Fdi in tradable_services_8211final_report

FDI Research Project –
Final Report

Department of Enterprise,
Trade & Investment

February 2008

For and on behalf of Experian
Approved by:

Clare Reid

Position:

Director of Economics, Strategy and
Research

Date:

6th February 2008

FDI Research Project –
Final Report
6th February 2008
Contents
Introduction................................................................................................................................................ 1
Background .............................................................................................................................................. 1
Objectives................................................................................................................................................. 1
Format ...................................................................................................................................................... 2
1

Context................................................................................................................................................ 3
1.1
Defining FDI ................................................................................................................................ 3
1.2
Type of FDI Project...................................................................................................................... 3
1.2.1 Greenfield ............................................................................................................................... 3
1.2.2 Mergers & Acquisitions ........................................................................................................... 4
1.2.3 Invest Northern Ireland’s Policy on FDI................................................................................... 4
1.3
Defining Tradable Services ......................................................................................................... 4

2

Literature review ................................................................................................................................ 6
2.1
Benefits of FDI............................................................................................................................. 6
2.2
global and uk trends in FDI.......................................................................................................... 7
2.2.1 Global geographic pattern....................................................................................................... 7
2.2.2 Likely future trends.................................................................................................................. 8
2.2.3 Global sectoral pattern ............................................................................................................ 9
2.2.4 UK trends .............................................................................................................................. 10
2.3
Exportable service trends .......................................................................................................... 12
2.4
Labour market implications of an FDI strategy .......................................................................... 15
2.5
Benefits to Tier One companies ................................................................................................ 17
2.6
Impact of Corporation Tax ......................................................................................................... 17
2.7
Reasons given for not investing ................................................................................................ 19

3

Investment inflows into Northern Ireland....................................................................................... 20
3.1
Northern Ireland in a UK context ............................................................................................... 20
3.2
total inflows 2002-2006.............................................................................................................. 21
3.3
Key investors............................................................................................................................. 21
3.4
Performance by Northern Ireland sub-region ............................................................................ 23
3.5
Performance by industry............................................................................................................ 23
3.6
Nation of ownership................................................................................................................... 24
3.7
Quality of job ............................................................................................................................. 25

4

Comparator Research...................................................................................................................... 26
4.1
Republic of Ireland..................................................................................................................... 27
4.1.1 Role of government............................................................................................................... 28
4.1.2 Performance.......................................................................................................................... 29
4.1.3 Critical success factors - benefits.......................................................................................... 31
4.1.4 Applicable lessons ................................................................................................................ 35
4.2
Sweden ..................................................................................................................................... 37
4.2.1 Role of government............................................................................................................... 37
4.2.2 Performance.......................................................................................................................... 37
4.2.4 Threats.................................................................................................................................. 40
4.2.5 Applicable lessons ................................................................................................................ 41
4.3
Poland ....................................................................................................................................... 41
4.3.1 Role of Government .............................................................................................................. 41
4.3.2 Performance.......................................................................................................................... 42
4.3.4 Threats.................................................................................................................................. 45
4.3.5 Applicable Lessons ............................................................................................................... 46

5

Workshops and business consultations........................................................................................ 47
5.1
Workshop .................................................................................................................................. 47
5.1.1 SWOT analysis ..................................................................................................................... 47
5.1.2 Developing opportunities and mitigating threats.................................................................... 49

6

Survey Findings ............................................................................................................................... 50
6.1.1 FDI Survey ............................................................................................................................ 50
6.1.2 Tier 1 Indigenous Suppliers Survey ...................................................................................... 51
6.2
FDI Survey Results.................................................................................................................... 51
6.2.1 Supply chain linkage ............................................................................................................. 51
6.2.2 International competitiveness................................................................................................ 53
6.2.3 New products and services ................................................................................................... 54
6.2.4 Increased skills...................................................................................................................... 55
6.2.5 Networking ............................................................................................................................ 56
6.2.6 Knowledge and Technology transfer..................................................................................... 57
6.2.7 Perceptions of Northern Ireland ............................................................................................ 58
6.2.8 Impact of FDI......................................................................................................................... 58
6.2.9 Summary............................................................................................................................... 58
6.3
Tier one Survey ......................................................................................................................... 58

7

Quantitative Analysis....................................................................................................................... 60
7.1
Methodological approach .......................................................................................................... 60
7.1.1 Input data .............................................................................................................................. 60
7.1.2 GVA impact calculation ......................................................................................................... 60
7.1.3 Employment impact calculation............................................................................................. 61
7.1.4 Fiscal impact calculation ....................................................................................................... 61
7.2
GVA Impact ............................................................................................................................... 61
7.2.1 Benefits ................................................................................................................................. 61
7.2.2 Net Overall Impact ................................................................................................................ 62
7.3
Employment impact ................................................................................................................... 62
7.3.1 Benefits ................................................................................................................................. 62
7.3.2 Net Overall Impact ................................................................................................................ 62
7.4
Fiscal benefits ........................................................................................................................... 63

8

Future trends in inward investment................................................................................................ 64
8.1
Investment outlook: overview .................................................................................................... 64
8.1.1 UK prospects......................................................................................................................... 64
8.1.2 Prospects for Northern Ireland .............................................................................................. 65
8.1.3 FDI opportunities for Northern Ireland in selected sectors .................................................... 66

9

Key Findings & Recommendations ................................................................................................ 70
9.1
Range of Benefits Tradable Services FDI Can Generate .......................................................... 70
9.1.1 Output benefits...................................................................................................................... 70
9.1.2 Employment benefits............................................................................................................. 70
9.2
Benefits at the Sub Sectoral Level ............................................................................................ 70
9.3
Fiscal Benefits of Service Sector FDI ........................................................................................ 71
9.4
Locational Factors ..................................................................................................................... 72
9.5
Forecast Trends ........................................................................................................................ 72
9.6
Market Failures.......................................................................................................................... 73
9.6.1 Identifying competitors .......................................................................................................... 74
9.7
International Examples .............................................................................................................. 74
9.8
Recommendations..................................................................................................................... 77
9.8.1 Focus .................................................................................................................................... 77
9.8.2 Corporation Tax .................................................................................................................... 77
9.8.3 Skills in high-tech industries.................................................................................................. 78
9.8.4 Measuring the impact of the Tradable Services sector. ........................................................ 78

Appendix A: Crowding out effects of FDI investment on Northern Ireland businesses
Appendix B: Model to generate economic impact calculation
Appendix C: Methodological note on Experian’s regional forecast

FDI Research – Final Report

Introduction
BACKGROUND
In June 2006, the Department for Enterprise, Trade and Investment in Northern Ireland
(DETI) appointed Experian’s Business Strategies Division to provide a robust evidence base
of trends in and the value of Foreign Direct Investment (FDI) in Northern Ireland, to improve
its understanding of the benefits that FDI projects can bring to the local economy and by
examining likely trends in FDI, identify the key sectors and markets which Invest NI should
target.
As well as DETI, other organisations included in the Client Steering Group for the research
are Invest NI and DEL.
The definition that this report will use for the tradable service sector will be the same as that
used in DETI’s Exporting Northern Ireland Services study (see section 1.3). In order to
develop a broader view of service sector exports in the UK in Northern Ireland, the report will
use the term ‘exportable services’ to describe those services that export at least five per cent
of their produce.
OBJECTIVES
The objectives of this study were to:
•

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

•

Explore these benefits at a sub-sectoral level, including wider supply chain benefits
accruing 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 failures
where government can respond;

•

Explore international examples of the development of successful tradable services subsectors;

•

Identify the policy implications of the evidence gathered.

•

•

Propose a series of actions that need to be taken to improve Northern Ireland’s
competitive advantage and also ensure that benefits from inward locating projects are
maximised. This will provide the rationale for all agencies and organisations with a
stake in FDI; and
Develop a series of recommendations that set out exactly what type of investment you
should or could attract and the most effective means of doing this.

1


FORMAT
The remainder of this document is structured as follows:
•

•

•

Section one sets out the context for the later analysis, by defining what is meant by the
terms ‘FDI’, ‘type of investment’ and ‘tradable services’;
Section two sets out the findings of the literature review, and includes an analysis of
trends in FDI and total investment in the UK and global economies, and an analysis of
the implications that FDI growth can have on economies and labour markets.
Section three discusses trends in total FDI, and tradable services FDI in Northern
Ireland by year, by sector, by geographic area of investment and by nation of
ownership.

