Fdi Research Final Report

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FDI Research Project Final Report

Department of Enterprise,Trade & Investment

February 2008


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For and on behalf of Experian

Approved by: Clare Reid

Position:Director of Economics, Strategy andResearch

Date: 6th February 2008


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FDI Research Project Final Report

6th February 2008

ContentsIntroduction................................................................................................................................................1

Background ..............................................................................................................................................1Objectives.................................................................................................................................................1 Format......................................................................................................................................................2

1 Context................................................................................................................................................31.1 Defining FDI ................................................................................................................................31.2 Type of FDI Project......................................................................................................................3

1.2.1 Greenfield ...............................................................................................................................31.2.2 Mergers & Acquisitions ...........................................................................................................41.2.3 Invest Northern Irelands Policy on FDI...................................................................................4

1.3 Defining Tradable Services .........................................................................................................42 Literature review ................................................................................................................................6

2.1 Benefits of FDI.............................................................................................................................62.2 global and uk trends in FDI..........................................................................................................7

2.2.1 Global geographic pattern.......................................................................................................72.2.2 Likely future trends..................................................................................................................82.2.3 Global sectoral pattern............................................................................................................92.2.4 UK trends ..............................................................................................................................10

2.3 Exportable service trends..........................................................................................................122.4 Labour market implications of an FDI strategy ............ .............. ............ ............. .............. ......... 152.5 Benefits to Tier One companies .............. ............. .............. ............ .............. ............. .............. ..172.6 Impact of Corporation Tax.........................................................................................................172.7 Reasons given for not investing ................................................................................................19

3 Investment inflows into Northern Ireland.......................................................................................203.1 Northern Ireland in a UK context ............ ............. ............ .............. ............. .............. ............ .....203.2 total inflows 2002-2006..............................................................................................................213.3 Key investors.............................................................................................................................213.4 Performance by Northern Ireland sub-region ............ ............. .............. ............. ............ ............ 233.5 Performance by industry............................................................................................................233.6 Nation of ownership...................................................................................................................243.7 Quality of job .............................................................................................................................25

4 Comparator Research......................................................................................................................264.1 Republic of Ireland.....................................................................................................................27

4.1.1 Role of government...............................................................................................................284.1.2 Performance..........................................................................................................................29 4.1.3 Critical success factors - benefits..........................................................................................314.1.4 Applicable lessons ................................................................................................................35

4.2 Sweden .....................................................................................................................................374.2.1 Role of government...............................................................................................................374.2.2 Performance..........................................................................................................................37 4.2.3 Critical success factors - benefits..........................................................................................404.2.4 Threats..................................................................................................................................404.2.5 Applicable lessons ................................................................................................................41

4.3 Poland .......................................................................................................................................414.3.1 Role of Government............. .............. ............. ............ .............. ............. ............ .............. .....414.3.2 Performance..........................................................................................................................42 4.3.3 Critical success factors - benefits..........................................................................................444.3.4 Threats..................................................................................................................................454.3.5 Applicable Lessons ........... .............. ............. .............. ............ .............. ............. ............ ........ 46


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5 Workshops and business consultations........................................................................................475.1 Workshop ..................................................................................................................................47

5.1.1 SWOT analysis .....................................................................................................................475.1.2 Developing opportunities and mitigating threats....................................................................49

6 Survey Findings ...............................................................................................................................506.1.1 FDI Survey ............................................................................................................................506.1.2 Tier 1 Indigenous Suppliers Survey ............. .............. ............ .............. ............. ............ ........ 51

6.2 FDI Survey Results....................................................................................................................516.2.1 Supply chain linkage ............ .............. ............. ............ .............. ............. ............ .............. .....516.2.2 International competitiveness................................................................................................536.2.3 New products and services .......... .............. ............. .............. ............ ............. .............. ......... 546.2.4 Increased skills......................................................................................................................556.2.5 Networking............................................................................................................................566.2.6 Knowledge and Technology transfer.....................................................................................576.2.7 Perceptions of Northern Ireland .......... .............. ............. ............ .............. ............. .............. ..586.2.8 Impact of FDI.........................................................................................................................586.2.9 Summary...............................................................................................................................58

6.3 Tier one Survey .........................................................................................................................587 Quantitative Analysis.......................................................................................................................60

7.1 Methodological approach ..........................................................................................................607.1.1 Input data..............................................................................................................................607.1.2 GVA impact calculation............ .............. ............. ............ .............. ............. .............. ............ .607.1.3 Employment impact calculation.............................................................................................617.1.4 Fiscal impact calculation ............. ............. ............. ............. .............. ............. ............ ............ 61

7.2 GVA Impact ...............................................................................................................................617.2.1 Benefits .................................................................................................................................617.2.2 Net Overall Impact ................................................................................................................62

7.3 Employment impact...................................................................................................................627.3.1 Benefits .................................................................................................................................627.3.2 Net Overall Impact ................................................................................................................62

7.4 Fiscal benefits ...........................................................................................................................638 Future trends in inward investment................................................................................................64

8.1 Investment outlook: overview .............. ............. .............. ............ .............. ............. ............ ........ 648.1.1 UK prospects.........................................................................................................................648.1.2 Prospects for Northern Ireland ............ .............. ............. ............ .............. ............. .............. ..658.1.3 FDI opportunities for Northern Ireland in selected sectors ............ ............. .............. ............ .66

9 Key Findings & Recommendations ................................................................................................70

9.1 Range of Benefits Tradable Services FDI Can Generate.............. ............. .............. ............ .....709.1.1 Output benefits......................................................................................................................709.1.2 Employment benefits.............................................................................................................70

9.2 Benefits at the Sub Sectoral Level .......... .............. ............. ............ .............. ............. .............. ..709.3 Fiscal Benefits of Service Sector FDI ........... ............. ............. .............. ............. ............ ............ 719.4 Locational Factors ............. .............. ............. ............. ............. .............. ............. ............ ............ 729.5 Forecast Trends ........................................................................................................................729.6 Market Failures..........................................................................................................................73

9.6.1 Identifying competitors ..........................................................................................................749.7 International Examples ............. .............. ............. ............ .............. ............. ............ .............. .....749.8 Recommendations.....................................................................................................................77

9.8.1 Focus ....................................................................................................................................779.8.2 Corporation Tax ....................................................................................................................779.8.3 Skills in high-tech industries..................................................................................................789.8.4 Measuring the impact of the Tradable Services sector. ............ ............. .............. ............ .....78

Appendix A: Crowding out effects of FDI investment on Northern Ireland businessesAppendix B: Model to generate economic impact calculation

Appendix C: Methodological note on Experians regional forecast


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FDI Research Final Report

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Introduction

BACKGROUND

In June 2006, the Department for Enterprise, Trade and Investment in Northern Ireland(DETI) appointed Experians Business Strategies Division to provide a robust evidence baseof trends in and the value of Foreign Direct Investment (FDI) in Northern Ireland, to improveits understanding of the benefits that FDI projects can bring to the local economy and byexamining likely trends in FDI, identify the key sectors and markets which Invest NI shouldtarget.

As well as DETI, other organisations included in the Client Steering Group for the researchare Invest NI and DEL.

The definition that this report will use for the tradable service sector will be the same as thatused in DETIsExporting Northern Ireland Services study (see section 1.3). In order todevelop a broader view of service sector exports in the UK in Northern Ireland, the report willuse the term exportable services to describe those services that export at least five per centof their produce.

OBJECTIVES

The objectives of this study were to:

Explore the range of benefits over and above direct employment impacts that FDI inthe tradable service sector can generate;

Explore these benefits at a sub-sectoral level, including wider supply chain benefitsaccruing to indigenous companies and knock-on effects in terms of the skills base;

Estimate the fiscal benefits of service sector FDI;

Identify any regional/ locational factors causing sub-sectoral variation;

Forecast key trends in service sector FDI;

Highlight areas where a competitive advantage can be developed and market failureswhere government can respond;

Explore international examples of the development of successful tradable services sub-sectors;

Identify the policy implications of the evidence gathered.

