Fdi in tradable_services___8211__final_report

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Fdi in tradable_services___8211__final_report

  1. 1. FDI Research Project – Final Report Department of Enterprise, Trade & Investment February 2008
  2. 2. For and on behalf of Experian Approved by: Clare Reid Position: Director of Economics, Strategy and Research Date: 6th February 2008
  3. 3. FDI Research Project – Final Report 6th February 2008 Contents Introduction................................................................................................................................................ 1 Background .............................................................................................................................................. 1 Objectives................................................................................................................................................. 1 Format ...................................................................................................................................................... 2 1 Context................................................................................................................................................ 3 1.1 Defining FDI ................................................................................................................................ 3 1.2 Type of FDI Project...................................................................................................................... 3 1.2.1 Greenfield ............................................................................................................................... 3 1.2.2 Mergers & Acquisitions ........................................................................................................... 4 1.2.3 Invest Northern Ireland’s Policy on FDI................................................................................... 4 1.3 Defining Tradable Services ......................................................................................................... 4 2 Literature review ................................................................................................................................ 6 2.1 Benefits of FDI............................................................................................................................. 6 2.2 global and uk trends in FDI.......................................................................................................... 7 2.2.1 Global geographic pattern....................................................................................................... 7 2.2.2 Likely future trends.................................................................................................................. 8 2.2.3 Global sectoral pattern ............................................................................................................ 9 2.2.4 UK trends .............................................................................................................................. 10 2.3 Exportable service trends .......................................................................................................... 12 2.4 Labour market implications of an FDI strategy .......................................................................... 15 2.5 Benefits to Tier One companies ................................................................................................ 17 2.6 Impact of Corporation Tax ......................................................................................................... 17 2.7 Reasons given for not investing ................................................................................................ 19 3 Investment inflows into Northern Ireland....................................................................................... 20 3.1 Northern Ireland in a UK context ............................................................................................... 20 3.2 total inflows 2002-2006.............................................................................................................. 21 3.3 Key investors............................................................................................................................. 21 3.4 Performance by Northern Ireland sub-region ............................................................................ 23 3.5 Performance by industry............................................................................................................ 23 3.6 Nation of ownership................................................................................................................... 24 3.7 Quality of job ............................................................................................................................. 25 4 Comparator Research...................................................................................................................... 26 4.1 Republic of Ireland..................................................................................................................... 27 4.1.1 Role of government............................................................................................................... 28 4.1.2 Performance.......................................................................................................................... 29 4.1.3 Critical success factors - benefits.......................................................................................... 31 4.1.4 Applicable lessons ................................................................................................................ 35 4.2 Sweden ..................................................................................................................................... 37 4.2.1 Role of government............................................................................................................... 37 4.2.2 Performance.......................................................................................................................... 37 4.2.3 Critical success factors - benefits.......................................................................................... 40 4.2.4 Threats.................................................................................................................................. 40 4.2.5 Applicable lessons ................................................................................................................ 41 4.3 Poland ....................................................................................................................................... 41 4.3.1 Role of Government .............................................................................................................. 41 4.3.2 Performance.......................................................................................................................... 42 4.3.3 Critical success factors - benefits.......................................................................................... 44 4.3.4 Threats.................................................................................................................................. 45 4.3.5 Applicable Lessons ............................................................................................................... 46
  4. 4. 5 Workshops and business consultations........................................................................................ 47 5.1 Workshop .................................................................................................................................. 47 5.1.1 SWOT analysis ..................................................................................................................... 47 5.1.2 Developing opportunities and mitigating threats.................................................................... 49 6 Survey Findings ............................................................................................................................... 50 6.1.1 FDI Survey ............................................................................................................................ 50 6.1.2 Tier 1 Indigenous Suppliers Survey ...................................................................................... 51 6.2 FDI Survey Results.................................................................................................................... 51 6.2.1 Supply chain linkage ............................................................................................................. 51 6.2.2 International competitiveness................................................................................................ 53 6.2.3 New products and services ................................................................................................... 54 6.2.4 Increased skills...................................................................................................................... 55 6.2.5 Networking ............................................................................................................................ 56 6.2.6 Knowledge and Technology transfer..................................................................................... 57 6.2.7 Perceptions of Northern Ireland ............................................................................................ 58 6.2.8 Impact of FDI......................................................................................................................... 58 6.2.9 Summary............................................................................................................................... 58 6.3 Tier one Survey ......................................................................................................................... 58 7 Quantitative Analysis....................................................................................................................... 60 7.1 Methodological approach .......................................................................................................... 60 7.1.1 Input data .............................................................................................................................. 60 7.1.2 GVA impact calculation ......................................................................................................... 60 7.1.3 Employment impact calculation............................................................................................. 61 7.1.4 Fiscal impact calculation ....................................................................................................... 61 7.2 GVA Impact ............................................................................................................................... 61 7.2.1 Benefits ................................................................................................................................. 61 7.2.2 Net Overall Impact ................................................................................................................ 62 7.3 Employment impact ................................................................................................................... 62 7.3.1 Benefits ................................................................................................................................. 62 7.3.2 Net Overall Impact ................................................................................................................ 62 7.4 Fiscal benefits ........................................................................................................................... 63 8 Future trends in inward investment................................................................................................ 64 8.1 Investment outlook: overview .................................................................................................... 64 8.1.1 UK prospects......................................................................................................................... 64 8.1.2 Prospects for Northern Ireland .............................................................................................. 