Foreign-Owned Companies

Abstract

A prolonged surge in FDI became the main driver of the boom, especially in the 1990s. Initially, this mainly involved high-tech manufacturing, with services becoming increasingly prominent later. The high-tech manufacturing sectors were less important in terms of net foreign earnings than they appeared to be in terms of exports, while the reverse was true for services. The purchasing linkages and R&D intensity of foreign-owned firms did not develop strongly during the boom, but they did increase their skill levels as more advanced activities were introduced. The overall effect was probably to make them more embedded in the Irish economy and more capable of sustaining higher pay levels, although less integrated than they would be in their home countries. The surge in FDI was not primarily caused by new policies in Ireland. Rather, it was mainly a result of new developments outside Ireland, particularly the introduction of the single European market and the rise of new fast-growing high-tech industries. At the same time, however, existing tax and grant incentives and other conditions in Ireland were very well suited to taking advantage of the new opportunities to attract FDI.

Foreign-owned companies were already prominent in the Irish economy before the boom started in the late 1980s. A large amount of foreign direct investment (FDI) had come into Ireland—particularly into export-oriented manufacturing—over the previous thirty years or so. This previous history was outlined in Chapter 2, where it was mentioned that, by 1987, foreign firms accounted for 43% of manufacturing employment, 52% of manufacturing output and 74% of manufactured exports (Census of Industrial Production, 1987). It was also mentioned in Chapter 2 that the contribution of such FDI to Ireland’s growth appeared to have weakened during the 1980s compared to the 1960s and 1970s.

This chapter examines the role of foreign-owned companies in the boom years beginning in the late 1980s. Section 6.1 briefly presents some basic data on the growth and sectoral composition of foreign-owned industry. Section 6.2 discusses the nature and characteristics of FDI in Ireland, Sect. 6.3 considers what motivated foreign companies to invest in Ireland, and Sect. 6.4 considers various effects or impacts of FDI on the Irish economy.

6.1 Growth and Composition of Foreign-Owned Companies

Employment in foreign-owned manufacturing gradually declined in the period before the boom, but it then grew very rapidly in the period up to 2000, before declining again in the final phase of the boom after 2000. The rates of growth in foreign-owned manufacturing employment were −0.9% p.a. in 1980–1988, 3.8% p.a. in 1988–2000, and −2.6% p.a. in 2000–2006. Foreign-owned companies accounted for 43% of manufacturing employment in 1988, and this increased to 48% by 2000 and then remained at 48% in 2006 (see Table 5.1 in Chapter 5).

Foreign-owned companies also increased their share of manufacturing gross output, from 52% in 1987 to 79% by 2001 and 80% in 2006. At the same time, their share of manufacturing exports rose from 74% in 1987 to 91% in 2001 and 92% in 2006. Throughout this period, a high percentage of the output of foreign-owned manufacturing firms was exported, with 85% being exported in 1987 and 93% in 2006.

Table 6.1 shows employment by sector in foreign-owned and Irish indigenous manufacturing in 2000. Compared to the indigenous industry, foreign-owned companies were more highly concentrated in pharmaceutical products, other chemicals, office machinery & computers, electrical machinery & apparatus, communication equipment, technical instruments and transport equipment. This means that foreign companies were far more concentrated in the sectors that are conventionally defined as high-technology and medium–high-technology sectors.¹ This group of sectors accounted for 64% of employment, 74% of gross output and 76% of exports in foreign-owned manufacturing in Ireland in 2000.

Table 6.1 Employment in foreign-owned and Irish indigenous manufacturing, 2000

In addition, it should be mentioned that foreign-owned companies were also major producers and exporters of software products, another high-technology activity, which was contained within the broader “printing & publishing” sector (NACE 22). The exports of software products from foreign-owned companies probably amounted to about another 10% of total foreign-owned manufacturing exports, so that about 86% of the exports of foreign-owned manufacturing came from high-tech or medium–high-tech sectors.

During the period before 2000, the growth of exports from foreign-owned manufacturing was the main driver of the growth of total exports from Ireland, as foreign-owned manufacturing firms increased their share of all exports from 64% to 74% between 1985 and 2000 (see Table 5.7). Within that trend, it was the high-tech and medium–high-tech sectors mentioned above that were largely responsible for the growth of foreign-owned manufacturing exports.

Subsequently, in 2000–2007, export growth from foreign-owned manufacturing firms slowed down dramatically and their share of all exports fell from 74% to 57%, while services exports became increasingly important (Table 5.7). That weaker trend after 2000 in foreign manufacturing was largely an effect of a much weaker trend in electronic products, while export growth remained stronger in chemicals, software, etc.

Net foreign earnings were a relatively low proportion of the value of exports in foreign-owned manufacturing, particularly in the more high-tech sectors, as was noted already in Chapter 5. Consequently, when foreign-owned manufacturing increased its share of total exports from 64% to 74% between 1985 and 2000, its share of total net foreign earnings increased from just 46% to 49%. Thus, its contribution to the economy and to growth was certainly important, but it was not as dominant as it appeared to be when seen in terms of exports.

When foreign-owned manufacturing’s share of total exports then declined from 74% in 2000 to 57% by 2007, its share of total net foreign earnings declined from 49% to 27% (Table 5.7), while the contribution of services increased rapidly.

The data that are available on the services sector are generally not as detailed as the data on manufacturing, and there is a particular scarcity of data distinguishing between Irish indigenous and foreign-owned services. Nevertheless, it is evident that foreign-owned companies were heavily involved in the growth of services exports. It was seen in Chapter 5 that foreign-owned companies increased their exports of services about five times faster than the growth of services exports from Irish indigenous companies in 1985–2007, and they accounted for about 77% of services exports in 2000, rising to 82% by 2007. Meanwhile, foreign-owned companies had a much smaller share of services employment and turnover. They accounted for just 21% of services employment in 2001, rising to 27% by 2007, while their share of services turnover was 35% in 2001, rising to 44% by 2007.

Foreign-owned services exports were worth much less than 10% of all exports in 1985, but they accounted for 14% of all exports by 2000, rising to 30% by 2007.

As regards sectoral composition, we can take it that sectoral data on total services exports must give quite a good indication of the composition of foreign-owned services exports, because foreign companies accounted for the bulk of services exports and most of their growth. The fastest growth in services exports during the boom occurred in computer services, business services, insurance and financial services. They became the dominant category of services exports and they accounted for 86% of total services exports by the end of the boom (see Chapter 4).

Net foreign earnings amounted to about 55% of the value of exports in foreign-owned services, which was a low figure compared to about 94% in Irish indigenous services but was much higher than the figure of 26% in foreign-owned manufacturing (Table 5.6). The result was that foreign-owned services accounted for a greater share of all net foreign earnings than their share of all exports. Consequently, when their share of total exports increased from 14% in 2000 to 30% in 2007, their share of all net foreign earnings increased from 23% to 43%.

Finally, when foreign-owned manufacturing and services are combined together, their share of total net foreign earnings increased from about 56% in 1985 to 73% in 2000 and then declined a little to 70% in 2007 (Table 5.7). By that criterion, foreign companies made a major contribution to economic growth over the full period of the boom. However, as Chapter 5 concluded, the indigenous contribution to the boom was relatively important in the late 1980s and again in the 2000s, whereas the foreign-owned contribution was very dominant in the 1990s.

6.2 The Nature and Characteristics of FDI in Ireland

It was noted in Chapter 2 that much of the FDI that came to Ireland before the boom had a good deal in common with the type of mobile industry that was able to move to less-developed or newly industrialising countries. At first, in the 1960s, this meant technologically mature and often labour-intensive products such as clothing, footwear, textiles, plastic products, light engineering, etc. Subsequently, from about the late 1960s, FDI in Ireland increasingly involved newer, more technologically advanced products, such as electrical and electronic products, machinery, pharmaceuticals, and medical instruments and equipment. These were mostly products of high-technology or medium–high-technology industries, but it was sometimes observed that there was still some parallel here with the type of mobile industry that was able to go to newly industrialising countries. This was because many of these industries in Ireland involved only certain stages of production which were not the most demanding on local technological inputs, skills and high-quality suppliers.

