June 16, 2024
Investment

Ireland’s model for attracting multinational investment is looking frayed – The Irish Times


It would be wrong to say that the dust is settling on the impact of the recent global upheavals on international economies. On the contrary, we are watching, as Minister for Public Expenditure Paschal Donohoe put it at the recent National Economic Dialogue “a global landscape in flux, marked by heightened geopolitical tensions and conflict, growing economic nationalism, and reconfigured global supply chains”.

The prospect of a second Donald Trump presidency, notwithstanding his conviction this week, adds to the feeling that more uncertainty lies ahead.

Trying to work out the implications of all this is complicated. But there are some key trends that are starting to come into view – and one is that the world of foreign direct investment is changing. And quickly.

Ireland needs to do some serious thinking, because the model used to attract big US companies here is starting to look decidedly frayed. Former taoiseach Leo Varadkar spotted one of the key trends last year, when he referred to the dangers to countries like Ireland of a “subsidy war” to attract investment, with chequebooks being waved at multinationals to support new plants.

This is one of the changes that have followed the war in Ukraine and the emergence of rising tensions with China. Big countries – led by the US – are increasingly thinking of investment as a key geopolitical tool. This is most evident in the area of computer chips, vital for everything from armaments to the development of artificial intelligence. The US and the EU want to move production away from the Far East – particularly Taiwan, a big producer – and back to their own territories. And as this spreads across different sectors, Ireland risks getting squeezed as the big players open their wallets.

A Trump presidency would be likely to increase US-China tensions further, but it is clear that whoever the next president is, the strains between the two biggest world economies are going to continue

The US has led the way by putting large sums of cash on the table to encourage investment “at home” via Joe Biden’s Inflation Reduction Act and the Chips and Science Act, both enacted in 2022, which offer subsidies for investment in clean tech, green energy production and key areas of electronics and research.

As a result, manufacturing investment in the US doubled last year compared with 2022. In turn, US subsidiaries in countries such as Ireland fear that they are moving down the rankings for the next round of investment from their parent companies, which are increasingly likely to put their next plant back home. A key thing to understand about multinational-land is that as well as competing with other companies, each national unit is in effect fighting with other subsidiaries of its parent elsewhere in the world for investment.

The trend to bring investment “home”, along with trade sanctions initially aimed mainly at China, are a pullback from years of globalisation, when the key issue was producing at the lowest price. We saw some fallout in the Irish trade figures last year when moves by the US to ban sales to China of some advanced chips from companies based in the United States – or those using US semiconductor technology in their production processes – led to a drop in Irish exports in this area, presumably related to production by Intel.

A Trump presidency would be likely to increase US-China tensions further, but it is clear that whoever the next president is, the strains between the two biggest world economies are going to continue.

Restrictions on where US companies can sell their chips are part of a wider game about the future of where they are produced. Europe responded to the US 2022 legislation by loosening State aid rules in key areas like electronics and clean tech. German government funding for a large new Intel investment in Magdeburg – the building of which has been delayed due to environmental issues – was facilitated by the State aid changes, allowing governments to put more cash on the table. Ireland lost out here as Oranmore in Galway was listed as a possible site for this new investment, though Intel did commit to some further investment here.

Ireland, as the European home of many big US players and a State seen as ‘friendly’ by Washington, still has a decent hand to play

And now Intel is planning to sell off a minority stake in its plant in Leixlip to investment funds to raise cash for its large spending plans across the world and respond to this new politically-driven agenda to increase the supply from US firms. The implications of this for Leixlip will take time to play out – a key issue will be the attitude of the funds involved to getting a return on their investment. It is vital for Ireland as part of this that Intel continues to upgrade its plant here, but a new minority investor will have a say in future.

As this global arm-wrestle for investment continues, what does Ireland need to do? The developing subsidy war carries dangers, as big governments such as the US and Germany can clearly outbid this State. As a middleweight boxer, you can’t go head-to-head with the super heavyweights.

The Government has argued against big further subsidies from European governments to industry – and any attempts to do it at EU level are likely to be difficult to agree. A report from former Italian president Mario Draghi on Europe’s competitiveness, due to be presented to EU leaders shortly, will set the agenda here. There is much work ahead here for Irish economic diplomacy as this plays out.

Ireland, as the European home of many big US players and a State seen as “friendly” by Washington still has a decent hand to play. And the fierce competition for key sectors like computer chips will not apply across the board.

But as this plays out, Ireland is looking complacent in key areas, following the large inward investment boom that followed international tax changes in 2015. Delivery in vital areas such as clean water and green energy is sluggish, at best. Whether the State can tap the huge resource of offshore wind remains in question – and will be vital. And even in funding higher education and research – a traditional strength – decisions are needed. Across all these areas, the long-fingering has to end. Ireland has seemingly endless strategies, position papers and action plans, but getting stuff done remains a problem.

The qualities of being clean, green, educated and politically stable are on Ireland’s calling card for attracting investment. We simply cannot get into an endless Children’s Hospital-type loop of indecision and failure in delivering the required investment to achieve this.



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