65 8.1.3 FDI opportunities for Northern Ireland in selected sectors .................................................... 66 9 Key Findings & Recommendations ................................................................................................ 70 9.1 Range of Benefits Tradable Services FDI Can Generate .......................................................... 70 9.1.1 Output benefits...................................................................................................................... 70 9.1.2 Employment benefits............................................................................................................. 70 9.2 Benefits at the Sub Sectoral Level ............................................................................................ 70 9.3 Fiscal Benefits of Service Sector FDI ........................................................................................ 71 9.4 Locational Factors ..................................................................................................................... 72 9.5 Forecast Trends ........................................................................................................................ 72 9.6 Market Failures.......................................................................................................................... 73 9.6.1 Identifying competitors .......................................................................................................... 74 9.7 International Examples .............................................................................................................. 74 9.8 Recommendations..................................................................................................................... 77 9.8.1 Focus .................................................................................................................................... 77 9.8.2 Corporation Tax .................................................................................................................... 77 9.8.3 Skills in high-tech industries.................................................................................................. 78 9.8.4 Measuring the impact of the Tradable Services sector. ........................................................ 78 Appendix A: Crowding out effects of FDI investment on Northern Ireland businesses Appendix B: Model to generate economic impact calculation Appendix C: Methodological note on Experian’s regional forecast
  5. 5. FDI Research – Final Report Introduction BACKGROUND In June 2006, the Department for Enterprise, Trade and Investment in Northern Ireland (DETI) appointed Experian’s Business Strategies Division to provide a robust evidence base of trends in and the value of Foreign Direct Investment (FDI) in Northern Ireland, to improve its understanding of the benefits that FDI projects can bring to the local economy and by examining likely trends in FDI, identify the key sectors and markets which Invest NI should target. As well as DETI, other organisations included in the Client Steering Group for the research are Invest NI and DEL. The definition that this report will use for the tradable service sector will be the same as that used in DETI’s Exporting Northern Ireland Services study (see section 1.3). In order to develop a broader view of service sector exports in the UK in Northern Ireland, the report will use the term ‘exportable services’ to describe those services that export at least five per cent of their produce. OBJECTIVES The objectives of this study were to: • Explore the range of benefits over and above direct employment impacts that FDI in the tradable service sector can generate; • Explore these benefits at a sub-sectoral level, including wider supply chain benefits accruing to indigenous companies and knock-on effects in terms of the skills base; • Estimate the fiscal benefits of service sector FDI; • Identify any regional/ locational factors causing sub-sectoral variation; • Forecast key trends in service sector FDI; • Highlight areas where a competitive advantage can be developed and market failures where government can respond; • Explore international examples of the development of successful tradable services subsectors; • Identify the policy implications of the evidence gathered. • • Propose a series of actions that need to be taken to improve Northern Ireland’s competitive advantage and also ensure that benefits from inward locating projects are maximised. This will provide the rationale for all agencies and organisations with a stake in FDI; and Develop a series of recommendations that set out exactly what type of investment you should or could attract and the most effective means of doing this. 1
  6. 6. FDI Research – Final Report FORMAT The remainder of this document is structured as follows: • • • Section one sets out the context for the later analysis, by defining what is meant by the terms ‘FDI’, ‘type of investment’ and ‘tradable services’; Section two sets out the findings of the literature review, and includes an analysis of trends in FDI and total investment in the UK and global economies, and an analysis of the implications that FDI growth can have on economies and labour markets. Section three discusses trends in total FDI, and tradable services FDI in Northern Ireland by year, by sector, by geographic area of investment and by nation of ownership. • Section four discusses the comparator research on Ireland, Sweden and Poland; • Section five summarises the views of stakeholders in the Northern Ireland economy during the consultation and workshop stages; • Section six summarises the main results of the Survey elements of the research; • Section seven provides an analysis of the impact of FDI in Northern Ireland; • Section eight examines future trends in investment inflows into Northern Ireland against a favourable global context; and • Section nine provides a summary of the key findings from the research and recommendations for the policy interventions that should follow from this work. 2
  7. 7. FDI Research – Final Report 1 Context International trade and investment flows provide a strong stimulus to global economic growth and to expansion in individual countries. Regions within national economies share the benefits, particularly if they have a strong exporting capacity or are direct recipients of FDI. This section provides a context for the rest of the report, defining ‘FDI’, type of FDI project, and ‘tradable services’ for the purposes of the research. 1.1 DEFINING FDI According to international institutions such as the International Monetary Fund (IMF) and the United Nations, FDI is defined as an investment made to acquire a lasting interest in an enterprise operating outside of the economy of the investor1. Investment may be in incorporated or unincorporated enterprises, branches or subsidiaries. The investor’s purpose is to gain an effective voice in the management of the enterprise. Some degree of equity ownership is almost always associated with acquiring an ‘effective voice’ and international institutions’ guidelines suggest a threshold of 10 per cent. FDI is also more likely to result in the importation of new technology and management skills, and is less likely to displace existing operations. The above definition involves cross-border flows. A broader concept of direct investment can be considered, to include inflows from other parts of the same nation-state. Such flows are much harder to identify, but if the data are available, they provide information that is of great interest in analysing the economic impact of direct investment. Information on total direct investment (‘cross border’ plus ‘investment from elsewhere in the UK’) is indeed available for Northern Ireland at the broad tradable services level, but not for the narrower definition used in this report. 1.2 TYPE OF FDI PROJECT Although all FDI should generate economic benefits to some degree, the extent of the benefits will, in reality, vary substantially depending upon whether the FDI is a greenfield investment or a merger/acquisition. 1.2.1 Greenfield A greenfield investment establishing a new operation or expanding existing facilities is likely to be of greatest benefit, providing new capacity, additional jobs, possibly new technology and management techniques, training for staff and potential linkages to the global marketplace. The increase in employment will provide additional spill over benefits to the local economy via increased effective demand. There may be an additional boost where the new operation stimulates expansion in up/down stream businesses in the area. But this form of FDI carries potential downsides. Existing industry in the area might be ‘crowded out’ as the incoming producer draws on local resources of labour and intermediate goods. In addition there is a risk that profits do not wholly feed back into the local economy but are repatriated to the investor’s home economy. 1 Balance of Payments Manual Fifth Edition: (BPM5) Washington DC IMF 1993 3
  8. 8. FDI Research – Final Report 1.2.2 Mergers & Acquisitions Mergers and/or acquisitions (M & As) account for the bulk of FDI but their initial impact is less powerful than a greenfield investment since they normally involve merely a change of ownership of existing assets. New technology and management skills may be introduced and linkages to the global market may be enhanced. But if the merger/acquisition leads to an expansion of capacity, the outcome would be similar to that following a greenfield investment. Because the benefits of greenfield investments are significantly greater than those associated with mergers and acquisitions, this research is concerned with the former type of investment. 1.2.3 Invest Northern Ireland’s Policy on FDI Invest Northern Ireland’s policy towards FDI states that funding will only be provided to support investments in export-oriented businesses. Invest NI therefore does not assist HQ operations, sales and marketing operations and logistic and distribution sectors. Nor does Invest NI assist mergers and acquisitions unless they lead to subsequent development projects. 1.3 DEFINING TRADABLE SERVICES The term ‘tradable services’ generally refers to any services that are capable of being imported and exported, i.e. services that are not necessarily purchased at the point of production, such as software design and consultancy. However, in some instances, the term can be broadened to include services such as transportation and hospitality that are purchased locally, but which generate foreign exchange revenues. Although, for analysis purposes, it is necessary to form a view as to which industries should, and should not be classified as ‘tradable services’, it is important to recognise that the Standard Industrial Classification (SIC) makes no distinction between tradable and nontradable activities. This means that, in many cases, SIC codes will include a mixture of tradable and non-tradable activities2. DETI’s Exporting Northern Ireland Services Study3 (ENIS) recommended that a definition be based upon those sectors that have the highest potential to trade services internationally. The sectors chosen by this study were: • • • • • • • • Computer and Related Activities (SIC 72); Research and Development (SIC 73); Market Research (SIC 74.13); Business and Management Consultancy (SIC 74.14); Architectural and Engineering (SIC 74.2) Technical Testing and Analysis (SIC 74.3); Advertising (SIC 74.4); and Creative Entertainment (SIC 92.1-92.3). This study will also adopt this ENIS definition for the tradable service sector, however, in order to develop a broader view of service sector exports in the UK in Northern Ireland, the 2 For example, the SIC classification system does not make any distinction between high street banks and telephone banking providers; between universities that provide distance learning qualification and those that do not provide such qualifications or between manufacturing companies who only sell processed outputs and those who also offer design services. 3 Exporting Northern Ireland Services Study, DETI, March 2007, http://www.detini.gov.uk/cgibin/downdoc?id=2844 4
