Monday, 4 November 2013

Apparent growth of inward investment to Ireland is largely a mirage

There has been much media attention recently to the apparently very high inflows of foreign investment into Ireland.  According to a report prepared for the American Chamber of Commerce Ireland, US firms invested $129.5 billion in Ireland over the five years to 2012, fourteen times the level of US investment in China.

Meanwhile, the CSO has reported a total foreign direct investment (FDI) inflow into Ireland of almost €30 billion in 2012 alone.

Yet employment in foreign firms here (most of which is American) has been falling – by eight per cent between 2007-2011 according to Forfás data – while sales have increased only marginally (by less than five per cent).  How can this be?

The main part of the answer lies in how statistics agencies measure FDI flows.  Thus, earnings of foreign companies that are reported in an economy but are not taken out are considered to be “reinvested earnings” (even though very little of it may be directed to productive activity) and are counted as an inward investment flow.  

Last year, these earnings accounted for three quarters of the total recorded FDI “inflow” into Ireland.  Most of these earnings actually originated abroad but were declared in Ireland for tax purposes.

It is also instructive that almost 60% of this FDI inflow went into financial activities (the bulk of it in financial intermediation) which have little connection with the real world where people work in producing goods and services.

According to The Irish Times (October 4), the person who wrote the report for the American Chamber stated that the investment in question was “real stuff…It is sticks in the ground, money being used for goods and services”.

While there certainly is a significant amount of new productive investment coming into the economy every year, the great bulk of the FDI inflow does not match this description.  It is as much a mirage as the large proportion of exports by foreign firms which consists of profits generated abroad and transferred to Ireland through transfer price manipulation (rather than representing goods and services produced in Ireland) and the large proportion of service inputs of these firms which consists of arbitrarily-set royalty payments.

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