Philipp Fink, Foreign-Owned Growth in Ireland in:

Philipp Fink

Late Development in Hungary and Ireland, page 195 - 201

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
195 carried the social costs of the social transfers. In contrast, as a result of political efficacy, middle and higher income groups additionally befitted from the increasingly regressive tax system and social provisions complementing their marketgenerated incomes. The lower incidence of wage mobility suggests that the transitional effects on the labour market are subsiding. As a result, income and therefore social positions are becoming rigid and hence the importance of access to educational attainment is increasing. However, the permeability of the educational system for members of disadvantaged social groups is declining. Consequently, the danger of remaining socially disadvantaged and experiencing social exclusion is growing. Hence, success or failure of social mobility is increasingly the result of social reproduction. 4.4 The Irish Stepping Stone Beginning with the analysis of the Irish industrial structure, the explicit aim of the Irish Republic’s FDI-led development strategy has been to create employment, increase exports and induce industrialisation via the attraction of FDI (McAleese/Foley 1991: 3). Hence, the developmental contribution of investing TNCs will be analysed. It will be shown that the Irish industrial structure is characterised by a distinct duality. Again, growth inputs stem from foreign, primarily efficiency-seeking and US-owned manufacturing firms using Ireland as a stepping stone to produce high-technology exports for EU markets. The superior performance of the TNC-dominated export sector masks the comparative underperformance of indigenous enterprise. Two sectors reside side by side with only a low level of interdependence. 4.4.1 Foreign-Owned Growth in Ireland Economic growth during the 1990s was footed on the expansion of the manufacturing sector, which tripled its output between 1991 and 2000 and increased its employment by 30% (DETE 2003: 65). The growth of manufacturing output was inturn the result of FDI inflows. A total of 10% of all greenfield investments in the EU were located to Ireland during the 1990s (Forfás 2002: 32). Internal and external factors made Ireland an attractive location for predominately US TNCs in 1990s. Beginning with internal factors, of critical importance were artificial factors in the form of low corporate tax rates and extensive investment and employment grants, which effectively subsidised production in Ireland (Jacobson/Kirby 2006: 30).155 Furthermore, since the 1980s industrial policy was specifically targeted towards the 155 In total, the IDA dispensed grants amounting to € 1.39 billion between 1992 and 2002 (Paus 2005: 72). 196 identification and attraction of IT sector market leaders by the IDA. This also entailed specific educational investment in subsequent workforce skills by the state (Smith 2005: 74-76). Similarly, infrastructure investments in the 1980s established a state of the art digital telephone system, which proved to be a vital asset for ICT TNCs (Paus 2005: 69-70). The external factors influencing the increased Irish location of TNCs were only indirectly the result of policy decisions. The most obvious of which was the establishment of the Single European Market in 1992, which enabled US TNCs to use Ireland as a stepping stone for its European operations, as intra-EU trade was now duty free (Paus 2005: 62). Furthermore, the “Fortress Europe” (Paus 2005: ibid) effects in the form of the introduction of stringent “rules of origin” regulations amounted to an increased protectionism of the European microchip industry. As a result, US electronics firms were propelled to seek European production sites. The rest was down to aggressive IDA marketing of the Irish production location and investment herding (Paus 2005: 63). The latter describes the propensity of rivals, clients and suppliers to follow the investment decisions of the relevant market leaders, prompting subsequent investment cascades (Krugman 1997: 50). Firms form or join existing clusters to benefit from agglomeration economies and demonstration effects. Agglomeration economies are essentially efficiency gains ensuing from the location in a sector, where firms with similar operations are already present (Krugman 1994b: 225-229). Ensuing investment cascades subsequently reinforce the positive externalities and therefore increase the concentration of firms (Barry et al. 2001b: 12; Barry/Bradley 1997: 1804). TNC Penetration Consequently, foreign-owned manufacturing firms have a dominating share in the country’s trade, employment and production. The large levels of FDI inflows have led to a high concentration of output in three foreign-dominated sub-sectors, featuring predominately US–owned subsidiaries. The following table shows the extent of foreign penetration in the Irish manufacturing sector in terms of employment, gross output. Furthermore, the changes in output and employment for individual manufacturing branch shares are displayed for 1991 and 2001. By 2001, almost 79% of output, 83% of GVA (ICSO 2004) and almost 50% of employment in manufacturing was attributable to foreign-owned firms. Interestingly, the overall share of TNC employment was four percent lower in 2001 than in 1991. This can be explained by cost-related disinvestments by foreign-owned firms in labour cost-sensitive branches and the increase in indigenous employment throughout the period. 