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Analysis/Comment Last Updated: Sep 12, 2010 - 10:28:00 AM

IDA Ireland Horizon 2020 Strategy: Lack of coherence on changes facing existing Irish-based multinationals/ challenges of adapting model for China and India - - Prof. Seamus Grimes
By Prof. Seamus Grimes, Centre for Innovation & Structural Change, NUI Galway
Mar 10, 2010 - 4:35:50 AM

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IDA Ireland  Horizon 2020 Strategy: In this article, Seamus Grimes, a professor at the Centre for Innovation & Structural Change, NUI Galway, says he is less than convinced that the published document presents a coherent strategy because there is no clear vision of what role Ireland can play in the next stage of the development of multinational subsidiaries based in the country, or what the rationale is for attracting new investment. Prof. Grimes, who was based at the East China Normal University, Shanghai, in 2009, says there are few ideas presented about how to engage with such rapidly growing markets as China and India.

I welcome the IDA strategy document ‘Horizon 2020' which presents the thinking of the agency for the next ten years. This is the first major statement about the next stage of Ireland’s FDI model since ‘Ahead of the Curve’ was published in 2004 by Forfás. The importance of this new document is that it confirms a commitment by the state to a continuation of exploiting the potential offered by inward investment for a considerable period to come. In recent years there has been a growing scepticism about the contribution of FDI to Ireland, and this has recently culminated in a number of statements by key figures about the need for Ireland to move on from its over-reliance on inward investment and to focus much more on indigenous companies. I believe that this scepticism is unfounded and could do damage to our economic future. 

While I accept the general wisdom of trying to shift our economic activity towards a more significant contribution from indigenous companies, I believe that this is a long term (20 year) project and of course we need to make as much progress as possible as soon as possible. The reality, however, is that the indigenous sector makes a relatively small contribution to exports in the major growth export sectors such as internationally traded services, and it will take many years before this exporting profile is significantly changed. This is why it is premature and quite dangerous to encourage a distancing from the role of FDI in the Irish economy. 

Thus while I welcome the ‘Horizon 2020’ document as a statement of intent, I am less than convinced that it presents a coherent strategy. The main reason for this lack of coherence is that there is no clear vision of what role Ireland can play in the next stage of the development of multinational subsidiaries based in the country, or what the rationale is for attracting new investment. The overall perspective is rather traditional, presenting an approach that involves replacing current inward investment with new forms of investment. There is no doubt that this will be a major part of what happens in the next 10 years, that there will be considerable churning of functions and activities within existing subsidiaries as parent companies implement extensive outsourcing and offshoring of functions that can no longer be carried out in a relatively expensive location like Ireland. 

The IDA have long recognised the implications for Ireland arising from globalisation processes, and have encouraged subsidiaries here to move in the direction of global procurement. It is not clear from this strategy document, however, where they see the next stage of this model going. If subsidiaries in Ireland are to develop a sustainable future they are faced with many challenges. One of these is to exploit the comparative advantage of lower cost regions such as China and India. I don’t believe that the overall agency setup in Ireland is sufficiently organised in an innovative manner for the challenges facing companies in the next ten years.

Tánaiste and Minister for Enterprise, Trade and Employment, Mary Coughlan. "Horizon 2020 marks the first time that IDA has published its strategic thinking in this way. This strategy document articulates our view of the next decade’s significant future changes. It outlines the results of a detailed analysis of global mega-trends, economic geopolitical changes and technology roadmaps from which we have outlined the goals Ireland needs to set to capitalise on the opportunities that they represent" - - Barry O'Leary, CEO IDA Ireland.
Many of the subsidiaries in Ireland have been here for quite a few years and have delivered important contributions to the economy. Many also have evolved toward more sophisticated activities. But because of the forces of globalisation subsidiaries are very much on a treadmill of seeking to ensure they will be part of their parent company’s plans in the future. Many of them have limited local autonomy for decision-making, and yet the management in a good number of cases have done an impressive job in building sustainable operations. A major challenge which they face is to move beyond the restrictions of the regional European/Middle East/Africa markets that they have been focusing on to date. The strategy document mentions the significance of the newly emerging markets such as China, but there are few ideas presented about how to engage with such rapidly growing markets. It is exceptionally difficult to convince Chinese companies that they should set up in Ireland in order to penetrate the European market. Every developed country in the world is wooing Chinese investment, and the small scale of activity in Ireland is problematic. Chinese companies do not behave like American multinationals and do not appear to understand the model on offer from Ireland, which has worked very well for US companies.

On the one hand IDA Ireland hopes to attract Asian investment to Ireland, but there are few ideas about how existing investment in Ireland might engage with China and India. We need to move beyond the traditional restrictive model, thinking that these huge markets are only for the small number of Irish companies. This strategy document is too Ireland-centric. It is not really thinking about what role Ireland can play in the global production networks of multinational companies. It is most likely that the increasing role will be associated with servicing international and global markets. Subsidiaries in Ireland must think in terms of developing ways of servicing global markets. Multinationals are currently involved in the process of shifting from regionalised to global frameworks. Ireland has an opportunity here, based on its record to date to develop innovative ways of helping companies to come to terms with this huge challenge.

Finally the strategy needs to look in more detail at the next stage of the FDI model in relation to corporation tax. The successful model developed by many multinational subsidiaries in Ireland is based around reporting their business carries out throughout Europe and beyond back to Dublin in order to benefit from low tax rates. Transfer pricing practices between multinational subsidiaries, whereby prices are fixed to maximise the benefits of low tax rates, have also been important. This aspect of the Irish FDI model appears to be under threat from both the US and also Brussels, with the possibility of taxes being levied at the point of sales in different European countries. The Irish state needs to respond to these major challenges to the model which has provided excellent returns to date, both to Ireland and the companies involved. If IDA Ireland have some creative ideas about how to respond to these major challenges in the coming years, they are not too obvious in this strategy document.

SEE also: Finfacts article, March 09, 2010; Irish Economy: Political spin, jobs and IDA Ireland

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