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FDI Qualities Assessment of Ireland - Key Findings

This presentation contains key findings from the OECD FDI Qualities Assessment of Ireland. The report examines the impact of foreign direct investment (FDI) attracted to Ireland from 2006 to 2016 and provides an overview of the direct contribution and spillover effects of this investment on the local economy. Find the full report at http://www.oecd.org/investment/fdi-qualities-assessment-of-ireland.htm

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FDI Qualities Assessment of Ireland - Key Findings

  1. 1. FDI QUALITIES ASSESSMENT OF IRELAND MAIN FINDINGS Virtual launch of the report, 19 January 2021 Martin Wermelinger, OECD Investment Division
  2. 2. • Under the right conditions, FDI can raise productivity, integration in GVCs, transfer knowledge and technology, and improve living standards [and foster gender equality, low carbon transition]  OECD FDI Qualities initiative • Report examines the direct contribution and spillover potential of FDI on the Irish economy  OECD FDI Qualities Assessment of Ireland • Report supported the development of IDA’s new strategy  IDA Ireland’s Driving Recovery & Sustainable Growth Strategy: 2021-2024 Context 2
  3. 3. • Growth driver – Analysis pre-dates COVID-19 but shows that FDI was key for Ireland to recover from another big economic crisis – “great recession” of 2007- 2009 • Resilience – IDA results show that sectors in which IDA-supported foreign firms are concentrated exhibited remarkable resilience in 2020 (e.g. medical goods, IT services, finance and insurance) • Promotion and policy – Success is result of FDI targeting by IDA – but also due to coordination with other agencies (e.g. Science Foundation Ireland, Enterprise Ireland), supportive government policy, actions of other stakeholders (e.g. investors). 3 Key takeaways (1)
  4. 4. • Globalisation – Ireland is one of the most open economies and FDI base deeply integrates Ireland’s economy in GVCs • Productivity frontier – Sectors in which IDA supported firms are concentrated exhibited rapid growth and are associated with higher productivity, R&D expenditures and wages • Concentration – Diversification of FDI is limited both in terms of sectors (manufacturing, information and communications and finance and insurance), origins (US) and sub-national regions (Dublin) – could expose economy to macroeconomic risks • Spillovers – Buy/supply linkages in line with other small, open economies; extensive labour mobility; remaining gaps with domestics firms across regions 4 Key takeaways (2)
  5. 5. 1. ROLE OF FDI IN TRADE AND INTEGRATION IN GVCS 5
  6. 6. Positive relationship between export orientation, GVC integration, and presence of MNEs – Indicates MNEs can facilitate a country’s integration in GVCs 1. Export orientation (share of domestic VA that is exported) – Ireland is 2nd in OECD 2. GVC integration (foreign VA embodied in a country’s exports) – Foreign VA in Irish exports is relatively high at nearly 50% i.e. backward linkages 3. Presence of MNEs (share of VA accounted for by foreign MNEs in national GDP) – Ireland highest in OECD FDI plays an important role in Ireland’s GVC integration Source: OECD TiVA database and Activities of MNEs database; reference year 2014 6
  7. 7. • Foreign affiliates accounted for growing trade surplus and enabled GVC integration following the 2008 crisis – Foreign firms’ exports of value added increased to 39% of GDP by 2015, up from 23% in 2008 – OECD experienced retrenchment in GVCs – Exports concentrated and expanding in FDI dominated sectors (e.g. chemicals, medical device; information and communications - e.g. publishing, IT services; and finance and insurance) • FDI operations in Ireland positioned at the end of supply chains (e.g. marketing, distribution, after-sales services, publishing) – High share of final goods exports – Share of value added at customer end of GVCs is growing, supporting high-paying jobs in Ireland • Highly concentrated FDI in terms of origins – FDI dominated by investors from the US (70% of total in 2017) 7 Some more highlights…
  8. 8. 8 Profits make a significant contribution to foreign affiliates’ value added Exports of value added For foreign firms, exported value added broken down into labour compensation and profits • High profits can be due to: • MNEs shifting intangible assets to Ireland • “End of value chain services” are profitable • Profits of foreign investors may not stay in Ireland: • Efforts for re-investment and expansion of investments are important
  9. 9. 2. FDI DIRECT CONTRIBUTIONS TO PRODUCTION, INNOVATION AND EMPLOYMENT 9
  10. 10. • Foreign firms account for 60% of VA (1st in EU), but only 18% of employment – FDI is driving labour productivity (11% annual growth over 2006-16) – Expansion in Information and Communication, Manufacturing, Finance and Insurance (>50% of GDP from these sectors) – Shift away from physical production in manufacturing – Significant FDI concentration in Dublin (40% of VA and employment in 2016) • Foreign affiliates helped recover from great recession: – Initial evidence points to similar pattern during COVID-19 crisis. 10 Foreign firms are driving value added and labour productivity in Ireland Share of national total, 2015