Propose a series of actions that need to be taken to improve Northern Irelandscompetitive advantage and also ensure that benefits from inward locating projects aremaximised. This will provide the rationale for all agencies and organisations with astake in FDI; and

Develop a series of recommendations that set out exactly what type of investment youshould or could attract and the most effective means of doing this.


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1 Context

International trade and investment flows provide a strong stimulus to global economic growthand to expansion in individual countries. Regions within national economies share thebenefits, particularly if they have a strong exporting capacity or are direct recipients of FDI.This section provides a context for the rest of the report, defining FDI, type of FDI project,and tradable services for the purposes of the research.

1.1 DEFINING FDI

According to international institutions such as the International Monetary Fund (IMF) and theUnited Nations, FDI is defined as an investment made to acquire a lasting interest in anenterprise operating outside of the economy of the investor1. Investment may be inincorporated or unincorporated enterprises, branches or subsidiaries. The investors purpose isto gain an effective voice in the management of the enterprise. Some degree of equityownership is almost always associated with acquiring an effective voice and internationalinstitutions guidelines suggest a threshold of 10 per cent. FDI is also more likely to result inthe importation of new technology and management skills, and is less likely to displaceexisting operations.

The above definition involves cross-border flows. A broader concept ofdirect investmentcan be considered, to include inflows from other parts of the same nation-state. Such flowsare much harder to identify, but if the data are available, they provide information that is ofgreat interest in analysing the economic impact of direct investment. Information on totaldirect investment (cross border plus investment from elsewhere in the UK) is indeedavailable for Northern Ireland at the broad tradable services level, but not for the narrowerdefinition used in this report.

1.2 TYPE OF FDI PROJECT

Although all FDI should generate economic benefits to some degree, the extent of the benefitswill, in reality, vary substantially depending upon whether the FDI is a greenfield investmentor a merger/acquisition.

1.2.1 Greenfield

Agreenfield investment establishing a new operation or expanding existing facilities is likelyto be of greatest benefit, providing new capacity, additional jobs, possibly new technologyand management techniques, training for staff and potential linkages to the globalmarketplace. The increase in employment will provide additional spill over benefits to thelocal economy via increased effective demand. There may be an additional boost where thenew operation stimulates expansion in up/down stream businesses in the area. But this form

of FDI carries potential downsides. Existing industry in the area might be crowded out asthe incoming producer draws on local resources of labour and intermediate goods. In additionthere is a risk that profits do not wholly feed back into the local economy but are repatriatedto the investors home economy.

1Balance of Payments Manual Fifth Edition: (BPM5) Washington DC IMF 1993


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1.2.2 Mergers & Acquisitions

Mergers and/or acquisitions (M & As) account for the bulk of FDI but their initial impact isless powerful than a greenfield investment since they normally involve merely a change ofownership of existing assets. New technology and management skills may be introduced andlinkages to the global market may be enhanced. But if the merger/acquisition leads to anexpansion of capacity, the outcome would be similar to that following a greenfieldinvestment. Because the benefits of greenfield investments are significantly greater thanthose associated with mergers and acquisitions, this research is concerned with the formertype of investment.

1.2.3 Invest Northern Irelands Policy on FDI

Invest Northern Irelands policy towards FDI states that funding will only be provided tosupport investments in export-oriented businesses. Invest NI therefore does not assist HQoperations, sales and marketing operations and logistic and distribution sectors. Nor doesInvest NI assist mergers and acquisitions unless they lead to subsequent developmentprojects.

1.3 DEFINING TRADABLE SERVICES

The term tradable services generally refers to any services that are capable of beingimported and exported, i.e. services that are not necessarily purchased at the point ofproduction, such as software design and consultancy. However, in some instances, the termcan be broadened to include services such as transportation and hospitality that are purchasedlocally, but which generate foreign exchange revenues.

Although, for analysis purposes, it is necessary to form a view as to which industries should,and should not be classified as tradable services, it is important to recognise that theStandard Industrial Classification (SIC) makes no distinction between tradable and non-tradable activities. This means that, in many cases, SIC codes will include a mixture oftradable and non-tradable activities2.

DETIsExporting Northern Ireland Services Study3 (ENIS)recommended that a definition bebased upon those sectors that have the highest potential to trade services internationally. Thesectors chosen by this study were:

Computer and Related Activities (SIC 72); Research and Development (SIC 73); Market Research (SIC 74.13); Business and Management Consultancy (SIC 74.14); Architectural and Engineering (SIC 74.2) Technical Testing and Analysis (SIC 74.3); Advertising (SIC 74.4); and Creative Entertainment (SIC 92.1-92.3).

This study will also adopt this ENIS definition for the tradable service sector, however, inorder to develop a broader view of service sector exports in the UK in Northern Ireland, the

2 For example, the SIC classification system does not make any distinction between high street banksand telephone banking providers; between universities that provide distance learning qualification andthose that do not provide such qualifications or between manufacturing companies who only sellprocessed outputs and those who also offer design services.3Exporting Northern Ireland Services Study, DETI, March 2007, http://www.detini.gov.uk/cgi-bin/downdoc?id=2844


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report will also use the term exportable services to describe those services that export atleast five per cent of their produce.


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2 Literature review

From a review of a range of literature sources, this section describes the benefits that FDI canbring to an economy, assesses recent global and UK trends in FDI, and examines the impactof increased FDI on economic growth and skills demand.

2.1 BENEFITS OF FDI

As well as the direct impact on employment and GVA4, the DETI Corporate Plan identifieswider economic benefits of FDI as follows:

The introduction of new products and processes; Improved management practices; New technology and skills development; and Improved job quality.

In acknowledging these benefits, the 2005Economic Vision for Northern Irelandsets out apolicy to adopt a targeted approach to FDI, which provides wider economic benefits to theeconomy and puts structures in place to encourage investment across all of Northern Irelandso that all areas benefit from sustainable economic growth and high value addedemployment.

Although an increase in the level of FDI investment does have potential to deliver clearbenefits to the Northern Ireland economy, there is a risk that the incoming businesses couldcrowd out activity in, and displace labour from, the indigenous business base. As part of ourresearch we have carried out an examination of literature on the crowding out issue, and haveconcluded that although 100 per cent crowding out is unlikely to occur, some allowance forcrowding out should nonetheless be made. A more detailed commentary on the crowding out

issue is provided in Appendix A.In addition to the economic benefits of FDI, there are also societal benefits of improved jobquality. The evidence of whether these benefits have been experienced within NorthernIreland is mixed. A recent study by Invest Northern Ireland5 found that 56 per cent of fulltime jobs promoted by first time inward investments, had weekly salaries above the NorthernIreland average for full time private sector employees. However, an analysis of more recentfigures provided by Invest Northern Ireland showed that 69 per cent of full time workers inFDI companies earned more than the Northern Ireland average, and that 49 per cent of fulltime workers in tradable services FDI companies did so. This job quality issue will beexplored in further detail in section 3.7.

A further job quality benefit arises as a result of the improvements that FDI companies can

bring to their host countrys skills base. In a recent study of the benefits of FDI to theAustralian economy6, Invest Australia argued that recipient economies can benefit from across-pollination and sharing of ideas, and that the skills of the local workforce can beenhanced through:

4 This will be examined in greater detail in the discussion on crowding out that follows.5Performance Report 2003/2004 2004-2005, Invest Northern Ireland,http://www.investni.com/performance_report_02-05.pdf6Benefits of Foreign Direct Investment to Australia, Invest Australia, 2004


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Staff relocating to the country from other parts of the multi-nationals operation; Staff being provided with global exposure as a result of their interaction with the

investors overseas operations; The introduction of new and innovative working practices; Knowledge transfer between the investor and their local supplier and linked companies;

and Knowledge transfer as a result of employees moving from the investing organisation to

indigenous employers.

2.2 GLOBAL AND UK TRENDS IN FDI

Data on trends in total FDI (including non-tradable activities) are available in terms of annualflows (from the perspective of both the originating countries and recipients) and stocks, whichreflect the accumulation of flows in a country over a period of time. We use both approachesto illustrate trends in the evolution of FDI.

