posted 5 Apr 2007 in Volume 9 Issue 10

Country report: Securing Ireland’s future – the challenge that lies ahead

Ireland’s economic success story has been widely reported in domestic and international circles, a success story driven by the roar of the so-called Celtic Tiger, an economic boom period born largely out of the implementation by successive Irish Governments of forward-thinking economic and fiscal policies.

By Robert O'Shea and Pat English, Matheson Ormsby Prentice

While Ireland remains a very attractive location for foreign direct investment, the competition is increasing all the time. Ireland now finds itself in a period of transition, a fact readily and widely acknowledged. The challenge ahead lies in sustaining Ireland’s success story and building to secure Ireland’s future as a location for foreign direct investment. Ireland has been here before, and more than most it recognises the need to consolidate, build and diversify as required, with a view to creating and sustaining an innovative environment for enterprise to thrive in. The challenge facing the Irish Government is to secure Ireland’s future as an attractive location for foreign investment in an environment where superior performance can be enjoyed in the longer term.

Ireland’s success story

Ireland’s ability to attract foreign investment has been the cornerstone of its economic success. Global multinationals directly account for more than 130,000 jobs in Ireland (more than six per cent of the entire workforce) and indirectly for a multiple of that number. Investors are attracted by a competitive tax regime coupled with a pro-business environment. This owes much to the commitment from successive Irish Governments over the years to maintain that regime, coupled with investment in R&D, science, education and infrastructure – greatly enhanced, of course, by membership of the EU. In addition, Ireland is the only English-speaking country in the eurozone, and offers a young, skilled workforce and a progressive education system, as well as the potential for grant aid.

With success and development comes experience and proven ability to deliver. Ireland has developed a growing sophistication in dealing with inward-investment projects. Overseas companies that have chosen Ireland as their European base now number more than 1,300 and are involved in a wide range of activities in various sectors, from pharmaceuticals to medical technologies; from finance and insurance to international services; and from e-business to information-communications technologies.

Without doubt, a key attraction for foreign investment in Ireland is the country’s tax regime. With
a corporation tax rate of 12.5 per cent on trading profits, Ireland has one of the most competitive tax regimes in the world, and the Irish government has been explicit in its stance against any proposed move towards tax harmonisation in the EU – a stance that remains critical from Ireland’s perspective. Recent announcements from household names such as Pepsico, Google, Cisco, Wyeth and Amgen are evidence that the investment pipeline is still strong.

The challenge ahead

Perhaps inevitably, Ireland’s success story has also resulted in the country moving up the cost league table. With any historic relative cost base advantage being lost to a large degree, the result has been some recent high-profile announcements by foreign investors in relation to closures of Irish manufacturing sites in favour of lower-cost locations in Eastern Europe and Asia in particular. In addition, while Ireland’s 12.5 per cent corporation tax rate has been of enormous benefit in the past in terms of attracting foreign direct investment, and remains a formidable factor, the competition is increasing with countries such as Switzerland, Luxembourg and Singapore offering very favourable tax incentives for foreign investment.

Ireland has been in this position before. When Ireland joined the then European Economic Community in 1973, the removal of protections that had hitherto been enjoyed by certain low-level manufacturing industries proved fatal to those industries. The decision to face the music regarding the sustainability of such industries in the longer term – and to diversify and invest with the aim of attracting higher level, higher quality industries – proved key in creating the environment within which the Celtic Tiger was born. While not at the same stark crossroads that Ireland found itself in the mid-1970s, the challenge it now faces is not wholly dissimilar. The focus now, as then, is on its strengths, and recognition of the importance of moving up the value chain and the country’s national capabilities, innovation, creativity and connected national ecosystem. Investment in Ireland’s knowledge economy is critical in this context.

The Irish Government has already committed to creating the conditions for an advanced knowledge economy through initiatives such as the Strategy for Science, Technology and Innovation (SSTI) and the National Development Plan 2007- 2013. Expenditure of €184bn on the NDP and €8.2bn on the SSTI in the 2007 – 2013 period has been provided for in this context.

In this context, R&D is most certainly the ‘big ticket’ item for the future, as Ireland seeks to broaden the multinational base and related multinational activities in Ireland, and develop long-term strategic relationships with multinationals. This will include the fostering of collaborative research-based projects between Irish academics and multinationals, and ultimately, in the wider context, the aim of creating a positive and creative environment within which Ireland can develop as a global IP-trading hub to generate resulting value, wealth and exports. This is the next logical step in Ireland’s evolution, and hopefully the next chapter in Ireland’s economic success story. Execution is key, and the real challenge lies in ensuring that investment is made at the right levels and at the right times to ensure the best conditions for this next phase of evolution and development. The time is certainly right for execution given the ever increasing global competitive forces Ireland is facing on a day-to-day basis.

To complement this, the Irish Government will need to ensure it remains firm in its stance in the debate on EU tax harmonisation. As operating costs continue to grow in this country, it inevitably becomes increasingly important for multinationals to recoup expenses in the form of tax savings. A 12.5 per cent corporate tax rate is formidable, but it may not be enough moving forwards. Brave decisions may be required at Irish Government level if the economy is to continue to prosper on the back of foreign direct investment, for the purposes of which the tax competitive advantage must be reinforced and sustained.

Conclusion

As with most, if not all, economic success stories, in many ways the biggest challenge lies in
sustaining the growth and related advantages the economy has successfully created. This is certainly true in Ireland’s case, where the country needs to remain focused on its objectives and strengths. Ireland’s success story will only be sustained by a continued and consistent drive to foster an innovative and dynamic environment, where superior long-term relationships and returns can be enjoyed by foreign investors. The role of the Irish Government is key in this context – executing pro-business fiscal and economic policies as part of what will need to be a progressive and courageous agenda to ensure that the valuable ground Ireland has made to date is not lost to its competitors. In realising its success story so far, Ireland Inc. has offered a distinctive product to its customers (e.g. foreign investors.) In changing times, the challenge lies in evolving and diversifying; ensuring that Ireland will continue to be in a position to offer that distinctive product in the future.