Business Irish

Thursday 14 December 2017

Dan O'Brien: Policy issues need work as foreign investment booms

Dan O'Brien

Dan O'Brien

The number of people working in foreign-owned, export-focused companies now stands just shy of 200,000, according to IDA Ireland figures published last week. This extraordinary figure - equivalent to around one in eight private sector jobs - shows how globalised the Irish economy is. That the number employed in such companies has grown by well over one third since 2009, multiples of the overall rate of employment growth in the economy, shows that Ireland is becoming ever more globalised.

No set of figures better reflects the changes in the Irish economy over recent decades than the IDA's data on employment in the firms it assists. The accompanying chart shows the annual percentage change in employment levels in those firms all the way back to 1980.

As it happens, multinationals in Ireland in the first half of the 1980s were actually shedding jobs, reflecting the poor economic management of the period which, among other things, severely eroded Irish competitiveness. By the low-point in 1985, just 65,000 people were employed in IDA-backed companies.

As the 1980s progressed, the post World War I era of globalisation intensified. Happily, Irish policy-making improved towards the end of the decade, allowing the economy to take advantage of the surge in flows of FDI globally. The deepening of European market integration in the early 1990s was a particularly important factor in boosting US investment into Ireland and Europe more widely.

From 1994 until 2000, the net number of jobs in IDA-assisted companies grew at an annual pace of almost 10pc. As capacity in the multinational sector increased, export growth exploded. This was the true Celtic Tiger period.

The collapse of the dot com bubble early in the new century led to a sharp reduction in corporate investment of all kinds across the developed world. That was reflected in three consecutive years of employment contraction in Ireland's foreign-owned sector. Even when investment did recover, the loss of competitiveness at the time led to a weak FDI recovery in the years up to 2008.

Then came the Great Recession. Business investment in developed economies collapsed. Again, this was very quickly reflected in the multinational sector in Ireland. IDA-backed firms shed almost 20,000 jobs in just three years, the largest decline on record.

But recovery in the sector began as early as 2010. Despite worldwide negative headlines linked to the EU-IMF bailout at the end of that year, whatever negative reputational effect resulted it clearly had little effect on foreign companies investing in their Irish subsidiaries. A greater (positive) effect was the fall in a wide range of prices which made Ireland a more competitive location from which to service the European market.

Over the past 24 months, the sector has gone from strength to strength.

Last year and 2015 recorded the second strongest and strongest, respectively, rates of employment growth in the foreign sector since the year 2000. If there was anything negative in last week's headline employment figures from the IDA it was the slight deceleration in growth in 2016 compared to 2015.

But not only were the headline employment growth figures impressive, a deeper look by sector and region showed almost nothing but positive trends. Of the eight regions of the country every one recorded an increase in jobs in companies backed by the IDA.

Across the main sectors in which foreign companies have operations in Ireland the picture was almost as rosy. The biggest single employer, the medical devices sector, grew its collective payroll by more than 7pc, bringing the numbers at work to almost 29,000.

The pharmaceutical sector is only a little smaller in terms of employment, and it grew jobs at an almost identical rate.

The third largest FDI sector by employment is financial services. Foreign companies in that sector increased their combined employment by more than 5pc last year, bringing the total to almost 25,000.

The one negative aspect was the continued decline in the computers, electronics and optical equipment sector. It has been shrinking since the turn of the century as manufacturing functions have shifted to low-wage economies.

That said, it's still employs more than 20,000 people and the decline in the numbers on the sector's payroll last year was small, at just over 1pc.

If the IDA's report showed a multinational sector in rude health, the World Bank's just-published 'Ease of Doing Business 2017' report* went part of the way to explaining why. The study does what it says on the cover - measures how easy it is to do business - in 190 economies around the world. Ireland is in 18th place.

But that is where the good news ends. Ireland's ranking has fallen from 15th place last year. Moreover, there has been little progress in dealing with the more problematic aspects of the Irish business environment.

The World Bank looks at 10 different factors ranging from the barriers to starting a business to the costs of winding one up. Ireland scores well in some sub-indices, but falls down in too many. Its lowest ranking is in contract enforcement, where the country is ranked 90th in the world owing to the high costs and length of time it takes to go to court. Not only is this dire, particularly for a country that depends so much on foreign investment, but the report shows that there has been no progress in improving contract enforcement over the past four years.

With changes to the US tax code coming down the line and a new American president who is hostile to the globalising companies which create so many jobs in Ireland, inward FDI to Ireland from the most important source country is threatened like never before. The Trump factor is one which no Irish government can have much influence over.

All the more reason, then, to get on with fixing the problems in the domestic business environment which can be influenced.

Sunday Indo Business

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