FDI flows reached a peak at the turn of the century (Table 2.1) as the global economyexpanded vigorously, investment in technology surged and mergers and acquisition activitywas especially strong. The economic slowdown of the early years of this decade and theterrorist attacks on the US led to a marked deceleration in FDI, but the pace of flows haspicked up strongly in recent years in line with the buoyancy of the global economy.

2.2.1 Global geographic pattern

Developed economies have traditionally been the dominant source of FDI. In 1970, theyaccounted for virtually all such flows, and even in 1980 the level of FDI from developingcountries was small. But the past quarter of century has seen important changes. Whiledeveloped economies still account for the bulk of FDI outflows, their share has decreased asdeveloping economies notably in Asia have expanded rapidly and in the cases of Chinaand India, participate more actively in the international economy through their steadyliberalisation of trade policies. The growing importance of developing economies as a sourceof FDI is highlighted in Table 2.1. In 2004, such countries provided 12.7 per cent of global

FDI. The table also shows that while the overall developed country share of world FDI flowsis on a steadily declining path, the share of individual regions within the total flows can bevery volatile.

Table 2.1 - FDI outflows (% of total unless otherwise noted)

1970 1980 1990 2000 2004

Developed economies 99.7 93.8 94.6 88.1 87.3

North America 58 43.4 15.2 15.1 37.9

Europe 36 45 58.2 69.9 42.4

Developing economies 0.3 6.2 5.4 11.9 12.7

World ($ million) 14,157 53,743 238,681 1,239,149 730,257

Source: UNCTAD (http://stats.unctad.org/FDI)

The pattern among recipients of FDI is similar to that shown in Table 2.1. The rise of thedeveloping economies has been strong, although from a much higher base than in the case ofoutflows, as the attractions of lower production costs have long been an incentive fortransnational companies to locate operations in such countries. In 1980 developing countriesreceived almost 16 per cent of total flows, and increased their share to 41 per cent by 2004.The rise of Asia as an investment location has been dramatic, with FDI flows increasing from$442 million in 1980 to $147.5 billion in 2004. In Latin America, the increase in flows overthe period was from $7.5 billion to $67.5 billion.


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Table 2.2 - FDI inflows (% of total)

1980 2004

Developed economies 84.5 59

Developing economies 15.5 41

Asia 1 23

Latin America 14 10

S E Europe/CIS 0.5 5

Source: UNCTAD (http://stats.unctad.org/FDI)

A useful way of considering the importance of individual countries in the global picture ofFDI is to investigate their stock of inward investment. The United Nations Conference onTrade and Development (UNCTAD) annual investment report7 contains a wealth ofinformation on this and allied topics. The following table highlights the importance of the UKin this context, second only to the US in terms of the value of investments, and shows therapid emergence of China as a major recipient.

Table 2.3 - FDI stock and greenfield projects ($ billion unless otherwise noted)

1990 2004 % growth Number of

greenfield

projects 2002-04Top developed countries*

US 395 1,474 273 1,580

UK 203 771 280 1,222

France 86 535 522 482

Top developing countries*

China (ex Hong Kong) 21 245 1,066 3,409

Mexico 22 182 727 451

Brazil 37 151 344 720

Source: UNCTAD World Investment Report

*In terms of FDI stock

Table 2.3 also indicates that as a destination for greenfield projects the UK does very well. At

1,222 projects in the period 2002-04, the figure is not far short of the US number and wellabove that seen in France, although in overall percentage growth terms France has increasedits FDI more rapidly than the UK. Chinas record in this context is extremely impressive, wellahead of the US. India, with 1,392 projects is in third place and Russia has also attracted over1,000 projects. But the stock of FDI in both these countries is still comparatively small.

It should be noted that since these figures were produced, the US share of FDI is likely tohave declined as a consequence of the countrys introduction of a one-off corporation taxamnesty for repatriated profits in 20057. However, this is only likely to be a short-term trend.

2.2.2 Likely future trends

Over the long term, patterns in FDI flows are likely to be closely correlated with future trends

in output growth, with companies in the worlds emerging economies taking on a new globalpresence in international markets. This means that Eastern European nations such as Bulgaria,the Czech Republic and Poland may begin to emerge as new sources of FDI, while existingsources such as China and India will take on even greater importance..

7 UNCTAD World Investment Report 2005, Statistical Annex, UN 20057Economy loses 18bn after US tax repatriation, p1, The Irish Times, 17th October 2006


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Figure 2.1 shows forecasts for average annual FDI per head of population (in US$) and FDIas a percentage of GDP from 2006 to 2010 for a selection of countries. It shows that theRepublic of Ireland will have the third highest FDI per capita figure of the 82 countriesassessed, at $4,750 per year, while the UK ranks 11th on the same indicator, attracting $1,480.

Figure 2.1 - Forecast FDI as a proportion of population and GDP

$4,776 $4,750

$3,258$3,053

$2,459

$1,480

$1,144$984

$479$224

$5,037

7.9% 7.9%

6.7%

5.1%

3.6%2.9%

2.0%

15.0%

2.2%

16.5%

1.2%$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Singap

ore

Hong

Kong

Irelan

d

Belgi

um

Nethe

rlands

Swed

en UK

Fran

ce US

Germ

any

Polan

d

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FDI inflows per head ($US)

FDI inflows as % of GDPSource: The Economist Intelligence Unit, 2006

2.2.3 Global sectoral pattern

The rapid expansion of the service sector has boosted the share of FDI in service industries.

This is true of developed and developing countries. In China for example, whilemanufacturing (led by computers and other electronic equipment and textiles) dominates thepicture, sectors such as distribution and financial services have recently seen significantinflows. The trend towards services is seen in the following table.

Table 2.4 - World FDI stock by sector

% shares of total inward FDI 1990 2003

Primary (agriculture and mining) 9.5 6.9

Manufacturing 41.6 33.3

Construction and electricity, gas water 1.7 3.2

Services 47.2 56.6

Trade 12 10.7

Hotels and restaurants 1.3 1Finance 19.7 18

Business activities 6.8 14.9

Transport & communications 1.5 5.2

Source: UNCTADWorld Investment Report 2005, Statistical Annex


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2.2.4 UK trends

New FDI investment into the UK grew steadily from 1988 to 1997, before undergoing fouryears of rapid growth between 1997 and 2000. Investment that fell rapidly in the wake of theSeptember 11th attacks of 2001 but is now showing signs of returning to its 2000 peak.

Figure 2.2 Inward investment flows into the UK, 1988-2004

17.2

78.5

36.6

42.8

12.4

16.0

54.4

44.9

20.3

15.712.7

6.09.98.88.4

17.411.6

0

10

20

30

40

50

60

70

80

90

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: United Nations Conference on Trade and Development (UNCTAD),2007

Billions of

Pounds

This investment into the UK has had a positive impact on employment levels, and UK Trade& Investment (UKTI) estimate that nearly 90,000 jobs were created or safeguarded in2005/06 as the UK recorded its highest ever number of inward investment projects.8 Of the1,220 projects, 508 were new, 337 expansions and the remainder, 375 (30 per cent) M & A

transactions.

Investment in the tradable service sector represented over 55 per cent of the total number ofprojects, with a strong representation in knowledge-intensive sectors. IT, software, internetand e-commerce represented 284 projects.

Survey evidence supports the view that the UK remains a top attraction for investment. Theannual survey by Ernst & Young revealed that in 2005, of 3,066 FDI projects in Europe, 559went to the UK, 538 to France and 181 to Germany in third place. An interesting feature ofthe survey was that 29 per cent of FDI projects in France were in manufacturing against 19per cent in the UK. The annual IBM survey also showed the UK in the lead, with France closebehind, in terms of the number of new projects.

Approximately half (51 per cent) of all FDI inflows into the UK originates from withinEurope, with Germany investing the most out of any European nation, followed by Franceand the Netherlands. The US is the biggest single investor in the UK, accounting for 33 percent of all investment, while 8 per cent of investment comes from Asia, and the remaining 10per cent is spread across the rest of the world (Table 2.5).

