(Continued from Part 1/3)
To a certain extent, the comparative advantages of those areas where Ireland used to be perceived as having significant strength are now diminishing, or more accurately, weakening. In their book – The Economy of Ireland – O’Hagan and Newman (2011) have made it clear that great challenge is currently faced by Ireland as the EU puts more pressure on the country ‘to harmonise corporation tax rates and increased restrictions on the provision of grants: two important policy tool options in relation to FDI for the Irish government in the past’.
The authors have also addressed the possibility of changes which could be made to the corporation profit tax rate. A general concern is that, if ‘firms are forced to pay taxes on profits in the country where they are earned and can no longer process profits through Irish subsidiaries’ (O’Hagan and Newman, 2011), the attractiveness of Ireland as a place to invest may decrease. The Irish Independent recently published a statement made by the U.S. President Obama which proposed exactly this idea.
Nevertheless, it has also been pointed out that, the end of transfer pricing may actually increase the level of actual economic activity that takes place in Ireland, ‘given the firms will be forced to site their real activity in Ireland to avail of the low tax rate’ (O’Hagan and Newman, 2011).
In our perspective, an increased level of economic activity shown by foreign-owned firms in the absence of transfer pricing would only come true if those firms are effectively embedded within the national innovation system, which comprises horizontal and vertical knowledge and production networks. In particular, the benefits from being engaged with innovation activities should be perceived by those firms to outweigh the potential loss from being without the low tax rate, although the comparison is subjective to firms themselves.
Those networks in essential bring foreign-owned firms, indigenous firms and key innovation actors (e.g. universities and public research organisations) together, through which knowledge is exchange and innovative products and services are created. Without these interactions, FDIs are not deeply embedded in the territory; instead, the main reason for their presence is finance related. Therefore, it should not come as a surprise when they (FDIs) are found to shift away to wherever they could pursue those benefits.
Limited study has been found to focus on the importance of embedding FDIs in influencing Ireland’s economic development in especially mid- to long period. A wider search for empirical analysis of other nations or regions has been done in the hope that those studies are able to shed some light in the direction.
An interesting article is that by Simmie and Martin (2010), in which the authors compared regional economic resilience of two UK city regions – Cambridge and Swansea – that have experienced quite different economic histories and outcomes over the past 40-50 years. It could be argued that the case of Swansea shows, to a certain degree, some similarity to what approach Ireland has been undertaking. To be more specific, Swansea turned to FDI from the 1970s and offered relatively cheap land and labour to attract inward investments, in particular Japanese investments in the electronics sector.
After examining the growth of the two city regions during the last 50 years, the authors tended to conclude that Cambridge has been more resilient than Swansea. The conscious decisions of local entrepreneurs making use of endogenously created new knowledge, the co-evolution of the attitude of Cambridge University to commercial exploitation of IPRs, and the facilitation of the development of science parks were considered by the authors to be the major driving factors of the long-term development of adaptive and resilience capacities in Cambridge. By contrast, whilst FDIs brought sufficient codified external knowledge for the establishment of manufacturing branch plants into the Swansea area, the region became locked into the technological paradigm owned by foreign firms.
The authors concluded the decline of the Swansea economy by stating, ‘the shock of the recession exposed the weakness of relying on exogenous knowledge generated by multinational companies’ (Simmie and Martin, 2010).
Since the launch of the National Development Plan in the 2000, much effort has been devoted into investing research and development (R&D) in universities and domestic business sector. All of these could be seen as part of government’s commitment to building the so-called smart economy. A functional, sustainable, and competitive smart economy should be one in which not only both endogenous and exogenous knowledge is created but they are also exchanged and shared effectively.
Although we do not underestimate the importance of indigenous firms in any way, we argue that Irish universities (or the Irish higher education sector) are best placed to build high-level research-intensive partnerships with foreign-owned firms in Ireland, as means of both embedding FDIs and building the smart economy.
(To be continued…)