In a major review of industrial policy in the early 1980s, the Telesis Consultancy Group (1982) highlighted such characteristics of these industries. They reported that nearly all of the foreign-owned electrical and electronic firms that they surveyed were “manufacturing satellites, performing partial steps in the manufacturing process. Skill development and linkages in Ireland have been limited”. On mechanical engineering firms, they said that they “consist mainly of sub-assembly and assembly shops of the sort commonly found in newly industrialising countries … of the 34 shops surveyed about half had only one or two skilled blue-collar workers and one or two engineers”. They also remarked that, in general, foreign-owned firms in Ireland, with few exceptions, “do not embody the key competitive activities of the businesses in which they participate; do not employ significant numbers of skilled workers; and are not significantly integrated into traded and skilled sub-supply industries in Ireland”.

While there were similarities here to the type of mobile industry that was able to go to newly industrialising countries at that time, the industries going to Ireland did include some more highly skilled activities, even if they usually lacked the key business functions of the firm. Thus, in the early 1980s, 60% of employees in the electronics industry in Ireland were unskilled, non-craft production workers, compared with over 90% in the electronics industries in Singapore and Hong Kong. At the same time, the figure of 60% for Ireland was a good deal higher than the figures of 34–39% for the UK, USA and Denmark (O’Brien 1985, Table 6.10). The electronics industry in Ireland also undertook far less R&D in relation to sales than the industries in the USA or UK (O’Brien 1985).

As regards the motivation for export-oriented FDI in Ireland, at first the main attractions were tax concessions, grants and relatively low-wage costs compared to more advanced industrial countries, as was outlined in Chapter 2. After Ireland joined the EEC in 1973, there was the additional important attraction of assured access to the large EEC market, which was a major draw for growing numbers of companies from the USA. The basic objective of many of the foreign investors after that time was to establish a factory somewhere within the EEC (and later the EC or EU) to produce for European markets, and then they selected Ireland as suitable for that purpose. Consequently, Ireland's main competitors in attracting such industries were usually Western European countries rather than developing countries with much lower wages. Other influences in attracting FDI to Ireland were the effective work of the Industrial Development Authority (IDA), and the work of the Irish education system in producing a good supply of graduates with the types of skills that were required for rapidly growing industries such as electronics, pharmaceuticals and software. The fact that the Irish labour force is English-speaking was also an attraction for many overseas investors, particularly those from the USA.

By the mid-1980s and subsequently, official policy statements concerning foreign-owned industry in Ireland tended to say that policy would aim to attract and develop a higher quality of FDI—meaning higher skill levels, more key business functions such as R&D and marketing, and more extensive purchasing linkages within the country (e.g., Industrial Policy 1984, pp. 7, 12). The report of the Industrial Policy Review Group (1992, p. 67), also known as the Culliton report, said that “far greater integration of foreign industry into the Irish economy is needed in terms of linkages with other industrial firms and the undertaking of important management functions in relation to investment, marketing and R&D”. The objective of this approach was to make companies more integrated or embedded in the Irish economy so that their presence in Ireland would be enduring, to make higher pay levels more sustainable, and to increase companies’ contribution to Ireland’s value-added and net foreign earnings. During the boom, some progress was made towards these goals in certain respects, although there was less evidence of progress in other respects and significant setbacks sometimes occurred.

6.2.1 Purchasing Linkages

Before the boom began, it was already an aim of industrial policy to increase the purchasing linkages that foreign-owned MNCs had with the Irish economy. A policy measure called the National Linkage Programme was introduced in 1985 to strengthen linkages between foreign MNCs and suppliers in Ireland by enhancing the technical and business competence of suppliers in cooperation with MNC customers (Crowley 1996). This type of policy was primarily focused on MNCs in manufacturing and their purchases of material inputs. For some time, there was evidence that the foreign manufacturing firms were purchasing an increasing proportion of their material inputs in Ireland, but that trend levelled off before very long.

Foreign-owned non-food manufacturing companies purchased about 15% of their material inputs in Ireland in 1986 and this rose to about 21% in the early 1990s, but then it stayed at around that level during most of the 1990s (O’Sullivan 2000). By 2000, foreign non-food manufacturing companies were purchasing 18% of their material inputs in Ireland, and this declined to 11% in 2005 and 10% in 2006.² Thus over the whole two decades, there was no progress on linkages when measured in terms of the proportion of materials purchased in Ireland by foreign manufacturing companies, despite the advance seen in the early years.

The decline after 2000 in the percentage of material inputs purchased in Ireland was particularly marked in computers, electronic & optical products, although it also occurred to a lesser extent in the rest of non-food manufacturing. In computers, electronic & optical products, 17% of material inputs was purchased in Ireland in 2000 and this fell to 5% by 2006. Meanwhile, in the rest of non-food manufacturing the corresponding decline was from 21% to 15%.³

Van Egeraat and Jacobson (2004) documented this declining trend in the computer hardware industry, noting that suppliers of the relevant material inputs in Ireland experienced increasing competition in the late 1990s from low-wage economies, particularly those in the Far East. This was then compounded by the exodus of the personal computer assemblers from Ireland, which disrupted local market conditions for sub-supply companies that had grown up to supply them with some of their input requirements. Van Egeraat and Jacobson (2004) also noted that the data on purchasing linkages cited above tended to overestimate the extent of local sourcing in the computer industry, partly because the data included expenditure on items that were bought from local turnkey supply-chain-managers but were manufactured in other regions.

6.2.2 R&D

As regards R&D, it was already noted in Chapter 5 that business expenditure on R&D (BERD) intensity increased rapidly in manufacturing between 1988 and 1997. BERD intensity in Irish indigenous manufacturing rose from 0.5% of gross output to 1.1% during that period, while there was a similar increase in foreign-owned manufacturing from 0.6 to 1.2% of gross output. However, these figures declined later in 1997–2003, to 0.75% in the case of indigenous industry and to 0.65% in foreign-owned industry. By 2003 the figure for foreign-owned industry was back to nearly the same level as in 1988.⁴

Even at the peak level in the late 1990s, BERD intensity was low compared with the OECD. It was particularly noticeable that foreign-owned industry in Ireland was highly concentrated in the sectors that generally had high R&D intensity in most OECD countries, but for the most part foreign-owned firms in Ireland had substantially lower R&D intensity than OECD firms operating in the same sectors as themselves (see Table 5.8 in Chapter 5). It was possible for them to function in this way because they could benefit from the R&D performed by other branches of the same MNCs in other countries.

When R&D intensity declined after the late 1990s, the main reason for this in the foreign-owned industry was because of the decline of the electronics industry. In 1997 the electrical & electronic equipment sector accounted for half of all R&D in foreign-owned firms, so trends in that sector had a strong effect on total R&D trends in foreign-owned firms. Between 1997 and 2003, the sector’s share of the total output of foreign-owned industry declined while its R&D intensity dropped by more than half, from 1.7% of gross output to 0.7%. It seems that cutting R&D activity was one aspect of a broader declining trend in electronics production in Ireland.

Meanwhile, R&D intensity also declined in the same period in the other major R&D performing sectors in foreign-owned industry, but the decline there was much less marked than in electrical & electronic equipment. R&D intensity was reduced from 2.0% to 1.9% in medical and technical instruments and from 5.1% to 3.7% in pharmaceuticals.⁵

Such trends in R&D probably did have real economic effects in Ireland. For example, as was noted in Sect. 5.1 in Chapter 5, Kearns and Ruane (1999) found that foreign-owned plants that undertook R&D in Ireland were more likely to survive in Ireland for longer than those that did not undertake R&D. The R&D performers also had lower rates of job loss and their jobs lasted for longer than among those that did not undertake R&D.