8UK Inward Investment 2005/6, UK Trade & Investment,www.ukinvest.gov.uk


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Table 2.5 - Gross foreign direct investment in the UK by nation of origin, 2003

Percentage of totalinvestments

Germany 13France 11Netherlands 13

Other Europe 14USA 33Other America 5Asia 8Rest of the World 5Source: National Statistics (Pink Book), 2006

The financial services industry is the biggest net source of foreign direct investment,contributing to approximately one third of all investment. Other major recipients of FDI in theUK include the transport & communications, retail & wholesale, utilities, business serviceand chemicals & plastics sectors (Table 2.6).

Most heavy industries, including the metals and mechanicals products and office equipmentsectors reported negative levels of net FDI, meaning that more money was invested in these

sectors by UK companies overseas, than by foreign companies in the UK.

Table 2.6 - Net foreign direct investment in the UK by industry, 2004

Industry Share of FDI

Financial services 32%Transport and communications 23%Retail / wholesale trade and repairs 14%Electricity, gas and water 13%Real estate and business services 9%Chemical, plasic and fuel products 6%Other services 2%Textile and wood, printing and publishing 1%Food products 1%Agriculture, forestry and fishing 0.1%Source: National Statistics Business Monitor, 2006

Figure 2.3 provides a ranking of factors influencing location decisions based on the 2006Ernst & Young Global Attractiveness Monitor. It shows that transport & logisticsinfrastructure and labour costs are considered to be the most important influencers, both beingdescribed as very important by a majority of respondents. Corporate tax rates, a keydifferentiator between the Northern Ireland and Republic of Ireland offer, are also consideredimportant, being mentioned by 46 per cent of respondents. Membership of the Eurozone,another key differentiator in the context of Ireland is, however, considered less important, andis considered to be of little or no importance by 36 per cent of respondents.


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Figure 2.3 - Ranking of the selection criteria for an investment location

54

52

48

48

47

46

45

44

41

40

33

31

29

29

27

24

23

23

22

35

39

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40

39

40

42

39

42

48

42

42

36

42

42

41

40

34

30

7

7

8

9

9

9

9

12

13

8

19

19

24

22

23

24

26

23

31

11

7

8

10

18

16

6

6

3

2

4

2

3

3

3

4

3

3

4

0 20 40 60 80 100

Transport & logistics infrastructures

Labour costs

Potential productivity increase

Telecommunications infrastructures

Transparency & stability of polit., leg. & reg.env.

Corporate taxation

Local labour skills levels

The country or region's domestic market

Flexability or labour legislation

Social climate and environment stability

The country or area's specific skills

Avail. of sites, cost of land & regulations

R&D availability and quality

Local language, culture and values

Specific treatment of expat. execs/corp HQs

Aid, subsidy & support from public authorities

Membership of the Euro zone

Quality of life

Access to local financial investors

Very important Of some importance Of little importance Not at all important

Source: Ernst & Young,

2.3 EXPORTABLE SERVICE TRENDS

Exportable services can be identified as service sector industries within which a significantproportion of total output is exported overseas. An analysis of the Office of National Statistics(ONS) 2004 Input-Output tables identifies 16 industries within which over 5 per cent ofindustrial output is exported. These are shown in Table 2.7.


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Table 2.7 - Export share of UK service sector industries

Figure 2.4 shows the long-term trend in export sales in the 16 selected exportable serviceindustries, and across the economy as a whole. It shows that the proportion of UK exportable

services outputs that are exported has increased from under 15 per cent in 1992 to over 17 percent in 2004. In contrast, the proportion of output exported across UK industries as a wholehas remained fairly static at close to 11 per cent.

Industry Percentage ofoutput exported

Exportable services

Water transport 60.8

Auxiliary financial services 53.9

Research & development 43.9

Other business services 22.5

Air transport 18.9

Computer services 12.1

Architectural activities & technical consultancy 11.7

Recreational services 9.9

Banking & finance 9.8

Advertising 8.9

Legal activities 8.4

Accountancy services 8.2

Insurance & pension funds 7.6

Hotels, catering, pubs etc. 7.2Telecommunications 7.2

Market research & management consultancy 4.8

Other services

Other land transport 4.3

Ancillary transport services 3.8

Railway transport 3.7

Postal & courier services 2.6

Education 2.0

Other service activities 1.2

Renting of machinery etc. 1.2

Public administration & defence 1.0

Motor vehicle distribution & repair, automotive fuel retail 0.4

Retail distribution 0.3

Letting of dwellings 0.3

Private households with employed persons 0.2

Sewage & sanitary services 0.2

Owning & dealing in real estate 0.2

Health & veterinary services 0.2

Estate agent activities 0.0

Social work activities 0.0Source: ONS Input-Output Statistics, 2004


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Figure 2.42

Proportion of UK output exported by industry grouping, 1992 - 2004

10

11

12

13

14

15

16

17

18

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

All Industries

Exportable services

Source: Experian 2006, based on ONS 2004 Input-Output data

Figure 2.5 shows the percentage change in export share in selected exportable serviceindustries between 1992 and 2004. The table shows that over this period, the UK hasmanaged to establish itself as a leading exporter of research and development, and hasenjoyed a substantial increase in banking and financial services exports. Although total outputin the air transport sector has increased substantially over this 12 year period, the majority ofthis increase originated from sales to UK based customers, and as a consequence, the exportshare in this sector has fallen sharply.

Figure 2.5

Percentage point change in export share 1992 - 2004 for selected industries

-15 -10 -5 0 5 10 15 20 25 30 35

Research & development

Water transport

Auxiliary financial services

Insurance & pension funds

Accountancy services

Banking & finance

Computer services

Legal activities

Advertising

Telecommunications

Architectural & tech consult

Wholesale distribution

Motor vehicle distribution & repair

Market res & managem't cons

Hotels, catering, pubs etc.

Recreational services

Other business services

Air transport

ONS 2004 Input-Output data


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2.4 LABOUR MARKET IMPLICATIONS OF AN FDI STRATEGY

Northern Ireland currently has one of the smallest private services sectors of any developedeconomy. However, a recent study by Regional Forecasts Ltd forecasts a large increase inservice sector jobs over the coming decade, as shown in Table 2.8. A successful strategy toattract tradable services FDI into the Northern Ireland economy would boost the sector,accompanied by an increase in the demand for skilled workers.

The table highlights the occupations in Northern Ireland that are likely to require the largestnumbers of new workers over the next ten years. It shows that, over the period, 43,950 newjobs will be created, while 698,940 further vacancies will arise as a result of people movingbetween occupations, people becoming unemployed or inactive, people retiring or peoplemigrating away from Northern Ireland. Most of the new jobs created will be in occupationsthat are in heavy demand by the service sector, while predominantly manufacturingoccupations, such as skilled trades, and process, plant and machine operatives, look likely toexperience a continuing fall in new employment demand.

It should be noted that these figures represent a baseline forecast for the Northern Irelandeconomy over the eleven year period, and that any future FDI strategy could, potentially, leadto employment demand levels that are higher than the figures shown below.

Table 2.8 - Forecast new employment and replacement demand in Northern Ireland byoccupation, 2005-2015 inclusive*

New employment

demand

Replacement

employment

demand

Total

employment

demand

Managers and Senior Officials 10,800 66,220 77,020

Professional occupations 15,500 58,300 73,800

Associate professional and technical occupations 6,100 66,880 72,980

Administrative and secretarial occupations 4,500 98,560 103,060

Skilled trades occupations -8,200 79,750 71,550

Personal service occupations 11,800 62,480 74,280

Sales and customer service occupations 4,900 92,840 97,740Process, plant and machine operatives -4,200 58,850 54,650

Elementary occupations 2,800 115,060 117,860

Total 43,950 698,940 742,890

Source: Regional Forecasts Ltd, 2006 * The replacement demand figure was calculated by multiplying the reported annual average figure for the 2005-2015 period by11

If present trends continue, future FDI investment will be disproportionately concentrated inand around Belfast and Derry, with Belfast, Derry, Craigavon, Newtownabbey, Limavady,Strabane, Larne and Carrickfergus all receiving a share of FDI that is above their share oftotal employment (see Table 2.9).


