Sunday 4 December 2016

It's time to stop relying on FDI - and grow our own businesses instead

Ireland has been very successful luring FDI - but with growing opposition to tax-avoidance by multinationals, we must now grow our own

Published 15/11/2015 | 02:30

Hugh Mackeown argued that the contribution of indigenous companies in often neglected
Hugh Mackeown argued that the contribution of indigenous companies in often neglected

Last week was a good one for foreign investment, with tech giant Apple announcing another 1,000 jobs. Other announcements last week included 300 jobs at job search site Indeed and an expansion of Microsoft's Irish data centre.

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Even before last week's bumper crop of announcements, 2015 was shaping up to be a record one for foreign direct investment into Ireland. The IDA secured 110 FDI projects which will create 9,000 new jobs in the first half of 2015 - up from 100 projects and 8,000 jobs for the same period of last year.

While we will have to wait until next January for up-to-date employment totals, it seems certain that the previous peak of 174,000 jobs in IDA-supported companies recorded at the end of 2014 will be comfortably exceeded.

And the Government is clearly hoping for even more jobs from the multinationals.

In its Enterprise 2025 Strategy, published last week, it is targeting 266,000 new jobs by 2020 - of which 75,000 will come directly from FDI and a further 65,000 indirectly. In other words, over half of the jobs which the Governments hopes will be created over the next five years will come either directly or indirectly from the multinationals.

But can one get too much of a good thing? FDI has clearly been beneficial for Ireland, with almost 300,000 jobs created. And the IDA estimates that another 122,000 jobs are indirectly supported by its client companies dependent on the multinationals.

But have we now become too reliant on overseas firms? With almost one in six of all jobs in the economy now either directly or indirectly reliant on the multinationals are we now dangerously exposed?

If the Enterprise 2025 targets are achieved then almost one in five of all jobs will depend on the multinationals by the beginning of the next decade.

Hugh Mackeown is one of Ireland's most respected businesspeople. In his 40 years with Musgrave, which celebrates its 140th anniversary next year, he grew the group from being a small local wholesaler into a €5bn giant with operations in three countries. Addressing Cork Chamber of Commerce last week he argued that the contribution of indigenous companies to Irish economic development is often neglected.

"At times I get the impression that politicians and media have an unthinking obsession with overseas investment, to the detriment of Irish-owned enterprises.

"Of course we need both, only a fool would think otherwise, but in recent plans for recovery it has emerged there is a strong need for Irish-based innovation and developments. To effectively achieve this, a shift is needed in the basic assumptions of government and media as to the desired balance of promotion between native and overseas enterprises", he said.

While much has been made of the contribution of foreign-owned companies to the Irish economy, the impact of indigenous companies generally receives less attention.

So how do indigenous companies measure up against the multinationals?

In 2013 the Irish-based operations of foreign-owned, IDA-supported firms had sales of €134bn as against less than €30bn for Irish-owned, Enterprise Ireland-supported firms, according to the Department of Jobs, Enterprise and Innovation's Annual Business Survey of Economic Impact.

When it comes to exports, foreign-owned firms enjoyed an even bigger lead over their Irish-owned counterparts - €128bn versus just €15bn.

However, when the figures are examined more closely a somewhat different picture emerges. Yes, the multinationals have far higher sales and export figures - but these numbers tend to exaggerate their contribution to the domestic economy.

While foreign-owned firms spent €24.8bn in the Irish economy in 2013, 18.4pc of their total sales, Irish-owned firms spent €19bn, 64.2pc of their total sales.

This means that a euro of sales by an indigenous company is worth more than €3.50 of sales by a multinational company to the Irish economy. When looked at through this light, the multinationals' sales lead over Irish-owned companies shrinks from 4.5:1 to just 1.25:1.

While the multinationals pay their workers more than indigenous firms, with a total 2013 payroll of €9.2bn as against €5.8bn for indigenous firms, the employment totals are broadly similar with indigenous firms employing 180,000 people directly and indirectly supporting another 120,000 jobs.

Yes, the multinationals are important, very important - but so too are indigenous companies.

The importance of the indigenous sector may be about to increase even further.

If IDA Ireland and Government Ministers aren't paying very, very close attention to next year's US presidential election then perhaps they should. The popularity of real estate tycoon Donald Trump with Republican voters and socialist Senator Bernie Sanders with Democrats has caused the campaign to succeed Barack Obama to veer off in an entirely unexpected, populist direction.

Matters haven't been helped by the furore generated by tax affairs of some American multinationals. In May 2013 the US Senate Investigation Subcommittee heard that Apple routed $74bn of profits, on which it paid very little tax, through a number of Irish subsidiaries. The Subcommittee's revelations triggered an EU Commission investigation into Apple's Irish tax arrangements.

A ruling is now expected from the Commission early next year - but the mood music is not good, with Apple having already warned its shareholders that it could have a "material impact" on the company.

Any hope that the controversy generated in the US by the Apple revelation would somehow die down have been dashed by the proposed "merger" between Pfizer, the world's second-largest pharmaceutical company, and the Irish-registered Allergan. This is a so-called "inversion" deal, which will see the merged company become "Irish" and thus qualify for our 12.5pc corporate tax rate rather than the US rate of 35pc - and it has not gone unnoticed Stateside.

Democrat front-runner Hilary Clinton has described such inversions as "gaming" the US tax system and has called for reform of the American corporate tax system "to encourage investment in the US, rather than shipping earning and jobs overseas".

Mr Trump has gone even further saying that: "These corporate inversions take capital - and more importantly, jobs - offshore. We need leadership in Washington to get the tax code changed so companies will be coming to America, not looking for ways to leave".

Meanwhile, the OECD published its latest Base Erosion and Profit Shifting (BEPS) proposals last week. By placing an obligation on companies to report their profits on a country-by-country basis they will make it much more difficult for them to route their profits through the most tax-advantageous locations.

This combination of factors creates the very real possibility that Ireland could find itself facing a "perfect storm" on FDI. This means that in future we may well have no choice but to grow our own rather than rely so heavily on the multinationals to create jobs and increase exports.

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