197 Table 10 TNC Penetration in Irish Manufacturing, 1991, 2001 (%) TNC Empl. Total Sector TNC Output Total Sector 1991 2001 1991 2001 1991 2001 1991 2001 Food Processing 28 25 23 20 30 47 35 18 Textiles 46 35 11 4 56 47 3 1 Wood 11 18 2 2 24 28 1 1 Paper and Printing 20 30 9 10 53 82 6 11 Chemicals 77 80 8 10 83 96 15 27 Rubber and Plastics 54 40 4 4 57 46 2 1 Non-met. Minerals 18 17 5 4 21 23 3 2 Basic Metals 28 23 7 6 44 40 4 2 Machinery n.e.c. 57 47 6 6 68 58 4 2 Elec. Equipment 84 84 17 26 93 95 20 33 Office Machinery 41 89 4 8 96 96 11 19 Elec. Machinery 76 67 5 5 80 88 3 3 Comm. Equip. 84 86 2 5 92 94 2 7 Optical Engineering 92 87 8 8 95 94 4 5 Transport 18 56a 5 4 23 68 2 1 Total 53 49 100 100 44 79 100 100 TNC figures show the share of employment and gross output of foreign-firms per branch. Total sector share denotes the proportion of the respective branch of total manufacturing employment and gross output. Sources: Own calculations based on Paus (2005: 56-57) for 1991 figures and ICSO (2004) for 2001 figures. Nevertheless, the domination of TNCs was highest in those product groups related to ICT (electrical equipment) and chemicals. These branches also were the largest contributors to total manufacturing output in 2001. Hence, the inflows of FDI into Irish manufacturing were concentrated in predominately medium to high technology sectors related to ICT products as well as the chemicals sector. The manufacturing branches related to ICT, i.e. electrical equipment and related sub-branches of office machinery, electrical machinery and communication equipment, almost doubled their output and increased their employment share by more than 10% between 1991 and 2000 (DETE 2003: 70). TNC expansion in the chemicals sector was driven in particular by investments in the sub-branch of pharmaceuticals, which accounted for over two thirds of employment in chemicals. In total, the two sectors were responsible for over 70% of output and 40% of manufacturing employment in 2000 (DETE 2003: 70). In contrast, the table also shows that less capital-intensive sectors, textiles and food processing experienced substantial restructuring during the 1990s. Hence, their levels of employment have decreased, but the TNC output share in both sectors has increased. Furthermore, only three sub-sectors show a sustained low level of foreign 198 participation in terms of output share and employment: wood, minerals and basic metals. Together with the branches of food processing and paper, printing and publishing, these sub-branches were responsible for over 60% of manufacturing employment, representing Irish-owned manufacturing strongholds. They are generally characterised by low to medium technology operations (DETE 2003: 70). The Irish manufacturing sector output displays a high degree of concentration. Three foreign-dominated sub-sectors, electrical equipment, chemicals as well as food and beverages, were responsible for more than 75% of manufacturing output in 2000 (DETE 2003: 70). In a different calculation, Keating (2000/2001: 12) shows that TNC output in the foreign-dominated manufacturing sub-branches of chemicals, computers as well as instrument and electrical engineering were responsible for almost a third of the 75% increase of Irish GDP between 1990 and 1999. Moreover, the ten largest foreign-owned exporters were responsible for more than 30% of Ireland’s exports, 27% of Irish imports and contributed to 17% of GDP growth in 1998 (Keating 2000/2001: ibid). Thus, as Barry et al. (1999c: 52) note, “the overall health of the economy is dependent on the performance of the foreign-owned sub-sectors of manufacturing”. Output dependency can even be linked to single products. The decision by the US pharmaceutical company Pfizer to produce Viagra for EU markets in Ireland resulted in a 70% increase in output for organic chemicals in 1997 (O’Hearn 2001: 175). Furthermore, the manufacturing sector was dominated by US-owned subsidiaries, verifying O’Hearn’s (2001: 170) assertion of Ireland resembling an “Atlantic economy”. In 2001, US TNCs were responsible for 63% of the sector’s turnover and 61% of its output. US subsidiaries accounted for 84% of output and 69% of employment in the important ICT-relevant branch of electrical equipment (ICSO 2004). Impact on Irish Trade Similarly, the inflows of export-oriented FDI had a notable impact