Post Apple, time to rethink FDI policy

Regardless of whether or not an appeal should or should not be taken by the Irish government in relation to the Apple tax ruling, apple themselves will of course appeal. We should not mistake the individual issue, whether Apple did or did not get illegal state aid, for the broader issue of Ireland’s over reliance on (tax driven)  FDI. Its time for a rethink.

We have been running  the FDI plan for the best part of a lifetime now, since the late 1950s. Initially conceived as a way to get us out of the permatrap of underperformance, it has since become both a shibboleth and a totem. We need to ask the question – should we not pivot away from this approach? The problem is that questioning the MNC sector in Ireland is seen as some form of economic blasphemy. Literal decades of media and political coverage have conditioned the population to think that the FDI game is the only game in town. Its not. FDI is clearly important for a whole host of reasons but the myth has grown up that it is the only game in town. Im more of the view that it is the most politically, not economically, rewarding game, which is why it is so lauded. There is much more kudos to be gotten, not to mention exciting foreign travel and global fine dining opportunities, when one hobnobs with the Fortune 500 than when one has to slum it with locals. So, inside the bubble the role of FDI gets magnified, and the compliant media do , until recently, their part in pumping out the message that there is no other way.

The latest estimates are that there are approx 180,000 FDI supported direct jobs. Thats less than 10% of total employment. These jobs of course are not the end of it. Each job supports, through direct and indirect linkages, other jobs. As to how many, there things get unclear. In economic speak this is called the employment multiplier. For comparison, the latest estimate of the employment multiplier from higher education is of the order of 4-6 – each job in higher education supports 4 to 6 others. By comparison, the Department of Finance estimates an employment multiplier for FDI of 3. The IDA estimate an employment multiplier of 1.7. So, on the face of it the higher education sector, itself of course a significant exporter, is a greater jobs engine than FDI. Research on the food industry suggests employment multipliers of the order of 2, even without taking account the knock-on effects; Slightly lower estimates of 1.8, but still above the Department of Finance estimates for FDI, come from the forestry and wood products sector, and estimates of 1.6 for walking tourism are of the same magnitude as FDI. While FDI is an important jobs engine, it is by no means clear nor is it obvious that it is the best or even the largest one for Ireland. This is something we rarely hear. Imagine Richard Bruton or Michael Noonan going on the radio and stating that they would move heaven and earth to ensure the future growth of the higher education export sector.

A further totem is that without the MNC’s we would be Albania without the weather, that they and they alone were responsible for and remain responsible for us not being trapped in a poverty cycle. That also doesn’t stack up, at least not fully, to scrutiny. Taking as an (imperfect) measure of wealth Irish GNP per capita as a % of the European average we see a takeoff not when started FDI in the late 50s but when the EU single market was launched in the early 90’s. Despite by then three decades of FDI we had not achieved convergence. While the single market for sure enabled greater exports, it also came at the point when agriculture subsidies were peaking, and when structural funds were getting serious. The greatest impact of the EU and structural funding, many would aver, was not so much the money but the need to start to improve governance capacity. We also had a set of tax amnesties in the late 80s and early 90s again important not perhaps for the money but for the widening of the tax net and for the improved revenue capacity. In short, FDI has been a large part of our catch-up to European income levels, but by no means is it clear that it is wholly responsible.

Then we come to the argument that we cannot take money from Apple, as doing so would surely drive away future investment. This is an argument as leaky as a sieve. First, the alleged state aid tax issue was closed off in 2014. Since then Apple has continued to invest in Ireland. It would surely have not done so were the tax situation the sole reason for it being here. Second, the government cannot have it both ways. If tax based profit shifting is the only reason for MNC’s to set up in Ireland then what of all the talk from successive governments on the knowledge economy, on EU access, on all the cultural and legal attractiveness? Were they lying then or are they lying now?

The reality is that the consensus of studies on FDI concludes that while tax is a major issue it is not the only and rarely the dominant reason for companies to engage in FDI. There is s substantial inertia – FDI attracts FDI. The stability and business friendliness of the destination also matters. Surveys of MNC’s show that also. While there may be a fear that retrospective tax policies would be chilling, this also confuses the argument. The decision was on state aid, via the tax system. One is the outcome the other the process. The EU are not engaging in retrospective taxation but clawing back state aid. Ireland barely makes the top 10 in European FDI destinations – none of the larger countries will countenance retrospective taxation, cutting off their own much larger FDI flows.

We need fear nothing from taking the Apple money. Taking the money would show the world that our government is confident and has the best interests of the population at heart. Not doing so suggests a government in thrall to its own fearful interpretation of a outdated policy. Either the FDI plan succeeded, and we should cease, or it failed, and we should cease. By all means lets have the IDA continue to seek worthwhile real, as opposed to financial, investment. Let a key criteria be the number of jobs and the prospect for regional development. Shift the emphasis away from the iBoxGoogleFace towards the development of a strong, indigenous, technically advanced domestic industrial and services base. No, its not as glamorous as hobnobbing with the titans of the corporate world, but it is a hell of a lot better for all of us in the long run.

 

A longer version of a column in the Irish Examiner, 5 September 2016