fdi and irelands tiger economy (a)

7/25/2019 FDI and Irelands Tiger Economy (a)

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706-007 Foreign Direct Investment and Ireland's Tiger Economy (A)

2

But by then, many experts feared that rising costs, labor shortages, skyrocketing housing prices,9and a soaring euro had eroded Irelands competitiveness and threatened its export-fueled success.There were concerns that as labor market pressures increased, real wages would grow faster thanunderlying productivity, thereby reducing profits and the incentive for FDI. It also seemed likely that

grant incentives, which some argued had been essential in attracting FDI, would be reduced orabolished. Since several regions in Ireland would no longer be categorized as Objective Oneregions, the European Union was poised to significantly curb the level of grant aid that Ireland couldoffer.10 In addition, while Ireland had agreed to retain a low corporate tax rate through 2010, therewas speculation that it would succumb to EU pressure11 to increase the tax rate. Others expressedconcern about increasing competition from the Eastern European countries, many of which wereaggressively pursuing foreign investments and reducing corporate tax rates.12

The new realities thus raised questions about whether Ireland could continue to attract significantFDI. If the ESGs contention was correctthat growth was mainly due to FDIit would radicallyalter Irelands policy response and other countries efforts to emulate the Celtic Tiger. Why was thecountry so successful in attracting FDI? Was FDI really the driving force behind the boom? Whataccounted for the economic growth? And, most importantly, could the boom be sustained?

Historical Background

Independence and Civil War

Modern-day Ireland was created in 1921, when, after a two-year War of Independence, Britainand Ireland signed a peace treaty ending nearly eight centuries of British colonial rule. The treatypartitioned the island broadly along religious lines into the Irish Free State, which comprised apredominantly Catholic population, and Protestant-dominated Northern Ireland, which remained apart of the United Kingdom (see Exhibit 2for a map of Ireland). Under the treaty, the Irish Free Statewas required to swear an oath of allegiance to the crown. Irish republicans fiercely opposed thetreaty, and a bloody civil war ensued.

In 1923, pro-treaty forces won the war, but Ireland emerged a wounded nation. The newgovernment inherited a severely underdeveloped infrastructure; basic services such as water andelectricity were lacking. Unemployment and emigration were high. Furthermore, the country had avirtually nonexistent manufacturing sector. Though undeveloped, the economy was largelyagricultural and heavily dependent on trade with the United Kingdom. At first, Ireland pursued aliberal trade policy, but this changed when the leader of the Fianna Fil political party, Eamon deValera, became prime minister in 1932.

After winning on a populist platform that emphasized national self-sufficiency, the de Valeragovernment introduced two acts that became symbols of economic, and to some degree political,nationalism. Under the Finance Act of 1932, Irelands tariffs became twice as high as those in theUnited States and 50% higher than those in the United Kingdom. The Control of Manufactures Act of

1932 required majority Irish ownership in new manufacturing ventures. The Wall Street crash andGreat Depression had provoked a worldwide resurgence in protectionism around this time, and deValeras policies drew widespread support. In a 1933 lecture at University College Dublin, JohnMaynard Keynes said, If I were an Irishman I would find much to attract me in the economicoutlook of your present government towards self-sufficiency.13


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Foreign Direct Investment and Ireland's Tiger Economy (A) 706-007

3

Trade and FDI: The Role of Government

De Valeras government had set Ireland on a path of economic nationalism. But by the 1950s,Irelands economic stagnation demanded change. A more pro-market agenda began to take hold

within the government, which subsequently passed a number of new laws designed to boost theeconomy. The Finance Act of 1956 introduced export profits tax relief (EPTR). It provided for a 50%tax exemption on profits earned from manufacturing goods, and was set to increase to 100% in1958.14The government also sent the message to the international community that Ireland was openfor business; in 1957, Ireland joined the World Bank and the IMF and relaxed restrictions on theControl of Manufactures Act.

In 1958 the finance minister advocated a shift from protectionism to free trade and proposed thatthe government encourage foreign investment through tax concessions and incentive grants. As aresult, between 1962 and 1964 Ireland unilaterally lowered tariffs. In 1965, the Anglo-Irish Free TradeAgreement was concluded. With this agreement, Ireland hoped to achieve free trade of allmanufactured goods by 1975. Perhaps most significantly, Ireland joined the General Agreement forTariffs and Trade (GATT) in 1967.

The new economic programs of the 1960s brought some relief to Ireland. (See Exhibit 3 for GDPdata, Exhibit 4 for government finances, and Exhibit 5 for balance-of-payments data.) GDP growthrates surpassed 4% annually, yet high unemployment and poverty continued to plague the nation,and the education system was in a shambles. A 1965 report highlighted the high dropout rate andthe dilapidated condition of many schools. In 1968 the minister for education eliminated fees forsecondary education, raised the minimum school-leaving age from 14 to 15, and abolished theprimary certificate (a form of entrance exam for secondary schools). He also mandated the provisionof adequate sanitation and heating. These changes had an immediate impact on the numbers ofchildren entering secondary school.15

Industrial Development Authority

The Industrial Development Authority (IDA) was formed in 1949 as a government agencypromoting greater investment throughout Ireland.16 Further, in the 1960s and 1970s, as it becameapparent that the government favored an export-focused industrial strategy, the IDA found itself atthe center of this new policy environment. With business-friendly legislation as a backdrop, the IDAset out to attract new investments from around the world. Ray Mac Sharry, minister of finance (1982,19871988), and Padraic White, managing director of the IDA (19811990), acknowledged, It (theEPTR) became the IDAs most distinctive investment incentive, and over time its most powerfulsingle weapon in the international industrial promotion battle.17

The IDA would have many wins in the 1960s. When the pharmaceutical giant Pzifer, in 1969,decided to set up a plant in Cork, it was seen as a major victory for the IDA. However, it was unclearwhether it was the promotional efforts per seor Irish-American connections that had attracted Pfizer.The IDA officials themselves acknowledged that the companys decision to set up a plant in Ireland

was largely due to the efforts of John Mulcahy, a man who had emigrated to America during the IrishCivil War and at the time sat on the Pfizer Board with one-third of the companys shares.

Nonetheless, by the mid-1960s, Ireland was host to a number of foreign firms, including GeneralElectric. Recruiting such reputable firms gave Irelands efforts instant credibility, and it appeared thata combination of factors, including the governments support for an export-oriented industrialstrategy, the IDAs promotional efforts, and American-Irish business ties were working in tandem.Over the next 10 years, 450 foreign companies negotiated new projects or expansions with the IDA.


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Yet, over the same period (as competition from Britain, France, and others intensified), the IDAbecame aware that Ireland no longer had the investment promotion field all to herself.18

Undaunted, the IDA pursued an aggressive plan to position Ireland as the most profitable

destination in Europe. Its direct marketing campaign identified promising leads, and the IDA wentdirectly to those companies to make the case for locating in Ireland. The head of the IDAs researchand planning section in the early 1970s described the criteria for selecting companies as follows:

1. Pick those that meet basic social and economic criteria such as not too capital intensive, highmale-labor content, high use of native raw materials and services, low scale factor.

2. Pick those that offer the best chances of commercial stability and therefore economic stability,by reference to commercial criteria such as high profitability. Pick those with strong growthboth in output and international trade.

3. Pick those with high dependence on scarce human resources, such as skilled people, becauseit implies a greater commitment and tie.

4.

Pick those that can take advantage of natural resources and therefore enable us to conserveother resources.19

In 1971, the IDA set up task forces and sent executives out on the road to countries such as theUnited States, Holland, and Sweden to present companies with detailed investment plans.

The IDA also forecasted profits to show companies that there was money to be made bymanufacturing in Ireland. In the first year, the IDA executives customized presentations to 105companies. By 1973, the team had made 2,600 presentations to companies worldwide. By the mid-1970s the IDAs efforts and the promises of the common market brought companies such as Gillette-Braun, Digital, Cross Pens, Baxter Travenol, Syntex, Merck Sharpe, and Warner Lambert to Ireland.

The Turbulent SeventiesWith its impending entry into the EEC, Ireland greeted the 1970s with optimism as it anticipated

gaining access to the EECs much larger market. Indeed, with one stroke of legislation, Ireland wasable to promise foreign investors a market of upwards of 200 million, as opposed to 3.6 million.

The year of membership, however, also brought the oil crisis of October 1973. Ireland, whichimported over 70% of its primary energy requirements, was thrown into turmoil. Moreover, astructural shift in the economy transferred manufacturing growth from traditional indigenousindustries to largely foreign-owned and export-oriented modern industries. Foreign firms accountedfor less than one-third of total industrial employment in 1973 and simply did not have the capacity tooffset the job losses suffered by indigenous industry.20

The government was now faced with growing unemployment at home and quadrupling oil priceson the international front. In order to stem the falling living standards, the Fine Gael-Labourcoalition launched an ambitious program of public spending, accompanied by major tax cuts. Thispublic-sector expansion was funded through borrowing. Gross expenditure on social welfare grewfrom 6.5% of gross national product (GNP) to 10.5% from 1973 to 1977. ( See Exhibit 4 for governmentfinances.) In 1977, the government was ousted in the general election, and Fianna Fail returned topower. The new government inherited a large fiscal deficit but continued the trend of deficitspending. In keeping with its election platform, the new government called for increased publicspending to lower unemployment and financing of this program by increased borrowing.