on the structure of Irish trade. The share of exports of services and goods in Irish GDP grew by 38% from 57% in 1990 to 95% in 2000 with imports rising from 52% to 81% in the same period (Paus 2005: 52-53). Consequently, Ireland became a so-called “super-trading economy” within the OECD and EU with trade accounting for 91% of Irish GDP in 2000 (OECD 2006a). Again, the growth in trade was driven by foreign-owned manufacturing firms (Murphy/Ruane 2004: 139), with TNCs exporting 93% of their output and importing almost 80% of their inputs in 2001 (ICSO 2004). Besides contributing to the increase in Irish exports, foreign-owned firms also transformed the structure and destination of exported goods. The 1990s saw an end to the dependency on UK markets for Irish goods. Although the UK still remained the single most important destination, accounting for 22% of all exports, the export markets were more diversified by 2000 compared to 1960, when 75% of Irish exports went to the UK (Barry et al. 1999b: 46). The non-UK EU markets became the 199 largest importers of Irish goods, accounting for a third of total export demand followed by the US with 17% of Irish exports (Paus 2005: 53). Concerning the structure of trade, the largest manufacturing export product groups were again ICT-relevant products, accounting for 38% of total manufacturing exports, and pharmaceutical goods, which represented 32% of secondary sector exports in 2001 (ICSO 2004). FDI inflows into these sub-sectors also greatly increased the high technology content of Irish exports. The number of exports classified as high technology products increased by 25% between 1990 and 2000. They represented almost 60% of all manufacturing exports, vastly over-scoring comparable EU and OECD averages (Paus 2005: 53). However, the largest manufacturing export sectors are not those defining Ireland’s comparative advantage (Barry 1996: 360). Indeed, the leading export branches of the economy, pharmaceuticals, metals and engineering, have a revealed comparative disadvantage (Barry et al. 1999b: 49). Instead, profits in theses sectors are based on competitive advantages defined by increasing returns to scale at firm level (IRS) (Barry/Bradley 1997: 1801-1802). Barry et al. (1999c: 50) estimated for 1996 that almost 75% of TNC employment was situated in these sectors, which was well above corresponding EU averages and had increased from around 50% in 1973. The prominence of FDI-dominated IRS sectors in Irish exports is linked to the nature of the TNC. The Irish production location is inserted within the international production strategies of the investing TNCs (Paus 2005: 53). Hence, the large proportion of TNC employment in IRS sectors reflects the importance of Ireland as a production location within the context of the internationalisation of production (Barry/Bradley 1997: 1803). Irish trade, therefore, displays high levels of both intra-industry and intra-firm trade. An estimated 54% of Irish manufacturing trade was deemed to be trade within the same industry (OECD 2002c: 161). Although this figure is four percent lower than for the 1980s it is above OECD averages and stable (OECD 2002c: ibid). In terms of intra-firm trade, Bernard et al. (2006a: 8) in their survey of related party trade between US TNC affiliates covering 54 countries find that Ireland had one of the highest levels of intra-firm trade. Their figures indicate that 78% of Irish exports to the US and 29% of US imports were the result of related party trade in 2000 (Bernard et al. 2006a: 22). Transfer Pricing Distortions The prominence of intra-firm and intra-industry trade together with the disproportionate shares of TNC output and GVA relative to their employment contributions as well as the vast profitability of TNC operations in Ireland give rise to suspicions over the level of transfer pricing in Ireland by investing TNCs. Transfer pricing in the form of profit-shifting exercises are driven by the lower effective corporate tax rate in Ireland (2000: 7%) in comparison to the effective tax rates in the countries of 200 origin of the TNCs (Bernard et al. 2006b: 3). Hence, the discussed aggregate figures should be taken with extreme caution.156 Ireland enjoys the dubious title of a semi-tax haven or an Entrepôt (or warehouse) economy due to these profit-shifting exercises. The government has regularly been pressurised by the EU Commission and other EU member states to increase its taxation levels. In fact, all changes to Irish corporate taxation levels have occurred following EU demands. Nevertheless, Ireland remains one of the most profitable international production locations for US firms. In 2002, US TNCs declared profits worth US$ 28.6 billion, amounting to around 10% of all US-owned affiliate profits worldwide (Paus 2005: 51). In the context of the Irish Entrepôt economy, transfer pricing leads to an overvaluation of economic performance. As shown in the following table, similar