  9. 9. FDI Research – Final Report report will also use the term ‘exportable services’ to describe those services that export at least five per cent of their produce. 5
  10. 10. FDI Research – Final Report 2 Literature review From a review of a range of literature sources, this section describes the benefits that FDI can bring to an economy, assesses recent global and UK trends in FDI, and examines the impact of increased FDI on economic growth and skills demand. 2.1 BENEFITS OF FDI As well as the direct impact on employment and GVA4, the DETI Corporate Plan identifies wider economic benefits of FDI as follows: • • • • The introduction of new products and processes; Improved management practices; New technology and skills development; and Improved job quality. In acknowledging these benefits, the 2005 Economic Vision for Northern Ireland sets out a policy to “adopt a targeted approach to FDI, which provides wider economic benefits to the economy and puts structures in place to encourage investment across all of Northern Ireland so that all areas benefit from sustainable economic growth and high value added employment”. Although an increase in the level of FDI investment does have potential to deliver clear benefits to the Northern Ireland economy, there is a risk that the incoming businesses could crowd out activity in, and displace labour from, the indigenous business base. As part of our research we have carried out an examination of literature on the crowding out issue, and have concluded that although 100 per cent crowding out is unlikely to occur, some allowance for crowding out should nonetheless be made. A more detailed commentary on the crowding out issue is provided in Appendix A. In addition to the economic benefits of FDI, there are also societal benefits of improved job quality. The evidence of whether these benefits have been experienced within Northern Ireland is mixed. A recent study by Invest Northern Ireland5 found that 56 per cent of full time jobs promoted by first time inward investments, had weekly salaries above the Northern Ireland average for full time private sector employees. However, an analysis of more recent figures provided by Invest Northern Ireland showed that 69 per cent of full time workers in FDI companies earned more than the Northern Ireland average, and that 49 per cent of full time workers in tradable services FDI companies did so. This job quality issue will be explored in further detail in section 3.7. A further job quality benefit arises as a result of the improvements that FDI companies can bring to their host country’s skills base. In a recent study of the benefits of FDI to the Australian economy6, Invest Australia argued that recipient economies can benefit from “a cross-pollination and sharing of ideas”, and that the skills of the local workforce can be enhanced through: 4 This will be examined in greater detail in the discussion on crowding out that follows. Performance Report 2003/2004 – 2004-2005, Invest Northern Ireland, http://www.investni.com/performance_report_02-05.pdf 6 Benefits of Foreign Direct Investment to Australia, Invest Australia, 2004 5 6
  11. 11. FDI Research – Final Report • • • • • 2.2 Staff relocating to the country from other parts of the multi-national’s operation; Staff being provided with global exposure as a result of their interaction with the investor’s overseas operations; The introduction of new and innovative working practices; Knowledge transfer between the investor and their local supplier and linked companies; and Knowledge transfer as a result of employees moving from the investing organisation to indigenous employers. GLOBAL AND UK TRENDS IN FDI Data on trends in total FDI (including non-tradable activities) are available in terms of annual flows (from the perspective of both the originating countries and recipients) and stocks, which reflect the accumulation of flows in a country over a period of time. We use both approaches to illustrate trends in the evolution of FDI. FDI flows reached a peak at the turn of the century (Table 2.1) as the global economy expanded vigorously, investment in technology surged and mergers and acquisition activity was especially strong. The economic slowdown of the early years of this decade and the terrorist attacks on the US led to a marked deceleration in FDI, but the pace of flows has picked up strongly in recent years in line with the buoyancy of the global economy. 2.2.1 Global geographic pattern Developed economies have traditionally been the dominant source of FDI. In 1970, they accounted for virtually all such flows, and even in 1980 the level of FDI from developing countries was small. But the past quarter of century has seen important changes. While developed economies still account for the bulk of FDI outflows, their share has decreased as developing economies – notably in Asia – have expanded rapidly and in the cases of China and India, participate more actively in the international economy through their steady liberalisation of trade policies. The growing importance of developing economies as a source of FDI is highlighted in Table 2.1. In 2004, such countries provided 12.7 per cent of global FDI. The table also shows that while the overall developed country share of world FDI flows is on a steadily declining path, the share of individual regions within the total flows can be very volatile. Table 2.1 - FDI outflows (% of total unless otherwise noted) 1970 Developed economies 99.7 North America 58 Europe 36 Developing economies 0.3 World ($ million) 14,157 Source: UNCTAD (http://stats.unctad.org/FDI) 1980 93.8 43.4 45 6.2 53,743 1990 94.6 15.2 58.2 5.4 238,681 2000 88.1 15.1 69.9 11.9 1,239,149 2004 87.3 37.9 42.4 12.7 730,257 The pattern among recipients of FDI is similar to that shown in Table 2.1. The rise of the developing economies has been strong, although from a much higher base than in the case of outflows, as the attractions of lower production costs have long been an incentive for transnational companies to locate operations in such countries. In 1980 developing countries received almost 16 per cent of total flows, and increased their share to 41 per cent by 2004. The rise of Asia as an investment location has been dramatic, with FDI flows increasing from $442 million in 1980 to $147.5 billion in 2004. In Latin America, the increase in flows over the period was from $7.5 billion to $67.5 billion. 7
  12. 12. FDI Research – Final Report Table 2.2 - FDI inflows (% of total) 1980 Developed economies 84.5 Developing economies 15.5 Asia 1 Latin America 14 S E Europe/CIS 0.5 Source: UNCTAD (http://stats.unctad.org/FDI) 2004 59 41 23 10 5 A useful way of considering the importance of individual countries in the global picture of FDI is to investigate their stock of inward investment. The United Nations Conference on Trade and Development (UNCTAD) annual investment report7 contains a wealth of information on this and allied topics. The following table highlights the importance of the UK in this context, second only to the US in terms of the value of investments, and shows the rapid emergence of China as a major recipient. Table 2.3 - FDI stock and greenfield projects ($ billion unless otherwise noted) 1990 Top developed countries* US UK France Top developing countries* China (ex Hong Kong) Mexico Brazil Source : UNCTAD World Investment Report *In terms of FDI stock 2004 % growth Number of greenfield projects 2002-04 395 203 86 1,474 771 535 273 280 522 1,580 1,222 482 21 22 37 245 182 151 1,066 727 344 3,409 451 720 Table 2.3 also indicates that as a destination for greenfield projects the UK does very well. At 1,222 projects in the period 2002-04, the figure is not far short of the US number and well above that seen in France, although in overall percentage growth terms France has increased its FDI more rapidly than the UK. China’s record in this context is extremely impressive, well ahead of the US. India, with 1,392 projects is in third place and Russia has also attracted over 1,000 projects. But the stock of FDI in both these countries is still comparatively small. It should be noted that since these figures were produced, the US share of FDI is likely to have declined as a consequence of the country’s introduction of a one-off corporation tax amnesty for repatriated profits in 20057. However, this is only likely to be a short-term trend. 2.2.2 Likely future trends Over the long term, patterns in FDI flows are likely to be closely correlated with future trends in output growth, with companies in the world’s emerging economies taking on a new global presence in international markets. This means that Eastern European nations such as Bulgaria, the Czech Republic and Poland may begin to emerge as new sources of FDI, while existing sources such as China and India will take on even greater importance.. 7 7 UNCTAD World Investment Report 2005, Statistical Annex, UN 2005 Economy loses €18bn after US tax repatriation, p1, The Irish Times, 17th October 2006 8
  13. 13. FDI Research – Final Report Figure 2.1 shows forecasts for average annual FDI per head of population (in US$) and FDI as a percentage of GDP from 2006 to 2010 for a selection of countries. It shows that the Republic of Ireland will have the third highest FDI per capita figure of the 82 countries assessed, at $4,750 per year, while the UK ranks 11th on the same indicator, attracting $1,480. Figure 2.1 - Forecast FDI as a proportion of population and GDP $6,000 18% 16.5% 16% 15.0% $4,776 $5,000 $4,750 14% $5,037 $4,000 12% $3,258 10% $3,053 $3,000 $2,459 8% 7.9% $2,000 6% 6.7% $1,480 $1,144 5.1% $1,000 3.6% 4% $984 2.2% $479 2.9% $224 2.0% 1.2% Source: The Economist Intelligence Unit, 2006 2.2.3 an y U S 0% er m G Fr an ce U K Sw ed en nd s m N et he rla Be lg iu la nd Ire Ko ng H on g Si ng ap or e $0 2% Po la nd 7.9% FDI inflows per head ($US) FDI inflows as % of GDP Global sectoral pattern The rapid expansion of the service sector has boosted the share of FDI in service industries. This is true of developed and developing countries. In China for example, while manufacturing (led by computers and other electronic equipment and textiles) dominates the picture, sectors such as distribution and financial services have recently seen significant inflows. The trend towards services is seen in the following table. Table 2.4 - World FDI stock by sector % shares of total inward FDI Primary (agriculture and mining) Manufacturing Construction and electricity, gas water 1990 9.5 41.6 1.7 2003 6.9 33.3 3.2 Services 47.2 56.6 Trade 12 10.7 Hotels and restaurants 1.3 1 Finance 19.7 18 Business activities 6.8 14.9 Transport & communications 1.5 5.2 Source: UNCTAD World Investment Report 2005, Statistical Annex 9
  14. 14. FDI Research – Final Report 2.2.4 UK trends New FDI investment into the UK grew steadily from 1988 to 1997, before undergoing four years of rapid growth between 1997 and 2000. Investment that fell rapidly in the wake of the September 11th attacks of 2001 but is now showing signs of returning to its 2000 peak. Figure 2.2 – Inward investment flows into the UK, 1988-2004 90 Billions of Pounds 80 78.5 70 54.4 60 44.9 50 42.8 40 36.6 20.3 30 12.4 20 11.6 17.4 15.7 12.7 17.2 8.4 10 8.8 9.9 16.0 6.0 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: United Nations Conference on Trade and Development (UNCTAD),2007 This investment into the UK has had a positive impact on employment levels, and UK Trade & Investment (UKTI) estimate that nearly 90,000 jobs were created or safeguarded in 2005/06 as the UK recorded its highest ever number of inward investment projects.8 Of the 1,220 projects, 508 were ‘new’, 337 ‘expansions’ and the remainder, 375 (30 per cent) M & A transactions. Investment in the tradable service sector represented over 55 per cent of the total number of projects, with a strong representation in knowledge-intensive sectors. IT, software, internet and e-commerce represented 284 projects. Survey evidence supports the view that the UK remains a top attraction for investment. The annual survey by Ernst & Young revealed that in 2005, of 3,066 FDI projects in Europe, 559 went to the UK, 538 to France and 181 to Germany in third place. An interesting feature of the survey was that 29 per cent of FDI projects in France were in manufacturing against 19 per cent in the UK. The annual IBM survey also showed the UK in the lead, with France close behind, in terms of the number of new projects. Approximately half (51 per cent) of all FDI inflows into the UK originates from within Europe, with Germany investing the most out of any European nation, followed by France and the Netherlands. The US is the biggest single investor in the UK, accounting for 33 per cent of all investment, while 8 per cent of investment comes from Asia, and the remaining 10 per cent is spread across the rest of the world (Table 2.5). 8 UK Inward Investment 2005/6, UK Trade & Investment,www.ukinvest.gov.uk 10
