Tuesday 11 December 2018

Asian firms would love a safe European home - let's give them one

Setting up in Europe holds many attractions for Asian businesses, and for Irish ones too
Setting up in Europe holds many attractions for Asian businesses, and for Irish ones too
Dan O'Brien

Dan O'Brien

This column has long maintained that one of the biggest opportunities for Ireland in the years and even decades to come is the attraction of multinationals from the developing world to serve the European market from this country.

If even a fraction of the rapidly growing share of global foreign direct investment which comes from emerging markets, and from Asia in particular, can be lured to Ireland, then the economy's vital export base will be secure over the long term.

There are many reasons to believe that this is achievable, and a new paper on the factors that cause developing world firms to internationalise makes the case stronger. But before considering that study, let's take stock of the many reasons that companies from the US and Europe locate here and consider why they are just as applicable to eastern companies as they are to those from the west.

Although there is no little pessimism about the European economy (balanced by some decent signs of a recovery in recent months), the single market of the EU28 is still the largest economy in the world. No company with global aspirations can ignore it. The choice for fast-growing companies the world over is not whether to service the EU market, but from where to service it: from home by exporting or from Europe via a subsidiary.

There are lots of reasons to choose Ireland. The low rate of corporation tax has always been one of the main selling points to potential investors. That is undoubtedly a major incentive. And there is very good reason to think it will never change in the lifetime of anyone reading this.

If any country or bloc hoped to force Ireland to bump up its corporation tax rate from 12.5pc, the greatest opportunity came when Ireland was weakest and in need of bailing out. That there was no change over that period means that there is as much certainty around it as there is in relation to anything in the field of tax policy or economic policy more generally.

lt is certainly the case that tighter international rules on tax avoidance are coming, but there is little that can or should be done to prevent a stronger rules-based regulatory system for global companies. While there is likely to be some negative effect for Ireland in the short- and medium-term, the longer-term gain of a stronger rules-based regime should offset any downside.

Another Irish strength is a well-educated workforce of native English speakers which has proved itself capable of adapting to the demands, and the workplace environment of multinational companies. Moreover, with the probability of the UK pulling out of the EU already very far from negligible and rising, Ireland could well be the only English-speaking country in the bloc before long.

That would add to the attractiveness of locating here - not only for companies setting up operations in Europe for the first time, but also for those already based in Britain. And Ireland Inc should not be behind the door in making it plain to companies that they can reduce the many uncertainties associated with Brexit by moving here.

Yet another reason to locate in Ireland is the generally good business environment. In the World Bank's survey on the ease of doing business, the Republic rose to 13th place globally in 2014, up from 17th in 2013. This survey covers 189 economies (countries and cities) and ranks them according to how easy (or difficult) the authorities make it to do things like enforce contracts, start a business or trade across borders.

A core element of this ranking is the financial and economic stability engendered by the State's decently functioning regulatory institutions. Legally compliant companies in Ireland have little to fear from any interaction with the judiciary, tax authorities or local councils. Ireland also shares the long-established common law system with economies as diverse as the US, India, Singapore and Hong Kong. This is all assuring to foreign companies considering investment here.

It may be particularly important to companies originating in countries where the rule of law as it is understood in the democratic world is non existent, or where the legal system is so inefficient that it makes contract enforcement extremely difficult. This is one factor drawing firms from the developing world to Ireland so that they can service the European market, along with the others listed above.

But it is precisely the difficulties of operating in developing world markets - even for companies from those very same markets - as highlighted in a new paper* by Alvaro Cuervo-Cazurra and Ravi Ramamurti of New York's Columbia University. Along with factors, such as ease of market penetration, that "pull" companies from their home countries to engage in FDI in another country, there are also "push" factors driving them to relocate.

One of these factors is motivated by a desire for "institutional escape", and is the counterpart to Ireland's reassuringly stable and predictable institutions. In many emerging markets, business owners worry about corrupt officialdom riding roughshod over their property rights. By diversifying into countries with stronger protection of property rights, they can safeguard their assets.

Another motivation is described as "discrimination escape". The researchers link this to the perception of poor quality associated with goods manufactured in some countries. International consumers may suspect products from emerging market countries are inferior in technical - would you prefer your hip replacement to come from Vietnam or Switzerland? In addition, there is also the potential for consumer boycotts if workers in developing countries are found to be toiling in conditions we would find Dickensian.

Setting up in EU countries reduces the danger of state appropriation of assets, banishes doubts about workers' conditions, and adds the lustre of technical quality associated with products manufactured in Europe - all likely motives of the efforts by the China National Tire & Rubber Company to takeover its competitor Pirelli, one of the flagships of the Italian economy for decades.

Of course, all this outward FDI means lower revenues for the governments in these companies' home countries, at least initially. Cuervo-Cazurra and Ramamurti stress that the lesson to be learned is not how governments can restrict flows of money leaving a country, but how to make it more attractive to invest at home.

This includes strengthening the rule of law, improving the country's image, and increasing the incentives for innovation. Until such time as this advice is taken on board, plenty of investment money is looking for a home. Ireland is in prime position to take advantage of this opportunity.

*http://ccsi.columbia.edu/files/2013/10/No-143-Cuervo-Cazurra-and-Ramamurti-FINAL.pdf

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