Globalisation may have a bad rap - but it's working for us
Published 10/07/2016 | 02:30
Globalisation is getting a bad rap at the moment. It is being widely blamed for voters' rising anger towards 'establishment' parties and policies. The latest example is the Brexit referendum. I look at the politics of anger in my column in the main section of the paper, but here let's consider economic and business-related issues around a pillar of globalisation.
The annual World Investment Report by the United Nations Conference on Trade and Development (UNCTAD) was published recently. It brings together data on the activities of multinationals, as well as analysis on current and future trends. And last week, IDA Ireland - the entity tasked with luring foreign direct investment (FDI) into Ireland - published its half-yearly statement. For an Irish readership, there was plenty to cheer in both.
As readers of these pages will know, Ireland is one of the most internationalised economies in the world. Globalisation has worked very nicely for us, with more of its benefits accruing to this economy than many others.
There have been fewer costs too - we haven't suffered North of England-style deindustrialisation, because we were never that industrialised in the first place. As such, one rarely hears multinationals being blamed for leaving segments of Irish society behind. Even among the usual 'neoliberal'-muttering suspects, there is a recognition that FDI has been a central factor in bringing standards of living in this country up to the levels enjoyed by our peers.
It is probably for this reason that there is widespread political support for ensuring Ireland remains a destination for foreign investors in the future, and why there is something approaching paranoia about threats to the country's comparatively low rate of profit tax.
The headline takeaway from the UNCTAD report was that global FDI flows rose by 38pc in 2015, as the amount companies invested in foreign affiliates hit $1.76 trillion. This was the highest level since the financial crisis.
But if this surge looks a little odd to you, then your instincts are not letting you down.
The world economy was sluggish last year and some emerging markets went into recession - factors that depressed FDI flows. The continued pullback in productive investment by the largest 5,000 multinationals did nothing to boost FDI - their total combined capital investment (at home and abroad) fell for the second year in a row. Countries that are endowed with natural resources (such as oil, metals and minerals) saw their inward investment decline last year because of falling commodities prices.
So how come there was so much more FDI activity? Much of the answer lies in companies doing 'inversions' to reduce their tax bills.
Apart from exporting, there are two ways a company can gain access to a foreign market: by taking over an existing company via mergers and acquisitions (M&As) or by investing in a subsidiary it has established itself (usually known as a 'greenfield operation').
Last year, increased FDI flows were largely due to a surge in M&As, and tax avoidance was a big reason for many of these cross-border corporate restructurings. Deals in Ireland, Germany, Hong Kong, the Netherlands and Switzerland were cited by UNCTAD.
It was especially prominent among American pharmaceutical corporations attempting to lower their tax liabilities via inversions (which allow a company redomicile for tax purposes by being 'taken over' by a smaller company in another country).
The biggest M&A deal in the world last year was the acquisition of the US company Allergan by the Irish firm Actavis for $68bn. Other deals that were cited included Sigma (US) by Merck AG (Germany) and the oncology business of GlaxoSmithKline (US) by Novartis (Switzerland).
The UN agency reckons that when the value of these tax-motivated M&As are stripped out of the data, the rise in FDI globally last year was closer to 15pc - well below the headline 38pc figure.
UNCTAD expects FDI flows to decline in 2016 not only on the back of a fragile global economy but because policy measures to curb tax inversions can be expected to calm the surge in M&As. A notable example was the US Treasury Department's regulatory changes to stop tax inversion in April of this year, which scuppered Pfizer's proposed mega-deal with (again) Allergan.
That would have sent Ireland's FDI figures off the chart. But other inversions meant that headline inflows to this country did balloon last year. Despite having only 1pc of Europe's population, the country managed to receive a massive 20pc of Europe's FDI inflows last year, according to UNCTAD.
These numbers are inflated. But just as inflated GDP figures don't mean the economy isn't growing, the inversion-fuelled FDI figures don't mean that there aren't good things happening in the FDI space.
Global greenfield investment, usually considered the more productive kind of FDI, increased by 8pc last year in dollar terms. This economy continued to attract more than its fair share. As the first chart shows, Ireland's slice of Europe's greenfield investment pie was almost 4pc.
As the second chart shows, employment in the multinationals that are IDA clients increased by more than 7pc last year. That was the most rapid rate of increase since the Celtic Tiger was in its heyday, and more than three times the growth in overall employment in the economy.
Last Wednesday, in its half-yearly statement, the IDA said that growth in the first six months of 2016 was as strong as last year. If that can be maintained over the next six months, employment in IDA-supported firms will hit the 200,000 mark for the first time ever (around one in every eight jobs in the private sector).
Brexit will probably have a negative impact on FDI inflows in the very short term. The huge increase in uncertainty is likely to cause businesses to reassess many aspects of capital spending. Over the medium and long term, however, Britain withdrawing from the European single market creates potential upside when it comes to flows of FDI into Ireland.
Like Ireland, the UK has punched above its weight. Its stock of FDI amounts to $1.5 trillion - more than any other European country. And Britain has also been very successful in attracting greenfield investment. According to FDI Intelligence, a division of the Financial Times, in the past 24 months there have been 2,146 greenfield projects in the UK, creating more than 150,000 jobs (for comparison, Ireland got 368 projects and 25,500 jobs).
Now some of those projects are at risk. Earlier this year, FDI Intelligence ranked Dublin second only to London as "the most promising investment location in Europe".
Its next rankings may very well reverse the order.
Sunday Indo Business