Van Egeraat and Barry (2009) provided insights into the type of R&D conducted by foreign-owned MNCs in the pharmaceutical industry in Ireland. They reported that the value chain in the pharmaceutical industry worldwide included three main types of R&D, as well as manufacturing, sales and marketing, etc. The three main types of R&D were discovery, product development, and process R&D. Discovery included research into the causes of diseases and the identification of compounds that have a pharmacological effect. Product development included the further development of these compounds, and notably their testing in pre-clinical and clinical trials. Process R&D involved the development of safe and efficient manufacturing processes.

Van Egeraat and Barry (2009) also reported that discovery and clinical trials were generally considered to be high value-added activities, while process R&D—along with sales and marketing—was regarded as medium-level, and manufacturing was often seen as lower value-added. They found that Ireland’s relative role in discovery remained very limited and clinical trial activities remained under-represented in Ireland, whereas process R&D had increased substantially.

Thus, the growth of process R&D represented an increase in the level of value creation in the sector during the boom period, as compared with manufacturing. However, much of the industry’s highest value-added R&D was still under-represented in Ireland.

As regards innovation capabilities, it was shown in Chapter 5 that levels of innovation activity in Ireland were quite high compared to other European countries in the 1990s, with foreign-owned plants generally reporting somewhat higher levels than Irish indigenous plants. However, since many of the innovations in foreign-owned plants could have been sourced from other parts of the same MNCs in other countries, such innovation data for Ireland do not tell us a great deal about the capabilities within the foreign-owned plants in Ireland in the field of innovation.

6.2.3 Decision-Making Autonomy

Hewitt-Dundas et al. (2002) presented survey findings on decision-making autonomy in relation to a range of different management issues in large foreign-owned MNC plants in Ireland in 2000. They also presented some additional findings on sales and marketing and on R&D.

They found that a large majority of plants (71–92%) had full autonomy on a number of operational-type issues—selecting suppliers, selecting subcontractors, awarding service contracts and staff training. A smaller majority (56–59%) had full autonomy in recruiting senior staff and setting wage/salary levels. At the same time, a significant minority of plants (21–33%) had full autonomy on a range of more strategic issues—design of products/packaging, setting product prices, purchasing production machinery, determining market territory served and sales promotion activities. Major capital investment was the only area in which very few plants (7%) had full autonomy.

As regards sales and marketing, Hewitt-Dundas et al. (2002) found that 39% of the large MNC plants had no need for a sales and marketing function because all their sales went to other group sites. In addition, a further 21% had no sales function and 16% had no marketing function because sales and marketing was done for them elsewhere in the group. On the other hand, 18% of the plants had full responsibility for sales and marketing in relation to the products they manufactured, while 21% were partly responsible for sales and 26% were partly responsible for marketing.

Hewitt-Dundas et al. (2002) also presented findings on R&D activity in the large foreign-owned MNC plants. They found that 53% of the plants had an R&D department, with 3% of total employment hours being in R&D. The type of R&D work was weighted more towards development, upgrading and adaptation of products, rather than pure research on new product technologies.

In the absence of comparable data from the 1980s, it is difficult to say with certainty whether the findings of Hewitt-Dundas et al. (2002) amounted to progress compared with the situation at the start of the boom. However, it appears to represent some advance from the situation described above in the quotes from the Telesis report, since by 2000 there was at least a substantial minority of large MNC plants that could not be described in terms such as “manufacturing satellites” or “assembly shops”.

6.2.4 Pay Levels

Pay levels in foreign-owned firms have sometimes been used as an indicator of the level of skills employed by those companies. The evidence in that respect shows that foreign-owned firms had relatively high and rising pay levels throughout the boom.

In manufacturing, average wages and salaries per head in foreign-owned companies were 16% higher than in Irish indigenous companies in 1986, 24% higher in 2000 and 36% higher in 2007.⁶ Average pay per head increased by 6.7% p.a. in foreign-owned manufacturing in 1986–2007, in current values, compared with 5.9% p.a. in Irish indigenous manufacturing. For comparison, the value of GNP per person at work increased by 6.0% p.a. in the same period.

Comparable data for the services sector are available only for the period beginning in 2001. In services, average wages and salaries per head were 28% higher in foreign-owned companies than in indigenous companies in 2001, and 18% higher in 2007.⁷ In this case, average pay per head increased more slowly in foreign than in Irish companies, although the pay level remained a good deal higher in the foreign firms. The rate of increase was 4.2% p.a. in foreign-owned services in 2001–2007, in current values, compared with 5.7% p.a. in Irish indigenous services.

To the extent that pay levels indicate skill levels, the data suggest that foreign-owned companies had relatively high and rising skill levels, especially in manufacturing. However, there is some room for doubt whether their pay levels truly reflected skill levels. This is mainly because the foreign-owned companies were mostly very profitable, their labour costs were usually quite low relative to the value of their sales, and they were often producing goods or services that were not particularly price-sensitive. Consequently, many of them would have been able to pay relatively well for any given skill level if they chose to do so, for example to facilitate recruitment of new staff, retention of employees, or good industrial relations.

However, pay levels in foreign-owned companies were at least consistent with the idea that they had relatively high skill levels compared with Irish indigenous companies and their skill levels were generally rising.

6.2.5 Sector Studies

A number of reports on individual sectors shed more light on the issue of stages of production and skill levels within foreign-owned MNC plants in Ireland.

Van Egeraat and Jacobson (2004) reported that the computer hardware manufacturers who had operations in Ireland and Scotland generally kept their computer development facilities concentrated in their own home country. Their operations in Europe typically included a range of other functions such as sales and marketing, customer service, technical support and regional headquarters, but these were not necessarily in Ireland or Scotland. Their European headquarters and sales and marketing headquarters were usually located in core European regions rather than in Ireland or Scotland.

At least until the early 1990s, Ireland and Scotland were acting as a “semi-periphery” of Europe, attracting the more factor-cost-sensitive parts of the production chain, including the system assembly plants. Then in the second half of the 1990s, rising wage rates in Ireland and Scotland, combined with the opening up of Eastern European economies as locations for FDI, caused computer assembly activity to shift to Eastern Europe.

Thus, in this case, the more factor-cost-sensitive and lower-skill parts of the industry could not prosper indefinitely in Ireland, and they eventually succumbed to competition from lower-cost locations. Van Egeraat and Jacobson (2004) concluded that IDA Ireland responded appropriately for the most part in seeking to attract other functions within the industry to Ireland, such as system development, software development, sales and technical support call centres, shared services and regional headquarters. By the early 2000s, progress along these lines was partly offsetting the very substantial loss of manufacturing activity.

Van Egeraat and Barry (2009) examined the pharmaceutical industry in Ireland, focusing particularly on Ireland’s changing role in manufacturing and in R&D in that industry. Their main conclusions on R&D were outlined earlier in this section, under the heading of R&D. To recap, they found that Ireland’s relative role in the highest value-added types of R&D—discovery and product development—had remained quite limited. However, process R&D had increased substantially in Ireland and, although this was not the highest value-added type of R&D, it did represent an increase in the level of value creation in the sector in Ireland during the boom period.

As regards manufacturing in the pharmaceutical sector, Van Egeraat and Barry (2009) found that Ireland’s involvement shifted in the direction of relatively higher value-generating activities during the boom. Specifically, they noted that pharmaceutical manufacturing included the manufacture of active ingredients (the drug substance), drug formulations (the tablet, capsule or injection material), and the material inputs into those items. They found that in Ireland very little growth occurred in the relatively low value-generating activity of basic chemical inputs. Instead, employment growth occurred mainly in drug formulation and the higher value-generating active ingredients sub-sector.

Taking account of both R&D and manufacturing, they concluded that “although the picture is complex and differentiated, the level of value creation in the Irish pharmaceutical industry has increased substantially over the Celtic Tiger era.”

Best et al. (2010) recognised that as the growth of high-tech industry in Ireland was driven primarily by foreign-owned MNCs, the sustainability of that growth had remained a basis for debate. They developed a new database that aimed to provide a deeper understanding of technological activities, technological change and technology management capabilities. They then carried out two case studies: (1) an examination of the emergence, growth, dynamics and capabilities of the medical technology sector in Ireland; (2) an assessment of the future of the renewable energy sector in Ireland, examining its potential and the barriers facing it.