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By the 1970s, the IDA had secured an unprecedented volume of foreign investment, but persistentunemployment called into question the success of Ireland's industrial policy. To make matters worse,the 1979 oil crisis hit the country, plunging it into a deep recession.

The Question of Industrial PolicyIs FDI Working?

Despite the economic turbulence of the mid and late 1970s, FDI continued to grow. Nevertheless,the IDA endured a steady stream of criticism that the agency-led foreign investment strategy had notdone enough to lift the economy. Critics wondered if foreign investors warranted the specialtreatment they received, noting that despite growth in the pharmaceutical and electronics sectors, thesuccess of the foreign sector was not trickling down to the rest of the economy. They further chargedthat linkages with foreign subsidiaries and local industry were limited. (See Exhibit 6for linkages offoreign firms in manufacturing.) As historian J.J. Lee put it, The native industry was resolutelyrefusing to grow.21Indeed, when Ireland joined the EEC in 1973, tariff reductions had exposed Irishindustry to unprecedented competition, triggering the widespread failure of indigenous firms.

The tide of condemnation eventually led the National Economic and Social Council to commission

the Telesis inquiry into Irelands industrial policy. The resulting 1982 report was not optimistic:Foreign owned industrial operations in Ireland with a few exceptions do not embody keycompetitiveness activities in which they participate; do not employ significant numbers of skilledworkers; and are not significantly integrated into traded and skilled sub-supply industries inIreland.22

The report stated categorically that the IDAs foreign investment promotion strategy was not assuccessful as the organizations propaganda implied.23 On the contrary, the report alleged thatsupport for foreign firms on the whole, and in the electronics industry in particular, had beenexcessive. As evidence for its claim, the report noted that only about 30% of the jobs announced bythe IDA ever materialized and that jobs created by foreign industries failed to make up for the jobsbeing lost in traditional Irish industries. The authors went on to argue that no country had succeededin achieving sustained economic growth without a strong native industry and that for this to happen,

the Irish authorities had to insist that foreign companies establish research and developmentactivities in Ireland and favor local sub-suppliers.

The report did not completely blame the multinational corporations (MNCs) for the lack ofintegration but acknowledged that MNCs had no choice but to source supplies from overseas, sinceindigenous suppliers lacked essential technical and mechanical expertise.24 Specifically, the reportcalled for Ireland to work toward raising the proportion of funds allocated to indigenous export orskilled supply firms from less than 40% . . . to 50% by 1985 and 75% by 1990. 25

The report suggested that the government select 50 to 75 winnersIrish firms whosemanagement had already been deemed top qualityand prop them up to become internationallycompetitive.26The report recommended that weaker companies redeploy their skills toward export-oriented activity with the help of the IDA money.27Finally, in what appeared to be a direct assault on

the IDA, the Telesis Report stated that the development effort to create a local industry must bereorganized to emphasize the building of structurally strong Irish companies rather than strongagencies to assist weak companies.28

The IDA disputed Telesiss claim that Irish incentives and support for foreign firms wereexcessive. The IDA pointed to the arrival of big companies such as Apple, Bausch & Lomb, andFujitsu in 198029 as evidence that its strategy was working and blamed the governmentsmismanagement of the economy, particularly the high inflation rates, for the depressed markets.


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Whatever the cause, one historian noted that the efforts to build Irish industry had largely failed:

Sixty years after independence, fifty years after blanket protection . . . fifteen years after theAnglo-Irish Free Trade Agreement, eight years after entering the EU, a native entrepreneurial

cadre of the requisite quality had failed to emerge. Irish-owned industry could not competeinternationally. It could not even compete on the home market. Neither carrot nor stick, neitherfree trade nor protection, had sufficed to create a competitive native industry.30

The Eighties: Crisis and Change

Years of excessive government spending and high unemployment took their toll on Irelandseconomy. By 1982, the deficit stood at 12% of GDP, and the current account deficit rose to a record of21% of GDP. In 1983, when Black & Decker and AT&T-owned Telectron announced closures on thesame day, it seemed that even the foreign sector, which had thus far appeared resistant to themacroeconomic crisis, had finally succumbed.31

By 1987 Ireland was deeply in debt and on the verge of economic collapse. Debt-to-GDP hit 122%,the budget deficit ballooned to 12% of GDP, and unemployment was over 17%.32 The governmentintroduced widespread reforms, slashing government spending in an attempt to reduce the 22billion-pound debt (1 Irish pound=1.27 euros). The prime minister explained: It is imperative thatwe carry further the progress we have made so far this year in getting public expenditure undercontrol. Unless we achieve further significant cuts in expenditure the growth in public sector debtwill continue to be a burden on the economy, inhibiting economic growth and employment andmaking it impossible for us to get development underway.33

Employers, farmers, and unions had all accepted the dismal economic scenario and recognized theneed for austere measures in the short term. The government took full advantage of this newenvironment and forged social partnerships across the political and economic sectors. Aware thatthese measures would cause considerable pain to the trade unions and their members, the

government offered tax reform as a compensating benefit. In 1987, the Program for NationalRecovery (PNR)known as social partnershipwas created. The quid pro quo was pay restraint inreturn for tax cuts. The net result, it was hoped, would be a real increase in take-home pay forworkers and reduced unemployment caused by rising competitiveness. The agreement also promisedthat welfare would not have to bear a disproportional burden of the fiscal cuts. Before 1987,productivity advances among foreign-owned firms prompted wage increases, which then spread tothe indigenous industries. PNR reversed this trend and allowed indigenous firms to lead wagesetting according to their slower productivity growth.

The IDA was determined to play a part in the economic recovery. It took advantage of PNR bysetting up a program designed to draw labor-intensive service businesses to Ireland. The IDA alsoused a new advertising campaign to reposition Ireland: it introduced Ireland with the tagline, Werethe Young Europeans, noting that Ireland had the youngest population in Europe.34The IDA also

shifted its emphasis from tax and financial incentives to an educated workforce and EU membership.As a result of these efforts, the IDA drew a host of new firms to Ireland, including Motorola,Teradata, Stratus, EDS, and Sandoz.

With the fiscal house coming to order and relative macroeconomic stability, the benefits of EUmembership began to be felt. The EUs main instrument for supporting social and economicrestructuring across the union was the Single European Act (SEA) of 1986. Through this act, the EUmade direct transfers to Ireland, providing farming subsidies and disbursing structural funds to beused for infrastructure development. Irelands annual net receipts from the EU totaled about 6% of


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GDP from the mid-1980s to the mid-1990s, with roughly two-thirds farm related and one-thirdstructural.35 Although the absolute figures were high, it was estimated that the transfers contributedless than 3% per year to Irelands GDP growth rate in the 1990s.36

The Nineties: The Emergence of the Celtic Tiger

By 1990, Irelands GDP growth rate reached 8.5%, and its volume of exports increased by 23.5%from 1985 to 1990. Irelands competitiveness in the export market had been improved by broadlyfavorable exchange rates throughout the late 1980s and into the 1990s. A 10% currency devaluation in1986, coupled with the strength of the dollar and the pound sterling later in the decade, had furtherboosted competitiveness. In 1996, the government eliminated third-level tuition fees in an effort tofurther improve the quality of the labor force.

The 1990s were promising times for Ireland. Propelled in part by the American IT boom and theformation of the single European market in 1992, the Irish economy grew rapidly and attractedunprecedented levels of foreign investment. Furthermore, fiscal discipline and reforms, imposed by

the Maastricht criteria in 1992, had resulted in lower deficits and debt-to-GDP ratios. Finally, arevaluation of the Irish pound upon Irelands joining the European Monetary System (EMS) madeIrelands export sector more competitive.

The IDA, aware of EU pressures to increase taxes, had begun lobbying the government to prolongthe tax rate. The IDA had conducted studies demonstrating that the low 10% manufacturing tax ratewas essential for Ireland to retain its competitiveness relative to other European countries. In 1990the government extended the 10% rate through 2010.

The combination of low corporate tax and ready access to the European market made Ireland anattractive option.37 Industries with high operating margins, like pharmaceuticals, were particularlydrawn by the low tax environment. Several EU countries were critical of Irelands corporate taxpolicy, especially when Ireland began to win sizable portions of FDI from the United States. Some

believed that a race to the bottom would develop in Europe, with tax cuts replacing devaluations as acompetitive device. But Kieran McGowan, IDA CEO from 1989 to 1999, described the problems othercountries would face if they dropped corporate taxes to Irish levels: They find it hard to replicateour tax policy because they have a large corporate tax revenue stream to begin with. We in Irelanddidnt have a corporate sector, so we had nothing to lose.38

In the meantime, foreign firms continued to open plants in Ireland, largely due to the IDAs abilityto identify and lure target companies (see Exhibit 7a for a survey of the economic impact of IDA-supported companies, Exhibit 7bfor their countries of origin, and Exhibit 7cfor the IDAs regionaloffices). International employees spent much of their time making and developing senior contacts intarget companies, and the IDA used its on-the-road staff to gather intelligence about market trends.The IDAs annual conference was a key event for consolidating feedback and identifying new trendsand patterns. The arrival of computer giant Intel in 1990 was a massive victory for Ireland in general

and for the IDA in particular and exemplified the IDAs persistence and imagination. The agencyfirst contacted Intel executives in the late 1970s and nurtured the relationship for more than a decadeuntil conditions were more suitable for investment. The IDA offered Intel a grant package of $157million, spread over 10 years. But Intel was concerned about the absence of a sufficient supply ofexperienced engineers. The IDA came up with a plan to address Intels concern: McGowan compileda list of Irish engineers working at semiconductor businesses, mainly in the United States, who wouldbe willing to return to Ireland. As McGowan put it, We presented a booklet to Intel with the names,addresses and phone numbers of 85 people. And I think that impressed them.39The hard work paidoff, and Intel chose Ireland over Scotland as a location for both its computer system and


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semiconductor facilities. At the IDA, 1989, the year of the announcement, came to be known as theyear of Intel.40By 2004, Intel employed approximately 5,000 people in Ireland.

