Sunday 25 September 2016

We should eke more entrepreneurs out of multinationals

Published 04/10/2015 | 02:30

Galway's medical technology cluster, which includes both large multinationals and mostly smaller indigenous firms, is probably a good example of FDI's benefits
Galway's medical technology cluster, which includes both large multinationals and mostly smaller indigenous firms, is probably a good example of FDI's benefits

Last week this column discussed the need for a more entrepreneurial culture in Ireland and set out the hard evidence of our limited success in business. As often happens when I make this point, some people respond by suggesting that a possible reason explaining why there are too few successful Irish companies could be because foreign companies are treated more favourably.

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You don't have to go far to hear folk who run indigenous businesses complain that their counterparts in multinationals have far easier access to government and officialdom.

A less-frequently made assertion is that multinationals actually squeeze home-grown businesses by sucking up resources, most notably labour.

While it is understandable that there is some frustration on the issue of political and policy access, I don't buy the notion that foreign investment is bad for indigenous business - and, in fairness, neither does the vast bulk of the Irish business community.

But if there is little evidence that foreign direct investment (FDI) has been bad for Irish companies, it has not had as strong a dynamising effect as one might have thought, particularly in the area of new companies spinning out of the multinationals.

The relationship between FDI and indigenous business is a hotly debated topic in economics not only in Ireland but internationally too. A paper published a few days ago on the excellent Vox website, for instance, discussed spill-overs that come with FDI in economies which are less developed than Ireland's.

The optimistic view on FDI spill-overs goes something like this. Foreign multinationals bring with them knowledge and technology, which is not always present in the host country. This, in turn, can spill over into the domestic economy and local firms, making them more innovative and productive.

Similar effects occur as a result of the increased competition generated by incoming firms.

Finally, having acquired a high level of managerial or technical skills, employees of multinationals are well equipped to start their own businesses. Working in a multinational can be an 'incubator' for entrepreneurs.

However, evidence on direct spill-overs in Ireland is mixed. There are certainly examples of spin-offs from multinationals in sectors such as software and medical devices.

Galway's medical technology cluster, which includes both large multinationals and mostly smaller indigenous firms, is probably a good example of FDI's benefits.

Some evidence of a positive relationship between FDI and increased indigenous exports and productivity also exists, but it is not strong, as was pointed out in a paper produced by the Department of Finance last year at budget time.*

The killer point on this subject is the fact that home-grown companies still account for just one-tenth of exports - so whatever positive effect there has been is limited.

A disappointment with regard to the impact of FDI in Ireland was observed as long ago as the early 1980s in the Telesis Report on industrial policy. The study lamented the limited linkages between multinationals and Irish businesses, particularly in how the latter sold few goods and services to the former.

That report claimed that too few benefits accrued to domestic firms from supplying multinationals with materials and services. Though the links could always be stronger, the involvement of Irish firms in multinational supply chains has since grown and continues to grow, as the chart shows.

Foreign-owned firms backed by IDA Ireland purchased more than €15bn of Irish goods and services from Irish-owned firms in 2013. When the impact of multinationals' wages and salaries is added into the mix, the overall impact was €10bn higher.

Perhaps counter-intuitively, though, having limited linkages is not always negative. In their analysis of the collapse of Ireland's computer-manufacturing sector in the 1990s, academics Frank Barry and Chris van Egeraat found that the lack of linkages between the departing factories and indigenous business may have lessened the impact.** (The authors also noted that this adjustment was easier, as most of it happened during the Celtic Tiger period, when employment was plentiful.)

One area already alluded to where there may be a negative by-product of FDI is in the labour market.

By definition a small country has a small labour force. And with salaries nearly twice as high in foreign-owned firms compared with Irish-owned ones, the best and the brightest are drawn to the sector at the expense of home-grown companies.

Likewise, high demand on high-skilled labour may lead to skill shortages, most notably in the IT sector. If there is a genuine downside to the success in attracting FDI, this is probably it. That said, nothing in this world is perfect and the net gains of FDI are unquestionable.

It has long been held that the nationality of a firm matters less and less in a globalising world in which companies become more internationalised. There is much truth in that. But a balanced economy needs a good mix of young and more mature companies across as many sectors as possible sectors. (Admittedly, given the small size of the Irish economy, the range of competitive sectors here will always be quite narrow.)

Multinationals are, almost by definition, quite mature in size and reach, if not necessarily in age. As such, growing the number of start-ups and increasing the speed with which they become mid-sized businesses remains an imperative.

Having more of the high-calibre Irish people who work for multinationals take the plunge and go out on their own is one way to achieve this. It is something that may well warrant greater policy focus.

*Economic Impact of the FDI Sector (www.budget.gov.ie/Budgets/2015/Documents/Economic%20Impact%20of%20the%20FDI%20sector.pdf) **The Decline of the Computer Hardware Sector: How Ireland Adjusted (http://eprints.maynoothuniversity.ie/6137/1/CVE-Decline.pdf)

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