In the medical technology sector, they found that the industry had evolved from low value-added branch plant manufacturing to upgraded product development and world-class manufacturing capabilities. They concluded that the capabilities were in place to allow a transition to a new business model based on endogenous development. In the renewable energy sector, they found that there was potential for an emerging industrial cluster operating at the intersection of two or more existing technology-based clusters.

Overall, Best et al. (2010) concluded that, from a capabilities perspective, Ireland had assimilated technological, manufacturing and managerial capabilities from MNCs which could be mobilised and enhanced as potential drivers of economic growth.

6.2.6 Conclusion

Some of the trends examined here did not show much sign of progress towards the desired objectives. This was true of the overall trends in material purchasing linkages and R&D intensity, although both had looked quite promising for some time in the earlier stages of the boom.

On the other hand, there were indications of progress in some other respects. There appeared to be advances in autonomy in decision-making including in marketing. There were indications of rising skill levels and more advanced activities in sectors such as pharmaceuticals and medical instruments & equipment. After a period of very negative trends in manufacturing of computers around the end of the 1990s, there were also subsequent moves into more skilled activities. At the same time, pay trends in foreign-owned MNCs were consistent with the idea that skill levels were relatively high and rising.

Thus, the trends were quite uneven and mixed. The overall effect was probably to make the FDI sector more skilled, more embedded in the Irish economy because of greater reliance on skills, and more capable of sustaining higher pay levels. At the same time, such effects must have been weaker than they would have been with higher levels of R&D intensity and purchasing linkages.

6.3 Motivations for Investing in Ireland

This section considers the question why foreign-owned MNCs decided to undertake direct investment in Ireland and, more specifically, why their investment in Ireland increased very substantially during the boom. This issue was already mentioned briefly earlier in this chapter, referring to factors such as tax concessions, grants, relatively low-wage costs, access to large European markets and the education system. These and related matters are examined in more detail here.

Since the expansion of export-oriented FDI in Ireland began in the 1950s, a number of studies have attempted to identify the reasons why the companies concerned chose to invest in Ireland. Two relatively early examples in the 1960s, Donaldson (1965) and the Survey of Grant-Aided Industry (1967), both highlighted the importance of four main attractions for foreign investors. These were tax concessions, government grants, market access and labour. At the time, the main tax concession was export profit tax relief (EPTR) which meant that there was no corporation tax on profits of manufacturing industry arising from export sales. “Market access” at the time primarily meant free access to the UK market, and the attraction of labour in Ireland lay in both its availability (at a time of full employment in many developed economies) and its relatively low cost compared to more developed economies.

About fifteen years later, a survey report commissioned and published by the Allied Irish Bank (1981) presented rather similar findings. The survey first asked foreign-owned companies in Ireland what had been the key criteria for them when they were evaluating which country to invest in. The most common response referred to the financial package of grant and tax incentives. Other very common responses referred to labour (specifically production costs, availability of labour, and availability of skilled/competent labour), and to market access (specifically location/access to market, and membership of EC). When the companies were then asked what was the most important reason for their decision to locate in Ireland, the most common response was grant and tax incentives with particular emphasis on tax incentives. After that, the most common responses again referred to labour and to market access.

Of course, an important change by 1981 compared to the mid-1960s was that Ireland had become a member of the European Community (EC), so that the market access mentioned by the respondent companies in 1981 referred primarily to the EC market. In fact, two-thirds of them regarded a site within the EC as an important attraction for them since their main markets were in Europe.⁸

Nearly two decades later, when the boom was in full swing, further investigations in this area highlighted the importance of somewhat similar factors in attracting foreign investment. Hannigan (1998, 2000) presented the findings of survey research on foreign-owned companies that had located in Ireland. Hannigan’s key conclusion was that Ireland’s corporate tax regime was the single most important factor attracting multinationals to the country.⁹ Subsequently, Hannigan reiterated this point, while noting that the quality workforce was also crucial.¹⁰

At around the same time, Gunnigle and McGuire (2001) had a particular interest in labour issues in their research on factors influencing US multinationals in Ireland, but they noted first that “for most organisations the critical factor positively influencing the final decision in Ireland’s favour was its low rate of corporation tax”. They also found that an EU location and government grants were often important influences on location decisions, as well as labour availability and quality.

6.3.1 The Increase in FDI During the Boom

The record of export-oriented FDI in Ireland goes back to the 1950s, but the contribution of FDI to Ireland’s economic growth appeared to weaken during most of the 1980s compared to the 1960s and 1970s, as was noted in Sect. 6.1. However, FDI then accelerated again and made a major contribution to economic growth during the boom. Thus, total employment in foreign-owned manufacturing companies grew strongly after 1988. Inflows of FDI from the USA into Ireland grew particularly fast at that time, both because US FDI inflows into the EU increased sharply and because Ireland’s share of these inflows also increased substantially (Barry et al. 1999b, Figures 3.8 and 3.10; Barry 2005, Figure 3).

This raises the question what caused this acceleration during the period of the boom? One aspect that needs to be examined in answering this is to consider whether there were significant enhancements to Ireland’s existing key attractions for FDI—namely in the areas of tax concessions, grants, market access and labour.

As regards the government’s financial package of grants to encourage investment, there were no significant changes in these measures that would account for the rise in FDI. In fact, the attractiveness of Ireland’s grants may have been reduced after the mid-1980s by a somewhat increased emphasis on obtaining better value for the state’s expenditure by tightening grant spending relative to employment generated.

In the area of tax concessions, there have been some changes over the years since the 1950s but, for the most part, these would not be linked to the surge in FDI that began in the late 1980s. The original main tax concession since the 1950s was export profit tax relief, as noted above. This was supplemented by other tax measures including double taxation agreements with a range of countries, and favourable depreciation allowances which varied over time and by region.

In 1978 the government announced that EPTR would be replaced by a new low rate of corporation tax of just 10% for all profits (i.e., including profits arising from domestic sales as well as from exports), to apply to manufacturing as well as selected internationally traded services from 1981 onwards.¹¹ This change was motivated by pressure from the EEC against discrimination in favour of exports contained in EPTR.

After that, there were no substantial changes concerning the key tax concessions for most sectors throughout the 1980s and most of the 1990s. Thus, consideration of timing indicates that the boom was not created primarily by major new tax concessions, since the main tax concessions for most sectors were largely in place and quite stable long before the boom.

In the late 1990s, the government began to move gradually towards a new standard corporation tax rate of 12.5% for all sectors in the economy. The tax rate applicable to sectors other than manufacturing and the selected internationally traded services had been 40%, and this was reduced to 32% in 1998 and finally to 12.5% by 2003. This move to 12.5% for all sectors in 2003 meant there was a small increase from 10% for manufacturing and the selected internationally traded services, as well as a much larger decrease in the rate for other sectors. This change is of little significance in explaining the surge of FDI in the boom years, because of its timing, because its effect on most internationally trading activities was slightly unfavourable, and because the sectors that gained the most from it were generally not the major recipients of FDI. Incidentally, the introduction of the new standard rate of 12.5% was again a response to the view of the EU, which considered that there was an unacceptable pro-trade bias inherent in the previous two-tier tax system.

It is necessary to mention one further point concerning tax concessions, which was relevant for explaining a particular part of the increase in FDI during the boom. This was the government’s decision to extend the scope of the tax concession regime after 1987 to approved international financial services provided to non-residents from the new International Financial Services Centre (IFSC) in Dublin. The tax concession regime had already applied throughout the 1980s to selected internationally traded services such as software and other computer-related services, R&D, engineering, architectural and other services, but these did not include financial services before 1987.

