A critical evaluation of the government incentives for foreign direct investment in Northern Ireland

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A critical evaluation of the government
incentives for foreign direct investment in
Northern Ireland and the Republic of Ireland

• BY Richard Spratt, Johnny Shannon, Mark
  Watters, David Phillips, Sinead Logue, Joanne
  Galway

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Executive Summary

• Northern Ireland
• foreign direct investment
• government incentives
• Porters Diamond of Competitive Advantage
• Republic of Ireland
• Government incentives
• Porters Diamond of Competitive Advantage
• North / South Comparison

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Introduction to NI

• Throughout the 1990s we have been one of the
  UKs fastest growing regional economies,
  attracting record levels of overseas investment
  from regional international manufacturers such as
  DuPont, Emerson, Seagate, Ford and Fujitsu. They
  know Northern Ireland as one of Europes best
  kept secrets.
• Mo Mowlam (The Times)

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History and Companies in NI

• Record investment from companies located in NI -
  10bn since 1982
• Most companies which locate in NI grow quickly
• Industry leaders are continuing to expand -
  DuPont, Seagate, Fujitsu, Daewoo, 3M

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Organisations which attract FDI

• Department of Enterprise, Trade Industry (DETI)
• Industrial Development Board (IDB) - promote
  inward investment
• Industrial Research Technology
• Training Employment Agency (TEA)
• Economic Development Network
• Enterprise Network
• NI Economic Council
• Trade International NI

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Marketing Selling NI to the Inward Investor

• Fast Growing Economy
• High Quality Well Educated Workforce
• Effective Communication Infrastructure
• Good Industrial Relations
• Flexible Cash Grant Regimes
• Favourable Tax Regimes
• Strong Industry / Academic Links Especially in
  Electrical Engineering Software Fields

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School Performance Comparisons With England and
Wales 1997-98
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Targeted Sectors

• Software
• Telecommunications
• Network Services
• Health Technologies
• Electronics
• Automotive Components

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Sectoral Targeting

• North America Europe Asia
• Software Yes No
• Telecoms Yes Yes
• Network Services Yes No
• Health Technologies No Yes
• Electronics Yes Yes
• Auto Components Yes Yes

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The Significance of Inward Investment

• Jobs promoted - 18,00 jobs by externally owned
  companies
• Targeting Social Need (TSN)
• 75 of all first time locational visits from
  inward investors to be TSN areas
• 75 of all first time inward investments projects
  to be located in or adjacent to TSN areas
• Property Provision
• Research Development
• Supply Chain - maximise supplier development
  opportunities

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Inward Investment Statistics

• April 1993 - March 1999
• New Expansion
  Competitiveness
• Projects 68 163
• Jobs Promoted 10,277 15,133
• Jobs Created at Mar 99 4,533 (44) 9,647
  (64)
• Jobs Safeguarded 334 13,717
• Total Investment (m) 533 1,664
• IDB Assistance (m) 164 398
• IDB Contribution 31 24

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Government

• An important variable in Porters Diamond of
  Competitive Advantage (1990s)

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Government Incentives

• Industrial Development Board (IDB)
• Industrial Research Technology
• Training Employment Agency (TEA)
• European Investment Bank (EIB)
• Department of the Environment (DOE)

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Industrial Development Board

• Revenue Grants
• Employment Grants
• Rent Relief
• Capital Grants
• Up to 50 for inward investment companies
• No tax
• Property Development Agreements

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Industrial Research Technology

• Radiane
• encourages technology transfer grant
• Start
• Up to 50 grant towards pre-competitive
  industrial RD
• Networking Programme

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Incentives given by TEA and European Investment
Bank

• TEA
• Graduate Schemes
• Premiere
• Explorers
• Recruitment and Training Support
• Pre-employment Training
• Recruitment Services
• European Investment Bank
• European loans at fixed or floating rates
• Projects up to GBP 7 million available through
  local banks

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Department of the Environment

• Urban Development Programme
• regeneration of properties in disadvantaged towns
• Urban Development Grant
• Belfast Derry
• 50 for refurbishment, 30 for new builds

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The Role of Government in the Diamond of
Competitive Advantage

• "Successful government incentives/policies work
  in those industries where underlying determinants
  of national advantage are present and where
  government reinforces them (Porter, 1990)

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Porters Diamond of Competitive Advantage (1990)

• 4 broad attributes of a nation that shape
  environment in which local firms compete that can
  create competitive advantage.
• Demand Conditions
• Factor Conditions
• Firm Strategy, structure rivalry
• Related Supporting Industries
• Important Variables
• Government
• Chance

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Demand Conditions

• Home Demand Composition
• employees/families enjoy a lifestyle of highest
  quality, therefore sophisticated buyers
• Rate of growth
• throughout 1990s, NI has enjoyed fastest economic
  growth of any regions in UK
• over past 5 years, manufacturing output has grown
  by almost 22
• between 1990-95, GDP grew by 11.6 (real terms)

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Factor Conditions

• Labour
• Population 1, 631,800 40 of which under 30
  years old
• 60 of high school graduates go to college
  education (highest in UK)
• 10,000 university graduates per year, 1000 of who
  major in computers
• Infrastructure
• rapidly developing a world class centre for
  excellence in communications and IT
• Business across wide range of industries -
  teleservices, software, electronics, and medical
  technologies

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Firms Strategy, Structure and Rivalry

