Capstone

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Capstone International Strategy
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CRITICAL EVALUATION OF GOVERNMENT INCENTIVES
FOR FOREIGN DIRECT INVESTMENT IN NORTHERN IRELAND
AND THE REPUBLIC OF IRELAND 13/09/00 Darragh
Dumigan Stephen Maguire Shay
Kernaghan Kelly McCrory Kytrina
Lennon Terri Reid
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Executive Summary

• FDI is an integral element of Government policies

• It builds upon those factors relating to
  competitive advantage

• It highlights the relationship between firms,
  nation and the Government

• It is evident that both Northern Ireland and the
  Republic have created organisations in an attempt
  to accommodate FDI

• An evaluation on the countries demonstrates that
  both have been successful in their respective
  incentives to attracting and sustaining FDI

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Why Foreign Direct Investment ?

• Relates to a strategic decision by nations

• The development of strategies to attract FDI is
  critical when there is intense competition for
  FDI between countries.

• Governments must understand why countries invest
  abroad

• Sourcing Competitive resources
• Response to competitive pressure in oligopolistic

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The elements that dictate FDI are presented in a
model by M.E.Porter 1990
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Northern Ireland Reasons for delayed start to
economic growth Previous situation
Political situation Peripherality
disadvantage Current situation Peace process
is progressing - Stability will create a FDI
dividend
(Alan
Gillespie IBM Chairman) Peripherality -
communication advantage
- Transport cost
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Fastest growth in Uk Manufacturing
output increased more than 20 Unemployment
declined to 6.7 Manufacturing investment
growth by 58 MNC investment projects
e.g. Nortel, Fujitsu, IBM, Daewoo Electronics

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Reasons to invest Low labour cost - 64
below those of Germany 32 below those
of the U.S, 15 below the UK Excellent
transport infrastructure Sea Transport -
Port of Belfast handles 25 for freight for all
of Ireland - More than 80
international shipping lines operate from
N.Ireland - Roll on/roll off facilities at
Londonderry, accomading a wide range
Of unit and general cargos. Air
Transportation - Belfasts two main airports
provide 32 flights to London daily
- Belfast international operates a direct service
to more than 40

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Destination in the United
Kingdom,Continental Europe and North
America Rail Transportation -A 150 Million
rail upgrade shortend travel time between
Belfast and Dublin to less than 100 minutes
Well Educated workforce - Northern Ireland has by
far the best educated labour force in
Britain with more students going on to
higher education than any where else in the
isles. Northern Ireland is a place where
one can find excellent people.... Highly
educated, highly motivated and willing
to apply themselves to any task at hand. It is
really just an excellent place to do
business (Peter McLrie, Chairman DuPont
LTD e.g. Educational Institutions
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University Of Ulster - Centre for
bio-engineering Queens University - Centre
for engineering and electronics Low employee
turnover - Turnover in N.I is typically a very
low 20 . Labour turnover here is
virtually unknown, we have an inquest
when someone leaves (Paul McWilliams) State
of the art fiber optic telecommunication systems
- A fully fibre optic integrated services
digital network (ISDN) infrastructure
provides voice, text, graphics and video
transmission world-wide. - Deregulated
telecommunications industry promotes competition
to offer high quality,low cost services.
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Telecommunication costs in the EU
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Competitive benefit package to encourage a
pro-business environment. - IDB
provides assistance schemes which cover
equipment, building finance and employment
costs Strong corporate / University research
and development link.
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The Conduit for Investment Within Northern Ireland

• To see a larger base of world class companies
  in Northern Ireland, both locally and
  externally owned, in the manufacturing
  internationally tradable service sectors.

Vision
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Objectives

• Facilitate greater sustainable growth by locally
  and externally owned internationally competitive
  companies in the manufacturing and
  internationally tradable service sectors in
  Northern Ireland.
• Attract, from within these sectors, new FDI which
  will contribute to growth and sustainable
  employment and opportunities for enhanced job
  quality.
• Implement industrial development programmes which
  ensure the equality of opportunity and fair
  treatment for all in Northern Ireland.
• Give particular emphasis to areas of greatest
  disadvantage.
• Secure maximum impact from the resources
  available.

