Foreign investment tilts imbalance of our economies

By Paul Goldrick-Kelly and Paul MacFlynn

Economic fortunes on the island of Ireland have changed dramatically over the last few decades.

The end of the 20th century saw an enormous change in the established relationship between both economies as the Republic leapfrogged Northern Ireland to become the regional dynamo.

A large part of this story is the explosion in foreign direct investment into the Republic — primarily the opening of subsidiaries by large multinationals.

This influx has had real effects on the economy in the Republic but it has also flattered measures of output.

This has become startlingly clear in the era of ‘Leprechaun economics’ when growth figures and related statistics have to be read with a generous pinch of salt since they often do not feed directly into living standards.

This is especially true for productivity, where the rubber meets the road in economic terms.

Productivity measures the efficiency of activity. This makes it the major determinant of improved living standards. In the long run, as economist Paul Krugman put it: “It is almost everything.”

With this in mind, the Nevin Economic Research Institute recently published a piece examining productivity on the island, attempting to read behind the distorted statistics.

We found that there are, in effect, three economies on the island.

One is an apparently world-beating foreign-controlled sector based around Dublin and Cork, for the most part; another is a modestly performing domestic economy in the Republic; and, finally, we have an underdeveloped economy in the North.

The foreign-controlled sector contributed over half of the Republic’s output in the business economy in 2014, double that of Northern Ireland and similar EU countries.

That sector looks exceptionally productive compared to EU averages for foreign-controlled firms, registering output per worker over double the average levels.

This is particularly concentrated in information and communications technology and manufacturing, reflecting the tech and pharma giants that have had such a large effect on our statistics.

Their presence has, however, masked a more mixed picture in the real domestic economy of the Republic.

While the last few years have seen an improvement in productivity, this economy is disproportionately concentrated in low productivity and low wage activities, such as hospitality and retail.

The domestic manufacturing sector is only around half the size of domestic manufacturing elsewhere in Europe.

Most surprisingly, domestic IT firms have underperformed compared to EU averages.

The North has fared worse. It, too, has received foreign investment, and while this has not been on the scale of the Republic, it is above EU averages.

Despite this, the region consistently underperforms. Only the Belfast area makes the top half of the 13 sub-regions on the island, in terms of value added per person.

These statistics point to a challenge for policymakers in the North and in the Republic.

For too long, governments have assumed that the mere presence of world-leading multinationals would lead to the economy as a whole gaining a productive edge.

Our statistics complicate that story and suggest this has not happened for the domestic economy in the Republic.

And the North has not apparently benefited from the fabled all-island economy either. Economies require much more to develop.

The value in foreign direct investment goes beyond the immediate output numbers or the employment they directly generate, important as that is.

The true benefits extend to the indirect potential boost it can give the whole economy.

We should invest in the skills and talents of the people of this island to ensure that we reap the benefits of an increasingly globalised economy.

In the face of Brexit and an uncertain future, that task should start now.

Paul Goldrick-Kelly and Paul MacFlynn are economists at the Nevin Economic Research Institute