All material subject to strictly enforced copyright laws. © 2022 Euromoney Institutional Investor PLC group

Taking the right FDI pills

Ireland’s success in attracting foreign direct investment has been pivotal in supporting the return of economic growth and, therefore, to the country’s impressive recovery in recent months. Philip Moore reports.

Maybe AstraZeneca knows something about Ireland that the world’s other largest pharmaceuticals companies don’t. According to Barry O’Leary, chief executive officer of IDA Ireland, the Irish government agency responsible for attracting foreign direct investment (FDI), each of the world’s 10 largest pharmaceuticals companies has invested in Ireland — except AstraZeneca.

The pharmaceuticals industry has been one of the most conspicuous successes in the Irish FDI story, which traces its roots back to 1970. That was when the IDA opened its doors, offering an attractive corporate tax rate as the main carrot with which to attract inward investment. “In the 1970s, many European countries used grants to attract FDI,” says Kevin Daly, senior European economist at Goldman Sachs. “But as Ireland’s fiscal position at the time was weak, it couldn’t afford to compete by offering similar grants, so the focus shifted to using low taxes as an incentive instead.” 

This competitive tax regime helped to attract some high quality investment, especially from sectors such as pharmaceuticals and technology. It did not do so immediately, however. “When we first opened, we welcomed any industry we could,” says O’Leary. As recently as 1990, he adds, the biggest investor measured by job creation was the t-shirt producer, Fruit of the Loom, which employed 4,500 people.

By then, however, higher value-added industries had also been alerted to Ireland’s potential. “By the early 1990s, Intel was breaking ground on its facility in Ireland, and the Irish Financial Services Centre (IFSC), which was set up in 1987, was expanding,” says O’Leary. “Today, Intel has invested about €8bn in Ireland and there are more than 30,000 people working in the IFSC.”

O’Leary says that technology, financial services, pharmaceuticals and medical devices, and digital media are the four sectors that IDA is pushing as the anchors of FDI in Ireland. US companies, in particular, have been attracted by the Ireland’s tax regime, legal system and language. But O’Leary insists that is the country’s talent pool and its demonstrable track record that have been its greatest assets in pulling in FDI. “Frankly, if tax was your number one concern, it wouldn’t be Ireland you’d go to,” says O’Leary. “It would be Switzerland or Singapore.”

Analysts say that Ireland’s success in attracting FDI, which in the EU has been bettered only by Belgium and Luxembourg over the last three years, has been pivotal in supporting its recent growth. “FDI inflows have been running at about 10% of GDP,” says Blerina Uruci, UK and Ireland economist at Barclays in London. 

Resilient performers

It is not just the absolute inflows of FDI that have made an important contribution to Ireland’s recovery in recent years. As Daly at Goldman points out, multinationals choosing Ireland as the base for their EU operations were resilient performers during the crisis. “Of course, inflows of FDI declined during the crisis, but the export performance of the sector remained strong,” he says. 

FDI’s record of job creation in Ireland, however, is mixed. According to the IMF, employment at FDI-related firms rose by 4.5% in 2012, although the direct contribution of FDI to total employment was what the IMF describes as a “more modest” 0.4%. Net job creation in the multinational sector of just under 6,000 in 2011 and a little over 6,500 in 2012 is of course welcome, but, as Davy comments in a recent research update, “pale” against job losses in the broader economy.

O’Leary says that many estimates of the contribution of FDI to the Irish economy fail to take into account the indirect employment created and sustained by multinational investors. For example, he says that by the IDA’s calculations, the pharmaceuticals sector accounts for about 45,000 Irish jobs — more than double the amount suggested in a recent Davy report. “FDI alone isn’t going to solve the Irish economy’s problems,” says O’Leary. “But most of the recent employment growth in Ireland has come out of the FDI space. About one in seven jobs in Ireland is dependent on FDI.”

Although O’Leary insists that tax is not the main draw for FDI, calls for a level playing field in the European tax regime would inevitably weaken its appeal to multinationals. “There is a constant debate about corporate tax harmonisation in Europe, which remains a long term risk to Ireland,” says Daly at Goldman Sachs. “The Irish authorities argue that while the headline corporate tax rate in Ireland is 12.5%, the effective corporate tax rate is very close to that level, at 11.9%. This contrasts with the situation in many other advanced economies which have headline corporate tax rates that are higher than Ireland’s, but effective rates that are often comparable or lower.”

O’Leary confirms that focusing purely on the headline rate of corporate tax is misleading. “Although we have a low corporate tax rate, our income and capital gains taxes are both higher than in many European countries,” he says.  

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree