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News : Irish Economy Last Updated: Jan 4, 2013 - 9:16 AM

Irish Economy: Sustainable growth dependent on foreign firms since 1990; Now FDI has peaked
By Michael Hennigan, Finfacts founder and editor
Dec 22, 2012 - 7:23 AM

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Swirling clouds of blue and green lit the Atlantic Ocean west of Ireland on June 2, 2006, when the Moderate Resolution Imaging Spectroradiometer (MODIS) on NASA’s Aqua satellite captured this image. The ocean is normally black in true-color, photo-like satellite images such as this one, but a large phytoplankton bloom lent the water its brilliant blue and green hues. Phytoplankton are microscopic plants that grow in the sunlit surface waters of the ocean. When enough of the plants grow in one place, the bloom can be seen from space.

Irish Economy: After a lost decade of a property boom and bust that has been washed out of Ireland's data, GNP (gross national product) per capita at constant prices in 2011 was just slightly higher than it was in 2000. It is striking that while sustainable growth has been dependent on foreign-owned firms since at least 1990, new FDI (foreign direct investment) into Ireland has peaked.   

GNP is viewed as a better measure of Irish economic performance compared with GDP (gross domestic product) because the metric excludes the inflated profits of the FDI sector that are included in GDP. In 2011, the value of GNP was 80% of GDP [pdf]. In the early 1970s for example, GNP exceeded GDP because of emigrant remittances. See more here on GDP and GNP. 

What is important to understand is that both GNP and GDP are strongly influenced by the activities of foreign firms.

Looking at data for 1972 when FDI was relatively low compared with today, Irish GDP per capita was 36% of Sweden's level.

In 1972-1990 Irish GNP per head at constant prices rose 34%.

In both 1990-2000 and 1990-2011, GNP per head rose 58%.

In 2000, the GNP per head was €28,042 and in 2011 it was at €28,317.

1990 is an important benchmark year as in the previous year, Intel, the US chip giant decided to build a facility in Ireland and as the US high tech boom gathered pace, most of the main players opened facilities in Ireland.

The late Dr. Garret FitzGerald wrote in the Irish Times in 2006 that during the brief Celtic Tiger period from 1993 to 2001, our living standards rose by one-half. But this was due to two special factors - both of which were essentially temporary in character.

The first was the impact upon our national productivity of a quite exceptional inflow of new US investment. For a number of years Ireland, with only 1% of Europe's population, attracted up to 25% of all US greenfield industrial investment in our continent. The new technology and skills that this inflow brought contributed to a 4% annual increase in output per worker at national level, ie productivity.

The second factor, which played an even larger role in boosting our living standards during this time, was the huge increase in the total number of people at work, and the corresponding drop in the proportion of dependants in our population. Several factors contributed to this: the exceptional inflows of young workers emerging from the educational system and of women transferring from "home duties" to the labour force, and also the flow of unemployed people returning to work and of recent emigrants coming back to jobs here.

Within a decade these inflows into our labour-force reduced from 230 to 115 the number of dependants that every 100 workers had to support, either directly within their families or indirectly through taxation.

During the property boom from 2001 to 2007, the indigenous sector added 10,000 jobs and the FDI sector lost 10,000 jobs.

Data from Forfás, the State agency, show that there were 143,000 people in full time employment in the foreign-owned export sector in 2011 - - down from 166,000 in 2000.

Data from UNCTAD, the UN agency, show that FDI inflows to Ireland were valued at $13bn in 2011 down from $26bn in both 2010 and 2009.

The data is provided by fDi Intelligence, a unit of The Financial Times.

UNCTAD's definition of 'greenfield,' includes projects from existing companies. Such projects can include new Tesco supermarkets.

Ireland gets a 5th ranking for attractiveness because of the existing large stock of FDI. However, in a survey of multinational companies, Ireland doesn't appear in the top 20 favourite destinations for 2012-2014.

The US Chamber of Commerce in Ireland in a report [pdf] claimed that "combined US inflows of $58.5bn in 2010 and 2011 represent the strongest two-year period of inflows on record, a surge in capital and confidence from the US.

US investment stock in Ireland’s 'information' sector (including investment in software, data processing, telecommunications, other services) surged by nearly 30% in 2011, rising to $19.5bn from $15.2bn the year before. The sizeable jump reflects the underlying confidence in Ireland among many leading US technology leaders, with Ireland trailing only the United Kingdom when it comes to attracting the most 'information-related' capital stock among European nations (see exhibit 1.5)."