  11. 11. • FDI in Ireland is concentrated in sectors* with – higher productivity, – higher business expenditure on R&D, and – with better employment outcomes (i.e. employment growth, wages/skills) • 80% of all patents* granted in Ireland were to foreign affiliates – Foreign firms account for the majority of R&D spending, but a smaller % invest in R&D • Continued promotion of technology-intensive activities likely to be successful FDI in Ireland concentrated in a few, high-performing sectors 11 * Reference year = 2016
  12. 12. • Ireland attracted investments by companies operating at the global productivity frontier • Among foreign firms there are substantial differences, and the distance appears to be widening • Firms at or above the 95th percentile are the national frontier • Difficult to assess if the Irish affiliates of the global frontier MNEs are on the global frontier themselves (would demand internationally harmonised data) Productivity dynamics of foreign affiliates: Are all foreign firms the same? Selected percentiles of labour productivity Source: Authors’ calculations on ABSEI data 12
  13. 13. MNE productivity dynamics: key results from transition matrices (2006-16) • In Manufacturing, best performers remain at the top of the productivity distribution, with highest share of jobs overall – Exits more than entrants support dynamism, with exits concentrated in lower productivity segments • In Information and Communication, best performers at the top also supported high shares of jobs – But more dynamism in other segments – 55% of lower productivity affiliates moving up the productivity ladder; and entrants provide important contribution to aggregate productivity growth and jobs • Best performers are exporting more, have higher investments in R&D and pay higher salaries • The MNE sector in Ireland is less dynamic (i.e. less churn) compared to international evidence, due to lower exit rates and high resilience at the top 13
  14. 14. 3. FACTORS DRIVING SPILLOVERS FROM FOREIGN AFFILIATES TO DOMESTIC FIRMS 14
  15. 15. • Capabilities gap between Irish firms and foreign MNEs: Performance gap between Irish firms and foreign MNEs provides an indication of the ability of domestic firms to adopt foreign technology and benefit from positive FDI spillovers • Extent of domestic business linkages: Buy and sell linkages with foreign MNEs can increase domestic firms’ productivity – By enabling domestic firms to reduce costs, innovate, etc. – Potential to increase domestic firms’ participation in GVCs through indirect exporting • Relevance of labour mobility: when workers move from foreign affiliates to domestic firms, they might bring knowledge that can enhance the domestic firms’ performance 15 Assessing the potential for indirect impacts or spill- overs from foreign MNEs to the Irish economy
  16. 16. 16 The capabilities gap between foreign MNEs and Irish firms is considerable in some sectors A value of the indicator above 0 means that foreign firms outperform domestic firms in a given metric (e.g. productivity) in a specific sector, and vice versa. Bars with ‘red’ borders indicate that domestic value added in those sectors is low, i.e. the size of the domestic sector is small. Bars with ‘yellow’ borders indicate that foreign value added in those sectors is low. Agriculture, mining, construction, energy, miscellaneous manufacturing and financial services are excluded. + Regional differences (not in figure): Gap in absorptive capacities is highest in South & East Source: OECD FDI Qualities Indicators, based on IDA’s Annual Business Survey
  17. 17. 17 Buy linkages are less relevant than in other OECD countries • Foreign affiliates in Ireland source less locally and their local sourcing benefits fewer domestic companies compared to other OECD countries • Similar to other small open economies, such as Luxembourg, Belgium and the Netherlands • Market size plays an important role (i.e. smaller market for inputs) • Declining shares and absolute values of domestic sourcing over 2008-16 (reverse trend since then) Sourcing structure and value added of foreign affiliates, 2016
  18. 18. • Between 2009 and 2015, more than one out of every four employees at foreign firms either moved to a domestic firm or became self-employed. • More than one in three start up founders previously worked at a foreign firm. • Labour mobility within Ireland is also very likely among highly skilled researchers that have been associated with patents in Ireland. One out of two inventors changed employer at least once over 2006-16; most inventors are based in foreign MNEs 18 Labour mobility from foreign MNEs to Irish companies is significant
  19. 19. 19 Thank you Martin Wermelinger, Project Manager, FDI Qualities, Martin.Wermelinger@oecd.org Letizia Montinari, Economist, FDI Qualities, Letizia.Montinary@oecd.org For further informationContacts Policy Framework for Investment www.oecd.org/investment/pfi.htm Investment Policy Reviews www.oecd.org/investment/countryreviews.htm FDI Qualities www.oecd.org/investment/fdi-qualities-indicators.htm Investment Promotion and Facilitation www.oecd.org/investment/investment-promotion-and-facilitation.htm
  20. 20. • We combined a wide range of data sources for this study • OECD has been improving statistical tools to analyse trade and investment in global value chains (GVCs) – Integration of FDI income into Trade in Value Added – Recent development of the OECD Analytical AMNE Database • We analysed IDAABSEI and Employment Survey data • We also complemented the analysis with other FDI and trade related datasets  Challenging to perfectly align industry classifications and time coverage A word on the statistics and data sources 20

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