•

Section four discusses the comparator research on Ireland, Sweden and Poland;

•

Section five summarises the views of stakeholders in the Northern Ireland economy
during the consultation and workshop stages;

•

Section six summarises the main results of the Survey elements of the research;

•

Section seven provides an analysis of the impact of FDI in Northern Ireland;

•

Section eight examines future trends in investment inflows into Northern Ireland
against a favourable global context; and

•

Section nine provides a summary of the key findings from the research and
recommendations for the policy interventions that should follow from this work.

2


1

Context

International trade and investment flows provide a strong stimulus to global economic growth
and to expansion in individual countries. Regions within national economies share the
benefits, 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 the
United Nations, FDI is defined as an investment made to acquire a lasting interest in an
enterprise operating outside of the economy of the investor1. Investment may be in
incorporated or unincorporated enterprises, branches or subsidiaries. The investor’s purpose is
to gain an effective voice in the management of the enterprise. Some degree of equity
ownership is almost always associated with acquiring an ‘effective voice’ and international
institutions’ guidelines suggest a threshold of 10 per cent. FDI is also more likely to result in
the importation of new technology and management skills, and is less likely to displace
existing operations.
The above definition involves cross-border flows. A broader concept of direct investment
can be considered, to include inflows from other parts of the same nation-state. Such flows
are much harder to identify, but if the data are available, they provide information that is of
great interest in analysing the economic impact of direct investment. Information on total
direct investment (‘cross border’ plus ‘investment from elsewhere in the UK’) is indeed
available for Northern Ireland at the broad tradable services level, but not for the narrower
definition used in this report.
1.2

TYPE OF FDI PROJECT

Although all FDI should generate economic benefits to some degree, the extent of the benefits
will, in reality, vary substantially depending upon whether the FDI is a greenfield investment
or a merger/acquisition.
1.2.1

Greenfield

A greenfield investment establishing a new operation or expanding existing facilities is likely
to be of greatest benefit, providing new capacity, additional jobs, possibly new technology
and management techniques, training for staff and potential linkages to the global
marketplace. The increase in employment will provide additional spill over benefits to the
local economy via increased effective demand. There may be an additional boost where the
new 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’ as
the incoming producer draws on local resources of labour and intermediate goods. In addition
there is a risk that profits do not wholly feed back into the local economy but are repatriated
to the investor’s home economy.

1

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

3


1.2.2

Mergers & Acquisitions

Mergers and/or acquisitions (M & As) account for the bulk of FDI but their initial impact is
less powerful than a greenfield investment since they normally involve merely a change of
ownership of existing assets. New technology and management skills may be introduced and
linkages to the global market may be enhanced. But if the merger/acquisition leads to an
expansion of capacity, the outcome would be similar to that following a greenfield
investment. Because the benefits of greenfield investments are significantly greater than
those associated with mergers and acquisitions, this research is concerned with the former
type of investment.
1.2.3

Invest Northern Ireland’s Policy on FDI

Invest Northern Ireland’s policy towards FDI states that funding will only be provided to
support investments in export-oriented businesses. Invest NI therefore does not assist HQ
operations, sales and marketing operations and logistic and distribution sectors. Nor does
Invest NI assist mergers and acquisitions unless they lead to subsequent development
projects.
1.3

DEFINING TRADABLE SERVICES

The term ‘tradable services’ generally refers to any services that are capable of being
imported and exported, i.e. services that are not necessarily purchased at the point of
production, such as software design and consultancy. However, in some instances, the term
can be broadened to include services such as transportation and hospitality that are purchased
locally, 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 the
Standard Industrial Classification (SIC) makes no distinction between tradable and nontradable activities. This means that, in many cases, SIC codes will include a mixture of
tradable and non-tradable activities2.
DETI’s Exporting Northern Ireland Services Study3 (ENIS) recommended that a definition be
based upon those sectors that have the highest potential to trade services internationally. The
sectors 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, in
order 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 banks
and telephone banking providers; between universities that provide distance learning qualification and
those that do not provide such qualifications or between manufacturing companies who only sell
processed outputs and those who also offer design services.
3
Exporting Northern Ireland Services Study, DETI, March 2007, http://www.detini.gov.uk/cgibin/downdoc?id=2844

4


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

5


2

Literature review

From a review of a range of literature sources, this section describes the benefits that FDI can
bring to an economy, assesses recent global and UK trends in FDI, and examines the impact
of 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 identifies
wider 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 2005 Economic Vision for Northern Ireland sets out a
policy to “adopt a targeted approach to FDI, which provides wider economic benefits to the
economy and puts structures in place to encourage investment across all of Northern Ireland
so that all areas benefit from sustainable economic growth and high value added
employment”.
Although an increase in the level of FDI investment does have potential to deliver clear
benefits to the Northern Ireland economy, there is a risk that the incoming businesses could
crowd out activity in, and displace labour from, the indigenous business base. As part of our
research we have carried out an examination of literature on the crowding out issue, and have
concluded that although 100 per cent crowding out is unlikely to occur, some allowance for
crowding 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 job
quality. The evidence of whether these benefits have been experienced within Northern
Ireland is mixed. A recent study by Invest Northern Ireland5 found that 56 per cent of full
time jobs promoted by first time inward investments, had weekly salaries above the Northern
Ireland average for full time private sector employees. However, an analysis of more recent
figures provided by Invest Northern Ireland showed that 69 per cent of full time workers in
FDI companies earned more than the Northern Ireland average, and that 49 per cent of full
time workers in tradable services FDI companies did so. This job quality issue will be
explored 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 country’s skills base. In a recent study of the benefits of FDI to the
Australian economy6, Invest Australia argued that recipient economies can benefit from “a
cross-pollination and sharing of ideas”, and that the skills of the local workforce can be
enhanced through:

4

This will be examined in greater detail in the discussion on crowding out that follows.
Performance Report 2003/2004 – 2004-2005, Invest Northern Ireland,
http://www.investni.com/performance_report_02-05.pdf
6
Benefits of Foreign Direct Investment to Australia, Invest Australia, 2004
5

6


•
•
•
•
•

2.2

Staff relocating to the country from other parts of the multi-national’s operation;
Staff being provided with global exposure as a result of their interaction with the
investor’s 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.
GLOBAL AND UK TRENDS IN FDI

Data on trends in total FDI (including non-tradable activities) are available in terms of annual
flows (from the perspective of both the originating countries and recipients) and stocks, which
reflect the accumulation of flows in a country over a period of time. We use both approaches
to illustrate trends in the evolution of FDI.
FDI flows reached a peak at the turn of the century (Table 2.1) as the global economy
expanded vigorously, investment in technology surged and mergers and acquisition activity
was especially strong. The economic slowdown of the early years of this decade and the
terrorist attacks on the US led to a marked deceleration in FDI, but the pace of flows has
picked 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, they
accounted for virtually all such flows, and even in 1980 the level of FDI from developing
countries was small. But the past quarter of century has seen important changes. While
developed economies still account for the bulk of FDI outflows, their share has decreased as
developing economies – notably in Asia – have expanded rapidly and in the cases of China
and India, participate more actively in the international economy through their steady
liberalisation of trade policies. The growing importance of developing economies as a source
of 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 flows
is on a steadily declining path, the share of individual regions within the total flows can be
very volatile.
Table 2.1 - FDI outflows (% of total unless otherwise noted)
1970
Developed economies
99.7
North America
58
Europe
36
Developing economies
0.3
World ($ million)
14,157
Source: UNCTAD (http://stats.unctad.org/FDI)

1980
93.8
43.4
45
6.2
53,743

1990
94.6
15.2
58.2
5.4
238,681

2000
88.1
15.1
69.9
11.9
1,239,149

2004
87.3
37.9
42.4
12.7
730,257

The pattern among recipients of FDI is similar to that shown in Table 2.1. The rise of the
developing economies has been strong, although from a much higher base than in the case of
outflows, as the attractions of lower production costs have long been an incentive for
transnational companies to locate operations in such countries. In 1980 developing countries
received 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 over
the period was from $7.5 billion to $67.5 billion.