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Table 2.9 Share of FDI and employment by district

DistrictPercentage of FDI

workforce

Percentage of total

employmentIndex

Belfast 33.4 32.4 103

Derry 13.8 6.9 200

Craigavon 6.7 6.2 109Lisburn 6.3 6.5 97

Newtownabbey 6.3 5.1 123

Newry & Mourne 4.8 5.2 91

Limavady 3.9 1.5 253

Strabane 3.4 1.5 227

Ballymena 3.2 4.9 64

Antrim 3.1 4.0 77

Coleraine 2.7 3.8 70

Larne 2.1 1.4 151

Castlereagh 1.9 4.2 45

Fermanagh 1.9 3.4 55

Carrickfergus 1.7 1.4 127

Northdown 1.5 3.7 42

Dungannon 1.4 3.3 43

Cookstown 1.0 1.8 58

Ards 1.0 2.9 35

Ballymoney 0.8 1.2 68

Down 0.6 2.9 20

Omagh 0.4 3.0 12

Moyle 0.2 0.6 39

Banbridge 0.1 1.9 8

Armagh 0.04 3.0 1

Magherafelt 0.02 2.4 1

Source: Invest Northern Ireland, Northern Ireland Census of Employment

In addition to the benefit of increased labour demand described above, Driffield8 suggests thatFDI can potentially deliver further benefits to the Northern Ireland labour market byincreasing the allocative efficiency, and therefore the productivity of the workforce. In otherwords, because more employment opportunities are made available to individuals working inNorthern Ireland, it will be easier for individuals to identify working opportunities that arewell suited to their skills and experience.

However, Driffield also suggests that, as a consequence of the increased demand for labourbrought about by FDI investment, and the resulting increase in industry wages, someindigenous businesses may attempt to reduce costs by substituting labour for capital. Theextent of such substitution will vary according to the degree of FDI investment in the industryin question, and the technical feasibility of substituting capital for labour in that industry.However, overall this substitution effect is expected to lead to the loss of one indigenous job

for every five FDI jobs created.The 2004 Northern Ireland Skills Strategy responds to this expected demand by focusing onthree different types of skills, namely:

Essential skills of literacy and numeracy and, increasingly, information andcommunications technology (ICT);

8Indirect employment effects of foreign direct investment to the UK, Nigel Driffield, Bulletin ofEconomic Research, 51:3, 1999


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Employability skills, including the key skills of team working, problem solving andflexibility; and

Work based skills, specific to a particular occupation or sector.

The 2006 Programme of Implementation for this strategy outlines how these types of skillswill be developed, citing, for example, work to increase the presence of UK wide SectorSkills Councils in Northern Ireland as a method of developing the final skill type.

2.5 BENEFITS TO TIER ONE COMPANIES

In addition to the labour market and export benefits associated with FDI, an investment alsoyields additional benefits for the indigenous companies who supply them (referred to in thisstudy as tier one companies) and other Northern Ireland businesses. These include, forexample, the profits made by local companies as a result of sales to FDI investors, profitsmade as a result of spending by the employees of FDI investors, profits gained as a result ofknowledge shared with investors, and agglomeration benefits (benefits of being located inclose proximity to one another such as labour mobility, and reduced transportation cost).

The extent to which these benefits are likely to be experienced by the wider business basevaries according to the characteristics of the FDI investor. For example, Turok9 argues thatinward investors can be categorised into two broad types10:

Investors with developmental linkages to indigenous businesses Investors thatestablish long-term collaborative partnerships with local businesses; have decentralisedmanagement structures; procure bespoke good and services from knowledge-intensivelocal industries; and employ a diverse range of local staff;

Investors with dependent linkages to indigenous businesses Investors that procurebasic goods and services at a minimal price from local companies, who employ lowskilled staff in elementary activities on temporary or casual contracts, with highlycentralised organisational structures.

Turok argues that while the former companies are likely to contribute to self-sustaininggrowth in a local economy, the latter group are likely to leave the economy vulnerable tomarket conditions elsewhere in the global economy, with a risk of large-scale low skillsemployment loss should the company close its operations11.

An estimate of the output and employment benefits received by tier one companies inNorthern Ireland will be provided in Section seven of this report.

2.6 IMPACT OF CORPORATION TAX

In recent years, there has been a regular debate in both the British and Irish media on the rolethat the corporation tax differential between the Republic of Ireland (which has a 12.5 percent rate on trading income in most areas, although a lower 10 per cent rate applies for

companies based in Shannon and for certain companies in the International Financial Services

9 See Inward investment and local linkages how deeply embedded is Silicon Glen?, I Turok, 199310 These two types are used for illustrative purposes. In reality, most companies would lie within aspectrum between these two extremes.11 It should however be acknowledged that attracting companies with dependent linkages may provedesirable from an equity perspective as these employers are more likely to offer employmentopportunities in areas of high economic inactivity.


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Centre and in the manufacturing sector) and Northern Ireland (which, in line with other partsof the UK, has a 30 per cent main rate)12.

The most obvious issue associated with such corporation tax differentials is that they maycause firms to choose to locate in low tax countries such as the Republic of Ireland, ratherthan in Northern Ireland, in order to reduce the amount of tax they are required to pay. Asecond issue is that they may encourage the branches of multinational corporations in high taxlocations, such as Northern Ireland, to sell goods and services to branches in low taxlocations, (such as the Republic of Ireland) in order to reduce the companys overall taxburden. This practice, known as transfer pricing, would reduce the total tax yield generated inthe high tax country13.

In a recent report entitledAssessing the case for a differential rate of corporation tax inNorthern Ireland (, November 2006), the Economic Research Institute of Northern Irelandestimate the impact that is likely to occur, should Northern Ireland reduce its corporation taxrate to Republic of Ireland levels. The calculation accounts for:

The additional corporation tax that will be paid by the newly attracted FDI investors; The reduction in the amount of corporation tax paid by existing companies in Northern

Ireland; The additional taxation paid as a result of induced domestic demand; The additional taxation paid as a consequence of knock on jobs in the Northern

Ireland economy; The reduction in unemployment and incapacity benefit costs caused by these knock

on jobs; Additional payments of other taxes, such as income tax and VAT; Additional public expenditure costs incurred in order to serve the new businesses.

The report finds that the immediate effect of any reduction in the rate of corporation taxwould be negative, as it would immediately reduce the tax payments of existing businesses.However, over time, the change will lead to growth in the business base, and balances shouldbecome positive from 2013 onwards, with the positive balance rising to almost 2.5 billion by

2030. However, as the report does not account for the likely benefits that will occur as a resultof UK companies relocating profits to capitalise on transfer pricing, it may understate thetrue likely benefit of such a change (Figure 2.6).

12 Recent articles includeDUP and Sinn Fin back corporate tax cut, Financial Times, 13th November2006 andNI pledged79bn to underpin St Andrews Agreement, Irish Times, 2nd November 200613 Likewise, if Northern Irelands corporation tax rate were to be reduced to below the UK average,Northern Ireland could benefit as a result of UK based companies operating in Northern Irelandreassigning profits to their Northern Ireland offices.


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Figure 2.6 Benefit to UK fiscal balances of a reduction of Northern Irelandcorporation tax rates to 12 per cent

-500

0

500

1000

1500

2000

2500

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Source: Regional Forecast Ltd, Economic Research Institute of Northern Ireland (2016 to 2029 figures Experian based on ERINI)

million

2.7 REASONS GIVEN FOR NOT INVESTING

In 2000, the House of Commons Northern Ireland Affairs Committee14 provided a list ofreasons why unsuccessful FDI investment leads had taken the decision not to locate inNorthern Ireland. These included:

An unfavourable tax regime; A small critical mass in comparison to other regions (in terms of the number of people

available); Distance from customer; and Concern regarding security and political stability.

This report was based on research carried out only a short time after the signing of the GoodFriday Agreement, at a time when political stability concerns were more pertinent than theyare currently. However, the three other concerns are all likely to remain of importance toforeign direct investors.

