Balancing Business Supports With Regional Development
Logic dictates that Dublin firms should receive more business supports, but state agencies are mandated to look after the regions too, writes Jake Mulcahy
The Department of Public Expenditure and Reform has conducted a spending review of the distribution of business supports from Enterprise Ireland, IDA Ireland and Local Enterprise Offices. The analysis breaks down how supports were doled out between 2015 and 2020, based on firm size, sector and location, and compares these shares to the national enterprise base at large.
In that period, a total of €1.6bn was paid through the three agencies under various different schemes. This was significantly less than the €2.4bn worth of approvals made during the period, with the discrepancy explained by projects being sometimes abandoned.
The regional distribution of client firms largely reflects each county’s share of the national enterprise base. However, Cork and Galway were slightly over-represented in terms of the value of support payments made. These counties also possess a disproportionate share of firms that are medium or large, foreign-owned, and in high productivity sectors.
At the sectoral level, just on half the supports by value went to manufacturing firms, followed by information and communication, and financial and insurance. These sectors received a disproportionate share of funds given their share of the national enterprise base and overall employment, largely due to the fact that firms in these sectors are more productive.
One notable insight in the report is that although the share of agency clients based in Dublin largely reflected the overall share of firms based in the capital, Dublin was slightly underrepresented in terms of supports paid out. This is perhaps explained by IDA Ireland’s mandate to increase FDI in regions outside Dublin by a minimum of 30% over the review period.
This highlights a tension in the stated aims of these agencies. The broad rationale for enterprise supports is to facilitate growth-enhancing business investments that might not otherwise occur. Investments in R&D in particular suffer from a free-rider problem, where the benefits accrue to the wider economy while the costs fall mainly on particular businesses. In any case, the focus is on promoting investment and job creation in highly productive exporting firms.
As the report notes, economic activity in modern advanced economies tends to concentrate in a few locations, and this effect is selfreinforcing. This phenomenon explains why Dublin has a disproportionate share of economic activity and of medium and large exporting firms in high value-added industries. Where the tension arises is the agencies’ additional commitment to support the economies of regions outside Dublin. Cold economic logic may dictate that the large bulk of business supports should be targeted towards Dublin firms, where the productivity and growth potential is greatest. Yet political pressures dictate that this spending is shared across Ireland’s regions.
It’s also unclear if shifting some business support funds outside Dublin can reverse the force of economic gravity pulling activity towards the capital. To do that would probably require patient investment in infrastructure, higher education attainment and public amenities in regional towns and cities.
On the flipside, if the government wanted to maximise the growth potential of Dublin business supports, it would need to step up its investment in housing and other infrastructure subject to the strains of a growing population. The government needs to decide which of the two aims of business supports - increasing economic growth or levelling up the regions - is more important, if it is to achieve either of them effectively.
‘Economic activity in advanced economies tends to concentrate in a few locations’