  15. 15. FDI Research – Final Report Table 2.5 - Gross foreign direct investment in the UK by nation of origin, 2003 Percentage of total investments Germany France Netherlands Other Europe USA Other America Asia Rest of the World Source: National Statistics (Pink Book), 2006 13 11 13 14 33 5 8 5 The financial services industry is the biggest net source of foreign direct investment, contributing to approximately one third of all investment. Other major recipients of FDI in the UK include the transport & communications, retail & wholesale, utilities, business service and chemicals & plastics sectors (Table 2.6). Most heavy industries, including the metals and mechanicals products and office equipment sectors reported negative levels of net FDI, meaning that more money was invested in these sectors by UK companies overseas, than by foreign companies in the UK. Table 2.6 - Net foreign direct investment in the UK by industry, 2004 Industry Share of FDI Financial services 32% Transport and communications 23% Retail / wholesale trade and repairs 14% Electricity, gas and water 13% Real estate and business services 9% Chemical, plasic and fuel products 6% Other services 2% Textile and wood, printing and publishing 1% Food products 1% Agriculture, forestry and fishing 0.1% Source: National Statistics Business Monitor, 2006 Figure 2.3 provides a ranking of factors influencing location decisions based on the 2006 Ernst & Young Global Attractiveness Monitor. It shows that transport & logistics infrastructure and labour costs are considered to be the most important influencers, both being described as ‘very important’ by a majority of respondents. Corporate tax rates, a key differentiator between the Northern Ireland and Republic of Ireland offer, are also considered important, being mentioned by 46 per cent of respondents. Membership of the Eurozone, another key differentiator in the context of Ireland is, however, considered less important, and is considered to be of little or no importance by 36 per cent of respondents. 11
  16. 16. FDI Research – Final Report Figure 2.3 - Ranking of the selection criteria for an investment location Transport & logistics infrastructures 54 35 Labour costs 52 39 3 7 7 2 Potential productivity increase 48 38 Telecommunications infrastructures 48 40 Transparency & stability of polit., leg. & reg. env. 47 39 9 3 Corporate taxation 46 40 9 3 Local labour skills levels 45 42 9 3 The country or region's domestic market 44 39 12 4 Flexability or labour legislation 41 42 13 3 Social climate and environment stability 40 8 3 8 4 9 48 2 The country or area's specific skills 33 Avail. of sites, cost of land & regulations 31 R&D availability and quality 29 Local language, culture and values 29 Specific treatment of expat. execs/corp HQs 27 Aid, subsidy & support from public authorities 24 41 24 8 Membership of the Euro zone 23 40 26 10 Quality of life 23 Access to local financial investors 22 0 Very important Of some importance 42 19 42 36 24 42 6 7 23 18 23 30 Of little importance 11 22 34 40 6 19 42 20 4 31 60 16 80 100 Not at all important Source: Ernst & Young, 2006 2.3 EXPORTABLE SERVICE TRENDS ‘Exportable’ services can be identified as service sector industries within which a significant proportion of total output is exported overseas. An analysis of the Office of National Statistics (ONS) 2004 Input-Output tables identifies 16 industries within which over 5 per cent of industrial output is exported. These are shown in Table 2.7. 12
  17. 17. FDI Research – Final Report Table 2.7 - Export share of UK service sector industries Industry Percentage of output exported Exportable services Water transport Auxiliary financial services Research & development Other business services Air transport Computer services Architectural activities & technical consultancy Recreational services Banking & finance Advertising Legal activities Accountancy services Insurance & pension funds Hotels, catering, pubs etc. Telecommunications Market research & management consultancy 60.8 53.9 43.9 22.5 18.9 12.1 11.7 9.9 9.8 8.9 8.4 8.2 7.6 7.2 7.2 4.8 Other services Other land transport Ancillary transport services Railway transport Postal & courier services Education Other service activities Renting of machinery etc. Public administration & defence Motor vehicle distribution & repair, automotive fuel retail Retail distribution Letting of dwellings Private households with employed persons Sewage & sanitary services Owning & dealing in real estate Health & veterinary services Estate agent activities Social work activities Source: ONS Input-Output Statistics, 2004 4.3 3.8 3.7 2.6 2.0 1.2 1.2 1.0 0.4 0.3 0.3 0.2 0.2 0.2 0.2 0.0 0.0 Figure 2.4 shows the long-term trend in export sales in the 16 selected exportable service industries, and across the economy as a whole. It shows that the proportion of UK exportable services outputs that are exported has increased from under 15 per cent in 1992 to over 17 per cent in 2004. In contrast, the proportion of output exported across UK industries as a whole has remained fairly static at close to 11 per cent. 13
  18. 18. FDI Research – Final Report Figure 2.42 Proportion of UK output exported by industry grouping, 1992 - 2004 18 17 16 15 All Industries Exportable services 14 13 12 11 10 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Experian 2006, based on ONS 2004 Input-Output data Figure 2.5 shows the percentage change in export share in selected exportable service industries between 1992 and 2004. The table shows that over this period, the UK has managed to establish itself as a leading exporter of research and development, and has enjoyed a substantial increase in banking and financial services exports. Although total output in the air transport sector has increased substantially over this 12 year period, the majority of this increase originated from sales to UK based customers, and as a consequence, the export share in this sector has fallen sharply. Figure 2.5 Percentage point change in export share 1992 - 2004 for selected industries Research & development Water transport Auxiliary financial services Insurance & pension funds Accountancy services Banking & finance Computer services Legal activities Advertising Telecommunications Architectural & tech consult Wholesale distribution Motor vehicle distribution & repair Market res & managem't cons Hotels, catering, pubs etc. Recreational services Other business services Air transport -15 -10 -5 0 5 10 15 20 25 30 35 ONS 2004 Input-Output data 14
  19. 19. FDI Research – Final Report 2.4 LABOUR MARKET IMPLICATIONS OF AN FDI STRATEGY Northern Ireland currently has one of the smallest private services sectors of any developed economy. However, a recent study by Regional Forecasts Ltd forecasts a large increase in service sector jobs over the coming decade, as shown in Table 2.8. A successful strategy to attract tradable services FDI into the Northern Ireland economy would boost the sector, accompanied by an increase in the demand for skilled workers. The table highlights the occupations in Northern Ireland that are likely to require the largest numbers of new workers over the next ten years. It shows that, over the period, 43,950 new jobs will be created, while 698,940 further vacancies will arise as a result of people moving between occupations, people becoming unemployed or inactive, people retiring or people migrating away from Northern Ireland. Most of the new jobs created will be in occupations that are in heavy demand by the service sector, while predominantly manufacturing occupations, such as skilled trades, and process, plant and machine operatives, look likely to experience a continuing fall in new employment demand. It should be noted that these figures represent a baseline forecast for the Northern Ireland economy over the eleven year period, and that any future FDI strategy could, potentially, lead to employment demand levels that are higher than the figures shown below. Table 2.8 - Forecast new employment and replacement demand in Northern Ireland by occupation, 2005-2015 inclusive* New employment demand Replacement employment demand Total employment demand Managers and Senior Officials 10,800 66,220 77,020 Professional occupations 15,500 58,300 73,800 Associate professional and technical occupations 6,100 66,880 72,980 Administrative and secretarial occupations 4,500 98,560 103,060 Skilled trades occupations -8,200 79,750 71,550 Personal service occupations 11,800 62,480 74,280 Sales and customer service occupations 4,900 92,840 97,740 Process, plant and machine operatives -4,200 58,850 54,650 Elementary occupations 2,800 115,060 117,860 Total 43,950 698,940 742,890 Source: Regional Forecasts Ltd, 2006 * The replacement demand figure was calculated by multiplying the reported annual average figure for the 2005-2015 period by 11 If present trends continue, future FDI investment will be disproportionately concentrated in and around Belfast and Derry, with Belfast, Derry, Craigavon, Newtownabbey, Limavady, Strabane, Larne and Carrickfergus all receiving a share of FDI that is above their share of total employment (see Table 2.9). 15
  20. 20. FDI Research – Final Report Table 2.9 – Share of FDI and employment by district Percentage of FDI Percentage of total Index workforce employment Belfast 33.4 32.4 103 Derry 13.8 6.9 200 Craigavon 6.7 6.2 109 Lisburn 6.3 6.5 97 Newtownabbey 6.3 5.1 123 Newry & Mourne 4.8 5.2 91 Limavady 3.9 1.5 253 Strabane 3.4 1.5 227 Ballymena 3.2 4.9 64 Antrim 3.1 4.0 77 Coleraine 2.7 3.8 70 Larne 2.1 1.4 151 Castlereagh 1.9 4.2 45 Fermanagh 1.9 3.4 55 Carrickfergus 1.7 1.4 127 Northdown 1.5 3.7 42 Dungannon 1.4 3.3 43 Cookstown 1.0 1.8 58 Ards 1.0 2.9 35 Ballymoney 0.8 1.2 68 Down 0.6 2.9 20 Omagh 0.4 3.0 12 Moyle 0.2 0.6 39 Banbridge 0.1 1.9 8 Armagh 0.04 3.0 1 Magherafelt 0.02 2.4 1 Source: Invest Northern Ireland, Northern Ireland Census of Employment District In addition to the benefit of increased labour demand described above, Driffield8 suggests that FDI can potentially deliver further benefits to the Northern Ireland labour market by increasing the allocative efficiency, and therefore the productivity of the workforce. In other words, because more employment opportunities are made available to individuals working in Northern Ireland, it will be easier for individuals to identify working opportunities that are well suited to their skills and experience. However, Driffield also suggests that, as a consequence of the increased demand for labour brought about by FDI investment, and the resulting increase in industry wages, some indigenous businesses may attempt to reduce costs by substituting labour for capital. The extent of such substitution will vary according to the degree of FDI investment in the industry in question, and the technical feasibility of substituting capital for labour in that industry. However, overall this substitution effect is expected to lead to the loss of one indigenous job for every five FDI jobs created. The 2004 Northern Ireland Skills Strategy responds to this expected demand by focusing on three different types of skills, namely: • Essential skills of literacy and numeracy and, increasingly, information and communications technology (ICT); 8 Indirect employment effects of foreign direct investment to the UK, Nigel Driffield, Bulletin of Economic Research, 51:3, 1999 16