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• Targeting social need
  Create jobs with external
• Aim to maximise investment within
  and local companies
• deprived areas
  
  
• Property provision
  Supply Chain
• for potential
  developments
• investors RD
  -promote and
• 
  support RD projects

IDB TARGETS 1998-2001
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Companies Attracted by Incentives Within Northern
Ireland

• Daewoo Electronics Co.
• Montupet
• Norbrook Laboratories
• AVX Corporation
• Ford Motor Co.
• Seagate
• Fujitsu

In our mind, Northern Ireland offered the best
investment package in Europe.
The biggest challenge for companies like Nortel
is to get the resources and the right skill
set...Northern Ireland fits the bill
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How the IDB is Creating Opportunities in Industry

• Software Tradable Services
• High growth forecast
  with resultant demand for employees with all
  levels of skills. To ensure growth potential of
  these sectors IDB works closely with T EA and
  educational authorities to ensure an adequate
  supply of skilled personnel.
• Electronics Telecoms
• High growth market
  creating demand for technical and professional
  engineers. IDB in partnership with T EA and the
  educational authorities are seeking to ensure an
  adequate supply of skilled personnel.

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• Engineering
• Significant improvements in
  export performance and the identification of new
  markets have lead IDB to invest heavily in
  conjunction with the T EA to ensure there is a
  sufficient pool of skilled people available.
• Textiles Clothing
• The largest provider of
  manufacturing jobs within Northern Ireland is
  experiencing increasing pressure from cheaper
  imports. The broad thrust of IDBs strategy to
  combat this, is to work in co-operation with
  individual companies, to encourage the sector to
  explore and develop differentiated products and
  new market opportunities.

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• Food Processing
• Starkly centred on grass
  based, beef and diary sectors, with recent growth
  in the poultry sector. Performance has been hit
  by milk quotas, BSE, and the arrival of major
  U.K. food retailers. IDB and its client
  companies in partnership with the Northern
  Ireland Food and Drink Association, together are
  restructuring the industry, differentiating the
  products and general devising of alternative
  business strategies.

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THE RESULTS OF IDBS INFLUENCE ON THE N.I.
ECONOMY IN THE LAST 10 YEARSThere have been
encouraging indications of growth in the N.I.
Economy in recent years. - Since 1990 N.I. has
been the fastest growing regional economy in the
UK.- Employment has increased with manufacturing
employment remaining constant compared to a
decrease in the rest of the UK while unemployment
has fallen at a faster rate in N.I.
Employment (000)
Manu. Output
Exports (m)
Manu. Productivity (GVA per head )
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EVALUATION

• The determinants used in evaluating the Northern
  Ireland context are described in the following
  model and some examples outlined

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IDB investments have created the presence of
international successful
related industry, which provides for information
flow and technical interchange. It also means
that new opportunities in industry are perceived
quickly.
FIRM STRATEGY STRUCTURE AND RIVALRY

• A strong communication ethos within N.I.
  enhances the primary technological based
  industries and lends itself to rapid product and
  process improvements. Combined with a strong work
  ethic this provides for a strong management
  culture.

• Geographic concentration of rivals derives
  benefits from domestic rivalry. It promotes a
  dynamic industry which sustains and widens the
  competitive advantage. The intense domestic
  rivalry also feeds a process of innovation which
  in turn stimulates the creation of new businesses.

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FACTORS

• Excellent infrastructure

• Superb academic institutions

• Large incentives from Government bodies

• A large pool of skilled labour with a strong
  work ethic

• Relative to other European and US nations - a
  very
• low labour cost and good labour relations

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Ireland Past and Present

• Pre-1950 agriculture livestock
• Post-1960s fiscal incentives - attracted
  foreign investment i.e. new industry
• Because the Irish economy is small, government
  tends to be responsive to the needs of
  industry......Our big advantage is that we have
  very low corporate tax rates and a very
  pro-business environment.
• Mary Harney, Irelands Deputy PM

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Snapshot of Ireland- Encouraging Investment

• Location
• Young, growing population
• Powerful economic performer
• Stable environment
• Dynamic educated workforce
• Trading links with Europe

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Foreign Investment in Ireland

• 1200 companies - 116,000 employees
• 1998 overseas exports - 21 billion
• Origin of investment
  Industries

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Institutions that create Foreign Incentives

• Irelands Response
• Forfas ? IDA Ireland
• Shannon Development ? Enterprise Ireland
• FAS ? Health Safety Authority
• National Standards Authority of Ireland

• These agencies foster conditions that create
  incentives for foreign investment
• Economy/ Cost of Employment ?Taxation
• Infrastructure ? Quality People
• Role of IDA- influencing foreign investment

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Role of the IDA

• IDA Ireland has national responsibility for
  securing new investment in manufacturing and
  international service sectors. (IDA, 2000)
• Objectives of IDA
• Encouraging expansion of existing investors
• Convincing new overseas companies to invest in
  manufacturing internationally traded services
• Fostering objective of regional industrial
  development

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Incentives for Foreign direct InvestmentEconomy/
Cost of Employment
Cost of Payroll

• Ireland world leader in number of aspects of
  economic performance
• Unemployment 6.4
• Cost of employment - lower than most EU countries
• Advantage enhanced by productive flexible
  workforce

Source US Department of Labour,1998
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INCENTIVES TO FOREIGN DIRECT INVESTMENT

• TAXATION
• Incentives - reduced tax rates, tax-free grants,
  accelerated depreciation, favourable tax
  treatment for foreign executives.
• One of most beneficial corporate tax environments
  

• Corporation Tax Rates, Manufacturing and
  Qualifying Services.