Inappropriate skills, absence from the Eurozone and infrastructure issues were not cited asbarriers by any of the leads questioned, However, it is possible that these and other issuesmay have impacted on the decisions made by other investors.

14 Northern Ireland Affairs Committee's Fifth Report 1999-2000, Public expenditure in NorthernIreland: Inward Investment


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3 Investment inflows into NorthernIreland

This section discusses the performance of Northern Ireland in attracting inward investment,and its performance by location and sector.

3.1 NORTHERN IRELAND IN A UK CONTEXT

In 2004/5, National Statistics reported that there were 36 project successes in NorthernIreland, equating to 21 successes per million people. In other words, on 36 occasions, anoverseas company specified an interest in, and successfully completed an investment in,Northern Ireland. Of these companies, 14 were manufacturers (eight per million people) and22 were non-manufacturers (13 per million people).

During this year, Northern Ireland had the UKs joint third highest success rate in terms ofpopulation share, behind only London and the North East (Figure 3.1).

Figure 3.1 FDI project successes per million population, 2004/5

35.4

12.1

17.4

12.610.5

8.8 9.0 9.47.4

9.78.3

5.3

1.3

10.5

4.3

8.0

8.5

6.94.4 3.9

5.42.3

2.4

2.2

0

5

10

15

20

25

30

35

40

London North

East

South

East

Northern

Ireland

Wales East

Midlands

North

West

Scotland West

Midlands

East Yorkshire

&

Humber

South

West

Manufacturing

Non-manufacturing

Source: National Statistics 2006

22.6

14.4

10.7

15.7

12.012.8

36.7

21.7

7.5

19.0

13.3

20.6

Between 2000/1 and 2004/5, the number of project successes in Northern Ireland rose from22 to 36, equivalent to a 64 per cent increase. This represents the fourth highest increase inthe UK over the period, behind only the East Midlands, North West and North East. As inmost other regions, non-manufacturing FDI grew more rapidly than manufacturing FDI(Figure 3.2).


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Figure 3.2 Percentage change in number of FDI projects

233%

173%

69%

27%

-37%

-4%

-29%

117%

-31%

-38%

46%

-38%

375%

121%

72%

100%

200%

138%

31%

8%

23%

20%

-14%

-29%

300%

136%

71%

64%

64%

44%

27%

20%

0%

-6%

-7%

-33%

-100% -50% 0% 50% 100% 150% 200% 250% 300% 350% 400%

East Midlands

North West

North East

Northern Ireland

Yorkshire & Humber

Wales

London

East

South West

Scotland

South East

West Midlands

Manufacturing

Non-manufacturing

Total

Source: National Statistics 2006

3.2 TOTAL INFLOWS 2002-2006

Table 3.1 shows the trend in FDI into Northern Ireland over the past five years. The figureshows that the Northern Ireland economy has generally experienced a steady increase in FDIinvestment, although it did experience two exceptionally strong years of investment in 2004and again in 2006.

In both these years, the exceptional performance was mostly attributable to major investmentsby Northbrook Technology and Citigroup, which together contributed 635 jobs in 2004 and585 jobs in 2006.

Table 3.1 - Trends in Northern Ireland FDI

Tradable service All industries

ProjectsJobs

createdCapital investment

(US$m) ProjectsJobs

createdCapital investment

(US$m)

2002 4 163 41 12 583 1512003 5 185 102 16 880 385

2004 11 1,188 6.5 27 1,862 224.4

2005 11 255 39.97 39 1,407 492.84

2006 11 1,073 176.69 32 4,263 440.88

Source: Locomonitor, 2007

3.3 KEY INVESTORS

Since January 2002, FDI in Northern Ireland has been dominated by the IT and business andfinancial services sectors, with six of the ten biggest investors in job creation terms operatingin these sectors. The most significant investor over this period was ICICI, the Indian contactcentre operator, which created 1,600 jobs in Belfast and Derry.

Northbrook Technology and Citigroup were the only two tradable service companies toappear in the list of the ten most significant investors.


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Table 3.2 - Northern Irelands largest foreign direct investors, January 2002 to March

Investing company Countryof origin

Destination city Jobscreated

Capital invested(US$m)

Sector

ICICI OneSource India Belfast, Derry 1,600 0 Business Services Northbrook Technology USA Belfast, Strabane, Derry 1,060 42 IT and Software HCL BPO India Belfast, Armagh 825 2 Business Services Citigroup USA Belfast 560 0 Financial Services Asda USA Antrim, Enniskillen 475 86 Food and Drink Teleperformance France Newry 450 13 Business Services IKEA Sweden Belfast 400 0 Consumer Products Quinn Direct Insurance Ireland Enniskillen 350 13 Financial Services Image Communications Group Ireland Armagh 304 0 Telecom Services Seagate Technology USA Derry 300 241 Business Equipment Source: Locomonitor, 2007

Table 3.3 - Northern Irelands largest tradable services foreign direct investors, January 2002 t

Investing company Country

of origin

Destination city Jobs

created

Capital invested

(US$m)

Sector

Northbrook Technology USA Belfast, Derry, Strabane 1,060 42 IT and Software Citigroup USA Belfast 560 0 Financial Services Allen Systems Group USA Belfast 168 6 IT and Software Polaris Software India Belfast 158 0 IT and Software FG Wilson USA Larne 155 87 Machinery & industrial goodAvalanche Technology USA Belfast 130 13 IT and Software CEM Solutions USA Belfast 100 32 Machinery & industrial goodGambro BCT Sweden Larne 86 13 Healthcare HCL BPO India Belfast 75 0 Business Services Liberty Information Technology USA Belfast 51 8 IT and Software Source: Locomonitor, 2007


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3.4 PERFORMANCE BY NORTHERN IRELAND SUB-REGION

Belfast is by far the most popular location for FDI investors into Northern Ireland, with 30tradable service investors, and a further 29 non-tradable service investors choosing to locatethere since January 2002, creating an additional 4,239 jobs. Derry is also a popular location,attracting three tradable, and eight non-tradable investments, and creating 1,766 additionaljobs. However, outside of these two cities, only Larne, Strabane, Bangor and Downpatrickhave succeeded in generating employment opportunities through tradable serviceinvestments15.

Table 3.4 - Geographic breakdown of Northern Ireland FDI investments, January 2002to March 2007


ProjectsJobs

createdCapital invest

(US$m) ProjectsJobs


(US$m)

Belfast 30 2,151 113 59 4,239 243Derry 3 360 111 11 1,766 375

Larne 3 270 110 5 321 110

Strabane 1 100 0 1 100 0

Bangor 1 18 0 4 218 0.5Downpatrick 1 15 1 2 85 5

Armagh 1 0 27 3 704 27

Newry 0 0 0 3 450 13

Antrim 0 0 0 2 425 45

Enniskillen 0 0 0 3 436 61

Kilkeel 0 0 0 2 264 25

Carrickfergus 0 0 0 4 176 216


3.5 PERFORMANCE BY INDUSTRY

Since January 2002, the Northern Ireland IT and software industry has attracted more FDIinvestments than any other industry, and has helped to create 1,842 jobs. However, the largest

share of jobs created has occurred in the business services sector, where 3,118 jobs have beencreated. Other sectors that attract significant levels of FDI in the region include the financialservices sector and food and drink.

The vast majority of tradable service sector investments have occurred within the IT andsoftware sector, though the business services sector has also received investments. All of thetradable investments outside these two sectors relate to the establishment of research anddevelopment facilities, and include Citigroups Technology Centre of Excellence andAssystems Aerospace Design Innovation Centre (both in Belfast).

