Global FDI patterns show opportunities arising in east as flows dip again
FOREIGN direct investment drives the Irish economy. As exports tend to be where the real value is added in a small economy, the fact that foreign companies account for up to 90pc of all the goods and services that are sold out of this country shows how central they are. Although some do not like to hear it, the hard truth is that this economy would be a backwater without the foreign companies that are located here.
That the world’s biggest company bar none decided to pull out of a major investment in Ireland last week was very bad news. That the withdrawal was the result of failures in the domestic planning process, not extraneous foreign factors over which nobody in this country has influence, makes it all the worse. It highlights the continued need for policymakers to get right the things that we can get right if Ireland wants to continue to be a top location for multinationals in Europe.
Given the foundational importance of globalised companies to the Irish economic model, trends in international investment flows need to be watched closely so that the new opportunities, which are emerging all the time, can be taken advantage of. A better understanding of the less favourable trends is also needed, so that threats can be mitigated where possible.
A recent publication* by the Organisation for Economic Cooperation and Development in Paris highlighted some important trends in FDI, including the stagnation of global flows of direct investment over the past decade.
Before looking at some of those trends in greater depth, it’s worth setting out exactly what is meant by FDI, and how it differs from other types of capital movements.
Most of the money that flows around the world, such as cross-border bank loans and purchases of foreign government bonds by insurance companies, does not give the investor much control over the entity in which he/she is investing in/lending to. That is what distinguishes these ‘portfolio’ investments from FDI.
Cross-border investment is categorised as “direct” when it involves an investor taking at least a 10pc stake in a target entity. The most ‘direct’ of all investment is the setting up of wholly-owned foreign subsidiaries. Ireland has been fortunate to attract a great deal of such jobs-rich FDI — in developed countries most FDI is accounted for by the acquisition of stakes in existing companies, something that brings much less additionally to the host economy than the building of, for example, a massive data centre, as Apple wanted to do in Galway.
Another component of the FDI figures is the reinvestment of profits. Rather than repatriating those profits to headquarters, they are counted as FDI if they are ploughed back into the local subsidiary, something that has become increasingly important in the case of Ireland-based multinationals. The OECD found that this component of global FDI grew last year, even if it was not by enough to offset the shrinkage in other components.
The most eye-catching overall fact from the report was that, despite unusually strong economic growth last year, and increased reinvested profits, total global FDI flows fell last year for the second year on the trot.
While they were, at $1.4trn, broadly in line with the levels recorded in the current decade, they have never recovered to the record highs of 2007.
The absence of growth in the 2010s has also been in marked contrast to the two decades up to the global financial crisis when there was a sharp upward trend global FDI. The stagnation of recent years points to a slower pace of globalisation (unusually weak growth in cross-border trade in recent years is further evidence to support the thesis that the globalisation process is decelerating).
This must be a cause of some concern for Ireland. If the foreign-owned sector were to stop growing, that would remove the most important component of overall economic growth over decades. This, however, is something to monitor rather than worry about, for the moment at least. All the evidence — hard and anecdotal — shows that, the Apple debacle aside, high-quality investments in cutting-edge sectors continue to be made.
The most important announcement in some time in this regard came two weeks ago when Chinese firm, WuXi Biologics, said that it had chosen Ireland as the location for its first major operation outside its home country.
This is hugely significant in more ways than one. First, the company is at the outer frontier of the high-growth medicines business. Second, the plant will be located not in Dublin or in Cork’s pharmachem cluster, but in Dundalk, which is growing its own cluster in the sector. It will also give that border town a boost as it faces the challenges of Brexit. Finally, and most importantly, it is a Chinese company.
A surprise in development featured in the OECD report was a decline in corporate China’s outward FDI last year, for the first time since 2005. But that is likely to be blip rather than the beginning of a trend.
More and more Chinese companies have reached great size in their massive home market and are seeking to globalise. As China is now rivalling Europe and the US in patenting as well as research and development spending, many of these companies are highly innovative.
That is the case with WuXi Biologics as well as Huawei, China’s biggest and most advanced technology company, which has a well established and substantial presence in Ireland.
With China having move into the top three source countries in the world for FDI in recent years, and with Europe among the most important foreign locations for that country’s companies, there is enormous potential.
If Ireland can become a hub for corporate China in the European market, as it has done with corporate America, tens of thousands of high-paying, export-focused jobs will be created. As this column has argued before, attracting China’s growing number of multinationals is probably Ireland’s single biggest economic opportunity over the foreseeable future.