National Systems of Technological Innovation, FDI, and Economic Growth: The Case of Ireland

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ABSTRACT

This study argues that Ireland's recent strong economic performance is the outcome of its National Systems of Technological Innovation (NSTI). Ireland's NSTI has resulted in a significant flow of inward FDI in technology intensive industries. The institutions that are the building blocks of the country's NSTI are: R&D infrastructures, labor skills, educational system, and telecommunication infrastructure. As discussed in the paper, the institutions of the Irish NSTI are the outcome of proactive economic strategies implemented by the Irish government.

INTRODUCTION

The interest in the relationship between firms and states has generated a substantial stream of international business literature (e.g., Vachani 1995). Among the topics investigated, the one on the bargaining between Multinational Enterprises (MNEs) and host states has advanced the farthest in paradigmatic development (Lenway and Murtha 1994). In particular, empirical studies have focused on the negotiation of agreements and investments in developing countries (Kobrin 1985). Less attention has been given to the strategies that Western countries with a low level of industrialization have developed to attract FDI.

The development of strategies to attract FDI is critical when there is intense competition for FDI between countries. As Graham and Krugman (1995) have noted, in 1980 countries outside Europe, Japan and the U.S. accounted for 15.5 percent of total stock of world FDI. By the end of 1988 this percentage was less than 9 percent. To attract FDI, it is important that governments understand the reasons why firms invest abroad. These can be reduced to two: sourcing competitive resources and response to competitive pressure in oligopolistic industries (Anand and Kogut 1997). The International Management literature has pointed out that international strategies are based on the interplay between a firm's competitive advantage and the comparative advantage of the country (ies) in which its value chain activities are performed (Kogut 1985; 1986). The competitive advantage of a nation is rooted in the resources that the country can offer to perform specific value chain activities (Porter 1990). It is also linked to domestic firms (Kobrin 1976) and to the foreign firms there located (O'Donnel and Blumentritt 1997). Countries' resources are not only related to wages and material costs, but are also related, particularly in advanced countries, to knowledge. "This knowledge is partly embodied in the skills of workers, and partly captured through spillovers due to proximity to research centers, suppliers or customers" (Anand and Kogut 1997: 446).

Ireland allows us to examine under what conditions the interaction between MNEs and a less industrialized country triggers the improvement of the qualitative and quantitative resources of a country, and, consequently, economic growth. In the case of Ireland, inward FDI was the outcome of strategies specifically designed to attract it. This behavior is consistent with Lenway and Murtha (1994) assertion that nations formulate strategies designed to attract FDI. Ireland's strategies have been developed to specifically attract those MNEs' value-chain activities most valuable to the country. In addition, the country's policymakers specifically targeted MNEs competing in knowledge intensive industries such as electronics and software.

The next section of the paper will provide the theoretical framework that we have used to investigate the Irish experience. A discussion of the Irish experience and concluding remarks follow.

THEORETICAL FRAMEWORK

FDI in knowledge-intensive activities requires that host countries develop the institutional capabilities needed to support them. The institutions of a nation are the sets of habits, routines, rules, norms, and laws, which regulate the relations between people and shape human interactions (Datum, Johnson and Lundvall 1992: 311). …

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