Over the next few years, almost every major computer company arrived in Ireland: Dell, Gateway,

Hewlett-Packard, and IBM all started production. Irelands share of FDI inflows into the EU tripledbetween 1991 and 1994, as the country attracted approximately 40% of U.S. electronics investments inEurope.41As Michael Dell, founder of Dell Computer, explained in a recent newspaper article:

What attracted us? [A] well educated work force and good universities close by. [Also,]Ireland has an industrial and tax policy which is consistently very supportive of businesses,independent of which political party is in power. I believe this is because there are enoughpeople who remember the very bad times to de-politicize economic development. [Ireland alsohas] very good transportation and logistics and a good locationeasy to move products tomajor markets in Europe quickly.42

The IDA was also responsible for recognizing Irelands potential as an offshore call center duringan overseas intelligence-gathering mission in the early 1990s. The IDA negotiated a deal with the

national telecom company to slash international call rates in return for increased call volumes, and itcompiled a list of multilingual workers in order to demonstrate an adequate supply of labor.43Ireland built on its first-mover advantage and became the location of choice for pan-Europeancustomer contact centers.

The Role of FDI: The Debate

The massive inflow of direct investment has been the major positive shock influencing theeconomy in the 1990s. . . . Irelands share of OECD total inflows surged in 1990s, reaching a level outof all proportion with its GDP share.

Organization for Economic Cooperation and Development (OECD), Economic Survey, 1999

By the early 1990s, the success of the foreign sector was evident, and it became widely accepted

that the spectacular rise in Irish exports had come almost entirely from aggressive export-orientedforeign firms. It was also apparent that indigenous exports had stayed flat in real terms and that thedomestic economy had generally lagged behind. Critics blamed the FDI-led policy responsible forthis change and pointed to several statistics to support their claim. Most notably, there was a highlevel of unemployment, which ranged between 14% and 16% through the early 1990s.44 Someclaimed that this was a by-product of a jobless-growth phenomenon that accompanied the FDI-ledpolicy. They also pointed to the yawning gap between Irelands GDP and GNP,45which they argueddemonstrated that foreign companies exported profits. As further evidence of the lack of linkagesbetween domestic and foreign firms, they pointed out that the investment share of Irish nationalincome had shrunk significantly in the early 1990s.

While there was growing evidence that FDI played a crucial role in the Celtic Tigers growth, itwas increasingly acknowledged that the foreign sector had limited ties with local businesses and that

an FDI-focused policy had yielded little in terms of creating a vibrant domestic economy. In reactionto this growing criticism, the government split the IDA into two separate entities in 1994. IDA Irelandcontinued to focus on attracting foreign direct investment, while Enterprise Ireland concentrated itsenergies on developing indigenous industries. Both organizations reported to Forfs, the nationalpolicy and advisory board, an umbrella organization through which powers were delegated to IDAIreland and Enterprise Ireland.

In 1998 Enterprise Ireland launched the National Linkage Program (NLP).46Under the program,NLP representatives would determine a foreign companys sourcing needs and match them with a


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potential supplier. However, as it became increasingly clear that local suppliers were simply unableto meet foreign standards, the NLPs focus shifted to one of a capacity-building role. Despite theNLPs best efforts, surveys evaluating the program concluded that a ceiling of about 20% of materialpurchases from within Ireland had been reached. Furthermore, these surveys suggested that it was

highly unlikely that this ceiling would be broken, given the inability of local suppliers to producegoods and services for the sophisticated technology sector. The program was scrapped by the end ofthe decade, vindicating some observers who questioned the long-term benefit of FDI-led growth. AsSean Dorgan, CEO of the IDA, noted, Perhaps in the past we focused too explicitly on creatinglinkages. There was an air of protectionism about it. Linkages were hard to measure, but the IDAused as a proxy foreign companies direct expenditure in the economy.47The debate on the questionof linkages, which had been at the center of FDI policy in Ireland, was particularly contentiousbecause some believed that linkages alone would spur job growth and the development of a localsub-supplier industry. But some studies concluded that foreign firms tended to have lower linkagesthan domestic firms and that there were sectoral differences in the extent of linkages created. 48

Academics who analyzed the interaction of foreign and domestic Irish firms claimed that, in fact,there was little product-market competition between the two. The reason behind this, they argued,

lay in the different origins and structures of foreign and domestic firms. Foreign firms were largelyfocused on export markets beyond the U.K., and 80% of their exports came from the chemicals andpharmaceuticals sectors; domestic firms, on the other hand, continued to export primarily to the U.K.,and only 10% of their exports came from the chemicals and pharmaceuticals sectors.49 While thelinkages question continued to be debated in Irish policy circles, by the mid-1990s, the fallingunemployment rate seemed to vindicate the FDI supporters. In 1998, statistics showed that 47% ofthe industrial workforce (generating 82% of industrial output) was employed by foreign-owned firmsand that some 75% of this FDI came from the United States. Furthermore, data also showed that U.S.foreign affiliates were responsible for 16.5% of Irelands GDP.50

With new employment data as another measure of success, FDI supporters continued toemphasize the positive impact of foreign firms on the Irish economy. Amongst other benefits,supporters pointed out that FDI had brought in substantial corporate tax revenues and additional taxrevenues from income tax and indirect taxes.51 They also pointed out that given the small size of theIrish economy, even the launch of a single new product by an MNC would have a positive effect oneconomic growth; for example when Pfizer introduced its Irish-produced Viagra, the Irish output oforganic chemical products rose by 70%.52

Macroeconomic data also supported their claims. Between 1995 and 1999 MNCs directlyaccounted for 85% of economic growth,53though this growth was largely concentrated within threemanufacturing sectorschemicals, computers, and electrical engineering (see Exhibit 8 formanufacturing ownership and output data). Furthermore, by the late 1990s, Ireland boasted all thebig names in the IT industry: Gateway, Dell, AST, Apple, Hewlett-Packard, and Siemens Nixdorf inPCs; Intel, Fujitsu, Xilinx, and Analog Devices in integrated circuits; Seagate and Quantum in diskdrives; and Microsoft, Lotus, and Oracle in software (see Exhibit 9 for software industry statistics).

Together these sectors alone accounted for 40% of Irish GDP growth during the 1990s and for 78% ofindustrial growth in 1998.54

While rising FDI had been the theme of the 1990s, the global downturn of 2001 contributed to alarge reduction in FDI inflows in Ireland. A 13% job loss at IDA-supported companies accompaniedthis downward trend and subsequently raised concerns about Irelands vulnerability to externalforces (see Exhibit 10 for employment in IDA-supported companies and Exhibit 11 for wages inIreland). While many saw Irelands reliance on foreigners as a serious threat, Dorgan claimed it wasthe inevitable result of globalization. He explained, Our open economy reduces the distinction


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between foreign and Irish firms. Global supply is now the reality.55 Ireland had certainly embracedglobalization, topping A.T. Kearneys Globalization Index from 2002 to 2004. Nonetheless, othersrefuted Dorgans rationale. Frank Kenny, founder of Delta Partners and a member of the ESG, said:

The standard line about globalization making global and local firms the same is basicallyuntrue. For example, the senior management of CRH56 is based in Ireland, so the majordecisions are made by people who live and work here. Their kids go to school in Ireland, andthey will fight harder to make money here. The fact that CRH is a public company withmajority foreign ownership is largely irrelevant.

As FDI dependency and vulnerability entered the narrative of the debate, some commentatorsworried that the boom was purely a by-product of American growth rather than a self-sustaining,local phenomenon. According to them, Irelands success at attracting U.S. high-tech companies to itsshores in the 1990s coincided with the longest bull market in American history and unparalleledbooms in many of the industries targeted by the IDA. Ireland piggybacked on this growth, which ledto claims that the Celtic Tiger itself was an illusionthat Irelands growth was primarily caused byits attachment to the powerhouse U.S. economy.

A journalist lamented Irelands overdependence: The fact that were too reliant on the U.S. is atruism. Were totally plugged into the American economy, and our dependence is made worse bylinkages. If Dell pulls out of Ireland, the local haulage company that serves it is in trouble. Manylocal companies rely on foreign firms for oxygen.57

Other attempts to explain the Irish boom focused on the catch-up theorythe inevitable result ofprudent economic policies after decades of mismanagement. Worse, some declared the boom to be achimera born of shady transfer pricing. Low corporate tax rates enticed multinationals to inflate theprofits of their Irish subsidiaries. This was often accomplished by booking internal transactions attransfer prices that served to locate a large percentage of the firms global profits in Ireland.58 Someobservers believed such practices exaggerated Irelands GDP figures to such an extent that theyrendered its economic performance entirely misleading. Others countered that growth ratesas

opposed to absolute output levelsremained largely unaffected by transfer-pricing issues. BrianCogan of Forfs denied the notion that the boom was a fabrication: Transfer pricing alone wouldjust show up as money flowing in and then out again. It wouldnt explain the decreasedunemployment, increased skill level of workers, and higher income levels in the country. 59Although the impact on Irish GDP was hard to quantify, it was notable that four thriving FDIsectorscola concentrates, software, pharmaceuticals, and computerswere particularly well placedto benefit from transfer pricing.60

The Future of the Irish Economy

The Celtic era, with double-digit growth rates, belongs to the past. Competitiveness has deteriorated.