  21. 21. FDI Research – Final Report • • Employability skills, including the key skills of team working, problem solving and flexibility; and Work based skills, specific to a particular occupation or sector. The 2006 Programme of Implementation for this strategy outlines how these types of skills will be developed, citing, for example, work to increase the presence of UK wide Sector Skills Councils in Northern Ireland as a method of developing the final skill type. 2.5 BENEFITS TO TIER ONE COMPANIES In addition to the labour market and export benefits associated with FDI, an investment also yields additional benefits for the indigenous companies who supply them (referred to in this study as ‘tier one companies’) and other Northern Ireland businesses. These include, for example, the profits made by local companies as a result of sales to FDI investors, profits made as a result of spending by the employees of FDI investors, profits gained as a result of knowledge shared with investors, and agglomeration benefits (benefits of being located in close proximity to one another such as labour mobility, and reduced transportation cost). The extent to which these benefits are likely to be experienced by the wider business base varies according to the characteristics of the FDI investor. For example, Turok9 argues that inward investors can be categorised into two broad types10: • • Investors with developmental linkages to indigenous businesses – Investors that establish long-term collaborative partnerships with local businesses; have decentralised management structures; procure bespoke good and services from knowledge-intensive local industries; and employ a diverse range of local staff; Investors with dependent linkages to indigenous businesses – Investors that procure basic goods and services at a minimal price from local companies, who employ low skilled staff in elementary activities on temporary or casual contracts, with highly centralised organisational structures. Turok argues that while the former companies are likely to contribute to self-sustaining growth in a local economy, the latter group are likely to leave the economy vulnerable to market conditions elsewhere in the global economy, with a risk of large-scale low skills employment loss should the company close its operations11. An estimate of the output and employment benefits received by tier one companies in Northern Ireland will be provided in Section seven of this report. 2.6 IMPACT OF CORPORATION TAX In recent years, there has been a regular debate in both the British and Irish media on the role that the corporation tax differential between the Republic of Ireland (which has a 12.5 per cent rate on trading income in most areas, although a lower 10 per cent rate applies for companies based in Shannon and for certain companies in the International Financial Services 9 See Inward investment and local linkages – how deeply embedded is “Silicon Glen”?, I Turok, 1993 These two types are used for illustrative purposes. In reality, most companies would lie within a spectrum between these two extremes. 11 It should however be acknowledged that attracting companies with dependent linkages may prove desirable from an equity perspective as these employers are more likely to offer employment opportunities in areas of high economic inactivity. 10 17
  22. 22. FDI Research – Final Report Centre and in the manufacturing sector) and Northern Ireland (which, in line with other parts of the UK, has a 30 per cent main rate)12. The most obvious issue associated with such corporation tax differentials is that they may cause firms to choose to locate in low tax countries such as the Republic of Ireland, rather than in Northern Ireland, in order to reduce the amount of tax they are required to pay. A second issue is that they may encourage the branches of multinational corporations in high tax locations, such as Northern Ireland, to sell goods and services to branches in low tax locations, (such as the Republic of Ireland) in order to reduce the company’s overall tax burden. This practice, known as transfer pricing, would reduce the total tax yield generated in the high tax country13. In a recent report entitled Assessing the case for a differential rate of corporation tax in Northern Ireland (, November 2006), the Economic Research Institute of Northern Ireland estimate the impact that is likely to occur, should Northern Ireland reduce its corporation tax rate to Republic of Ireland levels. The calculation accounts for: • • • • • • • The additional corporation tax that will be paid by the newly attracted FDI investors; The reduction in the amount of corporation tax paid by existing companies in Northern Ireland; The additional taxation paid as a result of induced domestic demand; The additional taxation paid as a consequence of ‘knock on’ jobs in the Northern Ireland economy; The reduction in unemployment and incapacity benefit costs caused by these ‘knock on’ jobs; Additional payments of other taxes, such as income tax and VAT; Additional public expenditure costs incurred in order to serve the new businesses. The report finds that the immediate effect of any reduction in the rate of corporation tax would be negative, as it would immediately reduce the tax payments of existing businesses. However, over time, the change will lead to growth in the business base, and balances should become positive from 2013 onwards, with the positive balance rising to almost £2.5 billion by 2030. However, as the report does not account for the likely benefits that will occur as a result of UK companies relocating profits to capitalise on ‘transfer pricing’, it may understate the true likely benefit of such a change (Figure 2.6). 12 Recent articles include DUP and Sinn Féin back corporate tax cut, Financial Times, 13th November 2006 and NI pledged €79bn to underpin St Andrews Agreement, Irish Times, 2nd November 2006 13 Likewise, if Northern Ireland’s corporation tax rate were to be reduced to below the UK average, Northern Ireland could benefit as a result of UK based companies operating in Northern Ireland reassigning profits to their Northern Ireland offices. 18
  23. 23. FDI Research – Final Report Figure 2.6 – Benefit to UK fiscal balances of a reduction of Northern Ireland corporation tax rates to 12 per cent 2500 £ million 2000 1500 1000 500 0 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 -500 Source: Regional Forecast Ltd, Economic Research Institute of Northern Ireland (2016 to 2029 figures Experian based on ERINI) 2.7 REASONS GIVEN FOR NOT INVESTING In 2000, the House of Commons Northern Ireland Affairs Committee14 provided a list of reasons why unsuccessful FDI investment leads had taken the decision not to locate in Northern Ireland. These included: • • • • An unfavourable tax regime; A small critical mass in comparison to other regions (in terms of the number of people available); Distance from customer; and Concern regarding security and political stability. This report was based on research carried out only a short time after the signing of the Good Friday Agreement, at a time when political stability concerns were more pertinent than they are currently. However, the three other concerns are all likely to remain of importance to foreign direct investors. Inappropriate skills, absence from the Eurozone and infrastructure issues were not cited as barriers by any of the leads questioned, However, it is possible that these and other issues may have impacted on the decisions made by other investors. 14 Northern Ireland Affairs Committee's Fifth Report 1999-2000, Public expenditure in Northern Ireland: Inward Investment 19
  24. 24. FDI Research – Final Report 3 Investment inflows into Northern Ireland This section discusses the performance of Northern Ireland in attracting inward investment, and its performance by location and sector. 3.1 NORTHERN IRELAND IN A UK CONTEXT In 2004/5, National Statistics reported that there were 36 ‘project successes’ in Northern Ireland, equating to 21 successes per million people. In other words, on 36 occasions, an overseas company specified an interest in, and successfully completed an investment in, Northern Ireland. Of these companies, 14 were manufacturers (eight per million people) and 22 were non-manufacturers (13 per million people). During this year, Northern Ireland had the UK’s joint third highest success rate in terms of population share, behind only London and the North East (Figure 3.1). Figure 3.1 – FDI project successes per million population, 2004/5 40 35 Manufacturing 36.7 1.3 Non-manufacturing 30 25 22.6 20 21.7 20.6 19.0 4.3 35.4 10.5 15.7 8.0 15 14.4 8.5 6.9 10 13.3 4.4 3.9 12.8 5.4 12.0 2.3 2.4 17.4 12.6 12.1 5 10.5 10.7 7.5 2.2 8.8 9.0 9.4 7.4 9.7 8.3 5.3 0 London North East South East Northern Ireland Wales East Midlands North West Scotland West Midlands East Yorkshire & Humber South West Source: National Statistics 2006 Between 2000/1 and 2004/5, the number of project successes in Northern Ireland rose from 22 to 36, equivalent to a 64 per cent increase. This represents the fourth highest increase in the UK over the period, behind only the East Midlands, North West and North East. As in most other regions, non-manufacturing FDI grew more rapidly than manufacturing FDI (Figure 3.2). 20
  25. 25. FDI Research – Final Report Figure 3.2 – Percentage change in number of FDI projects 233% East Midlands North West 121% 136% 69% 72% 71% North East 27% Northern Ireland Yorkshire & Humber 64% Scotland South East West Midlands -100% 200% 64% -4% 138% 44% -29% 31% 27% 117% 8% 20% East South West 100% -37% Wales London 375% 300% 173% -31% 0% -38% 20% -6% Manufacturing 46% -14% -7% -38% -29% -33% -50% 23% Non-manufacturing Total 0% 50% 100% 150% 200% 250% 300% 350% 400% Source: National Statistics 2006 3.2 TOTAL INFLOWS 2002-2006 Table 3.1 shows the trend in FDI into Northern Ireland over the past five years. The figure shows that the Northern Ireland economy has generally experienced a steady increase in FDI investment, although it did experience two exceptionally strong years of investment in 2004 and again in 2006. In both these years, the exceptional performance was mostly attributable to major investments by Northbrook Technology and Citigroup, which together contributed 635 jobs in 2004 and 585 jobs in 2006. Table 3.1 - Trends in Northern Ireland FDI Tradable service Projects Jobs created 2002 4 163 2003 5 185 2004 11 1,188 2005 11 255 2006 11 1,073 Source: Locomonitor, 2007 3.3 All industries Capital investment (US$m) Projects Jobs created Capital investment (US$m) 41 102 6.5 39.97 176.69 12 16 27 39 32 583 880 1,862 1,407 4,263 151 385 224.4 492.84 440.88 KEY INVESTORS Since January 2002, FDI in Northern Ireland has been dominated by the IT and business and financial services sectors, with six of the ten biggest investors in job creation terms operating in these sectors. The most significant investor over this period was ICICI, the Indian contact centre operator, which created 1,600 jobs in Belfast and Derry. Northbrook Technology and Citigroup were the only two tradable service companies to appear in the list of the ten most significant investors. 21
  26. 26. FDI Research – Final Report Table 3.2 - Northern Ireland’s largest foreign direct investors, January 2002 to March 2007 Investing company ICICI OneSource Northbrook Technology HCL BPO Citigroup Asda Teleperformance IKEA Quinn Direct Insurance Image Communications Group Seagate Technology Source: Locomonitor, 2007 Country of origin India USA India USA USA France Sweden Ireland Ireland USA Destination city Belfast, Derry Belfast, Strabane, Derry Belfast, Armagh Belfast Antrim, Enniskillen Newry Belfast Enniskillen Armagh Derry Jobs created 1,600 1,060 825 560 475 450 400 350 304 300 Capital invested (US$m) 0 42 2 0 86 13 0 13 0 241 Sector Key business function Business Services IT and Software Business Services Financial Services Food and Drink Business Services Consumer Products Financial Services Telecom Services Business Equipment Customer Support Centre Research and Development Customer Support Centre Research and Development Retail Customer Support Centre Retail Customer Support Centre Customer Support Centre Manufacturing, R&D Table 3.3 - Northern Ireland’s largest tradable services foreign direct investors, January 2002 to March 2007 Investing company Northbrook Technology Citigroup Allen Systems Group Polaris Software FG Wilson Avalanche Technology CEM Solutions Gambro BCT HCL BPO Liberty Information Technology Source: Locomonitor, 2007 Country of origin USA USA USA India USA USA USA Sweden India USA Destination city Belfast, Derry, Strabane Belfast Belfast Belfast Larne Belfast Belfast Larne Belfast Belfast Jobs created 1,060 560 168 158 155 130 100 86 75 51 Capital invested (US$m) 42 0 6 0 87 13 32 13 0 8 Sector Key business function IT and Software Financial Services IT and Software IT and Software Machinery & industrial goods IT and Software Machinery & industrial goods Healthcare Business Services IT and Software Research and Development Research and Development Research and Development Research and Development Research and Development Business Services Research and Development Research and Development Customer Support Centre Research and Development 22
