Irish Economic Analysis – The Role of FDI

Ireland’s recent economic success was partially the result of a pursuit of an export-led industrial policy lasting four decades that relied significantly on attracting inward foreign direct investment (FDI). The initial motivation behind this FDI policy was to create employment and curtail emigration from the country. It is only since 1990 that Ireland has really reaped the benefits of this strategy, a period of dramatic transformation in the Irish economy. We have witnessed this new prosperous Ireland develop and mature economically into an open globalised economy.

A simple way of fully understanding the significance of the growth in the 1990’s is by reminding ourselves of the facts: in 1990, Irish gross domestic product (GDP) was valued at $57bn, by 2006 it had grown to $276.4bn, an astonishing increase of 385%;1 and during the period 1987-2006 Ireland maintained an annual growth rate of 6% (while most other flourishing economies (E.U. and U.S.) were experiencing a growth rate of between 1 and 2%).2 In this paper I will attempt to demonstrate how FDI has been the engine of this transformation and the foundation for our new prosperity.

I will explain the nature of foreign investment in this country and show how it has affected and aided the economy in a relatively short timeframe. I will also pinpoint the areas that FDI has had the greatest influence on and highlight both the common dangers of FDI and the threats posed Irish influence in the sector. In 2008, Ireland maintained its position as the most FDI intensive economy in Europe.3 We must understand why it is these multinational companies have so commonly chosen Ireland and ask ourselves what gives us that competitive advantage, why are we different?

Why Ireland?

Since Ireland is just one of many countries that have focussed on FDI as a strategy toward industrial and economic progress, we must consider the factors that have made Ireland unique and what it is that has moulded the country into such an attractive proposition for foreign investment.


Academic commentators agree that the explosion of FDI in recent years would never have materialised without the government’s commitment to a low corporate tax regime.4 At 12.5% for all corporate trading profits, significantly below that of the E.U. and U.S.5, companies have cited this (as opposed to subsidies which can have the effect of making a bad investment look good) as the primary reason for choosing Ireland. It has stimulated transfer pricing among these FDI companies in Ireland6, thus benefiting Irish tax revenues by large multinationals locating large chunks of their substantial profits in the country.7 It is clear that Ireland has been fully understanding of the tax system and that it could be used advantageously, providing a regime that both attracted FDI and still benefited indigenous industry.


The establishment of the Industrial Development Agency (IDA)8 in 1950 had an unquestionably positive effect on the Irish economy and affirmed the fresh Irish approach to foreign investment. It is an organisation that is the product of Ireland’s withdrawal from protectionist ideals and a cause of the free, open globalised economy we see today.9 The IDA attracts FDI by recognising and luring those companies that will fit into the Irish economic model and enhance Ireland’s growth. The organisation has been widely hailed as a success, ensnaring prestigious companies such as Microsoft, Creative Technology and Pfizer to Ireland’s shores.10 IDA supported firms contributed significantly to the Irish economy in 2006: paying £2.8bn in corporation taxes, investing £2.6bn in fixed assets and spending £3.4bn on Irish materials and £5.7bn on both services and payroll costs.11 Essentially it is the role of the IDA to improve and promote the image of Ireland to potential investors either by forging links with the 3rd level institutions in the country to enhance the appropriate skill levels, by offering grants where necessary or by upgrading the country’s infrastructure to the next stage.12

E.U. Membership

Ireland’s membership of the E.U. and decision to join the European Monetary Union (E.M.U.) has given industry open access to the huge E.U. and U.K. markets. Net Transfer payments received from within the E.U. also aided the development of the country’s infrastructure and educational structure making it more appealing to high-value added FDI especially to U.S. companies who wish to gain access to the valuable E.U. market.13 More recently, the creation of the World Trade Organisation (WTO) in 1995 led to a new environment and a new attitude to FDI from governments and to foreign investment in general.14 FDI was easier and more acceptable, stimulating an influx of inward investment into Ireland in the 1990’s. Markets were opening up and Ireland possessed all the ingredients and potential for growth necessary to tempt foreign firms.


An increasing young vibrant and well-educated workforce in Ireland in the 1990’s was another important source of attraction for foreign-owned companies.15 One in five students in Ireland complete their third-level education and those enrolled in higher education grew by 8% between 1990 and 2001. At present, thanks to freer access to and increased availability of education, Ireland can boast one of the most impressive totals of over 25 year olds still actively engaged in various educational programmes.16 This open culture of education has boosted the economy enormously. When technology sectors in the country began to expand in the 1990’s there was an adequate stream of qualified graduates to deal with the ever-increasing demands in the area. The benefit of having such a highly skilled and educated workforce is only strengthened by the fact that Ireland is an English speaking country, an issue of particular relevance to U.S. companies.17

Other ‘Pull’ Factors

Other factors such as a pro-business regulatory environment and agile government, national partnership agreements18, and ‘demonstration effects’19 combined with the healthy state of the U.S. economy at the time all contributed to Ireland’s success in attracting FDI in the 1990’s.