OECD Economic Outlook, December 2003

As the new decade dawned, a global slowdown, caused mainly by the American recession, hadput the brakes on the Irish economy for the first time in 11 years. The IDA announced record joblosses in foreign-owned companies, and the numbers employed in the IT sector fell 11% in 2001 afterseveral high-profile closures, including those of Motorola, Gateway, and General Semiconductors.61Ireland faced the threat of new competition from countries in eastern Europe as well as constantpressure from the EU to increase the corporate tax rate, which rose from 10% to 12.5% in 2003 (seeExhibit 12 for comparative European corporate tax rates and Exhibits 13a and13b for comparativeeconomic data). While this tax rate was still one of the lowest in Europe, it raised the specter of


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future tax increases and called into question the sustainability of the low tax rate. Some scholarssuggested that as much as 80% of Irelands FDI inflow was due to its low corporate tax rate, 62 acontention forcefully refuted by an official at Forfs, who noted, Tax was hugely important, but itwasnt enough on its own.63

Ironically, Irelands economic success of the 1990s had eroded many of its former competitiveadvantages. Inflation ran well above the EU average, making it the second most expensive country inthe Eurozone (after Finland) and prompting widespread use of the term Rip-off Ireland by thepublic and media. Ireland had become an expensive place to do business. Even substantialimmigration could not prevent labor shortages, which in turn drove up private-sector wages and putpressure on unions to respond. Fears abounded that social partnership would collapse as unionssought their share of the new wealth. McGowan explained how the backdrop had changed: In the1980s, everyone could agree on the need to reduce unemployment. Its not so clear now that peoplewill subordinate their own interests for the national well-being.64

The IDA swiftly began to reposition the country, using Irelands EU membership, educatedworkforce, and its low wages and tax rate as major selling points. The IDA wanted to place Ireland

at the leading edge of the global economy . . . and [adopt a] broader vision of what constitutes FDI,with less emphasis on job numbers, and a much greater focus on job quality, higher value addedactivities, and making Ireland a centre for innovation and the strategic management of value chains,rather than just a manufacturing or basic service location.65 The objective was to reduce Irelandsdependence on manufacturing by targeting underrepresented portions of the value chain such asresearch and development (R&D), sales, and marketing. The ESG outlined the considerable challengeahead: Much of the foreign-owned sector is, by global standards, still positioned at a relatively lowpoint in the value chain. The research and development, marketing and other capabilities thatunderpin the competitive strength of these enterprises are not for the most part located in their Irishoperations.66

Prying such activities away from corporate headquarters would not be easy. The IDA believedcompanies tended to keep R&D close to home, and Ireland did not have an international reputation

as a research hub. Furthermore, its peripheral location isolated it from large markets, making salesand marketing more difficult.

Despite the challenges, the IDA was successful in winning approximately 10% of American FDI inEurope in 2003.67 Once momentum developed in a sector, reference selling made it easier toconvince the next player to move to Ireland. By 2004, 13 of the worlds top 15 pharmaceuticalcompanies had bases in Ireland, 16 of the top 20 medical-device companies, and 7 of the top 10software designers.68

There were some high-profile successes in the technology sector as well. Shortly before goingpublic in 2004, Google established its European headquarters in Dublin. Although the companyscelebrated product development function remained in Silicon Valley, the Irish office gainedresponsibility for online sales and operations in the Europe, Middle East, and Africa markets. A

Google manager explained the move:

There were two determining factors: low tax and a multilingual labor force. Irelandprovided a very favorable tax environment, as did Switzerland and the Netherlands, and wewere very impressed with the number of different languages available. We could getlanguages in Switzerland too, but at a much higher labor cost. We didnt feel we could get thesame variety of languages in the Netherlands. Furthermore, the IDA was tremendouslysupportive throughout.69


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At about the same time, Wyeth, the $16 billion U.S. pharmaceutical company, announced plans toinvest 1.5 billion euros in an R&D operation in Ireland, helped in part by a new tax concession forR&D investments introduced by the government in 2004. The development of clusters70and strongerlinks between universities and businesses was seen as crucial to creating a fertile R&D environment,

and Science Foundation Ireland (SFI) was established in 2003 to encourage cooperation betweeneducation, government, and industry. SFI planned to invest $652 million between 2000 and 2006 inacademic researchers and research teams in two fields: biotechnology, and information andcommunications technology.71

The IDA was central to these developments, but some commentators wondered if the agency wasoverstretching itself. Its raison dtrehad always been to create jobs, and its success could therefore beeasily measured. In an era of full employment, however, the emphasis had shifted from quantity toquality of jobs, and it became harder to assess the IDAs performance. Moreover, the EU wasexpected to impose limits in 2006 on state aid to firms, thereby removing one tool at the IDAsdisposal. More troubling still, the 10 new entrants to the EU threatened Irelands status as theEuropean export platform of choice. Their low costs and plentiful labor contrasted starkly with thenew Ireland. Even Irelands language advantage was neutralized by the prevalence of English

throughout eastern Europe. Irelands tax edge was also under fire, with pressure from Brussels toharmonize corporate taxes throughout the EU, as many Eastern European countries, such as Slovakia,were adopting low tax rates.

Looking Ahead

Irelands performance since 1987 had been extraordinary, but future growth was expected to bemore modest. An IDA economist remarked: We threw four aces in a row in the 1990s and thatwont happen againbut it doesnt have to happen again.72 Although the Irish had becomeaccustomed to economic success, Dorgan denied that complacency was inevitable: Perhaps all richcountries get fat and lazy. But I believe we still have the hunger.73

Identifying the cause of the boom was crucial to sustaining it, and Irelands future depended on

the lessons learned from the Celtic Tiger years. If growth had been driven by FDI, as the ESGbelieved, then perhaps the focus should continue to be on attracting better investment from abroad.But what if FDI had not been the primary cause? Was Ireland too dependent on foreigners? Couldscarce resources be better spent on reforming education, improving infrastructure, or encouragingindigenous enterprise? Policymakers had many choices going forward.


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Exhibit 1a FDI Flows in Ireland, by Type of Investment, 19742001 (US$ millions)

Year 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004

Inward InvestmentEquity n.a. n.a. n.a. n.a. n.a. -12728 8879 13771 6240 -8911Reinvested Earnings n.a. n.a. n.a. 660 2006 9698 9267 13796 19370 11345Other 158 287 164 -33 -560 28530 -8573 1564 989 8918

Total 158 287 164 628 1447 25501 9573 29131 26599 11352

Outward InvestmentEquity n.a. n.a. n.a. n.a. n.a. 3501 1427 9033 714 n.a.Reinvested Earnings n.a. n.a. n.a. 365 820 1293 2016 2141 2675 n.a.Other n.a. n.a. n.a. n.a. n.a. -154 660 -2650 139 6565Total n.a. n.a. n.a. 365 820 4641 4103 8524 3528 6565

Source: Adapted from United Nations Conference on Trade and Development (UNCTAD), Foreign Direct Investment (FDI)database.

Exhibit 1b Ireland: Foreign Direct Inflows (US$ millions)

Source: Adapted from UNCTAD, FDI database.

-2,500

2,500

7,500

12,500

17,500

22,500

27,500

1970 1975 1980 1985 1990 1995 2000


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14

Exhibit 2 Ireland

Source: CIA World Factbook, CIA website, http://www.cia.gov/cia/publications/factbook/geos/ei.html.


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16

Exhibit 4 Government Finances (billions of Irish pounds)

Year 1980 1985 1990 1995 2000 2001 2002 2003 2004

Budget revenue 4.7 10.4 14.7 20.8 37.5 39.8 43.1 46.5 49.8

Budget expenditure 6.0 12.9 15.7 21.9 33.0 38.7 43.3 46.3 49.6

Budget balance -1.3 -2.5 -1.0 -1.1 4.6 1.1 -0.2 0.2 0.2

Debt interest payments 0.5 1.6 2.2 2.1 0.9 0.2 0.2 0.3 0.3

Primary balance -0.8 -0.8 1.2 1.0 5.5 1.3 0.0 0.5 0.5

Public debt 8.3 n.a. 34.6 44.6 43.3 42.2 43.5 43.5 44.3

As a % of GDP

Budget revenue 43.5 40.4 39.4 36.4 34.5 33.7 34.5 34.1

Budget expenditure 53.8 43.2 41.5 32.0 33.5 33.8 34.3 33.9

Budget balance -10.3 -2.8 -2.1 4.4 1.0 -0.2 0.2 0.2

Debt interest payments 4.3 6.8 6.2 4.0 0.9 0.2 0.2 0.2 0.2

Primary balance -6.2 -3.5 3.4 1.9 5.3 1.1 0.0 0.4 0.3

Public debt 66.4 n.a. 95.4 84.7 42.1 36.6 34.0 32.3 30.3

Exchange rate

Pound:US$ (av) 0.72 1.31 0.79 0.76 1.08 1.12 1.06 0.88 0.80

Source: Adapted from Economist Intelligence Unit.