7


Table 2.2 - FDI inflows (% of total)
1980
Developed economies
84.5
Developing economies
15.5
Asia
1
Latin America
14
S E Europe/CIS
0.5
Source: UNCTAD (http://stats.unctad.org/FDI)

2004
59
41
23
10
5

A useful way of considering the importance of individual countries in the global picture of
FDI is to investigate their stock of inward investment. The United Nations Conference on
Trade and Development (UNCTAD) annual investment report7 contains a wealth of
information on this and allied topics. The following table highlights the importance of the UK
in this context, second only to the US in terms of the value of investments, and shows the
rapid emergence of China as a major recipient.
Table 2.3 - FDI stock and greenfield projects ($ billion unless otherwise noted)
1990

Top developed countries*
US
UK
France
Top developing countries*
China (ex Hong Kong)
Mexico
Brazil
Source : UNCTAD World Investment Report
*In terms of FDI stock

2004

% growth

Number of
greenfield
projects 2002-04

395
203
86

1,474
771
535

273
280
522

1,580
1,222
482

21
22
37

245
182
151

1,066
727
344

3,409
451
720

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 well
above that seen in France, although in overall percentage growth terms France has increased
its FDI more rapidly than the UK. China’s record in this context is extremely impressive, well
ahead of the US. India, with 1,392 projects is in third place and Russia has also attracted over
1,000 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 to
have declined as a consequence of the country’s introduction of a one-off corporation tax
amnesty 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 world’s emerging economies taking on a new global
presence 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 existing
sources such as China and India will take on even greater importance..

7
7

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

8


Figure 2.1 shows forecasts for average annual FDI per head of population (in US$) and FDI
as a percentage of GDP from 2006 to 2010 for a selection of countries. It shows that the
Republic of Ireland will have the third highest FDI per capita figure of the 82 countries
assessed, 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
$6,000

18%
16.5%
16%

15.0%
$4,776

$5,000

$4,750
14%

$5,037
$4,000

12%
$3,258

10%

$3,053

$3,000
$2,459

8%

7.9%

$2,000

6%

6.7%

$1,480
$1,144

5.1%
$1,000

3.6%

4%

$984

2.2%
$479

2.9%

$224

2.0%

1.2%

Source: The Economist Intelligence Unit, 2006

2.2.3

an
y

U
S

0%

er
m
G

Fr
an
ce

U
K

Sw
ed
en

nd
s

m

N
et
he
rla

Be
lg
iu

la
nd
Ire

Ko
ng
H
on
g

Si
ng
ap
or

e

$0

2%

Po
la
nd

7.9%

FDI inflows per head ($US)
FDI inflows as % of GDP

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, while
manufacturing (led by computers and other electronic equipment and textiles) dominates the
picture, sectors such as distribution and financial services have recently seen significant
inflows. The trend towards services is seen in the following table.
Table 2.4 - World FDI stock by sector
% shares of total inward FDI
Primary (agriculture and mining)
Manufacturing
Construction and electricity, gas water

1990
9.5
41.6
1.7

2003
6.9
33.3
3.2

Services
47.2
56.6
Trade
12
10.7
Hotels and restaurants
1.3
1
Finance
19.7
18
Business activities
6.8
14.9
Transport & communications
1.5
5.2
Source: UNCTAD World Investment Report 2005, Statistical Annex

9


2.2.4

UK trends

New FDI investment into the UK grew steadily from 1988 to 1997, before undergoing four
years of rapid growth between 1997 and 2000. Investment that fell rapidly in the wake of the
September 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
90

Billions of
Pounds

80

78.5

70

54.4

60
44.9
50
42.8
40
36.6
20.3

30

12.4
20
11.6

17.4

15.7
12.7

17.2
8.4

10

8.8

9.9

16.0

6.0

0
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

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 in
2005/06 as the UK recorded its highest ever number of inward investment projects.8 Of the
1,220 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 of
projects, with a strong representation in knowledge-intensive sectors. IT, software, internet
and e-commerce represented 284 projects.
Survey evidence supports the view that the UK remains a top attraction for investment. The
annual survey by Ernst & Young revealed that in 2005, of 3,066 FDI projects in Europe, 559
went to the UK, 538 to France and 181 to Germany in third place. An interesting feature of
the survey was that 29 per cent of FDI projects in France were in manufacturing against 19
per cent in the UK. The annual IBM survey also showed the UK in the lead, with France close
behind, in terms of the number of new projects.
Approximately half (51 per cent) of all FDI inflows into the UK originates from within
Europe, with Germany investing the most out of any European nation, followed by France
and the Netherlands. The US is the biggest single investor in the UK, accounting for 33 per
cent of all investment, while 8 per cent of investment comes from Asia, and the remaining 10
per cent is spread across the rest of the world (Table 2.5).

8

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

10


Table 2.5 - Gross foreign direct investment in the UK by nation of origin, 2003
Percentage of total
investments
Germany
France
Netherlands
Other Europe
USA
Other America
Asia
Rest of the World
Source: National Statistics (Pink Book), 2006

13
11
13
14
33
5
8
5

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 the
UK include the transport & communications, retail & wholesale, utilities, business service
and chemicals & plastics sectors (Table 2.6).
Most heavy industries, including the metals and mechanicals products and office equipment
sectors 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 2006
Ernst & Young Global Attractiveness Monitor. It shows that transport & logistics
infrastructure and labour costs are considered to be the most important influencers, both being
described as ‘very important’ by a majority of respondents. Corporate tax rates, a key
differentiator between the Northern Ireland and Republic of Ireland offer, are also considered
important, 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, and
is considered to be of little or no importance by 36 per cent of respondents.

11


Figure 2.3 - Ranking of the selection criteria for an investment location
Transport & logistics infrastructures

54

35

Labour costs

52

39

3

7
7

2

Potential productivity increase

48

38

Telecommunications infrastructures

48

40

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

47

39

9

3

Corporate taxation

46

40

9

3

Local labour skills levels

45

42

9

3

The country or region's domestic market

44

39

12

4

Flexability or labour legislation

41

42

13

3

Social climate and environment stability

40

8

3

8

4

9

48

2

The country or area's specific skills

33

Avail. of sites, cost of land & regulations

31

R&D availability and quality

29

Local language, culture and values

29

Specific treatment of expat. execs/corp HQs

27

Aid, subsidy & support from public authorities

24

41

24

8

Membership of the Euro zone

23

40

26

10

Quality of life

23

Access to local financial investors

22
0

Very important

Of some importance

42

19

42
36

24

42

6
7

23

18

23

30

Of little importance

11

22

34

40

6

19

42

20

4

31
60

16
80

100

Not at all important

Source: Ernst & Young,
2006

2.3

EXPORTABLE SERVICE TRENDS

‘Exportable’ services can be identified as service sector industries within which a significant
proportion 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 of
industrial output is exported. These are shown in Table 2.7.

12


Table 2.7 - Export share of UK service sector industries
Industry

Percentage of
output exported

Exportable services
Water transport
Auxiliary financial services
Research & development
Other business services
Air transport
Computer services
Architectural activities & technical consultancy
Recreational services
Banking & finance
Advertising
Legal activities
Accountancy services
Insurance & pension funds
Hotels, catering, pubs etc.
Telecommunications
Market research & management consultancy

60.8
53.9
43.9
22.5
18.9
12.1
11.7
9.9
9.8
8.9
8.4
8.2
7.6
7.2
7.2
4.8

Other services
Other land transport
Ancillary transport services
Railway transport
Postal & courier services
Education
Other service activities
Renting of machinery etc.
Public administration & defence
Motor vehicle distribution & repair, automotive fuel retail
Retail distribution
Letting of dwellings
Private households with employed persons
Sewage & sanitary services
Owning & dealing in real estate
Health & veterinary services
Estate agent activities
Social work activities
Source: ONS Input-Output Statistics, 2004

4.3
3.8
3.7
2.6
2.0
1.2
1.2
1.0
0.4
0.3
0.3
0.2
0.2
0.2
0.2
0.0
0.0

Figure 2.4 shows the long-term trend in export sales in the 16 selected exportable service
industries, 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 per
cent in 2004. In contrast, the proportion of output exported across UK industries as a whole
has remained fairly static at close to 11 per cent.

