WITH DEVELOPMENTS IN THE USA AND THE UK, THE THREATS TO IRELAND’S ECONOMY HAVE INCREASED
Martin D. Shanahan, Chief Executive, Industrial Development Authority (IDA)
Uncertainty is the “mot du jour” or more accurately the “mot de l’année”. It pervades global political, economic and business environments and it is to the forefront of the minds of investors. This uncertainty is driven by geo-political developments, by a rise in nationalistic populism, a questioning of capitalism and a questioning of globalisation.
The two most prominent manifestations of a new order are; BREXIT and the radically changed political environment in the US. However, there are other manifestations, including the rise of the far right and far left in other countries, including in some EU countries.
This address deals with the impact of these developments (primarily Brexit and the US) in an Irish context and particularly what they mean for the economy, enterprise, trade, investment and employment, with a specific focus on foreign direct investment.
There are five points that I wish to make:
Businesses don’t like uncertainty and they will take steps to mitigate risk. That is particularly the case in the context of Brexit, where we see UK companies move to put their access to the European market beyond doubt.
While it may be curious to some who follow the personalities and colour at play at a political level within Ireland, my job is to look at Ireland in an international context, and, from 35,000 feet, I can confirm that Ireland looks remarkably stable, centrist and consistent in policy terms.
That is a major plus when it comes to attracting investment. Investors crave certainty, and Ireland is providing that for them right now.
Since the 1950s we have embraced globalisation. The farsighted thinking of another generation led by people like T.K. Whitaker saw Ireland turn its back on protectionism and open up to trade and investment. We began to embrace the fact that our greatest natural resource was our people.
We in this country now understand and take it for granted that it is through trade and through attracting investment that we earn our living. As a small economy on the western edge of Europe (forcibly reinforced by where we are this evening in Glenties) we have to engage, we have to be connected to the outside world. We have to trade and we have to attract investment to earn our way in that world.
The same understanding has propelled the Irish and indeed global economy forward in recent decades. But now, we may be at a cross roads – as we look east and west, we see our neighbours once again becoming more protectionist. We see a type of populist nationalism rising in the world that doesn’t recognise inter-dependence and the value of connectivity.
Globalisation has been good for Ireland. Opening up to the world has led to prosperity and growth. While we can debate whether that prosperity is evenly distributed or indeed whether over the decades it has been used wisely at all times (and that is for the political strata to debate) – few would dispute that Ireland now, as a result of globalisation, is a better place than it was in the 1940s and 1950s.
A more protectionist global economy is not good for Ireland; but we have to deal with what is before us. I will come back to how we do that in a little bit.
For those who have advocated for Ireland to consider following the UK and leaving the European Union, I say this – such a move would put an end to foreign direct investment as we know it. Investors in Ireland value our European access hugely. It is part of every conversation we have with our clients in IDA. It provides us with access to one of the largest markets in the world, unrestricted movement of talent and services, amongst many, many other things. To see how important these issues are you need only open a paper on any day of the week and read about the difficulties that the UK is facing in its own efforts to leave the European Union. Ireland must continue to remain open.
We must remain open and welcoming to people and the diversity they bring. We must remain open to ideas, to innovation, to business and to trade and investment. We must embrace the next wave of technologies. Ireland is an example of how a small open economy can prosper in a globalised world – we must continue to lead by example.
Being subject to the vagaries of the global economy has its ups and downs and Ireland has experienced both. We have seen a very hard won recovery take hold and our international reputation has been enhanced by the way in which we have dealt with our challenges. Nobody here I am sure needs a recitation of the very stark data which demonstrates this. Ireland has in the recent past been through one of the worst recessions experienced anywhere in the world. The recovery has been impressive but I am concerned that there is now a feeling of ‘job done’ and once again the narrative in some quarters has turned exclusively to how we should distribute the wealth that the economy is generating. While of course, it is entirely legitimate to debate how one improves the lives of citizens, and the relative merits of different cohorts’ needs and demands to focus exclusively on it, to the exclusion of a discussion on how that wealth will be generated in a sustainable way into the future, would be folly.
We need to ensure that the productive elements of our economy that generate wealth and ultimately pay for social services and provide the standard of living that exists in this country are continually tended to, as well as making progress on the many social challenges that remain.