Financial services exports from Ireland grew rapidly after that, with most of the growth coming from new FDI. It is clear from the timing that the new tax concession was a major reason for this growth. Consequently, that new tax concession can be counted as a major cause of this specific part of the country’s boom in FDI. However, this was an untypical and relatively minor part of the overall boom. Honohan (2001) noted that employment in the IFSC grew rapidly from a start-up in 1987 to 11,000 by 2001, which was one-quarter of total financial sector employment, but at the same time, it was less than 1% of total employment in the economy. The growth in exports of financial and insurance services looked impressive, from just 0.4% of all exports in 1985 to 4.4% by 2000,¹² with most of these exports in 2000 resulting from FDI. However, despite the impressive growth, this was clearly a minor part of the overall boom.

As regards the role of market access as an attraction for FDI, there was an obvious enhancement to this attraction when the EU’s single European market was introduced. Prior to the single European market, there was already free trade between EU member states in the sense of an absence of tariffs and quotas on such trade, but it was commonly observed that there were significant remaining non-tariff barriers which acted as impediments to genuine free trade. Such non-tariff barriers included administrative formalities and delays at national borders, different technical standards and requirements in different countries, and preferential public sector purchasing from each country’s own national suppliers.

The objective of the single European market programme was to achieve full integration of the individual markets of the member states into one EU market, by implementing a series of measures to remove the non-tariff barriers over the eight years up to 1992. It was expected that this would have the effect of increasing trade between member states with resulting gains in efficiency. It was also expected that it would attract more FDI into the EU from external sources, because of the increased attraction of producing and selling in such a large integrated market.

In fact, there was quite a dramatic increase in flows of US FDI into the EU in the late 1980s as mentioned above, and the US Department of Commerce Survey of Current Business (March 1991) attributed much of this to the single European market programme. Consequently, it can be concluded that improved market access in the single EU market was a significant cause of the surge in FDI coming into Ireland. In addition, however, Ireland’s share of the US FDI inflows into the EU also increased dramatically in the early 1990s (Barry et al. 1999a, 1999b), and this would have to be explained by other factors that were more specific to Ireland.

As regards the role of Ireland’s labour supply as an attraction for FDI, the Irish education system was already quite well equipped, before the late 1980s, to provide the type of technical graduates that would be required by incoming FDI. It also had a feature that was somewhat unusual compared to other EU countries—namely regular interaction and dialogue between third-level education and the industrial policy system, with the aim of adjusting the supply of technical graduates from the education system in response to the changing employment opportunities and requirements in growing industries (Barry 2005).

This feature was already in place by the early 1980s. It meant that, as the opportunities emerged in the late 1980s to attract substantially more FDI in the high-tech sectors, the Irish education system was able to respond and adapt to the latest requirements of such industries more rapidly and flexibly than most other EU countries. In this way, the attraction of Ireland’s labour supply for FDI could be continually renewed, and probably increased relative to some other countries which adapted more slowly. Thus, it became noticeable during the boom that some other countries tended to experience shortages of graduates with the relevant skills more than Ireland did.

Apart from conditions in Ireland that could help to attract FDI, there was also a major new trend in the international economy which was increasing the supply of FDI that was potentially available for Ireland. This new trend, which occurred mainly in the USA, was the emergence and very rapid growth of new industries based on new technologies—especially computers, telecommunications equipment and related hardware, as well as software. Later, the development of the internet led to further strong growth. In addition, there was also very rapid growth and development of some longer established high-tech industries, including pharmaceuticals and medical instruments & equipment.

All of these were recognised and targeted relatively early by Ireland’s IDA as potential sources of new FDI for Ireland. Mac Sharry and White (2000, Chapter 15) noted that the IDA was continuously monitoring trends in the market. It developed a “rifle-shot” rather than a “scatter-gun” approach when seeking foreign investment, which involved identifying not only the sectors but also the companies that could operate well in Ireland and could bring economic benefits to the country. As a result of frequent interaction with the market, the IDA was regularly adjusting its targeting of sectors and companies, so that it was well aware of the potential offered by the fast-growing high-tech industries.

In view of the points outlined above concerning reasons for the surge in FDI in Ireland during the boom, it may be concluded that the major new developments that initiated the surge occurred outside Ireland. At the same time, however, policies and other conditions in Ireland were exceptionally well suited to taking advantage of the available opportunities, and adapting flexibly so as to secure substantial inflows of FDI.

The emergence and rapid growth of high-tech industries, together with the EU’s single European market programme, ensured that there was going to be a substantial increase in the supply of FDI looking for locations to settle in within the EU. Ireland was already a relatively attractive location for FDI, with a disproportionate share of FDI in the EU compared to its small size. Consequently, Ireland was always likely to receive a sizeable share of the new incoming FDI. As it turned out, however, its share of the inflow increased substantially. This was not because of significant new policy measures in Ireland, except in the case of new tax concessions for financial services. Rather, it was mainly because existing practices in Ireland were very well suited to attracting the type of industries that predominated in the rising wave of FDI.

In particular, Ireland’s concessions on corporation profit tax were well suited to attracting companies that were exceptionally profitable—such as much of the new wave of fast-growing high-tech industries. Thus, Telesis (1982, Chapter 6) had already found in the early 1980s that, compared to a selection of other EU countries and regions, Ireland’s package of financial incentives for industrial projects was particularly well geared to attracting companies that were highly profitable, as well as being of medium capital-intensity. They also observed that companies of this type accounted for almost all the projects sought by Ireland.¹³

The role of the IDA, and the interaction between it and the third-level education system, were two other aspects of existing practice in Ireland that were well suited to attracting FDI by new fast-growing high-tech companies. As outlined above, they enabled Ireland to be unusually responsive and adaptable to newly emerging and rapidly changing opportunities.

Finally, another point concerning motivations for FDI in Ireland was emphasised by Barry and Bradley (1997). It is possible that MNCs, when searching for a new overseas location, focus particularly on areas that their competitors have already explored and found to be satisfactory. If so, the inflow of FDI in a given sector may develop self-sustaining characteristics once a critical mass of firms has been established in that sector.

6.3.2 The Increase in Services FDI

Before concluding on motivations for FDI in Ireland, a few points should be mentioned about services FDI specifically.

Services accounted for a rather small share of both FDI and exports during most of the boom, until around the end of the 1990s (see Fig. 4.3). They amounted to less than one-fifth of total exports throughout that period, but their share of exports then rose very rapidly to about 45% by 2007.

Although it might appear that something must have happened to cause a sudden acceleration in services exports and FDI, that was not actually what happened. Services exports, which mostly came from FDI as was seen in Sect. 6.1, had been growing fast throughout the boom, but they were not very prominent for quite a long time because they were starting from a small initial base and because manufacturing exports were also growing fast. Services exports then became much more prominent quite suddenly because manufacturing exports stopped growing (see Sects. 6.1 and 6.2) while services exports carried on growing fast.

For the most part, the motivations for FDI in services were similar to those already outlined above, although the aircraft leasing sector presents a somewhat distinctive case. Ireland became a major centre of aircraft leasing during the boom, and it was commonly reported some years later that about half of the world’s leased commercial aircraft were managed from Ireland (Osborne-Kinch et al. 2017). This meant that about one-quarter of all commercial aircraft in the world were leased aircraft that were managed from Ireland, since about half of the world’s commercial aircraft were leased.

Most of the companies involved in the sector in Ireland were foreign-owned. The tax regime in Ireland was an obvious motivation for their choice of location, meaning not just the low corporate tax rate but also the double tax treaty network and the treatment of depreciation.

At the same time, however, another significant motivation was the presence of people with specialised skills that were relevant to the sector, including financial, legal, operational and technical skills. This pool of skills had developed in Ireland since the 1970s, because of the pioneering role of the Irish-based company Guinness Peat Aviation (GPA), which is credited with having invented aircraft leasing. After GPA collapsed in the early 1990s, the skilled staff were still available to work in the industry for other companies.

One indication of the strength of the skills environment was the fact that universities in Dublin were offering specialised courses that were specifically relevant to the industry, including an MSc degree in aviation finance which was claimed to be the only one in Europe.¹⁴

Another distinctive type of development occurred in the ICT sector, where foreign-owned service activities often emerged from previously existing manufacturing companies. This happened particularly around the end of the 1990s and early 2000s, when manufacturing activities in the sector were often in decline in Ireland.