13


Figure 2.42
Proportion of UK output exported by industry grouping, 1992 - 2004

18
17
16
15
All Industries
Exportable services

14
13
12
11
10
1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

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

Figure 2.5 shows the percentage change in export share in selected exportable service
industries between 1992 and 2004. The table shows that over this period, the UK has
managed to establish itself as a leading exporter of research and development, and has
enjoyed a substantial increase in banking and financial services exports. Although total output
in the air transport sector has increased substantially over this 12 year period, the majority of
this increase originated from sales to UK based customers, and as a consequence, the export
share in this sector has fallen sharply.
Figure 2.5
Percentage point change in export share 1992 - 2004 for selected industries
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

-15

-10

-5

0

5

10

15

20

25

30

35

ONS 2004 Input-Output data

14


2.4

LABOUR MARKET IMPLICATIONS OF AN FDI STRATEGY

Northern Ireland currently has one of the smallest private services sectors of any developed
economy. However, a recent study by Regional Forecasts Ltd forecasts a large increase in
service sector jobs over the coming decade, as shown in Table 2.8. A successful strategy to
attract 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 largest
numbers of new workers over the next ten years. It shows that, over the period, 43,950 new
jobs will be created, while 698,940 further vacancies will arise as a result of people moving
between occupations, people becoming unemployed or inactive, people retiring or people
migrating away from Northern Ireland. Most of the new jobs created will be in occupations
that are in heavy demand by the service sector, while predominantly manufacturing
occupations, such as skilled trades, and process, plant and machine operatives, look likely to
experience a continuing fall in new employment demand.
It should be noted that these figures represent a baseline forecast for the Northern Ireland
economy over the eleven year period, and that any future FDI strategy could, potentially, lead
to employment demand levels that are higher than the figures shown below.
Table 2.8 - Forecast new employment and replacement demand in Northern Ireland by
occupation, 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
97,740
Process, 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 by
11

If present trends continue, future FDI investment will be disproportionately concentrated in
and 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 of
total employment (see Table 2.9).

15


Table 2.9 – Share of FDI and employment by district
Percentage of FDI
Percentage of total
Index
workforce
employment
Belfast
33.4
32.4
103
Derry
13.8
6.9
200
Craigavon
6.7
6.2
109
Lisburn
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
District

In addition to the benefit of increased labour demand described above, Driffield8 suggests that
FDI can potentially deliver further benefits to the Northern Ireland labour market by
increasing the allocative efficiency, and therefore the productivity of the workforce. In other
words, because more employment opportunities are made available to individuals working in
Northern Ireland, it will be easier for individuals to identify working opportunities that are
well suited to their skills and experience.
However, Driffield also suggests that, as a consequence of the increased demand for labour
brought about by FDI investment, and the resulting increase in industry wages, some
indigenous businesses may attempt to reduce costs by substituting labour for capital. The
extent of such substitution will vary according to the degree of FDI investment in the industry
in 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 on
three different types of skills, namely:
•

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

8

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

16


•
•

Employability skills, including the key skills of team working, problem solving and
flexibility; and
Work based skills, specific to a particular occupation or sector.

The 2006 Programme of Implementation for this strategy outlines how these types of skills
will be developed, citing, for example, work to increase the presence of UK wide Sector
Skills 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 also
yields additional benefits for the indigenous companies who supply them (referred to in this
study as ‘tier one companies’) and other Northern Ireland businesses. These include, for
example, the profits made by local companies as a result of sales to FDI investors, profits
made as a result of spending by the employees of FDI investors, profits gained as a result of
knowledge shared with investors, and agglomeration benefits (benefits of being located in
close 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 base
varies according to the characteristics of the FDI investor. For example, Turok9 argues that
inward investors can be categorised into two broad types10:
•

•

Investors with developmental linkages to indigenous businesses – Investors that
establish long-term collaborative partnerships with local businesses; have decentralised
management structures; procure bespoke good and services from knowledge-intensive
local industries; and employ a diverse range of local staff;
Investors with dependent linkages to indigenous businesses – Investors that procure
basic goods and services at a minimal price from local companies, who employ low
skilled staff in elementary activities on temporary or casual contracts, with highly
centralised organisational structures.

Turok argues that while the former companies are likely to contribute to self-sustaining
growth in a local economy, the latter group are likely to leave the economy vulnerable to
market conditions elsewhere in the global economy, with a risk of large-scale low skills
employment loss should the company close its operations11.
An estimate of the output and employment benefits received by tier one companies in
Northern 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 role
that the corporation tax differential between the Republic of Ireland (which has a 12.5 per
cent 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, 1993
These two types are used for illustrative purposes. In reality, most companies would lie within a
spectrum between these two extremes.
11
It should however be acknowledged that attracting companies with dependent linkages may prove
desirable from an equity perspective as these employers are more likely to offer employment
opportunities in areas of high economic inactivity.
10

17


Centre and in the manufacturing sector) and Northern Ireland (which, in line with other parts
of the UK, has a 30 per cent main rate)12.
The most obvious issue associated with such corporation tax differentials is that they may
cause firms to choose to locate in low tax countries such as the Republic of Ireland, rather
than in Northern Ireland, in order to reduce the amount of tax they are required to pay. A
second issue is that they may encourage the branches of multinational corporations in high tax
locations, such as Northern Ireland, to sell goods and services to branches in low tax
locations, (such as the Republic of Ireland) in order to reduce the company’s overall tax
burden. This practice, known as transfer pricing, would reduce the total tax yield generated in
the high tax country13.
In a recent report entitled Assessing the case for a differential rate of corporation tax in
Northern Ireland (, November 2006), the Economic Research Institute of Northern Ireland
estimate the impact that is likely to occur, should Northern Ireland reduce its corporation tax
rate 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 tax
would 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 should
become 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 result
of UK companies relocating profits to capitalise on ‘transfer pricing’, it may understate the
true likely benefit of such a change (Figure 2.6).

12

Recent articles include DUP and Sinn Féin back corporate tax cut, Financial Times, 13th November
2006 and NI pledged €79bn to underpin St Andrews Agreement, Irish Times, 2nd November 2006
13
Likewise, if Northern Ireland’s 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 Ireland
reassigning profits to their Northern Ireland offices.

18


Figure 2.6 – Benefit to UK fiscal balances of a reduction of Northern Ireland
corporation tax rates to 12 per cent
2500

£ million
2000

1500

1000

500

0

20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30

-500

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

2.7

REASONS GIVEN FOR NOT INVESTING

In 2000, the House of Commons Northern Ireland Affairs Committee14 provided a list of
reasons why unsuccessful FDI investment leads had taken the decision not to locate in
Northern 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 Good
Friday Agreement, at a time when political stability concerns were more pertinent than they
are currently. However, the three other concerns are all likely to remain of importance to
foreign direct investors.
Inappropriate skills, absence from the Eurozone and infrastructure issues were not cited as
barriers by any of the leads questioned, However, it is possible that these and other issues
may have impacted on the decisions made by other investors.

14

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

19


3

Investment inflows into Northern
Ireland

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 Northern
Ireland, equating to 21 successes per million people. In other words, on 36 occasions, an
overseas company specified an interest in, and successfully completed an investment in,
Northern Ireland. Of these companies, 14 were manufacturers (eight per million people) and
22 were non-manufacturers (13 per million people).
During this year, Northern Ireland had the UK’s joint third highest success rate in terms of
population share, behind only London and the North East (Figure 3.1).
Figure 3.1 – FDI project successes per million population, 2004/5
40

35

Manufacturing

36.7
1.3

Non-manufacturing

30

25

22.6

20

21.7

20.6
19.0

4.3
35.4

10.5

15.7

8.0

15

14.4

8.5
6.9

10

13.3

4.4

3.9

12.8
5.4

12.0
2.3

2.4

17.4
12.6

12.1

5

10.5

10.7
7.5
2.2

8.8

9.0

9.4

7.4

9.7

8.3
5.3

0
London

North
East

South
East

Northern
Ireland

Wales

East
Midlands

North
West

Scotland

West
Midlands

East

Yorkshire
&
Humber

South
West

Source: National Statistics 2006

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

20


Figure 3.2 – Percentage change in number of FDI projects
233%

East Midlands
North West

121%
136%
69%
72%
71%

North East
27%

Northern Ireland
Yorkshire & Humber

64%

Scotland
South East
West Midlands
-100%

200%

64%
-4%

138%

44%
-29%

31%
27%
117%

8%
20%

East
South West

100%

-37%

Wales
London

375%

300%
173%

-31%
0%
-38%

20%

-6%

Manufacturing

46%

-14%
-7%
-38%
-29%
-33%
-50%

23%

Non-manufacturing
Total
0%

50%

100%

150%

200%

250%

300%

350%

400%

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 figure
shows that the Northern Ireland economy has generally experienced a steady increase in FDI
investment, although it did experience two exceptionally strong years of investment in 2004
and again in 2006.
In both these years, the exceptional performance was mostly attributable to major investments
by Northbrook Technology and Citigroup, which together contributed 635 jobs in 2004 and
585 jobs in 2006.
Table 3.1 - Trends in Northern Ireland FDI
Tradable service
Projects