to Murphy (1998: 15), Honohan and Walsh (2002: 54-55) attempted to measure the contribution of re-export business to economic growth. Goods are imported to a low tax location and are exported with only minimal or without any further processing. Table 11 Estimations on the Irish Entrepôt Economy, 1999 Cola Software Pharma PC Elec. Comp. Empl. 2,333 6,131 13,015 19,923 8,457 Output/Empl. IR£ 1,015 IR£ 728 IR£ 848 IR£ 169 IR£ 230 EU-15 1,127% 808% 520% 163% 177% Entrepôt % of Output 91% 91% 81% 38% 55% GVA/Empl. IR£ 499 IR£ 260 IR£ 226 IR£ 74 IR£ 206 EU-15 978% 426% 1,029% 88% 438% Entrepôt % of GVA 90% 76% 81% n.a. 77% Source: Honohan/Walsh (2002: 56). Honohan and Walsh (2002: 54) identified a total of four foreign-dominated and highly concentrated manufacturing sub-branches of cola concentrates, pharmaceuticals, software reproduction and computer components. Although the mentioned manufacturing branches represent important employers, accounting for around 20% of the manufacturing workforce and equalling three percent of the total workforce in 156 According to Bernard et al. (2006b: 26), the effective corporate tax rates in Ireland’s main investor countries were 17% for the UK, 16% for Germany and 35% for the US (OPTR 2006) in 2000. 201 1999, their contribution to total manufacturing output (57%) and GDP (15%) was vastly disproportionate. The productivity differences to EU-15 averages are staggering. In particular pharmaceuticals and the food processing sub-branch of coal concentrates strike out. The latter displays productivity rates in terms of output per employee, which are over 1,000% higher than corresponding EU-15 averages. Similarly, pharmaceuticals record a value added per employee of more than 1,000% of EU-15 averages. The vast differences in labour productivity can be explained by transfer pricing, which resulted in an estimated overvaluation of output and value added by more than 90%. In terms of the macroeconomic relevance of the Entrepôt economy, output and growth figures readjusted to cater for transfer pricing show that annual average GDP growth would have dropped from 8.2% to 6.2% between 1995 and 1999. Furthermore, total labour productivity in manufacturing would have been 5% lower in the same period (Honohan/Walsh 2002: 55, 57). Hence, the performance of the Irish economy was less glittering than officially assumed, as the readjusted aggregate figures were inline with EU averages. Profit repatriations from subsidiaries to the parent concern take place in the form of loyalty payments, loan repayments and fees for hired business services. Consequently, a constant net factor income outflow has appeared and the services position in Ireland’s balance of payments been continuously negative (Paus 2005: 53) As a result, GDP was overvalued by 20% in comparison to GNP in both 1998 and 1999 (Dauderstädt 2001: 7). The large disparity in GDP and GNP growth resembles not a mere statistical peculiarity of the Irish growth process, but it also tarnishes the record of actual wealth creation during the phase of high economic growth. For instance, Irish GDP per head income was 17% higher than the EU average in 2001. In contrast, when measured in GNP per head, the population was actually 20% poorer. Thus, instead of Ireland belonging to the richest member states in the EU, as stated by incomes figures based on GDP, Ireland had actually attained a below EU average income level, if the relevant measurements had been based upon GNP (Dauderstädt 2001: 7). 4.4.2 Linkages The discussion of the direct economic impact of FDI inflows into Ireland has shown that their primary effects have been unquestionably positive. Foreign-owned firms have contributed to the growth in high technology output, exports and employment. However, the picture in terms of the secondary effects of investing TNCs on the productive structure in the form of linkages between foreign-owned and indigenous firms is far less clear cut. The high incidences of intra-industry and related-party trade together with the high import and export intensity of TNC production in Ireland, indicate that the room for substantial linkages between foreign and indigenous firms is low.

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Irland und Ungarn verfolgen eine Entwicklungsstrategie, die in bewusster Abhängigkeit von Globalisierungsprozessen in Form von ausländischen Direktinvestitionen steht und sich als Paradigma in der Peripherie durchgesetzt hat. Doch dieser Entwicklungspfad hat zu einer ungleichen und abhängigen Entwicklung geführt. Dies ist laut dem Autor das Resultat des mangelnden Gestaltungswillens beider Staaten, für einen gleichgewichtigen Wachstumsprozess zu sorgen. Die historische Analyse zeigt, dass eine auf ausländische Firmen fußende Entwicklungsstrategie nicht ausreicht, um traditionelle Peripheralität zu überwinden. Der Autor fordert eine Reform des Entwicklungsparadigmas, um eine gleichgewichtige Entwicklung zu ermöglichen.