Barry and Van Egeraat (2008) noted that, by the late 1990s, Ireland was a major centre of computer hardware production, accounting for 5% of global computer exports and about one-third of personal computer exports sold in Europe. Ireland also accounted for around 6% of global exports of electronic components. However, the sector in Ireland then experienced a sharp decline as production was relocated eastwards to Central and Eastern Europe and to China.

Barry and Van Egeraat (2008) reported that some of the industry’s former staff found employment in other related manufacturing companies in Ireland, while others moved to employment in more diverse sectors. At the same time, however, some of the former hardware manufacturing companies shifted their Irish operations into higher value-added service activities such as sales, technical support call centres and logistics, thereby generating new service employment.

Grimes (2006) focused particularly on this latter aspect, involving service activities emerging in manufacturing companies. He pointed out that some other types of internationally traded services, such as financial services, were typically carried out by specialist services corporations, and were therefore clearly distinct sectors from manufacturing. In many areas of ICT, however, a strong complementarity continued between manufacturing and services, with many corporations involved in a spectrum of manufacturing and service activities. Grimes examined the cases of a number of leading companies in Ireland—including IBM, HP, Microsoft, Sun Microsystems and Apple—to see how they had evolved over time. He found that “the general trend is for an on-going shift away from hardware manufacturing towards a greater involvement in software, R&D and a range of other support services”.

In cases such as these, the companies’ motivation for establishing service activities in an Irish location would presumably have been influenced considerably by the fact that they already had premises and staff existing in Ireland, with a good deal of experience of operating in the country.

6.3.3 Conclusion

Since long before the boom, the main reasons why foreign-owned companies decided to invest in Ireland lay in the areas of tax concessions, government grants, market access and labour. The precise nature of these attractions changed somewhat over time.

The surge in FDI that occurred at the time of the boom was not mainly caused by new developments in Ireland relating to matters such as tax concessions, grants or labour. Rather, the major new developments that initiated the surge occurred outside Ireland, particularly the introduction of the single European market programme and the rise of new fast-growing high-tech industries. At the same time, however, existing policies and other conditions in Ireland were exceptionally well suited to taking advantage of the new opportunities as they arose, and to adapting flexibly to secure disproportionately large inflows of FDI.

6.4 Secondary Effects of FDI on the Irish Economy

The direct effect of foreign-owned companies, in terms of employment or production, has been outlined earlier in this chapter. This section examines various secondary effects that FDI had on the Irish economy. This discussion is partly related to some of the matters already covered in Sect. 6.2 on the nature and characteristics of foreign-owned companies in Ireland, but the focus here is different—looking at the effects on the wider economy outside the foreign-owned MNCs rather than the MNC subsidiaries themselves.

The issues that are briefly discussed in this section include effects on the balance of payments, potential adverse effects on indigenous companies, purchasing linkages, enhancement of Irish skills or technology, and development of industry clusters.

6.4.1 Balance of Payments

It was seen in Chapter 5 that foreign-owned companies tended to import much of the inputs that they required and to send large amounts of profits out of the country. With that type of cost structure, the impact of foreign-owned companies on Ireland’s balance of payments would have been negative if most of their sales had gone to the Irish domestic market, because the cost of imported inputs, as well as outflows of profits, would have outweighed the value of exports. As it was, however, foreign-owned companies in manufacturing and internationally traded services were generally very highly export-oriented, as outlined above. Consequently, their effect on the balance of payments was generally strongly positive, even though their imported inputs and outflows of profits were very substantial.

Some data and estimates of relevance to this were presented in Tables 5.6 and 5.7 in Chapter 5. Table 5.6 shows that the net foreign earnings of foreign-owned manufacturing (much the same thing as its contribution to the balance of payments) were just 26% of the value of its exports in 2005. This was much lower than the corresponding figure of 78% for indigenous manufacturing. Similarly, the net foreign earnings of foreign-owned services were just 55% of the value of its exports in 2005, which was much lower than the corresponding figure of 94% for indigenous services.

At the same time, however, the value of exports from foreign-owned firms was far greater than the value of exports from indigenous companies. The overall result was that the net foreign earnings of foreign-owned firms amounted to about 70% of total net foreign earnings by the 2000s, compared to about 30% for indigenous companies. The contribution of foreign firms had increased very rapidly so that its share of the total had risen from about 56% in 1985 to about 70% by the 2000s.

This contribution of foreign-owned companies to Ireland’s balance of payments, and the pace of its growth, was of fundamental importance for the economy, for the reasons outlined in Sect. 4.2. It was probably the most important impact that FDI had on the economy. The growth performance seen in the economy during much of the boom depended heavily on the contribution of foreign-owned companies to the balance of payments.

6.4.2 Potential Adverse Effects on Indigenous Companies

There are several different ways that FDI could potentially have adverse effects on indigenous companies in the host country. One issue, that has occurred in some other countries, arises when indigenous companies lose market share in their home market because of new competition from foreign companies. In Ireland, however, this was seldom a significant issue because most foreign manufacturing and internationally traded services companies were so highly export-oriented.

Another issue that has arisen in other countries is competition for supplies of local primary products as inputs. Again, this was seldom a significant cause of contention in Ireland because most of the foreign-owned companies that were expanding fast during the boom were not in the business of processing local primary products, and they tended to import most of their material inputs.¹⁵

An issue that did surface at times during the boom was competition for skilled labour. This arose sometimes in the software industry in the 1990s when there was rapid growth occurring in both foreign-owned and indigenous software companies at the same time. However, while some Irish companies were affected by this, it seems to have had no more than a limited impact. The education system was usually able to produce a sufficient, or almost sufficient, number of suitable graduates for the industry (O’Gorman et al. 1997, Chapter 3), and the record of rapid growth in indigenous software (Sect. 5.2) indicates that the problem was generally overcome reasonably successfully.

It was sometimes argued that one way that FDI created difficulties for indigenous industry, with consequent employment losses, was by causing wages to increase too rapidly. The argument was that foreign-owned companies had high and rapidly rising productivity and consequently they could afford to pay wage increases that were excessive for indigenous companies with their slower productivity growth. Barry (1996) argued along these lines. As was already discussed in Chapter 2—referring to the period immediately before the boom—he found that, in 1980–1986, average weekly earnings increased by 12.4% per year in the modern (predominantly foreign-owned) sector while the rate of increase was almost as high at 11.2% per year in the traditional (predominantly Irish-owned) sector. At the same time, he found that the volume of net output per person engaged grew by 11.0% per year in the modern sector but at a far slower rate of 4.9% per year in the traditional sector.

However, when we looked at this (in Chapter 2) solely in terms of values for both wages and net output per person, we found that the value of net output per person engaged increased by 14.1% per year in the traditional sector in 1980–1986, which was more than the increase in its average weekly earnings. Meanwhile, the value of net output per person engaged increased at an even higher rate in the modern sector. Thus, wage increases in the traditional sector were low enough to protect and enhance its profitability, while being of even greater benefit to the profitability of the modern sector because of its faster productivity growth.¹⁶

Barry (1996) also included the early years of the boom, 1986–1992, in his analysis, with similar findings to those for 1980–1986. Again, however, if we look at it solely in terms of values, the value of net output per head in the traditional sector increased faster than the rise in its average weekly earnings in 1986–1992, so its profitability was protected and enhanced.¹⁷

To conclude this section, the potentially adverse effects of FDI on indigenous companies were generally quite limited during the boom. The relative unimportance of these issues, as compared with some other countries, arose partly because FDI in Ireland mainly involved highly export-oriented greenfield plants which did not have much involvement in competition with local companies. The discussion that follows considers whether the FDI that occurred in Ireland was of significant positive benefit in improving the indigenous potential for development.