Jobs
created

2002
4
163
2003
5
185
2004
11
1,188
2005
11
255
2006
11
1,073
Source: Locomonitor, 2007

3.3

All industries

Capital investment
(US$m)

Projects

Jobs
created

Capital investment
(US$m)

41
102
6.5
39.97
176.69

12
16
27
39
32

583
880
1,862
1,407
4,263

151
385
224.4
492.84
440.88

KEY INVESTORS

Since January 2002, FDI in Northern Ireland has been dominated by the IT and business and
financial services sectors, with six of the ten biggest investors in job creation terms operating
in these sectors. The most significant investor over this period was ICICI, the Indian contact
centre operator, which created 1,600 jobs in Belfast and Derry.
Northbrook Technology and Citigroup were the only two tradable service companies to
appear in the list of the ten most significant investors.

21


Table 3.2 - Northern Ireland’s largest foreign direct investors, January 2002 to March 2007
Investing company
ICICI OneSource
Northbrook Technology
HCL BPO
Citigroup
Asda
Teleperformance
IKEA
Quinn Direct Insurance
Image Communications Group
Seagate Technology

Country
of origin
India
USA
India
USA
USA
France
Sweden
Ireland
Ireland
USA

Destination city
Belfast, Derry
Belfast, Strabane, Derry
Belfast, Armagh
Belfast
Antrim, Enniskillen
Newry
Belfast
Enniskillen
Armagh
Derry

Jobs
created
1,600
1,060
825
560
475
450
400
350
304
300

Capital invested
(US$m)
0
42
2
0
86
13
0
13
0
241

Sector

Key business function

Business Services
IT and Software
Business Services
Financial Services
Food and Drink
Business Services
Consumer Products
Financial Services
Telecom Services
Business Equipment

Customer Support Centre
Research and Development
Retail
Retail
Manufacturing, R&D

Table 3.3 - Northern Ireland’s largest tradable services foreign direct investors, January 2002 to March 2007
Investing company
Northbrook Technology
Citigroup
Allen Systems Group
Polaris Software
FG Wilson
Avalanche Technology
CEM Solutions
Gambro BCT
HCL BPO
Liberty Information Technology

Country
of origin
USA
USA
USA
India
USA
USA
USA
Sweden
India
USA

Destination city
Belfast, Derry, Strabane
Belfast
Belfast
Belfast
Larne
Belfast
Belfast
Larne
Belfast
Belfast

Jobs
created
1,060
560
168
158
155
130
100
86
75
51

Capital invested
(US$m)
42
0
6
0
87
13
32
13
0
8

Sector

Key business function

IT and Software
Financial Services
IT and Software
IT and Software
Machinery & industrial goods
IT and Software
Healthcare
Business Services
IT and Software

Business Services

22


3.4

PERFORMANCE BY NORTHERN IRELAND SUB-REGION

Belfast is by far the most popular location for FDI investors into Northern Ireland, with 30
tradable service investors, and a further 29 non-tradable service investors choosing to locate
there 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 additional
jobs. However, outside of these two cities, only Larne, Strabane, Bangor and Downpatrick
have succeeded in generating employment opportunities through tradable service
investments15.
Table 3.4 - Geographic breakdown of Northern Ireland FDI investments, January 2002
to March 2007
Tradable service
Projects
Belfast
30
Derry
3
Larne
3
Strabane
1
Bangor
1
Downpatrick
1
Armagh
1
Newry
0
Antrim
0
Enniskillen
0
Kilkeel
0
Carrickfergus
0

3.5

All industries

Jobs
created

Capital invest
(US$m)

Projects

Jobs
created

Capital invest
(US$m)

2,151
360
270
100
18
15
0
0
0
0
0
0

113
111
110
0
0
1
27
0
0
0
0
0

59
11
5
1
4
2
3
3
2
3
2
4

4,239
1,766
321
100
218
85
704
450
425
436
264
176

243
375
110
0
0.5
5
27
13
45
61
25
216

PERFORMANCE BY INDUSTRY

Since January 2002, the Northern Ireland IT and software industry has attracted more FDI
investments 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 been
created. Other sectors that attract significant levels of FDI in the region include the financial
services sector and food and drink.
The vast majority of tradable service sector investments have occurred within the IT and
software sector, though the business services sector has also received investments. All of the
tradable investments outside these two sectors relate to the establishment of research and
development facilities, and include Citigroup’s Technology Centre of Excellence and
Assystem’s Aerospace Design Innovation Centre (both in Belfast).

15

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

23


Table 3.5 - Industry breakdown of Northern Ireland FDI investments, January 2002 to
March 2007
Tradable service

All industries

Projects
Business services
IT and software
Financial services
Food and drink
Consumer products
Aerospace
Telecom services
Business equipment
Consumer electronics
Real estate
Pharmaceuticals
Healthcare
Aerospace
Electronic components

3.6

Jobs
created

Capital inv
(US$m)

Projects

Jobs
created

Capital inv
(US$m)

2
30
2
1
3
0
0
0
2
0
0
0
1
1
1

75
1,842
560
0
284
0
50
0
0
0
0
0
86
50
17

0
128
0
0
129
0
2
0
96
0
0
0
13
2
0

13
30
9
9
7
2
5
3
3
2
2
1
1
1
1

3,118
1,842
1,378
941
415
415
314
309
300
220
150
100
86
50
17

16
128
61
350
130
0
88
1
241
44
0
5
13
2
0

NATION OF OWNERSHIP

The USA are by a significant margin the largest FDI investor in the Northern Ireland
economy, making investments in 30 tradable services, and a further 62 non-tradable
investments since January 2002, and generating 4,057 additional jobs. India are also a major
investor, and their two tradable service sector investments (HCL and Polaris Software), have
together created 233 jobs in Belfast.
Although FDI investment from the Republic of Ireland has created a significant number of
jobs across the Northern Ireland economy as a whole, and in the finance, telecoms and food
and 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
16

All industries

Tradable service
Projects
USA
30
India
2
Sweden
1
France
2
Germany
3
Turkey
1
Ireland
2
Spain
0
Taiwan
0
Japan
0
South Korea
0
Belgium
0

Jobs
created

Capital invest
(US$m)

Projects

Jobs
created

Capital invest
(US$m)

2,443
233
86
80
55
17
0
0
0
0
0
0

309
0
13
13
6
0
27
0
0
0
0
0

62
8
6
11
6
1
20
1
1
3
1
2

4,057
2,583
561
906
295
17
1,004
180
150
116
70
6

1,140
3
57
100
8
0
147
0
40
28
4
0

16

Further investment were made from Bermuda and Austria based companies, however these did not
lead to the creation of any additional jobs

24


3.7

QUALITY OF JOB

Table 3.7 provides an illustration of the quality of job offer associated with recent FDI
investments both in Northern Ireland’s tradable service sector, the manufacturing sector and
across the business base as a whole. It shows that, although FDI has helped to safeguard a
number of high wage jobs, many of the newer jobs that have been created are lower value
added, 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 Median
salary
Tradable
Manufacturing
All industries
services
New jobs
47
72
54
Safeguarded jobs
100
84
84
All jobs
49
81
69
Source: Invest NI, NI Annual Survey of Hours and Earnings

Figure 3.3 provides a comparison of average wages in Northern Ireland’s tradable service FDI
businesses, 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 private
sector labour force.
The figures appears to present an opposing view to the table above, showing that the average
weekly 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 paid
staff, this is often offset by a minority of employees who are paid substantially more than the
national average.
Figure 3.3 – Comparison of average weekly wages by area and sector
£380

£374.52
£367.70

£370

£364.10

£363.90

All Employment, UK

All Private Sector
Employment, Northern
Ireland

£360
£350
£340
£330

£324.70

£320
£310
£300
£290
New and safeguarded
FDI, NI Tradable
Services

New and safeguarded
FDI, All industries

All Employment,
Northern Ireland

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

17

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

25


4

Comparator Research

This section provides comparator analysis for three countries, Ireland, Sweden and Poland.
The focus of the case studies is on the main tradable service sectors in which the three
countries have been successful in attracting FDI. The purpose of the case study analysis is to
consider lessons applicable to Northern Ireland or ideas that can be replicated. The three case
studies were selected working with the Client Steering Group:
Ireland – Focusing on the International Finance Services Centre (IFSC) in Dublin;
Sweden – Focusing on Electronics and ICT;
Poland – Focusing on Telecoms and Financial Services.