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17

Exhibit 5 Balance of Payments (US$ billions)

1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005

Goods Exports 3.0 8.2 10.1 23.3 44.4 73.5 77.6 84.2 88.6 100.1 104.1

Goods Imports -3.5 -10.5 -9.5 -19.4 -30.9 -48.5 -50.4 -50.8 -51.7 -61.1 -67.3

Trade Balance -0.5 -2.2 0.6 3.9 13.6 25.0 27.3 33.4 36.9 39.0 36.8

Services: Credit 0.6 1.4 1.3 3.4 5.0 18.5 23.5 29.9 42.1 52.7 57.3

Services: Debit -0.5 -1.6 -1.5 -5.2 -11.3 -31.3 -35.3 -42.8 -54.6 -65.4 -69.8

Balance on Goods and Services -0.5 -2.4 0.4 2.2 7.3 12.3 15.4 20.5 24.3 26.3 24.3

Income: Credit 0.3 0.8 0.8 3.3 5.1 27.6 28.9 27.2 34.1 43.5 53.9

Income: Debit -0.4 -1.7 -2.9 -8.2 -12.4 -41.2 -45.2 -49.5 -58.9 -71.4 -84.2

Balance on Goods and Services

and Income -0.5 -3.3 -1.7 -2.7 -0.1 -1.3 -1.0 -1.8 -0.4 -1.6 -6.0

Current Transfers, Net 0.4 1.2 1.0 2.4 1.8 0.8 0.3 0.7 0.5 0.5 0.7

Current Account -0.1 -2.1 -0.7 -0.4 1.7 -0.5 -0.7 -1.1 0.1 -1.1 -5.3

Capital Account, N.I.E. 0.0 0.0 0.1 0.4 0.8 1.1 0.6 0.5 0.1 0.4 0.3

Direct Investment Abroad 0.0 0.0 0.0 -0.4 -0.8 -4.6 -4.1 -11.1 -5.6 -18.1 -13.8

Direct Investments in Rep. Econ 0.2 0.3 0.2 0.6 1.4 25.5 9.6 29.5 22.4 -11.0 -29.7

Portfolio Investments, Assets 0.0 0.0 -0.1 -0.5 -1.1 -83.1 -111.3 -105.5 -163.8 -168.9 -148.4

Portfolio Investments, Liabilities 0.1 0.2 1.1 0.3 0.8 77.9 89.1 69.4 119.4 186.5 213.5

Other Investments Assets -0.5 -0.5 0.0 -5.3 -16.6 -37.0 -21.4 -33.2 -65.9 -57.4 -134.1

Other Investments Liabilities 0.7 2.8 -0.1 3.2 16.2 28.9 37.9 49.8 90.5 71.2 117.7

Other, Net 0.0 0.0 0.0 0.0 0.0 0.4 0.4 1.6 -0.5 1.0 -8.2

Financial Account, N.I.E. 0.5 2.7 1.1 -2.0 0.0 7.9 0.0 0.5 -3.5 3.3 -3.0

Net Errors and Omissions 0.0 0.1 -0.4 2.6 -0.2 -8.5 0.4 -0.2 1.4 -4.0 6.2

Reserve Assets -0.3 -0.7 0.0 -0.6 -2.3 -0.1 -0.4 0.3 1.9 1.4 1.8

Balance of Payments as a % of GDP

Current Account -1.4 -10.2 -3.6 -0.8 2.6 -0.5 -0.7 -0.9 0.1 -0.6 -2.7

Goods Exports 33.3 39.4 49.7 49.3 67.0 77.4 75.1 69.9 58.2 55.1 53.0

Goods Imports -38.7 -50.1 -46.6 -41.0 -46.5 -51.1 -48.8 -42.1 -34.0 -33.6 -34.3

Trade Balance -5.3 -10.7 3.1 8.3 20.4 26.3 26.4 27.8 24.2 21.5 18.7

GDP (current US$ Billion ) 9.1 20.9 20.4 47.3 66.3 95.0 103.3 120.5 152.1 181.6 196.4

Source: Adapted from IMF, International Financial Statistics database, and World Development Indicators (WDI), WorldBank.


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Exhibit 6 Linkages of Foreign Firms in Manufacturing: Irish Raw Materials as a Percentage of TotalRaw Material Purchases

1986 1989 1992 1995Nonfood manufacturing 16.2% 16.5% 19.2% 19.8%(millions) 353 546 734 1,326

Source: Adapted from Forfs, Shaping Our Future: A Strategy for Enterprise in Ireland in the 21stCentury, 1996.

Note: Excluding food, drink, and tobacco.

Exhibit 7a Survey of Economic Impact of IDA-Supported Companies (euro billions)

Survey 1999 2000 2001 2002

Sales 42.9 64.02 67.79 69.34Exports 38.2 58.22 63.14 65.17Direct expenditure in the economy 11.6 14.26 14.93 14.73of which:

Payroll costs 4.0 5.04 5.44 5.34Irish materials 4.7 4.28 4.51 4.38Irish services 3.0 4.94 4.98 5.01Direct expenditure as % of sales 27.1 22.30% 22.00% 21.20%

Source: Adapted from the Annual Business Survey of Economic Impact, coordinated by Forfs andadministered by the Survey Unit of the Economic and Social Research Institute (ESRI).

Note: The survey is based on manufacturing and internationally traded services companies with 10 or more

employees (excluding IFSC companies). Results can vary from previous estimates due to revisionsmade by companies and differences in the base of respondents from one survey period to the next.

Exhibit 7b Origins of IDA-Supported Companies, 2003

OriginNo. of

CompaniesTotal

Employment

U.S. 489 89,158Germany 149 11,394U.K. 118 8,086Rest of Europe 214 15,602Asia Pacific 44 2,937

Rest of the World 40 1,816

Total 1,054 12,8993

Source: Adapted from the Annual Business Survey of Economic Impact, coordinated by Forfs andadministered by the Survey Unit of the Economic and Social Research Institute (ESRI).


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706-007

-19-

Exhibit7c

IDAPresence:Dome

sticandInternational

Source:IDAIrelandwebsite,http://ww

w.idaireland.com/home/index.aspx?id=81

,accessedJuly17,2005.


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Exhibit 8 Total Manufacturing

Nationality of OwnershipNo. ofPlants

Total PersonsEngaged

GrossOutput

Percent ofImportedMaterialsPurchased

Percent of GrossOutput Exported

Irish 3,854 111,167 10,379 21.7 35.3Other EU 318 33,345 3,373 58.4 61.9

of which U.K. 112 12,763 1,575 45.1 39.0of which Germany 100 10,866 636 79.6 92.3

Non-EU 372 55,491 11,152 68.0 92.8of which U.S. 267 42,806 8,814 64.3 96.0

Total foreign 690 88,836 14,525 65.6 85.6Total 4,544 200,003 24,904 42.3 64.7

Source: Census of Industrial Production. Adapted from Frank Barry and John Bradley, FDI and Trade: the Irish host-countryexperience, paper presented at the Royal Economics Society Annual Conference, University of Staffordshire,March 2426, 1993.

Exhibit 9 Software Industry Statistics, 19911997

1991 1993 1995 1997

Total Percent Total Percent Total Percent Total Percent

Total Number of Firms 365 100% 417 100% 483 100% 679 100%Irish Owned 291 80% 336 81% 390 81% 561 83%

Foreign Owned 74 20% 81 19% 93 19% 118 17%

Total Employment 7,793 100% 8,943 100% 11,784 100% 18,300 100%Irish Owned 3,801 49% 4,495 50% 5,773 49% 9,200 50%Foreign Owned 3,992 51% 4,448 50% 6,011 51% 9,100 50%

Total Revenue ($M) 2,699 100% 3,107 100% 4,735 100% 6,245 100%Irish Owned 234 9% 368 12% 610 13% 739 12%Foreign Owned 2,465 91% 2,739 88% 4,125 87% 5,506 88%

Total Exports ($M) 2,510 100% 2,872 100% 4,442 100% 5,908 100%Irish Owned 95 4% 181 6% 357 8% 511 9%Foreign Owned 2,415 96% 2,691 94% 4,085 92% 5,397 91%

Source: Adapted from Paul. P. Tallon and Kenneth. L. Kraemer, The Impact of Technology on Ireland's Economic Growthand Development: Lessons for Developing Countries, proceedings of the 32nd Hawaii International Conference onSystem Sciences, 1999.