6.4.3 Purchasing Linkages

As was discussed in Sect. 6.2 above, it was an aim of industrial policy throughout the boom to increase the purchasing linkages that foreign-owned MNCs had with the Irish economy. Initially, at least, there was a particular focus on MNCs in manufacturing and their purchasing of material inputs. However, although foreign-owned manufacturing MNCs did purchase an increasing proportion of their material inputs in Ireland during the early years of the boom, that trend levelled off during the 1990s followed by a declining trend after 2000. Over the whole two decades, there was no progress on linkages when measured in terms of the percentage of material inputs purchased in Ireland by manufacturing MNCs, despite the advance seen in the early years.

As regards the effect of purchasing linkages on the indigenous economy, O’Malley (1995, p. 57) estimated that the amount of indigenous manufacturing employment supported by foreign-owned manufacturing’s purchasing of industrial products was about 8,200 in 1983, rising to 10,800 in 1990 and 11,200 in 1991. These figures were equivalent to 6.3% of total indigenous manufacturing employment in 1983, rising to about 9.6% in 1990 and 10.0% in 1991. Another way of looking at this is that for every 100 jobs in foreign-owned manufacturing in 1983, there were about 9 people employed in indigenous industry producing the products that foreign industry was purchasing as inputs. This number increased to 12 in 1990 and 13 in 1991.

Thus, foreign-owned industry was a quite important and growing market for indigenous industry, although its scale was not likely to transform the prospects for indigenous industry.

Foreign-owned manufacturing also had an impact on services employment in Ireland through its purchasing of services as inputs. O’Malley (1995, Table 5.3) estimated that, for every 100 jobs in foreign-owned manufacturing in 1983, there were about 40 people employed in the services sector in Ireland providing the services that foreign industry was purchasing as inputs. This number increased slightly to 41 in 1990 and 1991. This meant that about 5% of total services employees were engaged in providing services to foreign-owned manufacturing in 1991.

Those service job numbers related only to those employed directly in providing the service inputs purchased by foreign industry, but O’Malley (1995) also presented estimates of further categories of services employment associated with foreign-owned industry. These included: employment in services purchased as inputs by the service companies supplying the foreign manufacturers; employment in services induced by the spending of employees of the foreign manufacturers; further employment in services induced by the spending of all the service employees already mentioned; and employment in services supported by the re-spending of taxes paid by foreign manufacturers, their employees and all the service employees already mentioned.

The total employment in all such categories of services employment that was arguably supported by foreign-owned manufacturing amounted to about 93 jobs per 100 directly employed in foreign manufacturing in 1983 rising slightly to 95 in 1990 and 94 in 1991. Or to put it another way, this amount of services employment was equivalent to about 12% of total employment in the services sector in 1991.

This type of analysis was not replicated for other years late in the boom. However, the data that are available do not suggest that there were strong trends in the development of purchasing linkages during the boom. Expenditure by foreign-owned manufacturing on Irish materials was worth 11.4% of total sales of foreign-owned manufacturing in 1990, and this declined to 7.6% in 2000 and 3.7% in 2007. Similarly, its expenditure on Irish services declined from 12.2% of the value of its sales in 1990 to 5.6% in 2000 and 4.8% in 2007.¹⁸

Furthermore, foreign-owned manufacturing bought 21.1% of its material inputs in Ireland in 2000, declining to 10.9% in 2007. It also purchased 34% of its services inputs in Ireland in 2000, declining to 20% in 2007.

These declining trends are not quite as weak as they look, because they would be at least partly an effect of changing sectoral composition within foreign-owned industry, as sectors with the lowest linkages grew relatively fast. Nevertheless, the figures mentioned above would not be consistent with strong growth of linkages.

Comparable data on foreign-owned internationally traded services show somewhat similar trends in the period 2000–2007. Expenditure by foreign-owned internationally traded services on Irish materials was worth 5.8% of its sales in 2000, and this declined to 1.4% in 2007. Similarly, its expenditure on Irish services declined from 28.2% of the value of its sales in 2000 to 14.3% in 2007.¹⁹

Furthermore, foreign-owned internationally traded services bought 24.5% of its material inputs in Ireland in 2000, declining to 9.5% in 2007. It also purchased 67.9% of its services inputs in Ireland in 2000, declining to 37.1% in 2007.

Of course, these data do not provide quantitative estimates of the impact on the indigenous economy or employment. Nevertheless, it seems reasonable to conclude that there was little sign of strong trends in the development of purchasing linkages during the boom.

6.4.4 Effects on Indigenous Technology and Productivity

It has been found that foreign-owned MNCs could have an influence on their indigenous suppliers’ propensity to innovate. Jacobson and Mottiar (1999) presented a case study of the software manual printing industry in Dublin which found that a highly specialised software manual printing sector

…came into existence entirely because of the establishment in Ireland of the software MNEs. The production processes, quality control and delivery times have all been determined by the buyer firms. To be a supplier in this industry, high-quality product on the basis of just-in-time delivery was a prerequisite. (Jacobson and Mottiar 1999)

In this case, however, the manual printing firms were eventually left vulnerable when their specialist product became obsolete.

In a study covering all manufacturing sectors, Hewitt-Dundas et al. (2002) found that foreign-owned MNCs in Ireland were a potentially important channel through which world-class knowledge could be transferred to supplier businesses, because the MNCs were more advanced in terms of the use of a range of best-practice management and control systems.

Hewitt-Dundas et al. (2002) also examined the nature and intensity of interactions between MNC customers and their local suppliers that might provide the basis for knowledge transfer. They found that developmental interactions between MNC plants and their suppliers were common. For example, 79% of MNC plants had collaborated with local suppliers on product development, while 58% of MNC plants had assisted local suppliers with quality assurance systems. Most MNC plants also reported that they had enhanced the performance and competitiveness of their local suppliers in various ways, including enhancing their sales, productivity, product quality and service quality.²⁰

Ruane and Ugur (2005) aimed to examine whether productivity spillovers from foreign-owned MNCs had increased the productivity of indigenous firms. For this purpose, they used regression analysis on plant-level data for all manufacturing to examine whether productivity in indigenous firms was influenced by the scale of the foreign MNC presence in their own sectors. They found only weak evidence of such an influence.

There appear to be some valid reasons why this result from Ruane and Ugur (2005) could be consistent with the findings of Hewitt-Dundas et al. (2002). For example, perhaps many of the indigenous suppliers to MNCs (e.g., suppliers of packaging, plastic components or metal components) were not in the same sectors as their MNC customers (such as pharmaceuticals, computers or medical equipment), so that the benefits of interactions between them did not show up within individual sectors. Or perhaps the MNCs increased the productivity of the suppliers, but those suppliers did not amount to a sufficiently large proportion of their sector to have a substantial effect on the sector’s productivity.

Gorg and Strobl (2003) postulated that foreign-owned MNCs could have positive effects on the life-span or survival rate of indigenous firms through technology spillovers. They found that the scale of the foreign MNC presence in a sector in Ireland had a life-enhancing effect on indigenous firms in the same sector, but only in the high-tech sectors. They did not find such an effect in the low-tech sectors. It seems again that the suggestions made in the paragraph above concerning Ruane and Ugur’s findings could also apply to the low-tech sectors in Gorg and Strobl’s study.

6.4.5 Development of Clusters or Groups of Related Industries

Much of the discussion about industrial policy in Ireland during the boom years in the 1990s was concerned with the proposition that a successful industrial performance required the development of competitive advantage in clusters of interlinked industries or sectors. This discussion reflected the work of international researchers, particularly Porter (1990). It also influenced the “Culliton report”, which recommended that Irish policy should aim to develop groups or clusters of related industries (Industrial Policy Review Group 1992, pp. 73–74).

To examine this issue, the National Economic and Social Council (NESC) commissioned studies of three relatively successful Irish indigenous sectors—the dairy processing industry, the popular music industry and the indigenous software industry. The aim was to consider whether the presence of clusters of related or connected industries had been important in accounting for their degree of success, and how relevant was Porter’s model in the Irish context. Reports on these three case studies were later published by NESC (O’Connell et al. 1997; Clancy and Twomey 1997; O’Gorman et al. 1997), and Clancy et al. (2001) drew together and integrated the principal findings.