•
•
•

The figure below shows FDI inflows for our three case study countries.
Figure 4.1

FDI Inflows per annum
70,000

Ireland FDI inflows
60,000

Sweden FDI inflows
Poland FDI inflows

Dollars Millions

50,000
40,000
30,000
20,000
10,000

04
20

03
20

02
20

01
20

00
20

99
19

98
19

97
19

96
19

95
19

94
19

93
19

92
19

91
19

19

90

0

Source: Eurostat

There is a general upward trend for Ireland and Poland in particular although each country has
seen volatility in FDI inflows. Sweden has seen the largest fluctuations with FDI increasing
steadily over most of the 1990s; recording an exceptional, one-off peak in 1999, following the
£22 billion takeover of Astra by Zenica, a UK firm18; and declining in recent years. FDI
inflow growth in Poland has been the most gradual but consistent.
The figure below shows FDI outflows for the three case study countries.

18

http://news.bbc.co.uk/1/hi/business/576197.stm

26


Figure 4.2

FDI outflows per annum
120,000
Ireland FDI outflows
Sweden FDI outflows

100,000

Dollars Millions

Poland FDI outflows
80,000

60,000

40,000

20,000

20

04

03
20

02
20

01
20

00
20

99
19

98
19

97
19

96
19

95
19

94
19

93
19

92
19

91
19

19

90

0

Source: Eurostat

The table shows that outflows from Sweden have generally been more volatile than those in
Poland 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 performance
for the three countries.
Table 4.1 - FDI Actual Performance by Rank
1990
Ireland Inward FDI Rank
Poland Inward FDI Rank
Sweden Inward FDI Rank
Ireland Outward FDI Rank
Poland Outward FDI Rank
Sweden Outward FDI Rank
Source: UNCTAD

2000
52
100
53
12
63
2

2003
4
47
8
13
84
7

2004
5
72
54
10
86
7

5
75
93
26
62
8

The table demonstrates the strong performance of Ireland in actually attracting FDI although
the UNCTAD rated Sweden above Ireland in its Inward FDI potential index ranking between
1990 (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 EU
average. There were also high levels of unemployment with unemployment rates 18 percent
higher than the EU average. Furthermore national debt levels were 120 percent of gross
national product. 19

19

U.S. Foreign Direct Investment in Ireland, Making the Most of Other People’s Money, Berry R

27


In 1987, Dublin's IFSC, was set up by the Irish Government as a location for internationally
traded financial services. The initial designated site of the IFSC was 11 hectares of land in the
Custom House Docks area of Dublin City Centre. The Customs House Docks Development
Authority was established to redevelop the area and construction started in late 1988, with the
first 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 Exchange
Facility. The regeneration continued following this period and the Dublin Docklands
Development Authority was established in 1997 to develop and deliver IFSC phase II20.
Williams and Redmond21 report that Dublin’s economy has developed in three phases.
Phase 1 – Production of foods, textiles and beverages for local and export
consumption;
Phase 2 – Industry developed mainly through FDI from the US (manufacturing and
services);
Phase 3- Economy continues to develop as a “knowledge economy” building on
innovation and R&D.
They also note that a main reason for success has been focusing on growth sectors which
matched the labour force skills. Moving to the third phase of development meant developing
the educational base in line with the need to increase R&D. There was also a need to create an
environment 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 also
agreed a corporate tax rate of 10 per cent with the EU Commission. Furthermore, local
development incentives for Docks area were implemented, supported by an open and
responsive business environment and welcomed all types of inward investment22.
To supplement these incentives a marketing team was put in place to engage directly with
global institutions. There was also an important role in positively engaging local banks to
promote the centre. Part of this was the development of a social partnership between
Government, employers and unions.
The Industrial Development Agency of Ireland (IDA) and Enterprise Ireland were the main
public sector organisations involved with the development of the IFSC. The role of the IDA is
to attract FDI to Ireland focusing on high value-added investments using favorable
corporation tax rates as one marketing tool. Enterprise Ireland promotes joint ventures and
strategic alliances between indigenous and foreign companies, facilitating export activity of
indigenous 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 the
IDA. The Central Bank then undertakes regulation of member organisations activities. This
also ensured that ‘brass plate’ organisations would not be based in the IFSC and also meant
that any employment benefits were likely to be more enduring and significant. Due to the fact

20

IFSC Website
Ideopolis: Knowledge City Region, Dublin Case Study, Dr Brendan Williams and Dr Declan Redmond
22
ECB, FDI Task Force Report, 2004
21

28


that tax levels have now resumed to a more ‘standard’;level, and conditions for relocating are
less 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 figure
below.
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 FDI
inflows in Ireland. The chart below shows the significant FDI outflows including outflows
from 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 of
2002, creating significant net inward FDI from the IFSC.
The benefits of the IFSC are not confined to inward investment and in 2002 the Irish
Exchequer collected more than €700 million in corporation tax from IFSC companies.
According to the Central Bank, the net asset value for collective investment schemes for
regulated funds was just under €424 billion at the end of August 2004. The chart below
highlights that the IFSC also has a significant role in the Irish services market.
23

The Role of Dublin’s International Financial Services Centre in Irish Regional Development, White
M, CISC, 2003

29


Figure 4.5 - Services Exports

IFSC Imports/Exports in Euro Billions

20.0

40.0%

18.0

35.0%

16.0
30.0%

14.0

IFSC services exports

12.0

25.0%

10.0

20.0%

8.0

15.0%

6.0

IFSC services imports
IFSC exports as % of total
service exports

10.0%

4.0

5.0%

2.0
0.0

0.0%
1999

2000 2001

2002

2003

2004 2005

2006
Q1

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 institutions
providing products and services to a global customer base. The international financial services
industry made a net contribution of €2.5 billion to Ireland’s balance of payments from both
services and investment in 2000. The balance of payments statistics show that the sector
generated a surplus of €735 million on international trade in services and €1,763 million in
investment income.24
In addition to this direct contribution, the financial services industry also contributes
indirectly to the Irish economy by helping local businesses to secure funding. A recent study
by Patrick Honohan of Trinity College Dublin25 identified a clear relationship between the
depth (defined as the level of private credit available to businesses as a proportion of GDP) of
a country’s financial services sector, and the country’s economic growth rate. This is shown
in Figure 4.6.

24

FSIA Annual Report 2001
Honohan. P, To what extent has finance been a driver of Ireland’s economic success?, Quarterly
Economic Commentary, Winter 2006, pp59-72

25

30


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 the
net trade surplus of €4.9 billion in IFSC activities in 2004. The growth in IFSC exports,
comprising mainly insurance, financial services and business services exports, has been 234
per 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 to
financial services companies, except for those operations that set up before July 1998, which
could avail of this rate until the end of 2005. All other operations are now subject to the
standard corporation tax rate of 12.5 percent on trading income. Nevertheless, the average tax
rate 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 regeneration
alongside London, Bilbao, Shenzhen and Shanghai. The report found the three most important
elements involved in the regeneration of Dublin’s docks have been a low tax environment, a
healthy 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 benefited
from the Business Expansion Scheme, a government initiative to provide tax support to start
up businesses, which has helped to generate increased levels of exports and R&D investments
across the country’s base of start-up businesses.