• NI - firms small and privately owned
  (average 10 employees)
• Structures tend to be
• decentralised, flat, cross functional,
  empowerment
• Individual goals
• high achievers
• Domestic rivalry

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Related Supporting Industries

• NI software sector (25 foreign owned)
• Linkages to other related industries
  therefore.....
• innovation upgrading
• coordination in value chain
• superior inputs
• Sharing of complimentary activities and business
  alliances

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Chance

• Good Friday Agreement
• Influence of the Celtic Tiger
• Internet explosion

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Republic of Ireland
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Government

• Huge economic growth - Celtic Tiger
• GDP growing (see graph on next slide)
• Government Debt was 120 of GDP in 1990, now less
  than 60)
• Since 1992 productivity in Ireland grew at a
  faster rate than in other EU countries
• Why? Proactive Government Strategies
• Development of a consistent set of policies for
  25 years have successfully attracted FDI

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Government

• Ambitious strategy of industrial development
• Development of resources valuable to foreign
  firms in high-tech industries.
• FDI Incentives
• Fiscal Incentives
• A high marginal tax rate to support a generous
  social welfare system
• Low Corporation Tax rates - 10 special rate. By
  2003 the standard rate will be 12.5

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Government

• Double taxation agreements with the rest of the
  world are extensive
• Accelerated depreciation allowances enable
  buildings and machinery to be written off against
  tax liability
• Grant Aid is non taxable for sites, building and
  equipment.
• Training grants of up to 10 of the project are
  available

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Government

• Subsidies for RD
• Provide incentives for companies to locate
  research facilities in Ireland. Subsidies/Grants
  available for
• acquiring product or process technology
• acquiring trademarks, patents licenses
• acquiring know-how, projects and strategic
  information
• Low Cost Capital
• low cost facilities immediately available

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Government

• No restrictions on repatriation of profits
• No restrictions on capital flows or on the
  national origin of ownership of business firms
• Shannon Duty Free Processing Zone

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Factor Conditions

• Workforce
• Abundance of well-educated people
  technological/business qualifications
• Productive and expanding flexible workforce
• English Speaking
• Labour Costs
• Competitive wage environment - labour costs are
  amongst in European Union
• Low wage inflation

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Factor Conditions

• Statutory add-on are amongst lowest in European
  Union
• Lowest fringe benefits

A recent study of salary costs shows Ireland to
have the lowest costs in all job categories of 5
major European locations surveyed.
Source US Dept of Labour 2000
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Factor Conditions

• Demographics
• Population 3.744 million (CSO)
• 40 of population under the age of 25 years
• 43 of working population within a 20 mile radius
  of the Dublin area
• Telecommunications
• IR4 billion invested in telecommunications
  infrastructure over last 10 years
• One of the first to digitise network in Europe

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Factor Conditions

• Ireland offers a reliable fully digitised
  telecommunications system
• High capacity competitive telecom sector
• Developing broadband access network necessary for
  exploiting the full potential of the Internet and
  E-business
• Utilities
• Electricity - Adequate supplies available to meet
  major industrial demand at any location in country

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Factor Conditions

• Water
• Cost varies by county
• Facilities
• Competitively priced land and buildings are
  widely available for industrial and commercial use

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Factor Conditions

• Logistics
• Ireland has highest density of roads in the world
  (rd km per million inhabitants)
• Seaports handle 75 of Irish Trade to the rest of
  the world. By the end of 1999, more than IR230
  million was invested in modernising ports
• Comprehensive network of daily flights are
  available to European and North American
  destinations

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Factor Conditions

• Research Development/Education
• Energetic Partnerships between universities and
  industry
• Good Research Development infrastructures
• ROI ranked 1st in world in terms of its
  educational system meeting the needs of a
  competitive economy. (IMD World Competitiveness
  Report 1998)
• One of the highest rates of graduate output with
  IT skills in the world on per capita basis

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Demand Conditions

• Gateway to Europe access to huge market
  opportunities
• E.g. 40 of all European PC software is produced
  in Ireland
• Weak internal demand - Ireland is a producing
  country
• Exports exceeded imports by 40 in 1999 (a value
  of 18,000 million - CSO)

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Related Supported Industries

• Clustering (e.g. electronics industry)
• Sharing of RD activities
• Exchange of knowledge
• Co-ordination of activities in value chain
• Different firms in the same industry
  performing different value chain activities
  create a demand that stimulates innovation. This
  occurs because buying firms are demanding in
  terms of quality and technological standards.
  Exchange relationships help in identifying new
  needs and allows for a tight collaboration in the
  process of developing new products and production
  processes therefore stimulating competitive
  abilities in emerging industries (Porter 1990)

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Chance

• Technological Revolution Internet
• Political Stability Good Friday Agreement
• Strong Economy

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Disadvantages of ROI

• Lack of affordable private housing
• Skill Labour shortages
• Weak internal demand - small markets
• Heavy economic reliance on FDI
• Exchange rate instability

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What they said..

• The low cost way to support European
  customers from a single site. This enables
  overheads, inventory and accommodation costs to
  be minimised. Dell pioneered the trend by
  centralising European logistics and customer
  support in Ireland, which offers one of the
  lowest cost and most flexible working
  environments in Europe. Michael Dell, CEO Dell
  Computers.
• Our site search team had great things to say
  about the availability of talented people and
  supporting infrastructure. I would say they are
  right on the mark. Dave Young, General Manager,
  Hewlett-Packard Manufacturing Ireland.

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NI v ROIAnd the winner is.......