They found that indigenous companies in the three industries were not participants in fully developed clusters of the same type and scale described by Porter. However, the three industries did benefit to some extent from being part of some form of wider grouping of connected or related companies and industries in Ireland, and from interactions between them. Their most relevant finding for our purpose here was that foreign-owned MNCs had sometimes played a significant role in fostering competitiveness in the selected indigenous sectors:

For substantial parts of the three industries, the important links with related, supporting or customer industries are with foreign-owned MNEs in Ireland, rather than with Irish indigenous companies. These foreign-owned MNEs can have an important and positive influence on indigenous industry. (Clancy et al. 2001)

For example, many of the companies in the indigenous software industry were often selling to relatively successful and sophisticated companies in Ireland in sectors such as pharmaceuticals, chemicals, drinks, dairy products and financial services. In many cases, the customers concerned were foreign-owned MNCs. Irish software companies often found that their interactions with such local customers were beneficial for the development of their business and helped to prepare them for export success.

In addition, there were a number of industries in Ireland that were somewhat related to the indigenous software industry and had a helpful influence of some importance. One significant type was industries that helped to develop and improve the pool of labour skills which the indigenous software industry could draw on, such as the foreign-owned software, computer hardware and telecommunications equipment industries. Such industries constituted a relatively large concentration of information technology activities in a small economy. Another type of related industry was those in which indigenous software entrepreneurs had previously worked and gained relevant experience. These naturally included other indigenous software companies, as well as other indigenous and foreign-owned companies in information technology activities.

In the case of the Irish dairy processing industry, nearly all the companies interviewed agreed that they had learned from the standards and systems employed by their foreign-owned MNC customers in Ireland—an experience that helped them in international markets.

Jordan and O’Leary (2005) presented findings from a survey of companies—both indigenous and foreign-owned—in three high-tech sectors in Ireland. The companies surveyed were mostly engaged in manufacturing, with some service activities also included. They found that large majorities of the companies in all three sectors had regular to continuous interaction with other group companies, customers and suppliers for the purpose of product or process innovation. They also found that there was a clear tendency for the relevant group companies, customers and suppliers to be located more than one hour and usually more than four hours driving time from the high-tech businesses concerned. They concluded that this implied that such interaction did not occur locally or regionally within Ireland and may have been international. They also noted that the results “suggest the absence of strong interaction for the purpose of promoting innovation” between the high-tech businesses and locally or regionally based concentrations of suppliers, customers, etc.

While Jordan and O’Leary (2005) clearly had a valid point in highlighting the long-distance nature of most of the interactions, this did not mean that there was no such interaction locally or regionally. Their Tables 4 and 6 showed that quite substantial minorities of the companies in the high-tech sectors, especially the indigenous companies, had important local or regional interactions for the purpose of innovation. This could well be consistent with indigenous companies getting some significant benefit from interaction with local branches of foreign MNCs, as reported for a different set of sectors by Clancy et al. (2001).

Taken together, the results reported by Clancy et al. (2001) and Jordan and O’Leary (2005) indicate that there were few if any fully developed industry “clusters” in Ireland of the sort that Porter (1990) had found to be the norm among successful industries in advanced industrial economies. Such clusters would be characterised by continuous beneficial interaction occurring primarily between locally concentrated groups of suppliers, customers and other related industries, as well as supporting institutions and agencies.

At the same time, however, there was a more limited amount of beneficial interaction occurring in Ireland between less extensive groups of companies or industries, in which foreign-owned MNCs sometimes played a significant role in fostering competitiveness among indigenous companies.

6.4.6 Conclusion

To conclude this discussion on the secondary effects of FDI on the Irish economy, the effects concerned were quite uneven and varied. One of them stands out as being strongly positive. The contribution of foreign-owned companies to Ireland’s balance of payments was probably the most important impact that FDI had on the economy. The rapid growth of the economy during much of the boom depended heavily on that contribution from foreign-owned companies.

Another positive finding was the scarcity of potentially adverse effects of FDI, which have been known to occur in other countries.

The other secondary effects of FDI were more mixed and less clear-cut. Purchasing linkages were beneficial for some indigenous companies but they did not develop as strongly as might have been expected. There was also evidence of a certain amount of beneficial interaction between foreign-owned and indigenous companies, such as the transfer of technology and management expertise, and the development of labour skills. However the overall effect of this remained somewhat limited.

6.5 Conclusion

To conclude this chapter, foreign-owned companies were already prominent in the Irish economy long before the boom, but their contribution to the country’s growth had weakened during the 1980s compared to the 1960s and 1970s. Foreign-owned manufacturing then grew very rapidly during the boom until about 2000, as its share of Ireland’s manufacturing employment, output and exports all increased. During that period, the growth of exports from foreign-owned manufacturing was the main driver of the growth of total exports from Ireland. Within that trend, it was the high-tech and medium–high-tech sectors that were largely responsible for the growth of foreign-owned manufacturing exports.

Net foreign earnings were a relatively low proportion of the value of exports in foreign-owned manufacturing, particularly in the more high-tech sectors. Consequently, its contribution to the economy and to growth was certainly important, but it was not as dominant as it appeared to be when seen in terms of exports.

After 2000, the trend in exports of foreign-owned manufacturing weakened a good deal, while the contribution of exports from foreign-owned services increased very rapidly. Net foreign earnings amounted to a relatively high proportion of the value of exports in foreign-owned services compared to foreign-owned manufacturing, so that the rapid growth of such services was important for the growth of the economy.

When foreign-owned manufacturing and services are combined, their share of total net foreign earnings increased from about 56% in 1985 to 73% in 2000 and then declined a little to 70% in 2007. By that criterion, foreign companies made a major contribution to economic growth over the full period of the boom. However, the indigenous contribution to the boom was relatively important in the late 1980s and again in the 2000s, whereas the foreign-owned contribution was very dominant in the 1990s.

As regards the nature and characteristics of foreign-owned companies, their purchasing linkages and R&D intensity did not develop strongly during the boom. On the other hand, there probably were advances in the autonomy of decision-making, while there was firmer evidence of rising skill levels and more advanced activities in some of the most important sectors. Thus, the trends were quite uneven and mixed. The overall effect was probably to make the FDI sector more skilled, more embedded in the Irish economy because of greater reliance on skills, and more capable of sustaining higher pay levels. At the same time, such effects must have been significantly weaker than they would have been with higher levels of R&D intensity and purchasing linkages.

Since long before the boom, the motivation for FDI in Ireland had always lain in the areas of tax concessions, government grants, market access and labour. The precise nature of those attractions changed somewhat over time. The surge in FDI that occurred during the boom was not caused mainly by new developments in Ireland relating to tax concessions, grants or labour. Rather, the major new developments that initiated the surge occurred outside Ireland, particularly the introduction of the single European market programme and the rise of new fast-growing high-tech industries. At the same time, however, existing policies and other conditions in Ireland were exceptionally well suited to taking advantage of the new opportunities as they arose, and to adapting flexibly to secure disproportionately large inflows of FDI.

The contribution of foreign-owned companies to Ireland’s balance of payments was probably the most important impact that FDI had on the economy. The rapid growth of the economy during much of the boom depended heavily on the growth of that contribution from foreign-owned companies.

More generally, there was also some evidence of a certain amount of other beneficial effects of foreign-owned companies on the indigenous economy, such as transfer of technology and management expertise, and development of labour skills, although purchasing linkages and R&D intensity were clearly less than had been hoped. The overall effect of this remained somewhat limited.

Reflecting on the state of the foreign-owned industry in Ireland in the late 1990s, O’Sullivan (2000) asked two questions that remained pertinent during the remainder of the boom:

Are, then, foreign enterprises now embedded to a greater extent than before in the Irish economy? And, as a result, is the economic activity that they are currently generating in Ireland likely to provide the capability base on which the Irish economy can generate higher standards of living over a sustained period of time?

The findings discussed in this chapter suggest that the answer to the first question was yes, but only to a limited degree. Consequently, the second question remained open, without a clear answer.