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706-007

-21-

Exhibit10

EmploymentinIDA

-SupportedCompanies

1991

1992

1993

1

994

1995

1996

1997

1998

1999

2000

2

001

2002

2003

Newjobsfilled

6,904

7,075

8,216

9,961

11,958

13,220

14,685

15,946

17,613

22,994

12,802

11,059

9,182

Numberofcompanies

847

857

876

908

961

1,037

1,099

1,158

1,266

1,250

1,148

1,102

1,054

Full-timeemployment

75,018

76,218

78,915

8

5,597

92,424

99,583

108,231

117,864

126,199

141,125

136,277

132,004

128,993

Netchangeinfull-timeemployment

1,278

1,200

2,697

4,493

6,827

7,159

9,648

8,633

8,335

14,926

-4,848

-4,273

-3,011

%netchange

1.70%

1.60%

3.50%

6

.30%

8.00%

7.70%

9.70%

7.90%

7.10%

11.80%

-3

.40%

-3.10%

-2.30%

Joblosses

5,626

-5,875

-5,519

-

5,468

-5,131

-6,061

-5,037

-7,313

-9,278

-8,068

-17,650

-15,332

-12,193

Joblossesas%oftotaljobs

7.50%

7.70%

7.00%

-6

.40%

-5.60%

-6.10%

-4.60%

-6.20%

-7.40%

-5.70%

-13

.00%

-11.60%

-9.50%

Otheremployment

3,444

4,288

5,334

9,022

11,579

9,488

13,540

15,195

15,665

14,802

12,395

12,362

14,577

Source:

AdaptedfromForfsEmploymentSurvey,IDAAnnualReport2000,2003.

Exhibit11

WagesandSalariesofAffiliatesofForeignTNCsinIreland,byIndustryandGeographicOrigin(2000)

Source:AdaptedfromForfsEmployme

ntSurvey,IDAAnnualReport2000,2003andUnitedNationsConferenceonTradeandDevelopment,UNCTAD,WID.

Sector/Industry/Region/Economy

Tota

lWor

ldDev

elop

edCo

untries Eu

rope

an Uni

onBe

lgiu

mDen

mar

k Fra

nce

Ger

man

yNeth

erla

nds Sw

eden

Uni

tedK

ingd

om Uns

peci

fied

EU

Nor

thA

mer

ica Canad

a Uni

ted

Stat

es Jap

an

Unsp

ecifi

ed

Total

2712.8

2589

8

12.4

18.4

73.6

82.2

208.6

50.4

15.7

292.1

71.2

1716

461

669.7

61.2

123.7

Secondary

2712.8

2589

8

12.4

18.4

73.6

82.2

208.6

50.4

15.7

292.1

71.2

1716

461

669.7

61.2

123.7

Food,beveragesandtobacco

348.3

10.3

10.3

10.3

338

Textilesandclothingandleather

59.5

59.5

Woodandwoodproducts

44.5

44.5

Publishingandprinting

158.4

158.4

Chemicalsandchemicalproducts

466.2

401

124

34.7

37.4

51.9

277

277

65.2

Rubberandplasticproducts

74.5

54.5

39.3

19.7

3.8

15.7

15.3

15.3

Non-metallicmineralproducts

36.9

36.9

20.8

20.8

16.1

16.1

20

Metalandmetalproducts

82.7

26

26

13.3

4.8

7.8

56.6

Machineryandequipment

134.8

118.7

53.6

22.5

6.1

25

65.1

65.1

16.1

Electricalandelectricalequipment

827.7

1037.4

107.6

43.7

8

55.8

929.9

929.9

-209.7

Precisioninstruments

287.3

287.3

Motorvehiclesandothertransport

equipment

136

136

1

11.7

111.7

24.3

24.3

Othermanufacturing

53.1

53.1

Unspecifiedsecondary

2.9

768.2

319.1

18.4

73.6

82.2

74.7

50.4

15.7

232

-227.8

387.9

46

342

61.2

-765.3


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Exhibit 12 Comparative European Corporate Tax Ratesfor Substantial Distributed Trading Profits

Country Tax RateIreland 12.5%Cyprus 15.0%Latvia 15.0%Lithuania 15.0%Hungary 16.0%Poland 19.0%Luxembourg 22.9%Portugal 25.0%Slovenia 25.0%Estonia 26.0%Germany 26.4%Czech Republic 28.0%

Sweden 28.0%Finland 29.0%Slovakia 29.0%Denmark 30.0%U.K. 30.0%Italy 33.0%France 33.3%Belgium 34.0%Austria 34.0%Netherlands 34.5%Greece 35.0%Malta 35.0%Spain 35.0%

Source: Adapted from IDA Ireland website, http://www.idaireland.com/home/index.aspx?id=659.


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Exhibit 13a Selected EU Countries: Comparative Data

Year Country

GDP

(currentUS$

Millions)

GDPgrowth

(annual %)

GDP per

capita,PPP

(current

intl $)

GNI

(currentUS$

Millions)

FDI,

netinflows

(% of

GDP)

FDI, net

inflows(% of gross

capital

formation)

Market

Cap. of

listedcompanies

(% ofGDP)

1985 Cyprus 2,418 4.9 8,158 2,426 2.4 7.9 ..

Czech Republic .. .. .. .. .. .. ..

Estonia .. 0.5 6,171 .. .. .. ..

France 548,993 2.0 14,182 548,050 0.5 2.4 ..

Greece 41,977 2.5 9,741 42,534 1.1 4.1 ..

Hungary 20,623 -0.3 7,870 19,756 .. .. ..

Ireland 20,644 3.1 8,718 19,000 0.8 4.2 ..

Latvia .. -0.4 6,104 .. .. .. ..

Lithuania .. .. .. .. .. .. ..

Portugal 25,931 2.8 7,630 24,358 1.1 4.9 ..

UK 455,534 3.6 12,979 451,059 1.2 6.5 ..

1995 Cyprus 8,861 6.1 15,648 8,957 2.7 12.5 28.4

Czech Republic 55,257 6.0 13,144 55,153 4.7 14.3 28.4

Estonia 4,331 4.5 6,290 4,333 4.7 17.5 ..

France 1,570,256 2.2 22,251 1,573,219 1.5 8.1 33.3

Greece 120,152 2.1 13,612 123,837 0.9 4.7 14.2

Hungary 44,656 1.5 9,703 42,967 10.8 47.6 5.4

Ireland 67,104 9.6 17,844 60,561 2.2 11.8 38.5

Latvia 5,236 -1.0 5,258 5,259 3.4 24.0 0.2

Lithuania 7,621 3.3 6,302 7,569 1.0 4.3 2.1

Portugal 112,960 4.3 14,439 112,630 0.6 2.6 16.3

UK 1,133,633 2.9 21,326 1,129,173 1.9 11.3 124.2

2000 Cyprus 9,147 5.0 19,175 8,603 9.4 .. 47.6

Czech Republic 56,721 3.7 15,450 55,351 8.8 30.0 19.4Estonia 5,623 7.9 9,392 5,420 6.9 24.0 32.8

France 1,327,963 4.0 27,244 1,346,197 3.2 15.6 108.9

Greece 114,601 4.5 17,057 115,490 1.0 4.0 96.7

Hungary 47,958 5.2 12,977 45,383 5.8 19.0 25.1

Ireland 96,166 9.2 29,155 82,773 26.5 105.7 85.1

Latvia 7,833 6.9 7,975 7,814 5.3 22.2 7.2

Lithuania 11,418 3.9 8,719 10,643 3.3 16.7 13.9

Portugal 112,650 3.9 18,782 109,813 5.9 21.4 53.9

UK 1,442,845 4.0 26,476 1,444,479 8.5 48.3 178.6

2005 Cyprus .. .. .. .. .. .. ..

Czech Republic 123,981 6.1 20,845 117,495 .. .. 30.9

Estonia 13,748 10.5 15,968 13,055 21.8 61.8 25.4

France 2,126,630 1.2 31,908 2,137,573 3.3 16.5 80.4

Greece 225,206 3.7 23,377 221,054 0.3 1.2 64.4

Hungary 110,364 4.3 18,256 103,599 5.8 24.7 29.5

Ireland 201,817 5.5 38,892 170,785 -14.7 .. 56.6

Latvia 16,042 10.6 13,700 15,735 4.6 13.2 15.8

Lithuania 25,652 7.6 14,584 23,922 4.0 16.1 31.9

Portugal 183,305 0.4 21,125 180,291 1.8 7.8 36.54

UK 2,201,591 1.8 33,135 2,249,441 7.2 42.9 138.9

Source: Adapted from World Development Indicators, World Bank.


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24

Exhibit 13b Selected EU Countries: Comparative Data

Year Country UnemploymentRate

Population,

total(thousands)

Employment

in agriculture(% of total)

Employment

in industry(% of total)

Employment

in services(% of total)

Secondary

education(% of total)

Tertiary

education(% of

total)

Life

expectancyat birth

Literacrate, ad

1985 Cyprus 3.3 542 16.4 31.0 50.9 .. .. 75.8 92.5

Czech Rep. .. 10,335 12.1 47.7 40.2 .. .. 71.0 ..

Estonia .. 1,529 .. .. .. .. .. 70.0 99.8 France 10.2 55,170 7.6 32.0 60.4 .. .. 75.3 .. Greece 7.8 9,934 28.9 27.4 43.7 .. .. 75.0 93.2

Hungary .. 10,579 .. .. .. .. .. 69.0 98.8 Ireland 16.7 3,540 15.6 28.4 55.6 .. .. 73.5 .. Latvia .. 2,621 .. .. .. .. .. 69.3 99.8 Lithuania .. 3,545 19.7 40.4 39.5 .. .. 70.5 99.1

Portugal 8.6 10,011 23.8 33.8 42.4 .. .. 73.4 84.4

UK 11.3 56,685 2.5 31.2 64.9 .. .. 74.6 ..