There is a large existing base of US FDI in Ireland; some of the 'inflows' include retained earnings, some of it reflected in 'trapped' cash in the overseas accounts of US banks, to avoid incurring US tax charges while the claims in respect of the 'information' sector in 2011 are essentially bogus as they reflect the tax strategies of companies such as Apple, Google and Microsoft -- for more background check here.      

In 2011, IDA Ireland, the inward investment agency, supported a net addition of 6,000 jobs and in 2013, the target is 12,000 gross jobs (before losses). New projects tend to be small. Announcements made in respect of tech firms, Twitter and Dropbox, had no agreed minimum planned jobs, suggesting that the initial focus was on teh publicity value.

As we head into 2013, long-term unemployment (continuously for 12 months or more) is close to 200,000 people.

The proportion of foreign hires for IDA Ireland supported jobs is a State secret but it is a necessity for localisation work.

The February PayPal announcement of 1,000 additional jobs in coming years, was the biggest single Irish agency supported jobs project this year. In July, Louise Phelan, the Ireland chief, said Ireland suffered from a “deficiency” in workers with second languages. “We are a gateway to Europe but we need to ensure we are supporting the languages. Absolutely there is a deficiency in languages in Ireland. I am bringing in 50% of our language cover I require from 19 other countries.”

She added that this was imposing additional costs on the company. Each job is also subsidised by the taxpayer. The average number of foreign nationals on the Live Register in recent years has been at 75,000.

In the EU, nearly 80% of children were studying a foreign language at primary school in 2008; in Ireland the level was 3%! In Malaysia, a Chinese-Malaysian child learns: Malay, Cantonese, Mandarin and English!

So with FDI job numbers peaking in 2000, Ireland faces a serious challenge.

I was challenged this week on a claim I made on an Irish Economy blog thread that "absent the FDI sector, Ireland would be closer to Albania than a typical advanced country."

World Bank data for GDP per head in PPP terms  in 2011, has Albania at $9k and Sweden and Ireland at $41K.

On a GNP basis, the Irish figure was $32K

There has never been a time since 1922 when FDI wasn't a factor e.g. Ford, Dunlop and several British companies operated in the State from the early period; and from the mid-1930s when Guinness moved its headquarters its new brewery at Park Royal, London.

So this is a theoretical example.

What explains the rise in GNP per capita by 58% in the period 1990-2000 and by extension to 2011, excluding the property boom years?

According to the 2004 official report 'Ahead of the Curve' [pdf], produced by the Enterprise Strategy Group: "Over the period 1990-2002, exports by agency-assisted indigenous enterprise grew in nominal terms at 5.5% per annum (versus 15.9% for foreign-owned companies). When inflation is taken into account, the real growth in both sales and exports was negligible."

In 2002-2011, indigenous tradeable exports rose 4% annually in current price terms. Industrial production in traditional industries fell in the period 2001-2010.

There was no significant rise in tourism and agriculture to offset the flatlined indigenous tradeable sector. Normal construction growth and EU aid may have been factors that also boosted the economy.

Total net cash received from Europe since 1973 was €42bn in current price terms. It amounted to 5.1% of GDP in 1990; 6.2% in 1991; 5.1% in 1992 and 5.2% in 1993.

Total full-time permanent employment in the internationally tradeable goods and services sectors in December 2011 was 284,000 compared with 320,000 in 2000. So there were 141,000 employed in the indigenous internationally tradeable sector, almost as many as in the FDI sector.

However, the data show that the FDI sector was the key agent of growth.

So with the theoretical absence of all FDI, we should allow for some advances ourselves and say a GNP per head figure of $21,000 -  - up 38% in real terms from 1972 and in 2011 in line with Poland's and ahead of Estonia at $18,000 - - and closer to Albania than for example Sweden's or Germany's.

The FDI sector has also brought important intangible assets: improved standards of management, technical competence, integrity and treatment of workers -- the local chief is an employee like everyone else.

SEE also:

Irish Economy: Innovation, a failed enterprise policy and inconvenient facts for 2013

Irish Economy: Actual Individual Consumption per capita in Ireland at EU average; Germany at 20% above

Irish Economy: Pharmaceutical patent cliff no growth threat; High exports have low impact

Irish Economy: Export growth insufficient to pull domestic economy out of recession

Irish Economy 2012: At least a third of value of Irish services exports is overstated

Dell remains Ireland's biggest manufacturing exporter despite closing Limerick plant

Irish Economy 2012: Only 50,000 Irish direct workers responsible for 69% of annual Irish exports

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