The Success of Ireland's Foreign Investment Promotion Strategy: A Reconsideration

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ABSTRACT

The image of the Republic of Ireland's principal investment promotion agency (IDA Ireland), has been tarnished by the recent global recession and its aftermath. Questions have risen about the wisdom of using foreign direct investment (FDI) to fuel domestic growth and prosperity. It is the position of this paper that the overall historical strategy of IDA Ireland remains viable but that changes in the policy approach are needed. Ireland should (1) continue to seek inward FDI but should reduce the degree of dependency on inflows from the U.S., (2) should maintain a policy of investment selectivity but should change the mix, (3) should prioritize the creation of vertical linkages in the supply chain in FDI recruitment, (4) should consolidate the activities of IDA Ireland and Enterprise Ireland, (5) should de-emphasize the government's social contract with Irish labor, and (6) should negotiate aggressively to remain exempt from the EU's "principle of conversion" in the area of taxation.

INTRODUCTION

One of the most remarkable developments in the global economy over the past two decades has been the success of Republic of Ireland in translating heavy infusions of foreign direct investment (particularly from the U.S.) into rapid internal economic growth and development. Observers in the commercial press and in the economic literature until very recently have lavished praise on Irish industrial and promotion policy referring to the experience as the "Irish miracle" and to the country as the "Celtic Tiger".

Unfortunately, recent deterioration in the Irish economy during the current global recession has cast doubt about the sustainability of the Irish miracle and has produced derisive comments about the "Celtic Tiger" becoming the "Celtic Kitten".

Defenders of Irish foreign investment promotion strategy argue, of course, that the current economic malaise in the country is traceable to unwise housing speculative and irresponsible banking practices and not to flaws in the country's FDI promotion policy. However, there is an opposing point of view arguing that FDI fueled growth and development are not sustainable and that the country's policy driven appetite for FDI has been excessive.

As an example of this latter position, Dr. Robert Shapiro, a senior advisor to Barack Obama, argued at a recent conference at a Dublin university that "Ireland must wean itself from dependence on FDI" (Finfacts Ireland, 2009). This is particularly interesting in light of the fact that Ireland over the past two decades has been a favored venue for USFDI and that the Irish government's foreign investment promotion strategy has been established as a model for other countries to follow in seeking FDI fueled economic development.

The purpose of this paper is to examine the Irish miracle of recent memory and to reexamine the viability of the country's FDI promotion policy in light of new economic realities. The following key questions will be addressed. Was Irish promotion policy flawed? If so, in which specific areas? Are FDI fueled growth and development sustainable? If so, what new government policy initiates or policies might promote the same?

The Celtic Tiger: The Genesis

The evidence clearly indicates that the Republic of Ireland over an extended period of time (early 1970s-mid 2000s) enjoyed both heavy inflows of foreign direct investment and rapid real economic growth. The decade of the 1990s witnessed the heaviest infusion of growth fueled FDL During this decade, Irish growth, which was particularly impressive on a per capita basis, exceeded the performance of the other EU countries and actually ranked at the top of the 29 OECD member states.

Figure 1 below reveals some interesting per capita growth rate differentials over the past three decades. The so-called Irish "miracle" is clearly visible in the comparisons.

Beyond Europe, it is also true that Irish economic growth during the 1990s exceeded that of the socalled Asian Tigers, even before the currency crisis of 1997/98. …

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