1995 Cyprus .. 651 10.7 25.3 63.0 .. .. 77.5 95.8Czech Rep. 4.0 10,331 6.6 41.8 51.1 76.9 10.5 73.1 ..

Estonia 9.4 1,437 10.2 34.2 55.6 66.9 17.4 67.8 99.8

France 11.6 57,844 1.6 27.0 71.4 .. .. 77.8 .. Greece 9.1 10,634 20.4 23.2 56.3 28.0 20.8 77.6 96.2

Hungary 10.2 10,329 8.0 32.6 59.3 60.5 14.3 69.8 99.2

Ireland 12.2 3,609 11.6 28.1 59.9 31.8 24.3 75.8 ..

Latvia 18.9 2,515 17.4 28.0 54.0 .. .. 66.4 99.8 Lithuania 17.1 3,632 23.8 28.2 48.0 .. .. 69.0 99.5

Portugal 7.2 10,027 11.5 31.9 56.6 .. .. 75.1 89.9

UK 8.6 58,250 2.0 27.3 70.1 45.0 22.3 76.8 ..

2000 Cyprus 4.8 694 5.3 23.3 67.4 40.7 27.0 78.1 97.1

Czech Rep. 8.8 10,273 5.1 39.5 55.3 78.2 11.3 75.0 ..

Estonia 12.8 1,370 7.2 33.3 59.5 46.4 41.2 70.9 99.8France 10.0 58,896 1.6 24.5 73.9 46.0 25.4 78.9 ..

Greece 11.1 10,918 17.4 22.6 60.0 29.9 27.9 78.0 97.2

Hungary 6.4 10,211 6.5 33.7 59.7 65.2 16.4 71.2 99.3Ireland 4.3 3,805 7.8 28.5 62.9 .. .. 76.4 ..

Latvia 14.0 2,372 14.5 26.3 59.1 .. .. 70.4 99.7

Lithuania 16.4 3,500 18.7 26.8 54.5 41.4 43.2 72.0 99.6Portugal 3.9 10,226 12.6 34.4 52.9 11.9 9.0 76.5 92.2

UK 5.5 59,743 1.5 25.3 72.8 47.4 26.1 77.7 ..

2005 Cyprus 4.7a 758 .. .. .. .. .. 79.3 ..

Czech Rep. 8.3a 10,234 4.0 39.5 56.5 .. .. 75.9 ..

Estonia 9.6a 1,346 5.3 34.0 60.7 .. .. 72.6 .. France 9.9a 60,873 .. .. .. .. .. 80.2 ..

Greece 10.2a 11,104 12.4 22.4 65.1 .. .. 79.0 ..

Hungary 6.1a 10,087 5.0 32.4 62.6 .. .. 72.6 ..

Ireland 4.4a 4,159 5.9 27.8 65.6 .. .. 79.4 .. Latvia 8.7 2,301 12.1 25.8 61.8 .. .. 71.4 ..

Lithuania 8.3 3,414 14.0 29.1 56.9 .. .. 71.3 ..

Portugal 6.7a 10,549 .. .. .. .. .. 78.1 .. UK 4.6 a 60,227 1.4 22.0 76.3 .. .. 78.9 ..


aUnemployment figures for 2004.


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25

Exhibit 14a Selected Asian Countries: Comparative Economic Data

Year Country

GDP (current

US$

Millions)

GDP

growth

(annual %)

GDP per capita,

PPP (current

intl $)

GNI (current

US$

Millions)

FDI, net

inflows (%

of GDP)

FDI, net inflows

(% of gross

capital

formation)

Market

capitalization

(% of GDP)

1985 China 304,912 13.5 838 305,753 0.5 1.4 n.a.

Hong Kong 35,531 0.2 10,125 34,868 .. .. n.a.Ireland 20,644 3.1 8,718 19,000 0.8 4.2 n.a.

Korea, Rep. 96,619 6.8 4,533 94,289 0.2 ... n.a.

Malaysia 31,772 -1.1 3,165 29,535 2.2 8.8 n.a.

Singapore 17,743 -1.4 7,740 18,302 5.9 13.9 n.a.

1995 China 728,011 10.9 2,515 716,237 4.9 12.5 5.8

Hong Kong 144,230 3.9 22,026 146,945 .. .. 210.6Ireland 67,104 9.6 17,844 60,561 2.2 11.9 38.5

Korea, Rep. 517,118 9.2 12,515 515,330 0.3 .. 35.2

Malaysia 88,832 9.8 7,057 84,689 4.7 10.8 250.7

Singapore 84,291 8.2 18,219 86,424 13.7 40.2 175.6

2000 China 1,198,480 8.4 3,940 1,183,815 3.2 9.8 48.5

Hong Kong 168,754 10.2 26,214 169,878 36.7 133.4 369.4Ireland 96,166 9.2 29,155 82,773 26.5 105.7 85.1

Korea, Rep. 511,658 8.5 16,149 509,443 1.8 .. 33.5

Malaysia 90,320 8.9 8,573 82,712 4.2 15.5 129.5Singapore 92,717 10.1 23,594 91,975 17.8 42.2 164.8

2005 China 2,243,853 10.2 6,760 2,254,487 3.5 7.4 34.8Hong Kong 177,783 7.5 34,923 177,995 20.2 96.4 566.0

Ireland 201,817 5.5 38,892 170,785 -14.7 24.4 56.6

Korea, Rep. 791,427 4.2 22,080 790,239 0.5 4.1 90.7Malaysia 130,770 5.2 10,887 124,457 3.0 19.1 138.6

Singapore 116,693 6.6 29,842 112,117 17.2 62.7 178.5



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26

Exhibit 14b Selected Asian Countries: Comparative Economic Data

Year Country

Unemployment

(% of total)

Population

(Millions)

Employment

in agriculture

(% of total)

Employment

in industry

(% of total)

Employment

in services

(% of total)

Tertiary

education

(% of total)

Life

expectancy

at birth

(years)

Adult

Literacy

Rate

1985 China 1.8 1,051.0 .. .. .. n.a. 68.3 73.4

Hong Kong 3.2 5.5 1.6 44.4 54.0 n.a. 76.4 ..Ireland 16.7 3.5 15.6 28.4 55.6 n.a. 73.5 ..

Korea, Rep. 4.0 40.8 24.9 30.8 44.3 n.a. 68.5 ..

Malaysia 6.9 15.7 30.4 23.8 45.8 n.a. 68.9 76.3

Singapore 4.4 2.7 0.7 35.2 63.7 n.a. 72.9 85.6

1995 China 2.9 1,204.9 48.5 21.0 12.2 .. 69.4 81.9

Hong Kong 3.2 6.2 0.6 27.0 72.4 .. 78.7 ..Ireland 12.2 3.6 11.6 28.1 59.9 24.3 75.8 ..

Korea, Rep. 2.1 45.1 12.4 33.3 54.2 19.2 73.4 ..

Malaysia 3.1 20.3 20.0 32.3 47.7 .. 71.5 84.3

Singapore 2.7 3.5 0.2 31.0 67.9 33.2 76.4 90.7

2000 China 3.1 1,262.6 46.3 17.3 12.7 .. 70.3 90.9

Hong Kong 4.9 6.7 0.3 20.3 79.4 .. 80.9 ..Ireland 4.3 3.8 7.8 28.5 62.9 .. 76.4 ..

Korea, Rep. 4.1 47.0 10.6 28.1 61.2 24.0 75.9 ..

Malaysia 3.0 23.0 18.4 32.2 49.5 .. 72.6 88.7Singapore 4.4 4.0 0.2 34.2 65.4 36.6 78.1 92.5

2005 China 4.2 1,304.5 .. .. .. n.a. 71.8 n.a.Hong Kong .. 6.9 0.3 15.2 84.6 n.a. 81.6 n.a.

Ireland .. 4.2 5.9 27.8 65.6 n.a. 79.4 n.a.

Korea, Rep. .. 48.3 7.9 26.8 65.1 n.a. 77.6 n.a.Malaysia .. 25.3 .. .. .. n.a. 73.7 n.a.

Singapore .. 4.3 .. 29.5 69.6 n.a. 79.7 n.a.



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27

Endnotes

1 Headline of the article introducing the Economist Intelligence Units Quality of Life Survey, EIU World

Report in 2005, p. 86. The article adds, Ireland wins because it successfully combines the most desirable elementsof the new (the fourth highest GDP per head in the world in 2005, low unemployment, political liberties) withthe preservation of certain cozy elements of the old, such as stable family and community life.

2 Survey: Tiger, Tiger, Burning Bright, The Economist, October 16, 2004, p. 4. Available from Proquest,ABI/Inform, http://www.proquest.com, accessed February 7, 2005.

3Calculations based on World Bank data and Irish Economic Growth: A Brief History of the 1990s, AIBQuarterly Economic Focus(Autumn 2000). Allied Irish Banks website, www.fxcentre.com/jb/pdfs/quarterly/q3-2000-15.pdf, accessed February 14, 2005.

4Irish Economic Growth: A Brief History of the 1990s,AIB Quarterly Economic Focus.5For more information on the role of FDI in economic growth and the current debate see Laura Alfaro and

Esteban Clavell, "Foreign Direct Investment," HBS No. 703-018 (Boston: Harvard Business School Publishing,2002).