The impact of FDI on Ireland’s economy – Employment Intensive Growth

Following a phase of regression in employment growth in the 1980’s, Ireland has experienced an average employment growth rate of 4.4% from 1991-2008.20 There was a massive 50% increase in employment increase between 1993 and 200321 with employment in FDI companies increasing by 80% since 1991 (75,000 – 135,000 jobs).22 According to the IDA Annual Report 2006 there are now almost 1,000 foreign-owned companies operating in Ireland. Unemployment plummeted from 15% in 1989 to full employment (3.5%) in 2001, a figure that now stands at 5.2%.23 Such remarkable growth in Ireland can be partly attributed to an increased labour force due to net immigration. In the early 1990’s Ireland possessed a reasonably low-cost labour force that was highly skilled and well educated. This helped to attract FDI and in turn generated employment in the high-value added industries. It is certainly no coincidence that the period of sustained employment growth occurred at a time when significant FDI was entering the country. The FDI policy assumed by Ireland was bearing fruit. Workers were now persuaded to remain in the country as opportunities grew for graduates like never before, reversing the net emigration trend that had been the standard.

Inward FDI has also created more jobs in sectors that supported high-tech industries. It is within these sectors that we can see a dramatic in Irish industry since the early 1990’s. Since April 1994, according to a Quarterly National Household Survey (QNHS), there has been a 22% drop in employment in agriculture, forestry and fishing. However there has been a 46% increase in employment in industry and a 58% rise in service jobs since 1997.24

In the manufacturing sector, foreign-owned firms account for nearly 50% of employment. The number of jobs in FDI manufacturing firms has increased by 24% in the period 1991-2005.25 It is not difficult to understand why these foreign companies have succeeded when you consider that they have proven to be eight times more productive than their Irish competitors across all industrial sectors in 2005.26 This is surely something indigenous industry can learn from and is an example of how FDI can improve standards and competitiveness. There are specific areas of manufacturing where noticeable strides have been made by foreign-owned companies since 1991: publishing and printing has seen a 134% increase in FDI employment, the manufacturing of electrical and optical equipment has stimulated a 71% increase in jobs in the foreign-owned sector (a 124% increase by U.S. companies alone who now employ 74% of all workers in this industry in Ireland) while employment has risen by 78% in the manufacturing of chemicals, chemical products and man-made fibres. It is in the manufacturing of pharmaceuticals and medicinal chemicals where Ireland has really strengthened however. It is an industry previously comprising of smaller indigenous businesses and very few foreign companies (only 34 foreign units in 1991) but is now dominated by big American and European corporations who employ 82% of the industry’s highly skilled workers.27 Today nine of the worlds top ten pharmaceutical companies and twelve of the world’s top fifteen medical product companies are operating in Ireland.28 The 1990’s certainly illustrated the impact FDI can have on industrial employment and the economy in general.

We also must recognise the remarkable increase in wages and salaries since 1991 and what impact FDI had on these increases. Average industrial wages have risen to one of the highest in the E.U. and in turn there has been an upsurge in consumer spending in the economy. Foreign companies now pay 56% of the sector’s wages; averaging $39,000 per worker annually compared the average indigenous salary of £29,000.29 It is evident that the foreign sector provides significantly better paying conditions than their Irish counterparts.

Ireland’s efforts to lure export-oriented manufacturing firms has certainly been successful. Since 1991 and the advent of intensive foreign investment, Ireland has experienced speedy growth in manufacturing exports with almost 50% of manufacturers in Ireland (90% of foreign companies and 43% of Irish firms) involved in exporting.30 Gross manufacturing output exported increased from 73% to 88% between 1991 and 2005.31 This can primarily be explained by the higher export tendency of foreign companies whose gross output exported jumped from 88% to 94% in the same period while Irish companies slid slightly from 49% to 46%.32 I would attribute such a statistic to Ireland’s poor productivity in the manufacturing industry, which renders them unable to compete internationally with their highly productive foreign-owned competitors.

Between 1991 and 2005 however, as gross output increased, Irish manufacturing exports did also increase by 44% (while FDI exports increased by nearly 550%!) but the country did not succeed in minimizing its reliance on the U.K. market, with 46.1% of exports in 2005 (41.9% in 1991) heading across the Irish Sea. Indigenous industry’s share of total exports plummeted to 7.5% from 26% in 1991 while during this period E.U. companies in Ireland more than doubled their exports and U.S. companies (non-E.U.) increased theirs six-fold.33 Data informs us that foreign companies have increased their exports to both the E.U. and U.S. since 1991, suggesting that foreign investors see Ireland as a base for global trade. The sharp rise in exports to the U.S. would insinuate that some American companies are taking advantage of Ireland’s low tax rate and using the country as an intermediary for them to base their special purpose entities (SPE’s), thus artificially inflating Ireland’s FDI flows.34

Aside from manufacturing, it has been the increase in internationally traded services since 1991 that has been the most impressive. It is the FDI companies that have instigated this change and they now dominate exports in both the financial service sector and the software and high-tech sectors. Between 1994 and March 2008 there has been a near 300% rise in employment in these areas. Foreign-owned firms now hold claim to 80% of the international financial services workforce (24,000 people) across 250 companies.35 The International Financial Services Centre alone, established in 1987, has created 11,000 jobs. ICT Ireland has also been successful in attracting FDI to Ireland from both the U.S. and E.U. The high-tech sector has seen a 150% increase in employment since 1993 with a large proportion of these provided by FDI companies.36

Another service Ireland has attracted includes educational services. The trend here has been especially interesting, with a 165% increase in employment since 1994 highlighting the swing towards a knowledge economy.37

The role of women in the past 15 years must also be understood. It has been women’s contribution in the shift to services that has been the most significant, with the employment of females in financial services rising 180% since 1994.38 Without FDI women’s job possibilities may have been limited, and similarly without such a capable female labour supply there is no way FDI would have been attracted to Ireland nor could they function adequately.