  27. 27. FDI Research – Final Report 3.4 PERFORMANCE BY NORTHERN IRELAND SUB-REGION Belfast is by far the most popular location for FDI investors into Northern Ireland, with 30 tradable service investors, and a further 29 non-tradable service investors choosing to locate there since January 2002, creating an additional 4,239 jobs. Derry is also a popular location, attracting three tradable, and eight non-tradable investments, and creating 1,766 additional jobs. However, outside of these two cities, only Larne, Strabane, Bangor and Downpatrick have succeeded in generating employment opportunities through tradable service investments15. Table 3.4 - Geographic breakdown of Northern Ireland FDI investments, January 2002 to March 2007 Tradable service Projects Belfast 30 Derry 3 Larne 3 Strabane 1 Bangor 1 Downpatrick 1 Armagh 1 Newry 0 Antrim 0 Enniskillen 0 Kilkeel 0 Carrickfergus 0 Source: Locomonitor, 2007 3.5 All industries Jobs created Capital invest (US$m) Projects Jobs created Capital invest (US$m) 2,151 360 270 100 18 15 0 0 0 0 0 0 113 111 110 0 0 1 27 0 0 0 0 0 59 11 5 1 4 2 3 3 2 3 2 4 4,239 1,766 321 100 218 85 704 450 425 436 264 176 243 375 110 0 0.5 5 27 13 45 61 25 216 PERFORMANCE BY INDUSTRY Since January 2002, the Northern Ireland IT and software industry has attracted more FDI investments than any other industry, and has helped to create 1,842 jobs. However, the largest share of jobs created has occurred in the business services sector, where 3,118 jobs have been created. Other sectors that attract significant levels of FDI in the region include the financial services sector and food and drink. The vast majority of tradable service sector investments have occurred within the IT and software sector, though the business services sector has also received investments. All of the tradable investments outside these two sectors relate to the establishment of research and development facilities, and include Citigroup’s Technology Centre of Excellence and Assystem’s Aerospace Design Innovation Centre (both in Belfast). 15 Tradable service investments did occur in Cookstown, Limavady and Newtownards, however these investments did not lead to job creation 23
  28. 28. FDI Research – Final Report Table 3.5 - Industry breakdown of Northern Ireland FDI investments, January 2002 to March 2007 Tradable service All industries Projects Business services IT and software Financial services Food and drink Machinery & industrial goods Consumer products Aerospace Telecom services Business equipment Consumer electronics Real estate Pharmaceuticals Healthcare Aerospace Electronic components Source: Locomonitor, 2007 3.6 Jobs created Capital inv (US$m) Projects Jobs created Capital inv (US$m) 2 30 2 1 3 0 0 0 2 0 0 0 1 1 1 75 1,842 560 0 284 0 50 0 0 0 0 0 86 50 17 0 128 0 0 129 0 2 0 96 0 0 0 13 2 0 13 30 9 9 7 2 5 3 3 2 2 1 1 1 1 3,118 1,842 1,378 941 415 415 314 309 300 220 150 100 86 50 17 16 128 61 350 130 0 88 1 241 44 0 5 13 2 0 NATION OF OWNERSHIP The USA are by a significant margin the largest FDI investor in the Northern Ireland economy, making investments in 30 tradable services, and a further 62 non-tradable investments since January 2002, and generating 4,057 additional jobs. India are also a major investor, and their two tradable service sector investments (HCL and Polaris Software), have together created 233 jobs in Belfast. Although FDI investment from the Republic of Ireland has created a significant number of jobs across the Northern Ireland economy as a whole, and in the finance, telecoms and food and drinks sectors in particular, their involvement in the tradable services sector has been more limited. Table 3.6 - Northern Ireland FDI investments by nation of ownership, January 2002 to March 2007 16 All industries Tradable service Projects USA 30 India 2 Sweden 1 France 2 Germany 3 Turkey 1 Ireland 2 Spain 0 Taiwan 0 Japan 0 South Korea 0 Belgium 0 Source: Locomonitor, 2007 Jobs created Capital invest (US$m) Projects Jobs created Capital invest (US$m) 2,443 233 86 80 55 17 0 0 0 0 0 0 309 0 13 13 6 0 27 0 0 0 0 0 62 8 6 11 6 1 20 1 1 3 1 2 4,057 2,583 561 906 295 17 1,004 180 150 116 70 6 1,140 3 57 100 8 0 147 0 40 28 4 0 16 Further investment were made from Bermuda and Austria based companies, however these did not lead to the creation of any additional jobs 24
  29. 29. FDI Research – Final Report 3.7 QUALITY OF JOB Table 3.7 provides an illustration of the quality of job offer associated with recent FDI investments both in Northern Ireland’s tradable service sector, the manufacturing sector and across the business base as a whole. It shows that, although FDI has helped to safeguard a number of high wage jobs, many of the newer jobs that have been created are lower value added, with this being particularly true in the tradable services sector.17 Table 3.7 – Assessment of job quality of Invest NI FDI Investments Percentage of jobs paying above Northern Ireland Private Sector Median salary Tradable Manufacturing All industries services New jobs 47 72 54 Safeguarded jobs 100 84 84 All jobs 49 81 69 Source: Invest NI, NI Annual Survey of Hours and Earnings Figure 3.3 provides a comparison of average wages in Northern Ireland’s tradable service FDI businesses, against those across all FDI businesses in Northern Ireland, and against average weekly wages in the UK and Northern Ireland labour force, and the Northern Ireland private sector labour force. The figures appears to present an opposing view to the table above, showing that the average weekly wage offered by FDI firms is above that of the Northern Ireland economy as a whole. This is likely to be because, although investors tend to employ a large number of low paid staff, this is often offset by a minority of employees who are paid substantially more than the national average. Figure 3.3 – Comparison of average weekly wages by area and sector £380 £374.52 £367.70 £370 £364.10 £363.90 All Employment, UK All Private Sector Employment, Northern Ireland £360 £350 £340 £330 £324.70 £320 £310 £300 £290 New and safeguarded FDI, NI Tradable Services New and safeguarded FDI, All industries All Employment, Northern Ireland Source: Northern Ireland Annual Survey of Hours and Earnings, and Experian, based on Invest Northern Ireland, 2007 17 This analysis refers to the 2002/03 - 2005/06 period. At the point at which this report was produced, figures for 2007 were nearing completion, but were yet to become available. 25
  30. 30. FDI Research – Final Report 4 Comparator Research This section provides comparator analysis for three countries, Ireland, Sweden and Poland. The focus of the case studies is on the main tradable service sectors in which the three countries have been successful in attracting FDI. The purpose of the case study analysis is to consider lessons applicable to Northern Ireland or ideas that can be replicated. The three case studies were selected working with the Client Steering Group: Ireland – Focusing on the International Finance Services Centre (IFSC) in Dublin; Sweden – Focusing on Electronics and ICT; Poland – Focusing on Telecoms and Financial Services. • • • The figure below shows FDI inflows for our three case study countries. Figure 4.1 FDI Inflows per annum 70,000 Ireland FDI inflows 60,000 Sweden FDI inflows Poland FDI inflows Dollars Millions 50,000 40,000 30,000 20,000 10,000 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 91 19 19 90 0 Source: Eurostat There is a general upward trend for Ireland and Poland in particular although each country has seen volatility in FDI inflows. Sweden has seen the largest fluctuations with FDI increasing steadily over most of the 1990s; recording an exceptional, one-off peak in 1999, following the £22 billion takeover of Astra by Zenica, a UK firm18; and declining in recent years. FDI inflow growth in Poland has been the most gradual but consistent. The figure below shows FDI outflows for the three case study countries. 18 http://news.bbc.co.uk/1/hi/business/576197.stm 26
  31. 31. FDI Research – Final Report Figure 4.2 FDI outflows per annum 120,000 Ireland FDI outflows Sweden FDI outflows 100,000 Dollars Millions Poland FDI outflows 80,000 60,000 40,000 20,000 20 04 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 91 19 19 90 0 Source: Eurostat The table shows that outflows from Sweden have generally been more volatile than those in Poland and Ireland. Ireland has seen significant increases in FDI outflow in recent years, while levels of FDI outflow from Poland has remained consistently insignificant. UNCTAD gives rankings for FDI performance, the table below shows reported performance for the three countries. Table 4.1 - FDI Actual Performance by Rank 1990 Ireland Inward FDI Rank Poland Inward FDI Rank Sweden Inward FDI Rank Ireland Outward FDI Rank Poland Outward FDI Rank Sweden Outward FDI Rank Source: UNCTAD 2000 52 100 53 12 63 2 2003 4 47 8 13 84 7 2004 5 72 54 10 86 7 5 75 93 26 62 8 The table demonstrates the strong performance of Ireland in actually attracting FDI although the UNCTAD rated Sweden above Ireland in its Inward FDI potential index ranking between 1990 (6th) and 2003 (8th). The remainder of this section focuses on the three case studies. 4.1 REPUBLIC OF IRELAND In 1986 gross domestic product (GDP) per capita in Ireland was 64 percent of the EU average. There were also high levels of unemployment with unemployment rates 18 percent higher than the EU average. Furthermore national debt levels were 120 percent of gross national product. 19 19 U.S. Foreign Direct Investment in Ireland, Making the Most of Other People’s Money, Berry R 27
  32. 32. FDI Research – Final Report In 1987, Dublin's IFSC, was set up by the Irish Government as a location for internationally traded financial services. The initial designated site of the IFSC was 11 hectares of land in the Custom House Docks area of Dublin City Centre. The Customs House Docks Development Authority was established to redevelop the area and construction started in late 1988, with the first building completed and occupied by 1990. In May 1997, the Custom House Docks Development Authority was dissolved. At this stage, the IFSC had 114,000 sq m of office accommodation, as well as 333 apartments, a hotel, multi-storey car park and retail space, including a pub, restaurants and the Dublin Exchange Facility. The regeneration continued following this period and the Dublin Docklands Development Authority was established in 1997 to develop and deliver IFSC phase II20. Williams and Redmond21 report that Dublin’s economy has developed in three phases. Phase 1 – Production of foods, textiles and beverages for local and export consumption; Phase 2 – Industry developed mainly through FDI from the US (manufacturing and services); Phase 3- Economy continues to develop as a “knowledge economy” building on innovation and R&D. They also note that a main reason for success has been focusing on growth sectors which matched the labour force skills. Moving to the third phase of development meant developing the educational base in line with the need to increase R&D. There was also a need to create an environment where innovation was encouraged and suitable supply chains were developed. 4.1.1 Role of government The Irish Government took a decision to set up the IFSC in 1987. The Government also agreed a corporate tax rate of 10 per cent with the EU Commission. Furthermore, local development incentives for Docks area were implemented, supported by an open and responsive business environment and welcomed all types of inward investment22. To supplement these incentives a marketing team was put in place to engage directly with global institutions. There was also an important role in positively engaging local banks to promote the centre. Part of this was the development of a social partnership between Government, employers and unions. The Industrial Development Agency of Ireland (IDA) and Enterprise Ireland were the main public sector organisations involved with the development of the IFSC. The role of the IDA is to attract FDI to Ireland focusing on high value-added investments using favorable corporation tax rates as one marketing tool. Enterprise Ireland promotes joint ventures and strategic alliances between indigenous and foreign companies, facilitating export activity of indigenous firms, which may involve work with FDI projects. All businesses seeking to be part of the IFSC have to gain a licence through contact with the IDA. The Central Bank then undertakes regulation of member organisations activities. This also ensured that ‘brass plate’ organisations would not be based in the IFSC and also meant that any employment benefits were likely to be more enduring and significant. Due to the fact 20 IFSC Website Ideopolis: Knowledge City Region, Dublin Case Study, Dr Brendan Williams and Dr Declan Redmond 22 ECB, FDI Task Force Report, 2004 21 28
