ESRI: Innovation and skills key to attracting investors

Innovation intensity and the cluster effect are becoming as important as the corporate tax rate for multinationals in the information and communications technology (ICT) sector before they decide to invest, according to a report by the ESRI.

The report’s author, Iulia Siedschlag, looked into the reasons why US and EU multinationals made investment decisions across the EU.

The foreign direct investment sector is of huge importance to the Irish economy, representing a significant portion of the country’s exports. However, much of the original success in attracting multinationals to Ireland was based on having a low corporate tax rate.

Ms Siedschlag broke down her report’s findings into ICT manufacturing and service companies and US and EU companies.

“In ICT manufacturing as well as in ICT services, the location probability of foreign affiliates increased with demand-side determinants such as market size and market potential as well as supply-side factors such as human capital intensity,” said Ms Siedschlag.

“In addition, positive externalities from the presence in the region of other foreign-owned enterprises in the ICT sector, the availability of public goods [proxied by the income tax rate] in the host country and the size of the services sector in the neighbouring regions increased the attractiveness of regions to foreign direct investment in the ICT sector.

“In contrast, the region’s labour costs and human capital intensity in neighbouring regions decreased the probability of location.

“The region’s innovation intensity, as well as the intensity in the neighbouring regions, increased the attractiveness to foreign direct investment in ICT manufacturing, while foreign direct investment in ICT service industries was positively, but not significantly associated, with this supply-side factor.”

EU and US companies were attracted to a region if there was a cluster of similar companies. Innovation intensity and skilled labour, as well as the size of the market and the tax regime, are also important.

Ms Siedschlag said countries needed to enhance their innovation potential, improve their skills base, and deepen the cluster effect to attract investment.