6 Enterprise Strategy Group, Ahead of the Curve: Irelands Place in the Global Economy, July 5, 2004,Forfs website, http://www.forfas.ie/esg/, accessed February 7, 2005.

7 Tnaiste Launches Report of Enterprise Strategy Group, Press Release and Summary ofRecommendations, July 7, 2004, Forfs website, http://www.forfas.ie/esg, accessed February 14, 2005.

8Enterprise Strategy Group, Ahead of the Curve, p. 5.9Average housing prices had more than doubled since 1995. Martin Wolf, Irelands Miracle, The Financial

Times, July 19, 1999. Available from Factiva, http://www.factiva.com, accessed February 23, 2005.10The European Union classified Irelands regions into three different categories for structural fund

disbursement purposes. Objective One regions were those whose development was lagging behind.Specifically, the threshold set for qualification required per capita income, as measured by GDP, to be less than75% of the EU average. Since Irelands GDP per head had reached more than 100% in 1998, the governmentdecided to divide the country into two regions. The more affluent eastern and southern counties wouldexperience a gradual phasing out of Objective One status, while 13 border, midland, and western counties

retained Objective One status. It was estimated that by 2006, Ireland would be a net contributor to the EU budgetand not a net beneficiary.11Germany and Belgium, in particular, with 26% and 34% tax rates, respectively, objected to Irelands low

rate.12For example see Laura Alfaro, Rafael Di Tella and Anne Damgaard Jensen Rovna Da: The Flat Tax in

Slovakia With Rafael Di Tella and Anne Damgaard Jensen, HBS No. 707-043, 2007.

13J.W. OHagan, The Economy of Ireland(Dublin, Ireland: Gill & Macmillan, 2000), p. 30.14Data and portions of this section were taken from Ray Mac Sharry and Padraic White, The Making of the

Celtic Tiger(Cork, Ireland: Mercier Press, 2000.15 Richard Finnegan and Edward McCarron, Ireland: Historical Echoes, Contemporary Politics (Boulder, CO:

Westview Press, 2000), p. 109.16IDA had been formed in 1949, after contentious debate within government and civil service quarters (Mac

Sharry, p. 187). Some had feared that the new organization would be nothing more than a gang of crackpotsocialist planners who would hamper private enterprise (Mac Sharry, p. 184. Although IDA was established in1949 as part of the Department of Industry & Commerce, its authority increased greatly in 1969 when it wasincorporated as an autonomous state-sponsored body responsible for all aspects of industrial development.

17Mac Sharry and White, The Making of the Celtic Tiger, p. 187.18Ibid., p. 190.19Ibid., p. 235.20Ibid., p. 30.


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28

21J.J. Lee, Ireland 19121985, Politics and Society(Cambridge, England: Cambridge University Press, 1989), p.531.

22 Paul Tallon and Kenneth L. Kraemer, "Information Technology and Economic Development: Ireland'sComing of Age with Lessons for Developing Countries," Center for Research on Information Technology andOrganizations, I.T. in Business, Paper 136, November 1, 1999. Available fromhttp://repositories.cdlib.org/crito/business/136, accessed February 28, 2005.

23Lee,Ireland 19121985, p. 531.24Tallon and Kraemer, Information Technology and Economic Development.25Lee, Ireland 19121985, p. 532.26Ibid.27Ibid.28Ibid.29Mac Sharry and White, The Making of the Celtic Tiger, p. 203.30Lee, Ireland 19121985, pp. 535536.31Mac Sharry and White, The Making of the Celtic Tiger, p. 209.32 Ray Mac Sharry, "EIB Forum 2004 Speech," European Investment Bank website, http://www.eib.org/

forum/docs/ s_macsharry.pdf, accessed February 7, 2005.33Mac Sharry and White, The Making of the Celtic Tiger, pp. 6870.34Some observers cited demographics as a driver of Irelands success, noting that Irelands high birth rate in

the 1960s and 1970s led to its having the youngest population in Europe by the 1980s. Others noted that youngpopulations often have a destabilizing impact on sluggish economies and saw it as the fuel for growth ratherthan the trigger.

35J.W. OHagan, The Economy of Ireland(Dublin, Ireland: Gill & Macmillan, 2000), p. 38.36Frank Barry, John Bradley, and Aoife Hannan, The Single Market, The Structural Funds and Irelands

Recent Economic Growth, May 2001, p. 9.37For more on the impact of corporate taxation on FDI, see M. J. Slaughter, Host-Country Determinants of

US foreign direct investment into Europe, in Foreign direct investment in the real and financial sectors of industrialcountries, Hermann and Lipsey, eds. (Springer, 2003); and Altshuler, Gubert, and Newlon, Has US investmentabroad become more sensitive to tax rates? in International Taxation and Multinational Activity, J.R. Hines, Jr., ed.(Chicago: University of Chicago Press, 2001). See also Desai, Foley, and Hines, Chains of Ownership, regionaltax competition and foreign direct investment, NBER Working Paper No. 9224, 2002b.

38Kieran McGowan, interview by author, Dublin, Ireland, November 5, 2004.39A.V. Vedpuriswar, Country Scan: Ireland, A.V. Vedpuriswar website, http://www.vedpuriswar.org/

articles/ GCEO/Ireland.PDF, accessed February 7, 2005.40Mac Sharry and White, The Making of the Celtic Tiger, pp. 219220.41 Colin Coulter and Steve Coleman, eds., The End of Irish History?: Critical Reflections on the Celtic Tiger

(Manchester, England: Manchester University Press, 2003), p. 38.42Thomas Friedman, The End of the Rainbow, The New York Times, June 29, 2005.

43Brian Cogan, interview by author, telephone, October 7, 2004.44World Bank Indicators, WDI database.45Gross national product excludes the profits earned by foreign firms.46Several linkages programs had existed through the early and mid-1980s. The National Linkages Program

of the 1980s was launched by IDA. See United Nations Conference on Trade and Development, World InvestmentReport 2001:Promoting Linkages(New York and Geneva: United Nations, 2001), p. 185.

47For an overview of the empirical evidence see Laura Alfaro and Andrs Rodriguez-Clare, "Multinationalsand Linkages: An Empirical Investigation," Economia (Spring 2004); and Holger Gorg and Frances Ruane,


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Multinational Companies and Linkages: Panel-Data Evidence for the Irish Electronics Sector, InternationalJournal of the Economics and Business1 (2001): 118.

48

For more on debate surrounding FDI and linkages in Ireland see Gorg and Strobl, Multinationalcompanies, technology spillovers and plant survival: evidence from Irish manufacturing, EIJS Working Paper131, Stockholm School of Economics, 2001.

49Giorgio Barba Navaretti and Anthony J. Venables,Multinational Firms in the World Economy(Princeton, NJ:Princeton University Press, 2004), p. 209.

50 F. Desmond McCarthy, How the Celtic Tiger Did It: Irelands Rapid Convergence with the IndustrialWorld, World Bank, 2001.

51Sean Dorgan, Is FDI Necessary in Post Celtic Tiger Ireland? strategy statement by Sean Dorgan, CEO,IDA Ireland, Dublin Economic Workshop Conference, November 11, 2002.

52Coulter and Coleman, The End of Irish History?p. 39.53Ibid., p. 38.54Ibid., p. 39.55

Sean Dorgan, interview by author, Dublin, Ireland, November 3, 2004.56CRH was one of Irelands largest homegrown multinationals, with revenues of nearly $11 billion.

57Frank Fitzgibbon, business editor of the Sunday Times. Telephone interview by author, October 26, 2004.58Patrick Honohan and Brendan Walsh, Catching up with the Leaders: the Irish Hare, Brookings Panel on

Economic Activity, Brookings Institute, April 4, 2002, p. 19.59Brian Cogan, interview by author, telephone, October 7, 2004.60Honohan and Walsh, Catching up with the Leaders: the Irish Hare.61Coulter and Coleman, The End of Irish History?p. 39.62Gropp and Kostial (2000)noted in Barry, p. 18.63Brian Cogan, interview by author, telephone, October 7, 2004.64Kieran McGowan, interview by author, Dublin, Ireland, November 5, 2004.65

Dorgan, Is FDI Necessary in Post Celtic Tiger Ireland? IDA strategy statement.66 Department of Enterprise, Trade, and Employment, Review of Industrial Performance Policy 2003,September 19, 2003. Available from Department of Enterprise, Trade and Employment, http://www.entemp. ie,accessed February 14, 2005.

67 U.S. Department of Commerce Bureau of Economic Analysis website, http://www.bea.gov/bea/di/usdcap/cap_03.htm, accessed 2005.

68 Ireland Economic Profile, Enterprise Ireland website, http://www.enterpriseireland.com, accessedFebruary 28, 2005; Thomas Friedman, The End of the Rainbow, The New York Times, June 29, 2005.

69Sheryl Sandberg, interview by author, Mountain View, California, December 15, 2004.70Clusters are groups of firms all related to the same sector industry.71Science Foundation Ireland, Introduction to SFI: Helping Ireland Recruit and Retain Research Groups,

Science Foundation Ireland website, http://www.sfi.ie/content/content.asp?section_id=207&language_id=1,accessed February 14, 2005.

72Raymond Bowe, economist, IDA. Interview by author, Dublin, November 3, 2004.73Sean Dorgan, CEO, IDA. Interview by author, Dublin, November 3, 2004.

fdi and irelands tiger economy (a)

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