The notion that the economy will continue to grow and create jobs in perpetuity in absence of appropriate policy development and execution is naive.
There are real threats again to employment – particularly in those sectors that are heavily exposed to the UK market. We need to ensure that we, insofar as is possible, insulate ourselves against those threats and also maximise the opportunities that may exist as a result of Brexit with newly mobile investment.
If I take Brexit first; the UK’s exit from the EU was not what we wanted. It is overwhelmingly negative for Ireland on multiple fronts. There are indigenous sectors of the economy in particular heavily exposed to the UK including agri-food and fisheries. From an FDI perspective, Brexit presents both opportunities and challenges.
I will begin with the challenges for FDI as many will overlook them. These include: the fact that the absence of the UK weakens the attractiveness of the EU market; it potentially impacts on EU growth of the remaining 27; the UK has made it clear that it will be outside of both the single market and the customs union, impacting on supply chains; it creates a new ring-fenced (UK) market that companies based in Ireland have to consider how they service. There are also FDI sectors like engineering which have a high percentage of goods exported to the UK and so they are exposed.
On the opportunity side, many companies based in the UK, in the context of Brexit, have to consider their European footprint in order to access the market. Also, new FDI coming to Europe has to consider its location. Given that the UK was the most significant destination for that FDI over the past number of years – it creates opportunity, albeit that we should remember that about 50% of FDI currently going to the UK is to service a UK market.
IDA Ireland has been engaging with companies affected by Brexit for over a year now. There has been a significant focus on financial services, but discussions have now broadened beyond that to other sectors. We have seen companies like JP Morgan, Barclays, Legal and General, Chaucer, Beasley Re: and Almac announce investments in Ireland on foot of Brexit.
Ireland is making steady progress on winning investments. I am confident that we will see more Brexit related investments over the coming months, but we cannot be complacent, these investments will not fall into our laps, they will have to be won. We will also have to address the carrying-capacity of the economy if those investments are to continue into the future.
The change of US administration has created a new dynamic for our US investors – they make up about 70% of our portfolio in IDA. The reaction from corporate America to the high level policy prescriptions of the new Administration was, and remains, largely positive. This positivity emanates from the prospect of tax reform, the potential of an economic stimulus package and better/lighter regulation. There are however concerns amongst some in relation to protectionist trade policies and indeed migration.
Campaign promises in relation to ‘Making America Great Again’ and ‘Bringing Jobs Back Home’ gave rise to speculation as to whether the ensuing policies would impact on investment elsewhere including Ireland. Uncertainty also stemmed from a dearth of detail in relation to the administration’s policies such as the border adjustment tax and wider corporate tax changes.
Due to this uncertainty, IDA expected to see some holding off of investment decisions in the first half of 2017 and we did observe some of this in quarter one. However, overall the first half of the year has seen investments broadly at the same level as last year and jobs associated with those investments 22% ahead of last year.
Notwithstanding that, detailed policies are yet to be revealed from the US side, and right now, there is every reason to believe that US companies will continue to invest in Europe and in Ireland for reasons of seeking markets; seeking talent; seeking innovation, and seeking certainty.
There are any number of international developments that we might lament, but largely they are out of our control. We need to focus on those aspects that are within our control – those things are varied but largely fall under the heading “competitiveness”.
Education and talent availability; infrastructure – roads, public transport, broadband, utilities – energy, water, waste; costs; tax; and regulation all make a difference to investment decisions by multinationals, but also to Irish companies and entrepreneurs.
Our multinational clients tell us that, overall, they are pleased with the competitiveness environment. Our proposition remains strong and is enhanced in some areas by the relative weaknesses of others. The availability of talent is utmost in our clients’ minds and it is encouraging that there are high levels of satisfaction with the third level education system.
There are also areas that need attention – the National Competitiveness Council has highlighted the key areas in which action is required including the need to:
I remain cautiously optimistic about the future.
On the FDI side, the results over the past two years represent the strongest sustained employment performance since 1999–2000. Employment in IDA client companies is at the highest level on record, just shy of 200,000 people, representing c.10% of the labour force. Unemployment is at a 9 year low at 6.2%. This is an incredibly positive turnaround over a relatively very short period of time. If we apply the same diligence now as has been applied to driving the recovery over the past number of years – there is no reason to believe we can’t continue to achieve sustainable growth and within that – foreign direct investment will play its part.