange for FDI. With the Program for National Recovery (PNR) in 1987, Ireland officially sanctioned a new breed of social partnership that robustly supported labor-intensive foreign businesses as enticements to locate on Irish soil. A strengthened Ireland courted a new relationship with the European Union, garnering farming subsidies and infusion of funds for infrastructure development through the Single European Act (SEA) of 1986. Ireland could now claim benefits of its membership in the EU since Ireland had achieved the requisite levels of macroeconomic stability -- factors further underscored by the Maastrict criteria in 1992.

2.What have been the benefits and disadvantages of FDI in Ireland?

Before Ireland fully understood the impact that FDI was having on the nation's exports, the unemployment level hovered in the mid-teens and growth was inexplicably jobless. Domestic exports were flat, and the national economy was sluggish and severely lagging the FDI economic indicators. The touchstone was a substantive difference between the gross domestic product (GDP) and the gross national product (GNP), with the latter excluding profits earned by foreign enterprises. Further analysis of employment data showed the marked inroads made by MNC's: 1998 workforce data showed that 47% of industrial workers generated 82% of industrial output through their employment with foreign-owned companies. Accounting for 16.5% of Ireland's GDP was the 75% portion of foreign investment that originated in the U.S. When the dust settled on the cusp of 2000, it could be seen that 85% of Ireland's economic growth came from MNCs, and this predominately from the sectors of chemicals, computers, and electrical engineering.

3.Is the path of Irish development sustainable in the long run?

In 1994, the Ireland's government officially split the IDA into two distinct entities with separate and singular purposes: the IDA Ireland agency would continue to mine FDI, while Enterprise Ireland focused on domestic industrial development. This clear recognition that Ireland's approach to economic development needed to take a two-prong approach indicates a level of adaptability by the nation's economic development specialists and government that is promising. The fact that Ireland quickly achieved an apparently impenetrable ceiling at 20% contribution of materials to the multi-national companies -- despite the best efforts of the newly created National Linkage Program (NLP), which was a spin-off of Enterprise Ireland -- further illuminated the complexity of comparing (and attempting to link) foreign and domestic firms. Globalization was a new force to be reckoned with; in this regard, Ireland was close to the flames during the 2008 fiscal crisis -- and continues to be vulnerable to economic shocks from a U.S. epicenter.

4.What recommendations would you make to the Irish government in this respect?