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Analysis/Comment Last Updated: Sep 22, 2011 - 11:34 AM


Ireland, FDI, and the difference between Aviva and TalkTalk
By Dr. Chris van Egeraat, Department of Geography and NIRSA, NUI Maynooth
Sep 22, 2011 - 7:18 AM

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Job-losses at the Irish subsidiaries of multinational companies are starting to make headlines again. The perception has been created that we are currently experiencing a large number of number of plant closures, driven by a loss of Ireland’s competitiveness as a location for foreign direct investment (FDI). In line with this, we see the usual calls for a change in our industrial and enterprise policy, notably reducing our dependency on FDI and a focus on developing an indigenous capacity (see Prime Time, 20 September 2011).  To inform this debate it may be helpful to investigate the detail of recent divestments.

Firstly, are we actually experiencing an upsurge in divestments by multinational companies? Multinational operations go through a life cycle, and divestments and plant closures have therefore been a constant feature of Irish industry.  Annmarie Browne, a graduate student at NUI Maynooth has recently conducted a count of the number of divestments (leading to job losses) based on an analysis of newspaper articles. The divestment data allows us to compare the divestments since 2008 with those at the end of the 1990s. The up-dated results are presented in Figure 1.

Between 2008 and 2010 Ireland experienced on average about 15 divestments a year by multinational companies. This compares to an average of nine for the period 1997-1999. So although we have been experiencing great(above)er numbers of divestments in recent years, even during the height of the Celtic Tiger era a significant number of companies closed or downsized their Irish operations.

Although I have no comparable divestment data for the first half of the noughties, data on overseas relocations (the sub-set of all divestments that involves a relocation of activities to another country) suggests that the number of divestments actually reached their highest level during the first half of the noughties. Figure 2 presents the number of divestments that involved an overseas relocation of the Irish operations. The number of overseas relocations clearly peaked in the years immediately prior to the onset of the global economic crisis. The number of relocations has been dropping since and in 2010 only two multinationals moved (part of) their operations to overseas locations.

Secondly, to what extend are the recent divestments a result of a loss of competitiveness of Ireland as a location for FDI? To answer this it is helpful to investigate the reasons for the divestments. Companies divest for different reasons. Apart from rising labour costs and other factors that may reduce the competitiveness of Ireland, other reasons for divestment include a declining global market for a particular product, global cost cutting driven by falling profits of the corporation at a global level, overcapacity in the wake of merger and acquisition activity, etc.

We again use newspaper analysis to identify the main reasons for divestments. Table 1 show that, in recent years, in the majority of cases the reason for divestment lies outside of Ireland: either in a loss of profitability of the company globally or a fall in global demand for the subsidiaries’ specific products. Rising labour costs and/or a loss of competitiveness of Ireland as a location for FDI were cited in only about one-third of the cases.

Table 1. Drivers for divestment by multinationals operating in Ireland (%)

Main reason for divestment cited

2008

2009

2010

Declining global market for product

15

24

19

Global cost cutting by parent in face of loss of profitability global operations

38

36

50

Global restructuring following M&A activity

4

4

0

Collateral damage of closure customer in Ireland

4

0

0

Rising costs / fall in relative competitiveness Irish operation

38

36

31

 

100%

100%

100%

To illustrate these figures let us take a look at the reasons for divestment surrounding the more recent divestments, including those highlighted during the Primetime item. The potential divestment by Aviva (if it does materialise) has nothing to do with the Irish production climate. If implemented, it will be the result of what probably is a long overdue corporate restructuring exercise after the acquisition of the Irish business, combined with a loss of sales in the Irish market. The potential divestment by MBNA in Carrick will be driven by the US parent’s decision to retreat from the UK market, not by a loss of competitiveness of Ireland as a production location. Similarly, the job-losses at Halifax last year were the result of the company withdrawing from the Irish retail banking market.

The job losses at Pfizer, Schering Plough and GSK in 2010 were the result of corporate restructuring processes following mergers (leading to overcapacity) and/or a fall in global demand for specific products. Incidentally, some of the effected plants were subsequently bought by other pharmaceutical companies. Divestments at Baxter and Boston Scientific and ABB in 2010 were driven by falling demand for products globally. The main examples of divestments driven mainly by a reduction of Ireland’s relative competitiveness as a production location include B3 Cable, UTC Fire and Security and, to an extent, TalkTalk.

In conclusion, the rise in the number of divestments may be less significant than has been suggested by recent media hype. In addition, many of the recent divestments and concomitant job losses are not the result of a fall in Ireland’s competitiveness as a location for FDI. In those cases where the relatively high labour costs are the main cause for divestment, we will never be competitive again, nor should we strive to be. Finally, in the wake of the recent developments we see a debate resurfacing regarding the drawbacks of an FDI-led industrial development strategy and the virtues of an indigenous/endogenous strategy.

We seem to forget that government has adopted a mixed model some time ago. The problem is that it will take years before we will have developed a competitive indigenous export-sector that will create the number of jobs required to address the current unemployment crisis. In the mean time, maybe we should stick with this two-pronged strategy.

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