26

FDI Magazine, Feb 2004, Urban Renaissance

31


4.1.3.2 Labour Market Conditions
An additional factor in the investment decision to locate in Dublin was the attractiveness of
the labour market which was well educated, young, relatively cost effective and English
speaking. The Dublin population remains younger than the population within many
competitor locations and in 2010 and 2015 will have an average age of 36.9 years and 37.9
years respectively. Ireland is also expected to have the largest under 25 year old population
share 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 but
particularly from the US. This continues to be the case and it is reported that US investment
flow into Ireland in 2004 was $10.4 billion, roughly one-tenth the US total for the EU27 while
over 40 per cent of all US foreign software investment is in Ireland28, one-third of all
manufacturing inward investment in Ireland comes from the US and 300 US entities have
been licensed to trade in the IFSC.
This level of investment can be explained by some of factors above but also are testimony to
the cultural links between the US and Ireland and the marketing efforts that the Irish
Government have made to target CEOs of leading US companies. Time zone comparability
and lack of language barriers for US businesses seeking to manage cash in Europe and within
the 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 areas
such as the EU Common Agricultural Policy. It is widely accepted that Ireland has received
more support through CAP than other countries, receiving subsidies twice as large as their
share of EU agricultural output in 200430. The effective use of this support assisted the
overall development of Ireland’s 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 indirect
employment and supply chain development benefits, particularly in the business services
sector - legal firms, auditors and tax experts; and the corresponding knowledge transfer within
the cluster.
4.1.3.6 Possible threats
In spite of the advantages previously identified, there is a risk that, if left unchecked, an
overheating of the Irish economy could limit the future growth potential of the IFSC.

27

American Chamber of Commerce Ireland
Address by Mr Brian Cowen, To the American Chamber of Commerce Ireland November 2005
29
Offshore Treasury Centers: Rethinking Outsourcing Based on Tax-Advantaged Structures, June 2005
By George Cassidy (International Finance & Treasury)
30
BBC News, 2 December 2005
28

32


An example of this is the strong house price growth that has occurred in Ireland, and in
Dublin in particular in recent years, with house prices growing by 42 per cent in Dublin and
by 36 per cent nationally in the three years to September 2006.
Figure 4.7 – Average house prices in Dublin and Republic of Ireland
€450,000
Dublin

Rest of RoI

€419,800

€400,000
€356,200

€350,000

€330,600
€296,500

€300,000

€266,300

€250,000

€231,400

€222,100
€195,400

€200,000

€150,000

€100,000

€50,000

€0
2003

2004

2005

2006

Source: Permanent TSB House Price Index, 2006q3

A second example of how the Republic of Ireland economy is overheating is the rapid
tightening of the labour market that has taken place, with unemployment falling from 4.7 per
cent to 4.3 per cent over the past three years, with the decline expected to continue over the
medium term (Figure 4.8).
Figure 4.8 – ILO unemployment rates for the Republic of Ireland, 2003-2010
4.8

4.7

4.6

4.5

4.4

4.3

4.3

4.2
4.0

4.0
3.8

3.7
3.6

3.6

3.5

3.4
3.2
3.0
2003

2004

2005

2006

2007

2008

2009

2010

Source: Experian, 2006

33


Finally, price levels are on a strongly upward trend in Ireland, with consumer prices
increasing by 23 per cent since 2000 and commercial property prices increasing by 3 per cent
in 2005 alone31. This has put cost pressures on investors seeking to procure locally (Figure
4.9)
Figure 4.9 – Harmonised Index of Consumer Prices for the Republic of Ireland, 20002010 (2000=100)
140
137
133

135
130
130

126
123

125
118
120

116
113

115
109
110
104
105
100
100
95
90
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


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

31

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

34


Figure 4.10 – US FDI investment projects in Europe as a percentage of all FDI projects
50
45

41.7

43.8

39.0

40
35.5

36.8

35

32.5
29.6

30

27.0

26.45

25
20
15
10
5
0
1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: Ernst & Young European Investment Monitor, 2006

4.1.4

Applicable lessons

The development of the IFSC in Dublin has contributed to economic growth in the Republic
of Ireland, and raised the prominence of the sector in the national economy.
In 2006, the financial services sector accounted for 4.7 per cent of employment and 9.7 per
cent of output, substantially higher than the figures of 4.2 per cent and 6.7 per cent reported
six years previously. However, in spite of this upward trend, the sector’s employment and
output shares are expected to remain broadly unchanged over the next four years (Figure
4.11).

35


Figure 4.11 – Employment and output in Republic of Ireland financial services sector
as a percentage of the national total
12%

10%

9.5%

9.9%

10.0%

10.1%

9.7%

10.3%

4.7%

4.8%

4.9%

4.9%

5.0%

8.8%
8.4%
7.3%

8%
7.1%

6.7%

6%

4.2%

4.2%

4.1%

4.3%

4.6%

4.6%

4%

2%
FTE employment
Output
0%
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


However, due to the large movements of capital involved in financial services FDI, there is a
risk that assessing the impact of the sector purely in gross investment terms may cause the
sector’s impact on the economy to be overstated. Indeed Forfas reports that the financial
services sector creates fewer jobs per unit of investment than many other industries. This is
partly due to the fact that businesses operating in the financial services sector in Dublin are
engaged in large movements of capital by parent companies to their fund management and
other IFSC financial subsidiaries, which are then reinvested in overseas assets. In this sense,
flows of direct investment into IFSC companies are roughly matched by outward flows of
portfolio investment. The sector also has issues with the low levels of internal supply chain
activities which it attracts.
The main factors contributing to the success of the IFSC in Dublin can be summarised as:
•
•
•
•
•
•
•
•
•
•

the international business culture in Dublin;
modern IT infrastructure;
regulatory environment;
strong domestic political support;
competitive cost base, assisted through low tax and ‘urban renewal incentives’;
air access to the rest of the world;
availability of well trained employees;
youthful labour market;
cultural relationship with US; and
proximity to other financial centres.

The Central Bank of Ireland32 report that the risk to Ireland from the strongly growing central
and eastern European countries is relatively limited as Ireland has focused on different
sectors. This is underpinned by the fact that Ireland has a head start on these countries. In
effect it has a first mover advantage which it is sustaining by continually improving its offer.
32

Quarterly Bulletin 1 2006, Central Bank and Financial Services Authority of Ireland

36


While limitations may exist due to the labour market and inflationary pressures that growth
causes, the IFSC is a relatively sustainable model due to:
•
•
•
•
•

4.2

first mover advantage;
a culture of knowledge and innovation;
continuous improvement ahead of competitors;
network creation amongst firms; and
employees who are willing to remain in the area.
SWEDEN

Until the mid-1980s FDI in Sweden was restrictive and governed by a complex system of
laws and regulations. Since entry into the EU in 1995, Sweden has improved the investment
climate to attract FDI through a number of interventions including reductions in income and
corporation tax, deregulation of foreign ownership and loans to foreign investors.
Although FDI has increased in Sweden in recent times, there are obvious year on year
fluctuations.
4.2.1

Role of government

The following bodies govern and influence FDI in Sweden:
•
•
•
•

Swedish Institute for Growth Policy (ITPS); analyses policies, growth studies and
various areas of government statistics;
Swedish Business Development Agency (known as Swedish National Board for
Industrial and Technological Development (NUTEK) prior to 2001);
Invest in Sweden Agency (ISA);
Position Skane – the agency for investment and tourism in Southern Sweden.

ISA offers assistance in key sectors including IT, electronics and biological sciences:
•
•
•
•
•

4.2.2

comprehensive information on business opportunities in Sweden;
tailor-made information and practical advice;
introductions to relevant contacts;
assistance in finding and arranging visiting programs; and
supporting the development of the Fibre Optic Valley cluster.33
Performance

FDI in Sweden has increased significantly since 1989 helping GDP to grow by 73 per cent
between 1991 and 2005.34
FDI inflows in Sweden peaked at over £3.8 million in 1999, and increased by 73 per cent in
the ten year period 1990 to 1999. Since 1999 FDI inflows in Sweden have decreased each
year, reaching -£202 million in 200435. Figure 5.9 demonstrates the volatility of FDI in
Sweden.