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Quality of People
Demographics - 40 of population are under the
age of 25 years.
Education - Ireland has one of the best systems
in the world. Table below highlights Irelands
country score in terms of the Education system
meeting the needs of a competitive economy.
(Source IMD World Competitiveness Yearbook 1999)
Labour Costs - very competitive wage environment,
wage inflation is low.

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INFRASTRUCTURE Property- IDA work closely with
Private sector to ensure availability of high
quality property in Ireland. Development of new
Digital parks - stimulate e-commerce.
Telecommunications - Ireland has invested 5bn in
this sector over last 10yrs, Created Advanced
Factor Condition. Result - one of Europes most
advanced systems Logistics - Ireland has
highest density of roads in the world.
Substantial investment in upgrading road networks
in recent years. By 1999 IR230m was invested in
modernising Irish ports.
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EXAMPLES OF FOREIGN DIRECT INVESTMENT IN
IRELAND. Software Industry - over 120 overseas
companies employ more than 15,000 people e.g IBM,
Intel, Microsoft. Why Ireland? Highly educated
youthful workforce, big graduate output in
computer related areas. Also strong support
services - clustering. Teleservices - Ireland is
leader in the field of pan-European call centres.
Over 60 companies employ 6000 people in Ireland
e.g Gateway. Why Ireland? State of the art
telecommunications system, support
infrastructure, profits subject to a lower tax
rate. International Financial Services Centre
(IFSC) - established in Dublin in 1987. About 750
international institutions operate from Dublin
e.g LGT, Barings. Why Ireland? Deep
clustering, low corporation tax rate, no
restrictions on currency movements, generous rent
allowances
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Evaluation

• FDI relates to the concepts of
• sourcing competitive resources
• competitive pressures in oligpolistic industries

The development of which is supported by
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• Demand
• Internal Demand in Ireland now possesses
  international
• characteristics
• Presence of domestic buyers which are
  subsidiaries of
• foreign firms has pushed the Irish system to
• Internationalisation

Related Cluster of Irish firms has developed
through the sharing of research
activities. Exchange of RD critical in the
context of ongoing technological and competitive
evolution
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• Rivalry
• The adoption of U.S managerial practices has
  resulted in many firms possessing similar
  structures, goals and strategies i.e. Value chain
• National Systems of Technological Innovation

• Factors Advanced
• Ireland now possesses a large pool of a skilled
  labour market
• Incentives by FAS ensure that there are
  continuing education programmes
• FORFAS develops programmes of RD support
• Telecommunications has created an infrastructure
  that caters for international dispersion of value
  chain activities

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• Government
• Pro-business environment
• Good returns on investment
• Taxation
• Operate Competitively
• Clean unspoilt environment

• Chance
• European Union
• Exchange rates

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Evaluation

• Adverse aspects
• Celtic Tiger - Collective delusion
• Some aspects of community excluded
• Extraordinary rates of growth can lead to rampant
  inflation
• Labour shortage worries

• Positive Aspects
• Economically booming
• An exporter of people has now become an importer
• Far and away the most dynamic, successfully
  growing nation in Europe

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Conclusion of Republic of Ireland and FDI

• Provides the nation and investing forms with
  unique and valuable intangible resources

• Promoted through
• Fiscal incentives low labour costs (easily
  matched)

• What makes Ireland the preferred location for
  FDI?
• Quality of the country's
• Telecommunication/RD Quality educational
  systems Labour force

• Framework of which is built through the
  inter-relationship between
• Universities Institutions Firms

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GENERAL CONCLUSIONS

• FDI has an important role to play in government
  decisions

• Porters model demonstrates a number of essential
  aspects in relation to FDI

Creation of Factor Conditions i.e Healthy Tax
Incentives. Development of relationship between
firms and states.

• Both countries have made positive inroads in
  attracting and sustaining FDI

Both countries must be aware that that in
attracting FDI a number of adverse aspects shall
arise

• Future Government decisions shall decide the
  future success of both countries