15 Tradable service investments did occur in Cookstown, Limavady and Newtownards, however theseinvestments did not lead to job creation


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Table 3.5 - Industry breakdown of Northern Ireland FDI investments, January 2002 toMarch 2007


ProjectsJobs

createdCapital inv

(US$m) ProjectsJobs

createdCapital inv

(US$m)

Business services 2 75 0 13 3,118 16

IT and software 30 1,842 128 30 1,842 128Financial services 2 560 0 9 1,378 61

Food and drink 1 0 0 9 941 350

Machinery & industrial goods 3 284 129 7 415 130

Consumer products 0 0 0 2 415 0

Aerospace 0 50 2 5 314 88

Telecom services 0 0 0 3 309 1

Business equipment 2 0 96 3 300 241

Consumer electronics 0 0 0 2 220 44

Real estate 0 0 0 2 150 0

Pharmaceuticals 0 0 0 1 100 5

Healthcare 1 86 13 1 86 13

Aerospace 1 50 2 1 50 2

Electronic components 1 17 0 1 17 0


3.6 NATION OF OWNERSHIP

The USA are by a significant margin the largest FDI investor in the Northern Irelandeconomy, making investments in 30 tradable services, and a further 62 non-tradableinvestments since January 2002, and generating 4,057 additional jobs. India are also a majorinvestor, and their two tradable service sector investments (HCL and Polaris Software), havetogether created 233 jobs in Belfast.

Although FDI investment from the Republic of Ireland has created a significant number ofjobs across the Northern Ireland economy as a whole, and in the finance, telecoms and foodand drinks sectors in particular, their involvement in the tradable services sector has been

more limited.Table 3.6 - Northern Ireland FDI investments by nation of ownership, January 2002 to

March 2007

Tradable service16

All industries

ProjectsJobs


(US$m) ProjectsJobs


(US$m)

USA 30 2,443 309 62 4,057 1,140India 2 233 0 8 2,583 3

Sweden 1 86 13 6 561 57

France 2 80 13 11 906 100Germany 3 55 6 6 295 8

Turkey 1 17 0 1 17 0

Ireland 2 0 27 20 1,004 147Spain 0 0 0 1 180 0

Taiwan 0 0 0 1 150 40

Japan 0 0 0 3 116 28

South Korea 0 0 0 1 70 4

Belgium 0 0 0 2 6 0


16 Further investment were made from Bermuda and Austria based companies, however these did notlead to the creation of any additional jobs


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3.7 QUALITY OF JOB

Table 3.7 provides an illustration of the quality of job offer associated with recent FDIinvestments both in Northern Irelands tradable service sector, the manufacturing sector andacross the business base as a whole. It shows that, although FDI has helped to safeguard anumber of high wage jobs, many of the newer jobs that have been created are lower valueadded, with this being particularly true in the tradable services sector.17

Table 3.7 Assessment of job quality of Invest NI FDI Investments Percentage of jobs paying above

Northern Ireland Private Sector Mediansalary

Tradableservices

Manufacturing All industries

New jobs 47 72 54Safeguarded jobs 100 84 84All jobs 49 81 69Source: Invest NI, NI Annual Survey of Hours and Earnings

Figure 3.3 provides a comparison of average wages in Northern Irelands tradable service FDIbusinesses, against those across all FDI businesses in Northern Ireland, and against average

weekly wages in the UK and Northern Ireland labour force, and the Northern Ireland privatesector labour force.

The figures appears to present an opposing view to the table above, showing that the averageweekly wage offered by FDI firms is above that of the Northern Ireland economy as a whole.This is likely to be because, although investors tend to employ a large number of low paidstaff, this is often offset by a minority of employees who are paid substantially more than thenational average.

Figure 3.3 Comparison of average weekly wages by area and sector

374.52

367.70

324.70

364.10 363.90

290

300

310

320

330

340

350

360

370

380

New and safeguarded

FDI, NI Tradable

Services

New and safeguarded

FDI, All industries

All Employment,

Northern Ireland

All Employment, UK All Private Sector

Employment, Northern

Ireland

Source: Northern Ireland Annual Survey of Hours and Earnings, and Experian, based on Invest Northern Ireland, 2007

17This analysis refers to the 2002/03 - 2005/06 period. At the point at which this report wasproduced, figures for 2007 were nearing completion, but were yet to become available.


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Figure 4.2

FDI outflows per annum

0

20,000

40,000

60,000

80,000

100,000

120,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

DollarsMillions

Ireland FDI outflows

Sweden FDI outflows

Poland FDI outflows

Source: Eurostat

The table shows that outflows from Sweden have generally been more volatile than those inPoland and Ireland. Ireland has seen significant increases in FDI outflow in recent years,while levels of FDI outflow from Poland has remained consistently insignificant.

UNCTAD gives rankings for FDI performance, the table below shows reported performancefor the three countries.

Table 4.1 - FDI ActualPerformance by Rank

1990 2000 2003 2004

Ireland Inward FDI Rank 52 4 5 5Poland Inward FDI Rank 100 47 72 75Sweden Inward FDI Rank 53 8 54 93

Ireland Outward FDI Rank 12 13 10 26

Poland Outward FDI Rank 63 84 86 62Sweden Outward FDI Rank 2 7 7 8

Source: UNCTAD

The table demonstrates the strong performance of Ireland in actually attracting FDI althoughthe UNCTAD rated Sweden above Ireland in its Inward FDIpotential index ranking between1990 (6th) and 2003 (8th).

The remainder of this section focuses on the three case studies.

4.1 REPUBLIC OF IRELAND

In 1986 gross domestic product (GDP) per capita in Ireland was 64 percent of the EUaverage. There were also high levels of unemployment with unemployment rates 18 percenthigher than the EU average. Furthermore national debt levels were 120 percent of grossnational product. 19

19 U.S. Foreign Direct Investment in Ireland, Making the Most of Other Peoples Money, Berry R


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In 1987, Dublin's IFSC, was set up by the Irish Government as a location for internationallytraded financial services. The initial designated site of the IFSC was 11 hectares of land in theCustom House Docks area of Dublin City Centre. The Customs House Docks DevelopmentAuthority was established to redevelop the area and construction started in late 1988, with thefirst building completed and occupied by 1990.

In May 1997, the Custom House Docks Development Authority was dissolved. At this stage,the IFSC had 114,000 sq m of office accommodation, as well as 333 apartments, a hotel,multi-storey car park and retail space, including a pub, restaurants and the Dublin ExchangeFacility. The regeneration continued following this period and the Dublin DocklandsDevelopment Authority was established in 1997 to develop and deliver IFSC phase II20.

Williams and Redmond21 report that Dublins economy has developed in three phases.

Phase 1 Production of foods, textiles and beverages for local and exportconsumption;Phase 2 Industry developed mainly through FDI from the US (manufacturing andservices);Phase 3- Economy continues to develop as a knowledge economy building oninnovation and R&D.

They also note that a main reason for success has been focusing on growth sectors whichmatched the labour force skills. Moving to the third phase of development meant developingthe educational base in line with the need to increase R&D. There was also a need to create anenvironment where innovation was encouraged and suitable supply chains were developed.

4.1.1 Role of government

The Irish Government took a decision to set up the IFSC in 1987. The Government alsoagreed a corporate tax rate of 10 per cent with the EU Commission. Furthermore, localdevelopment incentives for Docks area were implemented, supported by an open andresponsive business environment and welcomed all types of inward investment22.

To supplement these incentives a marketing team was put in place to engage directly withglobal institutions. There was also an important role in positively engaging local banks topromote the centre. Part of this was the development of a social partnership betweenGovernment, employers and unions.

The Industrial Development Agency of Ireland (IDA) and Enterprise Ireland were the mainpublic sector organisations involved with the development of the IFSC. The role of the IDA isto attract FDI to Ireland focusing on high value-added investments using favorablecorporation tax rates as one marketing tool. Enterprise Ireland promotes joint ventures andstrategic alliances between indigenous and foreign companies, facilitating export activity ofindigenous firms, which may involve work with FDI projects.

All businesses seeking to be part of the IFSC have to gain a licence through contact with theIDA. The Central Bank then undertakes regulation of member organisations activities. Thisalso ensured that brass plate organisations would not be based in the IFSC and also meantthat any employment benefits were likely to be more enduring and significant. Due to the fact

20 IFSC Website21 Ideopolis: Knowledge City Region, Dublin Case Study, Dr Brendan Williams and Dr Declan Redmond22 ECB, FDI Task Force Report, 2004


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that tax levels have now resumed to a more standard;level, and conditions for relocating areless onerous the Central Bank now undertakes screening instead of the IDA23.