33

Invest in Sweden Agency http://www.isa.se/templates/Normal____2040.aspx
OECD.stat http://stats.oecd.org/wbos/default.aspx
35
A negative outflow could indicate a disinvestment (e.g. where capital or earnings are repatriated to
the country of origin)
34

37


Although foreign ownership increased, this was mainly due to acquisitions of domestic firms
rather than greenfield operations36. The value of mergers and acquisitions between 1990 and
2000 increased in Sweden by 192 per cent.37
Looking across sectors (Table 4.2), we see that FDI in Sweden has traditionally been
dominated by the manufacturing sector, which has seen higher levels of inward investment
than tradable services in nine out of the past eleven years.
Figure 4.12

FDI in Sweden - Manufacturing, Services and Tradable
Services, 1991 to 2002

£ Million
35,000
30,000

SECONDARY SECTOR
TERTIARY SECTOR

25,000

Tradable Services*

20,000
15,000
10,000
5,000
0
1991
-5,000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Source: Central Bank of Sweden
* Note: Tradable Services includes transport and storage

In recent years, tradable service FDI has been largely dominated by the transport, storage and
communications sector, and the ICT cluster in particular, although there has also been
significant investment in finance and business services.

36

The determinants of FDI Flows: Evidence from Swedish manufacturing and service sector, Karpaty
and Paldah, 2006
37
UNCTAD, http://stats.unctad.org/FDI/ReportFolders/ReportFolders.aspx

38


Table 4.2 - FDI Inflows in Sweden by sector 1991-2002
Sector
1991
TOTAL
3,601
PRIMARY SECTOR
0
Agriculture, hunting forestry and fishing
Mining, quarrying and petroleum
0
SECONDARY SECTOR
2,498
Food, beverages and tobacco
42
Textiles, leather and clothing
38
Wood and wood products
12
Manufacture of wood products
Paper and paper products
11
Coke, petroleum and nuclear fuel
69
Chemicals and chemical products
Rubber and plastic products
Non-metallic mineral products
12
Metal and Metal products
Basic metal and metal products
144
Fabricated metal products
Machinery and equipment
2,181
Other manufacturing
0
TERTIARY SECTOR
969
Electricity, gas and water
182
Construction
22
Trade
151
Hotels and restaurants
Transport, storage and communications
39
Finance
338
Financial intermediation
8
Insurance and pension funding
330
Business activities
239
Community, social and personal service
-2
Unspecified
114
Reinvested earnings
20
Source: Central Bank of Sweden, Balance of Payments

1992
-23
1
1
-295
0
7
-6
-9
194
11
458
-961
2
706
146
7
187
44
117
-76
193
155
50
110
-546

1993
2,559
6
6
1,188
245
2
149
146
313
96
50
333
0
639
58
80
244
105
6
170
-165
126
21
63
664

1994
4,150
0
0
2,180
23
14
591
305
1,486
74
127
-136
0
996
1
16
629
141
102
100
2
103
4
10
964

1995
9,150
306
0
306
6,572
807
8
-55
-86
5,197
3
57
503
53
743
133
48
304
140
-40
-41
1
148
10
7
1,522

1996
3,482
8
8
802
33
-1
179
178
263
105
-78
301
0
2,268
1,538
5
182
306
25
13
12
192
19
405
364

1997
6,695
-9
-1
-8
2,559
289
-2
102
96
414
-42
134
1,661
4
2,887
841
9
858
368
244
243
1
506
62
384
873

1998
11,965
-41
2
-43
3,841
38
-8
2,200
2,279
217
178
147
1,030
39
5,966
-50
-31
70
614
5,280
5,200
80
37
46
696
1,502

1999
37,642
301
120
181
30,715
57
-2
198
123
24,805
1,477
274
3,900
6
3,050
181
-6
504
878
349
229
120
1,132
11
1,123
2,452

2000
15,355
95
3
92
6,151
-8
27
266
225
1,066
-524
36
4,971
316
4,952
1,238
28
1,128
765
989
542
447
870
-67
2,084
2,074

2001
8,264
-252
1
-253
4,294
813
25
1,523
3
1,520
-759
29
818
1,867
-21
2,879
1,045
43
-399
700
895
894
2
547
48
1,716
-373

£ millions
2002
7,841
39
1
38
414
-128
28
-154
131
-284
506
6
892
-882
145
6,797
966
2
1,043
2,003
1,281
178
1,103
1,528
-24
720
-129

39


4.2.3

Critical success factors - benefits

The growth in FDI in Sweden is due to a number of institutional changes that took place
during the late 1980s, including liberalisation of cross-border capital transactions and the deregulation on foreign ownership. The tax reform launched in the early 1990s resulted in a
decrease in corporation tax, attracting further foreign investment
Sweden has a number of competitive advantages that attract foreign investors:
•

•

It has an exceptional telecommunications network, a stable political environment,
advanced technology and a well-educated labour force (highly skilled in modern
technology) owing to the expansion of higher education in Sweden;
Deregulation of industries; in particular the electricity, postal service, air transportation,
railroads and telecommunication markets, has resulted in more efficient sectors and
lower prices.

Sweden has implemented a range of incentives to encourage FDI inflows, these include:
•
•
•
•
•
•

Dividends paid by foreign subsidiaries in Sweden to their parent company are no longer
subject to Swedish taxation;
Loans are available to foreign investors from the Swedish Business Development
Agency and the regional development funds;
Support programmes include location and employment grants; low-rent industrial
parks; economic free zones;
A range of incentives exists for research and development programs by the Swedish
government;
Deduction on key foreign personnel’s income tax.
The development of the ‘Fibre-Optic Valley’ ICT cluster, centred around the
Hudiksvall municipal area, on the Gulf of Bothnia, 300km north of Stockholm.

For example, as part of Sweden’s reform to its higher-than-average income tax system, and to
encourage foreign key personnel to Sweden, there was a reduction in income tax charges for
key foreign personnel. This change meant that from January 2001 onwards, individuals
classified as ‘key expert personnel’ within foreign direct investment firms were only required
to pay tax on 75 per cent of their income. While foreign companies have complained about
bureaucratic difficulties and the sometimes arbitrary nature of obtaining expert status38, we
found no evidence that this has impacted upon decisions to invest in Sweden.
4.2.4

Threats

Although Sweden has recently enjoyed great success in attracting FDI, there are a number of
factors which, if left unchecked, are likely to deter investors in the future. One such deterrent
is likely to be the high cost of labour in the country, which can cause investors profit margins
to be squeezed. This is illustrated overleaf.

38

2006 Investment Climate Statement – Sweden, US department of State

40


Figure 4.13 – Average monthly labour costs in selected European economies, 2003
€5,000
€ 4,313

€4,500

€ 4,101

€ 3,997

€ 3,895

€4,000

€ 3,726

€ 3,716

€ 3,643

€ 3,487

€3,500

€ 3,355
€ 3,017

€3,000
€2,500
€2,000
€1,500
€1,000
€500

la
nd
Po

la
nd
Fi
n

R

ep
ub
l

ic

of

I re
la
nd

UK

la
nd
s
N

et
he
r

m
an
y
G
er

iu
m
Be
lg

an
ce
Fr

ar
k
en
m
D

Sw

ed
en

€0

Source: Eurostat, 2006, CSO Census of Industrial Production, Polish Central Statistical Office, Experian

In addition to these high labour costs, high price levels in general in the country may diminish
investors’ purchasing power, and act as a deterrent to future investment39. Furthermore, the
country’s high tax, and especially income tax levels, may reduce the country’s attractiveness
to investors.
4.2.5

Applicable lessons

The Swedish example has shown that, through a combination of heavy investment in
infrastructure, capital and skills; outward looking trade policy; cluster development; and a
discriminatory taxation system, it is possible for a country that was once largely overlooked
as a location for overseas investment to position itself as a desirable location of knowledge
intensive business. However, such success comes at a price, contributing to high housing and
labour costs, and high levels of personal taxation; factors which, in the long term, could act as
a deterrent to future investors if policies aren’t implemented to address them.
4.3

POLAND

Poland has undergone significant political and economic transitions in the past 20 years. In
1989 it became the first country out of the former Soviet block to re-establish democracy and
launch an economic and social move to a market economy.
Following financial liberalisation and reforms including a new currency in 1995, FDI
increased in Poland. The country joined the EU in 2004, and after the announcement in 2003,
FDI in Poland was boosted appreciably.
4.3.1

Role of Government

FDI is monitored by three institutions in Poland:

39

A recent study by The Economist suggested that prices in Sweden were 53 per cent overvalued in
relation to the US$, see http://www.oanda.com/products/bigmac/bigmac.shtml

41

Fdi in tradable_services___8211__final_report

Fdi in tradable_services_8211final_report

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