Wednesday 18 September 2019

Dan O'Brien: 'What should the IDA be focusing on out to 2025?'

Martin Shanahan, CEO of the IDA, which is setting out its next five-year strategy
Martin Shanahan, CEO of the IDA, which is setting out its next five-year strategy
Dan O'Brien

Dan O'Brien

What is the future of foreign direct investment? This a crucial question for Ireland's prosperity, because a central pillar of the country's economic model is the attraction of globalised foreign companies.

IDA Ireland - the public body tasked with luring such businesses to Ireland - is in the process of formulating its next five-year strategy, to cover the 2020-24 period. Last week I gave a presentation to the organisation's board of directors on issues of relevance to the formulation of that strategy. These are the six matters highlighted.

The global economy

Since 1960 the global economy has shrunk in only one year - 2009 - according to World Bank data. Although there is very likely to be some form of an economic downturn over the next seven years, it would take a protracted global depression for the world's economic output in the middle of the next decade to be below current levels. Foreign direct investment has historically been correlated with economic growth. If this correlation is sustained - and there is little reason to believe that it won't - it is likely that international flows of FDI will, at the very least, stay at their current relatively high levels out to 2025.

The future of globalisation

The internationalisation of human activity has been accelerating for centuries. The internationalisation of the firm, which marks out the current era of globalisation for previous ones, has been one of the defining features of the modern world economy. It would take severe measures by governments, such as bans on inward and/or outward capital movements, to halt companies from seeking out opportunities in foreign markets. Such measures, even in these more protectionist times, only seem likely in the event of extreme scenarios materialising, such as war between the US and China. As such, the pace of globalisation may slow or even be partially reversed, but the changes in international production patterns of recent decades are unlikely to be undone.

Globalisation of corporate China

Big economies create big companies. Barring a crash, China will move closer to overtaking the US as the world's largest economy in the first half of the next decade. Among the many features of the country's extraordinary modernisation has been the proliferation of large firms.

Many are now outgrowing their huge domestic market and going global. The stock of Chinese FDI (both from Hong Kong and the mainland) outside China is rising rapidly and has already one tenth of all FDI globally.

There is also every reason to believe that more investment will take the form of establishing greenfield operations, as opposed to the takeover of existing firms which has hitherto been Chinese companies preferred mode of market entry.

A number of cutting-edge Chinese companies, such as Huawei, have already established operations in Ireland. To replicate with Chinese multinationals the success achieved in attracting corporate America to Ireland is perhaps the biggest single opportunity for the IDA over the period to the middle of the next decade.

This, however, will not be easy for a number of reasons. The same historical and linguistic connections do not exist with China as exist with the US and national security concerns are much greater given the role of the (autocratic) Chinese state in all organisations of any size - private as well as public.

The taxation of companies

Ireland's corporation tax rate and wider regime have long been considered to be under threat from various EU-level initiatives. These fears have always been exaggerated. Tax issues are subject to a veto by all of the bloc's 28 members.

There is no foreseeable prospect that this will change over the period to 2025. While it is possible that agreement will be reached on some aspects of how companies are taxed, last week's failure of EU finance ministers to agree a turnover tax on technology companies followed a long-standing pattern. An enforced change of any significance to Ireland's tax regime in the outlook period is highly unlikely.

Brexit's opportunities/challenges

The one upside of Brexit for Ireland is the impact it will have on the attractiveness of the UK for foreign companies seeking access to international markets.

Britain has by far the largest stock of inward FDI in Europe. The strongly negative reaction to Brexit by Japanese companies in the UK is just one indication of how the loss of access to the EU's single market is viewed by internationalised businesses. Developments in British politics have further tarnished the image of the UK as a place known for effective government.

The British Labour Party under its current leadership is not pro-business and is highly sceptical of free markets. Given the depth to which this wing of the party has extended its control of the organisation, there is only a limited chance that it will move towards a more centrist stance by the middle of the next decade. Were it to be elected, coming on top of Brexit, the attractiveness of the UK as a business location would be further diminished.

Brexit poses not just FDI-related opportunities, but challenges too. In the shorter term, and if no withdrawal agreement is reached, a period of severe trade disruption is likely. If the Irish Government does not preserve the integrity of the EU single market by policing the southern side of the border with Northern Ireland, other member states will - sooner or later -introduce checks on goods arriving on the continent. This would quickly raise serious questions about Ireland's de facto membership of the single market.

Given that single market membership is the basis of many companies' presence in Ireland, any uncertainty around this issue would be extremely serious for the country's economic model.

The future of Europe

The word 'existential threat' is often misused, but if there is a foreseeable existential threat to the European integration project it is the reigniting of the euro crisis. Greece is a tiny economy, but it almost brought down the single currency in the early years of the current decade.

Italy is one of the 10 largest economies in the world and is very close to going Greek. Its populist government, in office for six months, is openly hostile to EU budgetary constraints despite its large and unstable public debt position. Data in recent weeks suggest that the Italian economy is tipping into recession.

The last euro crisis caused a recession in Europe. An Italian-triggered crisis would likely do the same even if it could be contained. More fundamentally, if the euro were to fail, would the EU fail, as German Chancellor Angela Merkel remarked during the last bout of crisis?

If the EU itself were to fragment, what would this mean for the single market upon which Ireland and its FDI sector is so dependent? This is the biggest single risk to Ireland's FDI sector out to the end of the IDA's next strategy timeframe.

Sunday Indo Business

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