News Analysis

Friday 19 September 2014

State should focus next on winning some Chinese FDI

Published 16/03/2014 | 02:30

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THE FAR EAST: The Chinese market is huge, but in reality it has very little relevance for the vast majority of our domestic economy. Photo: Reuters
FDI from developing economies

WHAT is the most effective way the State's very limited resources can be used to generate prosperity?

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Among the most obvious answers is to play to existing strengths and make the economy even more globalised than it already is.

But should ministers and diplomats, who this weekend are taking advantage of the door-opening gift that is St Patrick's Day across the world, be most focused on boosting export opportunities for Ireland-based firms or luring foreign firms to invest here?

Let's start with exports and note that distance has not died when it comes to cross-border commerce. There are few iron laws in economics, but one is that despite hugely improved communications and logistics, countries' main trading partners are almost always their closest neighbours. Geography, therefore, should be central to any export strategy.

European politicians seem often to overlook this, something that is most evident when they start blathering about BRICs, the faddish acronym for four very different countries – Brazil, Russia, India and China.

Almost inevitably, once 'BRIC' has passed their lips they become gripped by mercantilist fervour and start talking about how their citizens will grow rich by exporting more to these countries.

A comment by British Prime Minister David Cameron a couple of years ago illustrates this phenomenon well. When talking about his government's trade ambitions, he remarked (disapprovingly) that Ireland was a bigger export market for Britain than the four BRICs combined.

But Britain will never trade very significant amounts with the BRICs because they are too far away and because when British companies want to service those markets they will usually set up subsidiaries in those countries to do so. The case is no different for Ireland.

As the pie chart illustrates, Irish goods and services exports to the BRICs account for 3.6 per cent of the €176bn total in 2012. The Russian market is so small it is invisible, Brazil is not much bigger and India accounts for a tiny sliver. Only China is in any way significant as a market for goods and services. While there are certainly opportunities – Bord Bia, for instance, thinks that China will soon be the second biggest foreign market for Irish food and drinks products – exports to far-flung economies will never be transformative for the Irish economy.

Now consider the truly transformative role of inward investment in Ireland over decades.

A quarter-of-a-million people in this economy work in foreign-owned companies. That amounts to about three out of every 10 waged and salaried employees in the private sector. While these 250,000 jobs include people working in foreign businesses serving the domestic market – retailers, insurance companies and the like – they also include jobs in the technology, pharmaceuticals and business services sectors. The latter group collectively generates 90 per cent of this economy's total exports. This export share is by far the largest among developed economies.

The role of foreign multinationals in Ireland cannot be overemphasised and it cannot be said often enough (even if it does not please everybody to hear it) that Ireland is one of the world's great trading nations because foreigners trade from here, not because large numbers of indigenous companies are good at selling their wares abroad.

It should also be noted that the foreign sector's focus is on markets geographically close to Ireland, not on the BRICs, which they leave to their subsidiaries located in or closer to those markets.

While there are many great Irish companies and some progress has been made in improving the export performance of home-grown businesses in recent years, there is a very long and hard road to be travelled before it can be claimed that we have a genuinely successful indigenous export sector.

By contrast, and as the jobs numbers cited above attest, the single greatest economic and economic-policy success in the State's history has been to attract huge numbers of foreign companies here to service the European market (almost two-thirds of exports go to the EU).

And that success continues because it is based on many factors, including, among others: a low and stable corporation tax regime; access to the largest single market in the world; political and policy stability, and an English-speaking, educated and flexibly minded workforce operating in a labour market that balances well the rights of workers and management.

This long-run success can not only be maintained, but improved upon. The continued globalisation of production means that the amount of available foreign direct investment (FDI) up for grabs should keep rising.

One of the main drivers of globalisation now and into the future is and will be the rise and rise of multinationals from the developing world. That is happening as a growing number of companies in emerging markets reach critical mass whereby they are large enough to set up international subsidiaries. This is particularly true of China – now the second largest economy in the world and the third largest source of FDI globally.

These trends can be seen in the numbers. Developing countries' FDI has exploded in the 21st century, as the line and bar chart shows. In 2012 alone, $426bn (about €306bn) of FDI flowed from developing economies, according to UN data. That amounts to a near twentyfold increase over two decades.

What's more, and as the same chart shows (on the right-hand scale), the share of global FDI flows coming from the developing world is also rising fast, from about 10 per cent in the early years of the century to more than 30 per cent in 2012.

For Ireland, this represents, in the coming decades, one of the biggest economic opportunities, if not the biggest opportunity (and one that is far greater than the opportunities to increase exports to emerging markets). If the success in attracting US FDI can be repeated for globalising Chinese, Indian and other emerging market firms who are looking to penetrate the EU market then we should have a bright future over the next couple of decades.

But if that is to happen, it will have to be placed clearly and explicitly at the top of the State's list of priorities for its economic diplomacy, with resources allocated accordingly. The recent announcement that IDA Ireland will be given increased resources is to be welcomed – it is hard to think of any other area of government spending that has generated a better return for citizens than money spent on that agency over the decades – but more is needed.

When traditional trade missions and St Patrick's day trips to emerging markets are described as focusing on 'investment, trade and tourism' in that order (investment almost never comes first) then it will be a good indication that the strategic focus is being aligned to exploit the economy's greatest proven strength.

Sunday Indo Business

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