Ongoing FDI is crucial to the future economic recovery of our island

Thursday September 10 2009
Irish Independent

During the boom years, Ireland attracted many of the world's best companies. They created jobs on a comparatively massive scale, invested in high tech plant and machinery and propelled the country to the top of the international league table of exporters.

Now, one hears far less about how Ireland so successfully hitched its wagon to the engine of globalisation, as the country turns in on itself in order to deal with the consequences of its protracted property mania, and the Government's fiscal ineptitude and regulatory failings.

This is understandable. But just as hubris prevented honest evaluation of weaknesses during the good times, despondency should not now be allowed to cause enduring strengths to be ignored. Balance is needed. It is needed now more than ever.

One of the most serious, if rarely discussed weaknesses of the Irish economy, was and is the poor performance of home-grown businesses. Although there have been some real successes which give reason for optimism over the medium to long term, indigenous industry is not only weak, it is falling further behind its competitors as measured by the most broad-ranging and important indicator -- exports.

Over the course of the current decade, Irish-owned companies have, year after year, lost world market share from an already very low level, and if exports of the foreign-owned sector disappeared overnight, Ireland would be the most closed economy in the developed world. This is a sad indictment after years of boom when skills levels soared, financing was easy and English became ever more deeply entrenched as the world's language of selling and buying.

If indigenous industry could not cut the mustard in the international market place when times were good, there is little reason to believe that it will do so in the much more challenging business environment of the immediate future.

Prosperity

It, therefore, will not lead the return to prosperity. For that, Ireland will have to look to the foreign direct investment (FDI) that powered the economy to record-breaking growth in the 1990s and that remained its most genuinely dynamic sector by far during the current decade.

And here, the recent past and on-going international developments give reason for guarded optimism. Despite the competitiveness problems Ireland suffers, inflows of new investment have remained strong over the course of the decade.

The best measure of the sort of jobs-rich foreign investment that is vital for Ireland comes from UNCTAD, an agency of the United Nations. Folk there measure the number of new foreign investment projects, and as late as last year Ireland still attracted a hugely disproportionate share of available global FDI.

The explosive growth of FDI that began in the early 1990s is currently undergoing a sharp contraction owing to the global recession. But there are now real signs that the world economy has reached the bottom of the very deep hole into which it fell exactly one year ago. If that floor does not cave in, a return to growth could begin in the months ahead.

That, in turn, will give companies the confidence to increase their FDI again. And although the global crisis has changed much, there is little evidence to date that companies intend to change their strategies of globalisation. Nor is there any real sign that governments are throwing up barriers to that process -- a recent comprehensive survey of the world's largest economies by UNCTAD found surprisingly few examples of protectionism since the crisis erupted.

Given that new FDI opportunities will be there for the taking if global recovery takes hold, and given that dynamic foreign companies promise Ireland the most effective and rapid means of powering a domestic recovery, everything possible must be done to lure as many of them as possible. To some extent, a more attractive environment will come about of its own accord, thanks to the interplay of supply and demand. Commercial property prices are plummeting and wages are beginning to fall. The sharp increase in costs during the boom years is being reversed, albeit in the most brutal way possible. This should help maintain Ireland's attractiveness as a location for foreign companies.

But market forces alone will not be enough. Proactive measures will be needed to address self-inflicted damage. Ireland's reputation has been undermined in multiple ways by the economy's violent crash landing, by the policy failures that contributed to causing it and by the scandals that have been revealed since it happened.

Issues

Failure to quickly get to grips with these issues risks pushing Ireland off the all-important shortlists that companies draw up when deciding where to locate their foreign operations. Since the 1990s at least, Ireland has been on those lists. If domestic weaknesses are not dealt with expeditiously, not only will new investment be much harder to attract, but companies already in situ will almost certainly reconsider existing investments.

The most urgent issue is the referendum on the Lisbon treaty. If the Irish people were to reject definitively the latest changes to the EU's structures and institutions, agreed by 27 democratically elected governments over the course of almost decade, real questions would arise about Ireland's future in Europe.

For a corporate executive sitting in a US company headquarters in an American city, the whys and wherefores of the rejection would be of little interest when 26 other potential investment locations in the EU single market are available. Such people have neither the time nor the inclination to ponder. They seek to whittle down potential locations as quickly as possible so that a decision can be made. If Ireland were to create uncertainty about its place in Europe, that would be sufficient reason to strike it from shortlists.

If, on the other hand, the treaty is accepted, Ireland's place at the centre of the European single market would be confirmed. This would not in itself herald the beginning of the end of the recession, but it would eliminate huge uncertainty and ensure that the economy's most dynamic sector can maintain existing jobs and create new ones in the future. To a very considerable degree, the future of Ireland's long and bountiful relationship will be decided on October 2.