  33. 33. FDI Research – Final Report that tax levels have now resumed to a more ‘standard’;level, and conditions for relocating are less onerous the Central Bank now undertakes screening instead of the IDA23. 4.1.2 Performance The IFSC makes up a significant amount of total FDI in Ireland and this is shown in the figure below. Figure 4.3 – FDI inflows Source: Trade and Investment Report 2005, Forfas The chart demonstrates the significance of IFSC FDI inflows as a percentage of total FDI inflows in Ireland. The chart below shows the significant FDI outflows including outflows from the IFSC. Figure 4.4 - FDI outflows Source: Trade and Investment Report 2005, Forfas The chart shows that IFSC outflows have been small in recent years, with the exception of 2002, creating significant net inward FDI from the IFSC. The benefits of the IFSC are not confined to inward investment and in 2002 the Irish Exchequer collected more than €700 million in corporation tax from IFSC companies. According to the Central Bank, the net asset value for collective investment schemes for regulated funds was just under €424 billion at the end of August 2004. The chart below highlights that the IFSC also has a significant role in the Irish services market. 23 The Role of Dublin’s International Financial Services Centre in Irish Regional Development, White M, CISC, 2003 29
  34. 34. FDI Research – Final Report Figure 4.5 - Services Exports IFSC Imports/Exports in Euro Billions 20.0 40.0% 18.0 35.0% 16.0 30.0% 14.0 IFSC services exports 12.0 25.0% 10.0 20.0% 8.0 15.0% 6.0 IFSC services imports IFSC exports as % of total service exports 10.0% 4.0 5.0% 2.0 0.0 0.0% 1999 2000 2001 2002 2003 2004 2005 2006 Q1 Source: International Trade and Investment Report 2005 - Forfas The international financial services industry has a major economic contribution to make. Approximately 11,000 people are directly employed by the sector in a range of institutions providing products and services to a global customer base. The international financial services industry made a net contribution of €2.5 billion to Ireland’s balance of payments from both services and investment in 2000. The balance of payments statistics show that the sector generated a surplus of €735 million on international trade in services and €1,763 million in investment income.24 In addition to this direct contribution, the financial services industry also contributes indirectly to the Irish economy by helping local businesses to secure funding. A recent study by Patrick Honohan of Trinity College Dublin25 identified a clear relationship between the depth (defined as the level of private credit available to businesses as a proportion of GDP) of a country’s financial services sector, and the country’s economic growth rate. This is shown in Figure 4.6. 24 FSIA Annual Report 2001 Honohan. P, To what extent has finance been a driver of Ireland’s economic success?, Quarterly Economic Commentary, Winter 2006, pp59-72 25 30
  35. 35. FDI Research – Final Report Figure 4.6 – Relationship between financial sector depth and GDP growth Source: Honohan, 2006 The continued success of the IFSC and its importance to the economy is emphasised by the net trade surplus of €4.9 billion in IFSC activities in 2004. The growth in IFSC exports, comprising mainly insurance, financial services and business services exports, has been 234 per cent since 1999. 4.1.3 Critical success factors - benefits 4.1.3.1 Taxation The role of low tax levels as an incentive was significant to the success of the IFSC. However, from the end of 2002, the 10 percent corporation tax rate ceased to apply to financial services companies, except for those operations that set up before July 1998, which could avail of this rate until the end of 2005. All other operations are now subject to the standard corporation tax rate of 12.5 percent on trading income. Nevertheless, the average tax rate in OECD countries reported in the most recent tax report (2005) is just over 30 per cent, and Dublin retains this competitive advantage. FDI Magazine26 reported that Dublin is highlighted as an exemplar of dockland regeneration alongside London, Bilbao, Shenzhen and Shanghai. The report found the three most important elements involved in the regeneration of Dublin’s docks have been a low tax environment, a healthy labour market and clear political support during the 15 years of recent development. In addition to this Corporation Tax benefit, businesses start ups in the area have benefited from the Business Expansion Scheme, a government initiative to provide tax support to start up businesses, which has helped to generate increased levels of exports and R&D investments across the country’s base of start-up businesses. 26 FDI Magazine, Feb 2004, Urban Renaissance 31
  36. 36. FDI Research – Final Report 4.1.3.2 Labour Market Conditions An additional factor in the investment decision to locate in Dublin was the attractiveness of the labour market which was well educated, young, relatively cost effective and English speaking. The Dublin population remains younger than the population within many competitor locations and in 2010 and 2015 will have an average age of 36.9 years and 37.9 years respectively. Ireland is also expected to have the largest under 25 year old population share in Western Europe. (Ireland Vital Statistics, IDA). 4.1.3.3 US effect Economic growth was underpinned by significant FDI from a number of countries but particularly from the US. This continues to be the case and it is reported that US investment flow into Ireland in 2004 was $10.4 billion, roughly one-tenth the US total for the EU27 while over 40 per cent of all US foreign software investment is in Ireland28, one-third of all manufacturing inward investment in Ireland comes from the US and 300 US entities have been licensed to trade in the IFSC. This level of investment can be explained by some of factors above but also are testimony to the cultural links between the US and Ireland and the marketing efforts that the Irish Government have made to target CEOs of leading US companies. Time zone comparability and lack of language barriers for US businesses seeking to manage cash in Europe and within the Eurozone are also important29. 4.1.3.4 Other factors While the IFSC was considered to be an undoubted success Ireland did benefit in other areas such as the EU Common Agricultural Policy. It is widely accepted that Ireland has received more support through CAP than other countries, receiving subsidies twice as large as their share of EU agricultural output in 200430. The effective use of this support assisted the overall development of Ireland’s economy. 4.1.3.5 Other benefits The main benefits of IFSC activity to date are: • • • the regeneration impacts; employment benefits; and associated fiscal tax income benefits. However, our research has also found anecdotal evidence of other benefits including indirect employment and supply chain development benefits, particularly in the business services sector - legal firms, auditors and tax experts; and the corresponding knowledge transfer within the cluster. 4.1.3.6 Possible threats In spite of the advantages previously identified, there is a risk that, if left unchecked, an overheating of the Irish economy could limit the future growth potential of the IFSC. 27 American Chamber of Commerce Ireland Address by Mr Brian Cowen, To the American Chamber of Commerce Ireland November 2005 29 Offshore Treasury Centers: Rethinking Outsourcing Based on Tax-Advantaged Structures, June 2005 By George Cassidy (International Finance & Treasury) 30 BBC News, 2 December 2005 28 32
  37. 37. FDI Research – Final Report An example of this is the strong house price growth that has occurred in Ireland, and in Dublin in particular in recent years, with house prices growing by 42 per cent in Dublin and by 36 per cent nationally in the three years to September 2006. Figure 4.7 – Average house prices in Dublin and Republic of Ireland €450,000 Dublin Rest of RoI €419,800 €400,000 €356,200 €350,000 €330,600 €296,500 €300,000 €266,300 €250,000 €231,400 €222,100 €195,400 €200,000 €150,000 €100,000 €50,000 €0 2003 2004 2005 2006 Source: Permanent TSB House Price Index, 2006q3 A second example of how the Republic of Ireland economy is overheating is the rapid tightening of the labour market that has taken place, with unemployment falling from 4.7 per cent to 4.3 per cent over the past three years, with the decline expected to continue over the medium term (Figure 4.8). Figure 4.8 – ILO unemployment rates for the Republic of Ireland, 2003-2010 4.8 4.7 4.6 4.5 4.4 4.3 4.3 4.2 4.0 4.0 3.8 3.7 3.6 3.6 3.5 3.4 3.2 3.0 2003 2004 2005 2006 2007 2008 2009 2010 Source: Experian, 2006 33
  38. 38. FDI Research – Final Report Finally, price levels are on a strongly upward trend in Ireland, with consumer prices increasing by 23 per cent since 2000 and commercial property prices increasing by 3 per cent in 2005 alone31. This has put cost pressures on investors seeking to procure locally (Figure 4.9) Figure 4.9 – Harmonised Index of Consumer Prices for the Republic of Ireland, 20002010 (2000=100) 140 137 133 135 130 130 126 123 125 118 120 116 113 115 109 110 104 105 100 100 95 90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Experian, 2006 In addition to this economic tightening, the future of the Republic of Ireland FDI market may also be at risk from the diminishing importance of the US, Ireland’s biggest supplier of FDI, in the European market. This is illustrated below. 31 http://www.shelteroffshore.com/index.php/property/more/commercial_property_ireland/ 34
  39. 39. FDI Research – Final Report Figure 4.10 – US FDI investment projects in Europe as a percentage of all FDI projects 50 45 41.7 43.8 39.0 40 35.5 36.8 35 32.5 29.6 30 27.0 26.45 25 20 15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Ernst & Young European Investment Monitor, 2006 4.1.4 Applicable lessons The development of the IFSC in Dublin has contributed to economic growth in the Republic of Ireland, and raised the prominence of the sector in the national economy. In 2006, the financial services sector accounted for 4.7 per cent of employment and 9.7 per cent of output, substantially higher than the figures of 4.2 per cent and 6.7 per cent reported six years previously. However, in spite of this upward trend, the sector’s employment and output shares are expected to remain broadly unchanged over the next four years (Figure 4.11). 35
