UNIVERSITIES AND FOREIGN DIRECT INVESTMENT IN IRELAND: AN EMBEDDEDNESS PERSPECTIVE (PART 3/3)

(Continued from Part 2/3)

Similar to the fact that Ireland has a binary system of higher education, the business sector in the country is also divided into two, with one being foreign-owned and the other being indigenous.

The historical success of Ireland in attracting a substantial amount of FDIs has led to an industrial base strongly dependent on multinationals and oversea exports. It is not difficult for one to find that a relatively small number of foreign-owned companies are responsible for the majority of Business Expenditure on Research & Development (BERD) in Ireland, an indication to show not only the strong performance of multinational firms but also the ‘unsatisfactory’ performance of the so-called indigenous firms.

More interestingly, it seems that foreign-owned firms and indigenous firms are concentrated in distinct sectors; for example, high-tech sectors like ICT and pharmaceutical are obviously dominated by multinationals.

A comparison of the amount of expenditure on R&D by sector reveals that the higher education sector, which is, in this regard, largely dominated by the seven universities plus the Dublin Institute of Technology, outperforms the indigenous business sector and the government (and public) sector.

The strengths of Irish universities have further been intensified after nearly a decade of state support in the area of research and development. Admittedly, the Irish government has also called for, and indeed made some efforts in supporting the growth of indigenous small to medium-sized firms, this sort of investment is not comparable to what universities have been receiving.

It is based on these facts that we argue that it is time Irish universities build closer relationships with foreign-owned companies during a period when previous advantages of the country are in the risk of weakening. In particular, we would like to introduce an embeddedness approach which is adapted from the ‘Triple Helix’ model popularised by Etzkowitz and Leydesdorff in 1997.

Figure 1 A ‘Node-Channel’ model of G-U-I interactions in Ireland (Foreign-own firms on the left; Indigenous firms on the right)

Image

Figure 1 above shows a ‘Node-Channel’ model of interactions of three main regional stakeholders in Ireland – government, university, industry – in which node stands for strength of each sector and channel refers to linkages between each other. Following the categorisation of many previous studies, in this figure we divide the industry node into two smaller nodes (foreign-owned firms and indigenous firms). In relative terms, we consider that Ireland has R&D strength in the university sector and foreign-owned firms, less so in domestic firms and the government sector, however there is plenty of room for improvements in inter-firm linkages and university-industry collaborations.

UNIVERSITIES AND FOREIGN DIRECT INVESTMENT IN IRELAND: AN EMBEDDEDNESS PERSPECTIVE (PART 2/3)

(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…)

UNIVERSITIES AND FOREIGN DIRECT INVESTMENTS IN IRELAND: AN EMBEDDEDNESS PERSPECTIVE (PART 1/3)

There has been an extensive body of literature investigating the importance of foreign direct investments (FDIs) in the Irish economy. Since the 1960s onwards, the continuing dedication of the Irish government to attracting investments from overseas, in particular from the U.S., has transformed the country significantly.

In terms of GDP per capita, Ireland has made impressive progress during the last few decades, climbing from one of the poorest countries in western Europe to one of the richest in the world. As recent data from World Bank shows, Ireland’s GDP per capita (current US $) in 2012 stood at 45,921, in comparison to 38,920 in the UK.

Much of the extant literature attributes the economic development of Ireland to the success of attraction of FDIs, which could be evidenced by the fact that “the overall stock of FDI in Ireland has averaged just below 100% of GDP over the 10-year period from 1999 to 2009, reaching a peak of 149% of GDP in 2002” (Gray et al., 2010).

In their book entitled “Economic Analysis of Ireland’s Comparative Advantages for Foreign Investment”, Gray et al. (2010) selected a list of milestones in Irish policy which resulted in the attraction of multinationals. Figure 1 below shows the detail.

Figure 1 Selected milestones in Irish policy which have impacted on foreign investment

Figure 1

Source: Adapted from Gray et al. (2010).

Nevertheless, there has always been some concern with regard to an increased dependency on foreign investment. Some have argued that a practical matter for Ireland is that it has less and less room for pursuing independent economic policies. For many others, there is a question mark over the long-term impacts of FDIs on the Irish economy, especially in the face of declining flows of foreign investment after the 2008 economic crisis.

The underlying reason for these worries is related to the mobility of FDIs. Understandably, FDIs are attracted into a certain region or nation due to a number of comparative advantages demonstrated by that area. When those comparative advantages diminish or become unsustainable, FDIs may be relocated into wherever else showing them. In order to attract new FDIs and to maintain current investments, a crucial task is to understand what key elements of Ireland have been perceived by multinationals as of significant strength.

A comprehensive survey with the chief executives of foreign-owned plants in Ireland was conducted by Indecon to capture what are the key factors which determine the relative attractiveness of Ireland as a location for FDIs. The main results of the Indecon survey have been presented, in much detail, by Gray et al. (2010) and are shown here.

Figure 2 Foreign firms’ rating on elements of comparative advantage of Ireland for investment

Figure 2

Source: Adapted from Gray et al. (2010).

Whilst it remains unclear for us to say whether the foreign firms surveyed are representative enough of the whole sector, Figure 2 indeed shows some interesting results. The top three elements perceived by foreign firms as significant strengths are comparative corporate tax rate, English-speaking population and government support for foreign direct investment. At a less level, foreign firms also regard skilled employees, membership of Euro and stability of exchange rates, flexible labour force and commitment from Industrial Development Agency as significant strengths in Ireland. Quality of universities and quality of research and development (R&D) are the two factors that are least frequently perceived by foreign firms as where Ireland has significant strength and as their reason to make the investment decision.

It is obvious that universities, and probably the higher education sector as a whole, have not become a key factor, in relative to elements such as corporate tax rate, considered by those multinationals when they attempt to decide whether or not to invest in Ireland. Although it is too arbitrary to assert now that foreign firms do not collaborate closely with Irish universities, it is fair to say that how companies perceive the relative importance of university research and development (R&D) would to a certain extent influence their later decision on working with those universities.

(To be continued…)