Ireland’s FDI may be in jeopardy. Ireland has been considered to be a tax haven especially for corporations such as Apple. But the recent European Commission ruling requiring that Ireland pay up to €13bn in compensation for Apple back taxes is very damaging to Ireland’s international reputation and makes the country a less attractive foreign direct investment target. As foreign direct investment increases, the demand for the currency of the receiving country increases and raises its rate of exchange. When Ireland receives more foreign direct investment, the demand for its currency increases and its currency exchange rate is more favorable to Ireland and less favorable to foreign investors, while their foreign spending power is greater. Alas, there is a downside. When their currency is more expensive for investors they may be less inclined to invest, seeking a better deal elsewhere. A higher currency may reduce Ireland’s competitiveness. When exports decrease the balance of payments may become increasingly unfavorable. FDI, as it affects the balance of payments will generally outweigh the significance of increasing exchange rates that follow. What has attracted US technology investors to Ireland are its exceedingly low 12.5% corporate tax rate and a structure that allows multinationals to shift profits to tax haven countries like the Cayman Islands and Bermuda (Campbell).
With FDI, the foreign investor has control over the assets and there is a flow of capital between two countries called outward for the investing country (in the case of Apple the United States) and inward for the recipient country (in this case Ireland). Benefits Ireland can reap from inward FDI are an increase the Gross Domestic Product, creation of jobs, an increase in the ability to produce goods and services, a capital account inflow and stimulation of new economic development. Looser regulations such as those currently available in Ireland help increase domestic FDI and the positive results of its growth. An increase in business taxes can suppress positive economic development in the inflow country. In the economic crisis of 2008, FDI plummeted causing a decline in investment worldwide and a decrease in unemployment and overall economic prosperity. This is a good reason why it would be best for Ireland to succeed in its opposition to the potential 13 billion euro fine imposed by the European Commission ruling. By July 2016, Ireland had a negative FDI. The consequences may be serious and include fewer employment opportunities in Ireland, a decrease in the standard of living, lower government revenues that lead to deficits in government services. That means that there may be a negative impact on healthcare and education.
The source of data for the above graph (but not the graph itself) is the Central Statistics Office of Ireland as reported by Trading Economics Ireland Foreign Direct Investment -Net Inflows 1998-2016. The scale for currency is EURO million. It shows a significant rise in FDI from 2013 to January 2016 followed by a precipitous decline in July 2016. FDI averaged approximately 5700 Million EUR from 1998 till 2016, but FDI decreased by 17020 million EUR in Q2 of 2016.
Evaluation
How can FDI in Ireland be improved and generate more positive outcomes in both long and short term?
In the past, the government of Ireland has invested in education, technology and infrastructure and these have proven effective in driving growth in new economic sectors and growth in FDI. IDA Ireland is the national agency in charge of attracting new development of Foreign Direct Investment in Ireland. This agency was founded 1949. Ireland’s IDA partners with multinational companies to win and develop FDI with anticipated benefits of increasing foreign direct investment, domestic job development and overall improvement if Ireland’s economy. Improvement in terms of trade occur as a currency increases in value. The expression, “terms of trade” is defined as 100 x (the value of a country’s exports/value of a country’s imports). Ireland’s strategy includes a regional value proposition. Investors are seeking locations that have optimal regional centers. They need to be the right size, provide sufficient numbers of skilled people. There must be an appropriate infrastructure that supports international connectivity. Include are optimal telecommunications, energy resources and services. FDI is not a standalone strategy for economic development but it plays a substantial role in keeping unemployment down and supporting prosperity. Both regional and national individuals and organizations must play a pivotal role as collaborators in order to make regional infrastructures appealing to future foreign investors. IDA is targeting every region throughout the country to fit into this national strategic goal. IDA is striving to increase the number of investments outside of Dublin by 30 to 40 percent. In order to accomplish this, they are increasing the number of “property solutions” with both long term and short term strategies. The players will include new investments and an expansion of existing overseas companies including research and development investors. In the South East there is a focus on medical technologies. In the Midlands there is a focus on Life Sciences and Engineering. The Border area is focusing on the financial sector. The West has been concentrating on Life Sciences and Services. The Midwest has a medical technology focus, while the Southwest is the “go to” region for pharmaceuticals, technology and engineering. This regional focus has proven extremely successful in the past and the diversity and expertise presented by each region will give it a firm opportunity for future growth.
- Campbell, Apple tax ruling ‘a serious blow’ to Irish investment, Available from http://www.bbc.com/news/uk-northern-ireland-372
- Economics Online, Foreign Direct Investment, Available from http://www.economicsonline.co.uk/Global_economics/Foreign_Direct_Investment.html
- IDA, Winning: Foreign Direct Investment 2015-2019, Available from http://www.idaireland.com/docs/publications/IDA_STRATEGY_FINAL.pdf
- Trading Economics, Ireland Foreign Direct Investment – Net Inflows 1998-2016, Available from http://www.tradingeconomics.com/ireland/foreign-direct-investment
