Investing in Ireland: A survey of foreign direct investors examines the main factors that bring foreign direct investment to Ireland and the ongoing challenges in attracting investment.

Report Summary

Ireland's most important competitive advantages are access to EU markets, a competitive corporate tax infrastructure (including the headline rate and a number of other incentives including double taxation treaties and sector-specific incentives), a uniquely talented workforce – both homegrown and from abroad – and a stable regulatory framework that supports business. Indeed, the survey suggests that investors see Ireland's unique selling proposition as not a single factor, but the powerful combination of these benefits that Ireland offers. Each of these four cornerstones of Ireland's competitiveness is explored in detail in this paper.

The disadvantages in the eyes of investors, however, are largely out of policymakers hands and include the country's small size andinstability in the euro zone. On the whole, the survey sample and interviewees are bullish on Ireland, with two particularly positive findings emerging from the survey. First, of the 315 respondents, only ten say that they plan to reduce their level of investment in Ireland over the next three years. Second, extrapolations from survey responses suggest that the respondents' levels of investment over the same time frame could create up to 20,000 new jobs. Although this is based on opinion data and is not a rigorous economic forecast, it is a demonstration of investors' strong confidence in Ireland as a place to do business in the near term. In addition, interviewees overwhelmingly view the financial crisis as an opportunity to boost Ireland's competitiveness.

Access to European markets is Ireland's FDI foundation. Survey respondents and interviewees were clear about the foundation of their investment in Ireland: market access. In general, global investors say their prime motivation for entering foreign markets is access – for 58%, this is the most important consideration, far outweighing the second and third most popular factors, namely availability of key skills (34%) and government incentives (32%). When it comes to Ireland specifically, access comes out on top, with "access to EU market" named by 46% of respondents, compared with 30% citing legal and fiscal stability and 29% citing the competitive corporate tax rate.

The headline corporate tax rate is important for competitiveness but it should be thought of as one ingredient in the overall tax infrastructure; and policymakers need to put it in context when compared with other investment drivers. Almost one-half of respondents (46%) say a low corporate tax rate is the most important government fiscal incentive they consider when investing abroad, and this was a particularly important component in decisions to bring investment to Ireland originally. The headline rate is clearly important. However, evidence from the survey and interviews suggests that excessive focus on the headline rate threatens to overshadow the total corporate tax infrastructure including double-taxation treaties, tax credits, transfer pricing or other sector-specific incentives. It also needs to be put in context with other aspects of competitiveness, such as personal income tax reform or access to skills and talent.

Investors praise Ireland's pool of domestic and foreign workers, but income taxes could be discouraging senior talent. Survey respondents and interviewees say the quality of the local labour force is a strong point, especially the presence of formal qualifications and more innate abilities such as a practical approach to problem solving. Nonetheless, interviewees are concerned about what they see as imbalances in Ireland's personal tax system. As a result of tax credits that are generous by international standards, there is a large gap between the average all-in tax rate paid by the typical worker, which is among the lowest in the OECD, and the marginal tax ratefor top earners, which is among the highest. Interviewees believe that these high marginal tax rates will make it less attractive for senior executives to settle in Ireland.

The biggest disadvantages for investors are outside the Irish government’s direct control, but respondents say more should be done to improve regulation and reduce red tape. The biggest downside of doing business in Ireland, cited by 51% of those surveyed, is the size of the domestic market, but this is a factor policymakers can do very little to influence. Three other factors which received more than 30% of responses included instability in the euro zone (33%), uncertainty in relation to government finances (32%), and Ireland’s peripheral location (31%).

Ireland is generally perceived as a more costly place to do business than other investment locations. According to investors, Ireland compares unfavourably with other countries across a range of cost criteria, with wages and salaries the biggest concern: 51% say Ireland is more expensive than other locations where they are invested, compared with 16% who say it is cheaper. The cost of raw materials, the cost of living and the price of utilities and infrastructure also compare unfavourably.

Respondents believe the Irish government's post-crisis response is on the right track and view the country as an investment opportunity. While there was little belief among respondents that Ireland would rebound quickly, there was definitely a sense, particularly among interviewees, that Ireland's economic crisis represents a huge opportunity from an FDI perspective. Overall, investors have more faith in the current Irish government than the previous one, although views are far morefavourable among investors currently located in the country than among those based outside.The government's priorities are also in line with investor expectations – stabilising the financial system, attracting inward investment and addressing the budget deficit.

Some post-crisis policies will not require trade-offs between stabilising the financial system and boosting Ireland's investment competitiveness, but in other areas policymakers will have difficult choices. Tackling the high cost of doing business in Ireland is both a domestic vote-winner and a competitiveness-booster. Likewise, tackling the deficit supports both domestic economic sustainability and convinces international investors that Ireland is a sound place in which to do business. Other aspects of Ireland's recovery, however, have very real trade-offs. One example is higher value-added tax, which may help close the deficit but pushes up Ireland's already high cost of living, affecting competitiveness. Another potentially more serious issue is the area of financial regulation, where interviewees believe that the government has failed to distinguish adequately between regulations on domestic banking and those on international financial services.