4.1.2 Performance

The IFSC makes up a significant amount of total FDI in Ireland and this is shown in the figurebelow.

Figure 4.3 FDI inflows

Source: Trade and Investment Report 2005, Forfas

The chart demonstrates the significance of IFSC FDI inflows as a percentage of total FDIinflows in Ireland. The chart below shows the significant FDI outflows including outflowsfrom the IFSC.

Figure 4.4 - FDI outflows

Source: Trade and Investment Report 2005, Forfas

The chart shows that IFSC outflows have been small in recent years, with the exception of2002, creating significant net inward FDI from the IFSC.

The benefits of the IFSC are not confined to inward investment and in 2002 the IrishExchequer collected more than 700 million in corporation tax from IFSC companies.According to the Central Bank, the net asset value for collective investment schemes forregulated funds was just under 424 billion at the end of August 2004. The chart belowhighlights that the IFSC also has a significant role in the Irish services market.

23The Role of Dublins International Financial Services Centre in Irish Regional Development, WhiteM, CISC, 2003


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Figure 4.5 - Services Exports

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

1999 2000 2001 2002 2003 2004 2005 2006

Q1

IFSC

Imports/ExportsinEuroBillions

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

IFSC services exports

IFSC services imports

IFSC exports as % of total

service exports

Source: International Trade and Investment Report 2005 - Forfas

The international financial services industry has a major economic contribution to make.Approximately 11,000 people are directly employed by the sector in a range of institutionsproviding products and services to a global customer base. The international financial servicesindustry made a net contribution of2.5 billion to Irelands balance of payments from bothservices and investment in 2000. The balance of payments statistics show that the sectorgenerated a surplus of735 million on international trade in services and 1,763 million ininvestment income.24

In addition to this direct contribution, the financial services industry also contributesindirectly to the Irish economy by helping local businesses to secure funding. A recent study

by Patrick Honohan of Trinity College Dublin

25

identified a clear relationship between thedepth (defined as the level of private credit available to businesses as a proportion of GDP) ofa countrys financial services sector, and the countrys economic growth rate. This is shownin Figure 4.6.

24 FSIA Annual Report 200125 Honohan. P, To what extent has finance been a driver of Irelands economic success?, QuarterlyEconomic Commentary, Winter 2006, pp59-72


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Figure 4.6 Relationship between financial sector depth and GDP growth

Source: Honohan, 2006

The continued success of the IFSC and its importance to the economy is emphasised by thenet trade surplus of4.9 billion in IFSC activities in 2004. The growth in IFSC exports,comprising mainly insurance, financial services and business services exports, has been 234per cent since 1999.

4.1.3 Critical success factors - benefits

4.1.3.1 Taxation

The role of low tax levels as an incentive was significant to the success of the IFSC.However, from the end of 2002, the 10 percent corporation tax rate ceased to apply tofinancial services companies, except for those operations that set up before July 1998, whichcould avail of this rate until the end of 2005. All other operations are now subject to thestandard corporation tax rate of 12.5 percent on trading income. Nevertheless, the average taxrate in OECD countries reported in the most recent tax report (2005) is just over 30 per cent,and Dublin retains this competitive advantage.

FDI Magazine26 reported that Dublin is highlighted as an exemplar of dockland regenerationalongside London, Bilbao, Shenzhen and Shanghai. The report found the three most importantelements involved in the regeneration of Dublins docks have been a low tax environment, ahealthy labour market and clear political support during the 15 years of recent development.

In addition to this Corporation Tax benefit, businesses start ups in the area have benefitedfrom the Business Expansion Scheme, a government initiative to provide tax support to startup businesses, which has helped to generate increased levels of exports and R&D investmentsacross the countrys base of start-up businesses.

26 FDI Magazine, Feb 2004, Urban Renaissance


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4.1.3.2 Labour Market Conditions

An additional factor in the investment decision to locate in Dublin was the attractiveness ofthe labour market which was well educated, young, relatively cost effective and Englishspeaking. The Dublin population remains younger than the population within manycompetitor locations and in 2010 and 2015 will have an average age of 36.9 years and 37.9years respectively. Ireland is also expected to have the largest under 25 year old populationshare in Western Europe. (Ireland Vital Statistics, IDA).

4.1.3.3 US effect

Economic growth was underpinned by significant FDI from a number of countries butparticularly from the US. This continues to be the case and it is reported that US investmentflow into Ireland in 2004 was $10.4 billion, roughly one-tenth the US total for the EU27 whileover 40 per cent of all US foreign software investment is in Ireland28, one-third of allmanufacturing inward investment in Ireland comes from the US and 300 US entities havebeen licensed to trade in the IFSC.

This level of investment can be explained by some of factors above but also are testimony tothe cultural links between the US and Ireland and the marketing efforts that the IrishGovernment have made to target CEOs of leading US companies. Time zone comparabilityand lack of language barriers for US businesses seeking to manage cash in Europe and withinthe Eurozone are also important29.

4.1.3.4 Other factors

While the IFSC was considered to be an undoubted success Ireland did benefit in other areassuch as the EU Common Agricultural Policy. It is widely accepted that Ireland has receivedmore support through CAP than other countries, receiving subsidies twice as large as theirshare of EU agricultural output in 200430. The effective use of this support assisted theoverall development of Irelands economy.

4.1.3.5 Other benefits

The main benefits of IFSC activity to date are:

the regeneration impacts; employment benefits; and associated fiscal tax income benefits.

However, our research has also found anecdotal evidence of other benefits including indirectemployment and supply chain development benefits, particularly in the business servicessector - legal firms, auditors and tax experts; and the corresponding knowledge transfer withinthe cluster.

4.1.3.6 Possible threats

In spite of the advantages previously identified, there is a risk that, if left unchecked, anoverheating of the Irish economy could limit the future growth potential of the IFSC.

27 American Chamber of Commerce Ireland28 Address by Mr Brian Cowen, To the American Chamber of Commerce Ireland November 2005 29Offshore Treasury Centers: Rethinking Outsourcing Based on Tax-Advantaged Structures, June 2005 By George Cassidy (International Finance & Treasury) 30BBC News, 2 December 2005


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An example of this is the strong house price growth that has occurred in Ireland, and inDublin in particular in recent years, with house prices growing by 42 per cent in Dublin andby 36 per cent nationally in the three years to September 2006.

Figure 4.7 Average house prices in Dublin and Republic of Ireland

296,500

330,600

356,200

419,800

195,400

222,100231,400

266,300

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2003 2004 2005 2006

Dublin Rest of RoI

Source: Permanent TSB House Price Index, 2006q3

A second example of how the Republic of Ireland economy is overheating is the rapidtightening of the labour market that has taken place, with unemployment falling from 4.7 percent to 4.3 per cent over the past three years, with the decline expected to continue over themedium term (Figure 4.8).

Figure 4.8 ILO unemployment rates for the Republic of Ireland, 2003-2010

3.5

3.6

3.7

4.0

4.7

4.5

4.3 4.3

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

2003 2004 2005 2006 2007 2008 2009 2010

Source: Experian, 2006


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Finally, price levels are on a strongly upward trend in Ireland, with consumer pricesincreasing by 23 per cent since 2000 and commercial property prices increasing by 3 per centin 2005 alone31. This has put cost pressures on investors seeking to procure locally (Figure4.9)

Figure 4.9 Harmonised Index of Consumer Prices for the Republic of Ireland, 2000-2010 (2000=100)

137

133

130

126

123

118

116

113

109

104

100

90

95

100

105

110

115

120

125

130

135

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Experian, 2006

In addition to this economic tightening, the future of the Republic of Ireland FDI market mayalso be at risk from the diminishing importance of the US, Irelands biggest supplier of FDI,in the European market. This is illustrated below.

31http://www.shelteroffshore.com/index.php/property/more/commercial_property_ireland/


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Figure 4.10 US FDI investment projects in Europe as a percentage of all FDI projects

26.4527.0

32.5

43.841.7

39.0

35.5 36.8

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