Thursday 18 July 2019

Dan O'Brien: 'Ireland remains a magnet for US investment - but if globalisation goes into full retreat, everything changes'

As US companies employ more people in Ireland than those of any other country, an exodus back across the Atlantic could be ruinous for the economy
As US companies employ more people in Ireland than those of any other country, an exodus back across the Atlantic could be ruinous for the economy
Dan O'Brien

Dan O'Brien

The earliest inhabitants of this island lived in the Stone Age. Their lives were nasty, brutish and short.

To lessen their privations they traded with others beyond these shores. Axes made from Irish stone have been dug up in Britain and on the continent.

Archaeologists assume the enterprising of that time took to dugout canoes and paddled great distances in perilous circumstances to trade cutting implements for things unavailable here. In this, the early Irish were no different from their contemporaries around the world.

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Across the planet for thousands of years commerce over long distances was conducted by similarly enterprising folk. Over time, as human affairs became more complex, so did commerce.

One manifestation was the emergence of companies. Rather than individual merchants or small partnerships being at the heart of business and trading, corporations increasingly came to dominate.

In the 20th century one of the most profound changes in economic activity was the emergence of globe-spanning companies. These multinationals didn't just make their widgets in one country and ship them all over the world.

Rather, they set up sister companies in other countries and regions of the world to service local markets. These multinational subsidiaries have replaced long distance trade to an extent that is widely under-appreciated.

What is less under-appreciated is that the prosperity of everyone in this country depends on multinational companies. For more than half of the period since independence, attracting them has been at the core of the Irish economic model. It has been wildly successful. Arguably, it is the single most successful policy initiative in the history of the State.

The huge presence in Ireland of these companies, which drive the process of globalisation, has made Ireland both rich and highly interconnected with the rest of the world, as the hundreds of thousands of people who go to work each day in multinational companies can attest.

Last week an important study of multinationals and what they do was published. At a time of heightened concerns about possible recessions and on-going trade wars, it gave cause to be optimistic about the sustainability of Ireland's tried and tested economic model.

In a large office building overlooking Lake Geneva in Switzerland, dozens of economists and researchers at the United Nations Conference on Trade and Development (UNCTAD) toil to understand the world's mega-corporations.

Each year they publish what is considered the bible on foreign direction investment (FDI). What they published last week suggested that while the world economy may not be globalising at the accelerating pace it once did, economic integration continues apace.

The least rosy findings by UNCTAD was that, for the third year in a row, the amounts companies invested in their foreign operations contracted. World-wide, FDI stood at $1.3trn (€1.158trn). That was well below the banner years of 2008 and 2015, when investment flows were, respectively, slightly below and slightly above $2trn (€1.78trn).

If the cash amounts of foreign investment have been falling recently, a different picture emerges from another measure of corporate internationalisation. Last year across the planet the number of new investment projects - known as "greenfield" investments - rose to record levels and, for the first time, surpassed the previous pre-crisis high-water mark recorded in 2008.

The good news for readers is this economy continues to punch well above its weight in attracting greenfield projects. Last year the UN counted 235 of them coming into Ireland, one for almost every working day of the year and the second highest on record.

This is broadly in line with separate findings from the State agency tasked with luring foreign companies to Ireland. IDA figures for last year showed the number of people working in the export-focused, foreign multinationals it supports hit a new all-time record.

At almost 230,000 jobs, these companies employ around one in seven people in the private sector (and many more jobs depend on these companies via wages spent and inputs sourced locally).

This is not only very good news in and of itself, it is cause for some considerable relief. At the beginning of 2018 the most comprehensive tax reform package in decades was enacted in the US. It slashed taxes on company profits. Among other things, it was designed to get American companies to repatriate jobs from foreign countries.

As US companies employ more people in Ireland than those of any other country, and they are by far the biggest exporters and payers of profit tax, an exodus back across the Atlantic could be ruinous for the economy.

To date, however, there is little evidence that US companies have moved jobs from Ireland to their home country. Nor is there much sign that the future investment pipeline is pumping less forcefully.

This is not just a great relief. It is a welcome surprise. UNCTAD attributes much of the aforementioned decline in world-wide, dollar-measured FDI last year to a fall in American companies' overseas investment as a direct result of the new tax laws. Indeed, so sharp was the decline the US was not even in the top 20 countries globally as the main sources of FDI.

The effect of the new US laws were felt mostly in the first half of 2018. In the second half, American companies collectively started investing in the rest of the world again. That, say the dismalists in Geneva, suggests global FDI is looking up (modestly) for 2019.

But those same dismalists are by no means delirious. They rightly highlight a trend towards protectionism and economic nationalism across the world. This has been a central cause of the deceleration in globalisation over the past decade compared with the 1990s and 2000s (up to the financial crisis of 2008).

If globalisation were to go into reverse, Ireland's economic model since the 1950s would be at risk. If 'deglobalisation' were to really take hold, it would not send Ireland back to the Stone Age, but it would change everything.

Irish Independent

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