  40. 40. FDI Research – Final Report Figure 4.11 – Employment and output in Republic of Ireland financial services sector as a percentage of the national total 12% 10% 9.5% 9.9% 10.0% 10.1% 9.7% 10.3% 4.7% 4.8% 4.9% 4.9% 5.0% 8.8% 8.4% 7.3% 8% 7.1% 6.7% 6% 4.2% 4.2% 4.1% 4.3% 4.6% 4.6% 4% 2% FTE employment Output 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Experian, 2006 However, due to the large movements of capital involved in financial services FDI, there is a risk that assessing the impact of the sector purely in gross investment terms may cause the sector’s impact on the economy to be overstated. Indeed Forfas reports that the financial services sector creates fewer jobs per unit of investment than many other industries. This is partly due to the fact that businesses operating in the financial services sector in Dublin are engaged in large movements of capital by parent companies to their fund management and other IFSC financial subsidiaries, which are then reinvested in overseas assets. In this sense, flows of direct investment into IFSC companies are roughly matched by outward flows of portfolio investment. The sector also has issues with the low levels of internal supply chain activities which it attracts. The main factors contributing to the success of the IFSC in Dublin can be summarised as: • • • • • • • • • • the international business culture in Dublin; modern IT infrastructure; regulatory environment; strong domestic political support; competitive cost base, assisted through low tax and ‘urban renewal incentives’; air access to the rest of the world; availability of well trained employees; youthful labour market; cultural relationship with US; and proximity to other financial centres. The Central Bank of Ireland32 report that the risk to Ireland from the strongly growing central and eastern European countries is relatively limited as Ireland has focused on different sectors. This is underpinned by the fact that Ireland has a head start on these countries. In effect it has a first mover advantage which it is sustaining by continually improving its offer. 32 Quarterly Bulletin 1 2006, Central Bank and Financial Services Authority of Ireland 36
  41. 41. FDI Research – Final Report While limitations may exist due to the labour market and inflationary pressures that growth causes, the IFSC is a relatively sustainable model due to: • • • • • 4.2 first mover advantage; a culture of knowledge and innovation; continuous improvement ahead of competitors; network creation amongst firms; and employees who are willing to remain in the area. SWEDEN Until the mid-1980s FDI in Sweden was restrictive and governed by a complex system of laws and regulations. Since entry into the EU in 1995, Sweden has improved the investment climate to attract FDI through a number of interventions including reductions in income and corporation tax, deregulation of foreign ownership and loans to foreign investors. Although FDI has increased in Sweden in recent times, there are obvious year on year fluctuations. 4.2.1 Role of government The following bodies govern and influence FDI in Sweden: • • • • Swedish Institute for Growth Policy (ITPS); analyses policies, growth studies and various areas of government statistics; Swedish Business Development Agency (known as Swedish National Board for Industrial and Technological Development (NUTEK) prior to 2001); Invest in Sweden Agency (ISA); Position Skane – the agency for investment and tourism in Southern Sweden. ISA offers assistance in key sectors including IT, electronics and biological sciences: • • • • • 4.2.2 comprehensive information on business opportunities in Sweden; tailor-made information and practical advice; introductions to relevant contacts; assistance in finding and arranging visiting programs; and supporting the development of the Fibre Optic Valley cluster.33 Performance FDI in Sweden has increased significantly since 1989 helping GDP to grow by 73 per cent between 1991 and 2005.34 FDI inflows in Sweden peaked at over £3.8 million in 1999, and increased by 73 per cent in the ten year period 1990 to 1999. Since 1999 FDI inflows in Sweden have decreased each year, reaching -£202 million in 200435. Figure 5.9 demonstrates the volatility of FDI in Sweden. 33 Invest in Sweden Agency http://www.isa.se/templates/Normal____2040.aspx OECD.stat http://stats.oecd.org/wbos/default.aspx 35 A negative outflow could indicate a disinvestment (e.g. where capital or earnings are repatriated to the country of origin) 34 37
  42. 42. FDI Research – Final Report Although foreign ownership increased, this was mainly due to acquisitions of domestic firms rather than greenfield operations36. The value of mergers and acquisitions between 1990 and 2000 increased in Sweden by 192 per cent.37 Looking across sectors (Table 4.2), we see that FDI in Sweden has traditionally been dominated by the manufacturing sector, which has seen higher levels of inward investment than tradable services in nine out of the past eleven years. Figure 4.12 FDI in Sweden - Manufacturing, Services and Tradable Services, 1991 to 2002 £ Million 35,000 30,000 SECONDARY SECTOR TERTIARY SECTOR 25,000 Tradable Services* 20,000 15,000 10,000 5,000 0 1991 -5,000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Central Bank of Sweden * Note: Tradable Services includes transport and storage In recent years, tradable service FDI has been largely dominated by the transport, storage and communications sector, and the ICT cluster in particular, although there has also been significant investment in finance and business services. 36 The determinants of FDI Flows: Evidence from Swedish manufacturing and service sector, Karpaty and Paldah, 2006 37 UNCTAD, http://stats.unctad.org/FDI/ReportFolders/ReportFolders.aspx 38
  43. 43. FDI Research – Final Report Table 4.2 - FDI Inflows in Sweden by sector 1991-2002 Sector 1991 TOTAL 3,601 PRIMARY SECTOR 0 Agriculture, hunting forestry and fishing Mining, quarrying and petroleum 0 SECONDARY SECTOR 2,498 Food, beverages and tobacco 42 Textiles, leather and clothing 38 Wood and wood products 12 Manufacture of wood products Paper and paper products 11 Coke, petroleum and nuclear fuel 69 Chemicals and chemical products Rubber and plastic products Non-metallic mineral products 12 Metal and Metal products Basic metal and metal products 144 Fabricated metal products Machinery and equipment 2,181 Other manufacturing 0 TERTIARY SECTOR 969 Electricity, gas and water 182 Construction 22 Trade 151 Hotels and restaurants Transport, storage and communications 39 Finance 338 Financial intermediation 8 Insurance and pension funding 330 Business activities 239 Community, social and personal service -2 Unspecified 114 Reinvested earnings 20 Source: Central Bank of Sweden, Balance of Payments 1992 -23 1 1 -295 0 7 -6 -9 194 11 458 -961 2 706 146 7 187 44 117 -76 193 155 50 110 -546 1993 2,559 6 6 1,188 245 2 149 146 313 96 50 333 0 639 58 80 244 105 6 170 -165 126 21 63 664 1994 4,150 0 0 2,180 23 14 591 305 1,486 74 127 -136 0 996 1 16 629 141 102 100 2 103 4 10 964 1995 9,150 306 0 306 6,572 807 8 -55 -86 5,197 3 57 503 53 743 133 48 304 140 -40 -41 1 148 10 7 1,522 1996 3,482 8 8 802 33 -1 179 178 263 105 -78 301 0 2,268 1,538 5 182 306 25 13 12 192 19 405 364 1997 6,695 -9 -1 -8 2,559 289 -2 102 96 414 -42 134 1,661 4 2,887 841 9 858 368 244 243 1 506 62 384 873 1998 11,965 -41 2 -43 3,841 38 -8 2,200 2,279 217 178 147 1,030 39 5,966 -50 -31 70 614 5,280 5,200 80 37 46 696 1,502 1999 37,642 301 120 181 30,715 57 -2 198 123 24,805 1,477 274 3,900 6 3,050 181 -6 504 878 349 229 120 1,132 11 1,123 2,452 2000 15,355 95 3 92 6,151 -8 27 266 225 1,066 -524 36 4,971 316 4,952 1,238 28 1,128 765 989 542 447 870 -67 2,084 2,074 2001 8,264 -252 1 -253 4,294 813 25 1,523 3 1,520 -759 29 818 1,867 -21 2,879 1,045 43 -399 700 895 894 2 547 48 1,716 -373 £ millions 2002 7,841 39 1 38 414 -128 28 -154 131 -284 506 6 892 -882 145 6,797 966 2 1,043 2,003 1,281 178 1,103 1,528 -24 720 -129 39
  44. 44. FDI Research – Final Report 4.2.3 Critical success factors - benefits The growth in FDI in Sweden is due to a number of institutional changes that took place during the late 1980s, including liberalisation of cross-border capital transactions and the deregulation on foreign ownership. The tax reform launched in the early 1990s resulted in a decrease in corporation tax, attracting further foreign investment Sweden has a number of competitive advantages that attract foreign investors: • • It has an exceptional telecommunications network, a stable political environment, advanced technology and a well-educated labour force (highly skilled in modern technology) owing to the expansion of higher education in Sweden; Deregulation of industries; in particular the electricity, postal service, air transportation, railroads and telecommunication markets, has resulted in more efficient sectors and lower prices. Sweden has implemented a range of incentives to encourage FDI inflows, these include: • • • • • • Dividends paid by foreign subsidiaries in Sweden to their parent company are no longer subject to Swedish taxation; Loans are available to foreign investors from the Swedish Business Development Agency and the regional development funds; Support programmes include location and employment grants; low-rent industrial parks; economic free zones; A range of incentives exists for research and development programs by the Swedish government; Deduction on key foreign personnel’s income tax. The development of the ‘Fibre-Optic Valley’ ICT cluster, centred around the Hudiksvall municipal area, on the Gulf of Bothnia, 300km north of Stockholm. For example, as part of Sweden’s reform to its higher-than-average income tax system, and to encourage foreign key personnel to Sweden, there was a reduction in income tax charges for key foreign personnel. This change meant that from January 2001 onwards, individuals classified as ‘key expert personnel’ within foreign direct investment firms were only required to pay tax on 75 per cent of their income. While foreign companies have complained about bureaucratic difficulties and the sometimes arbitrary nature of obtaining expert status38, we found no evidence that this has impacted upon decisions to invest in Sweden. 4.2.4 Threats Although Sweden has recently enjoyed great success in attracting FDI, there are a number of factors which, if left unchecked, are likely to deter investors in the future. One such deterrent is likely to be the high cost of labour in the country, which can cause investors profit margins to be squeezed. This is illustrated overleaf. 38 2006 Investment Climate Statement – Sweden, US department of State 40
  45. 45. FDI Research – Final Report Figure 4.13 – Average monthly labour costs in selected European economies, 2003 €5,000 € 4,313 €4,500 € 4,101 € 3,997 € 3,895 €4,000 € 3,726 € 3,716 € 3,643 € 3,487 €3,500 € 3,355 € 3,017 €3,000 €2,500 €2,000 €1,500 €1,000 €500 la nd Po la nd Fi n R ep ub l ic of I re la nd UK la nd s N et he r m an y G er iu m Be lg an ce Fr ar k en m D Sw ed en €0 Source: Eurostat, 2006, CSO Census of Industrial Production, Polish Central Statistical Office, Experian In addition to these high labour costs, high price levels in general in the country may diminish investors’ purchasing power, and act as a deterrent to future investment39. Furthermore, the country’s high tax, and especially income tax levels, may reduce the country’s attractiveness to investors. 4.2.5 Applicable lessons The Swedish example has shown that, through a combination of heavy investment in infrastructure, capital and skills; outward looking trade policy; cluster development; and a discriminatory taxation system, it is possible for a country that was once largely overlooked as a location for overseas investment to position itself as a desirable location of knowledge intensive business. However, such success comes at a price, contributing to high housing and labour costs, and high levels of personal taxation; factors which, in the long term, could act as a deterrent to future investors if policies aren’t implemented to address them. 4.3 POLAND Poland has undergone significant political and economic transitions in the past 20 years. In 1989 it became the first country out of the former Soviet block to re-establish democracy and launch an economic and social move to a market economy. Following financial liberalisation and reforms including a new currency in 1995, FDI increased in Poland. The country joined the EU in 2004, and after the announcement in 2003, FDI in Poland was boosted appreciably. 4.3.1 Role of Government FDI is monitored by three institutions in Poland: 39 A recent study by The Economist suggested that prices in Sweden were 53 per cent overvalued in relation to the US$, see http://www.oanda.com/products/bigmac/bigmac.shtml 41

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