The Economic Journal, (No�ember), –. # Royal Economic Society . Published by BlackwellPublishers, Cowley Road, Oxford OX JF, UK and Main Street, Malden, MA , USA.

FDI AND TRADE: THE IRISH HOST-COUNTRY

EXPERIENCE*

Frank Barr� and John Bradle�

In Irish manufacturing, the foreign sector accounts for about one half of employment and some% of gross output. The Irish experience therefore provides us with a textbook case study of theeffects on an EU host economy of export-oriented FDI. We explore in this paper the structuralchanges induced by FDI and the effects of FDI on the determinants of growth in Ireland. We alsoconsider some possible adverse effects that may be associated with such strong reliance onmultinational investment.

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From the early s to the late s high tariff barriers and a strictprohibition on foreign ownership of firms operating in Ireland were thecornerstone of policies designed to promote growth of indigenous manu-facturing from the very low base inherited at independence in .

The changes forced on Irish policy-makers by economic collapse in the lates were fundamental and far-reaching. The Control of Manufactures Act,which prohibited foreign ownership, was abolished and replaced by a policythat systematically cultivated FDI through a zero corporate profits tax onmanufactured exports (replaced in by a flat rate of % on allmanufacturing), attractive investment grants and a complete dismantling ofmost tariff barriers within less than a decade.

Much of the history of the Irish economy during the following three decadescan be explained in terms of the quite phenomenal growth of export-orientedFDI in manufacturing, from a zero base in the late s to a situation wherealmost % of gross output and % of employment in manufacturing is inforeign-owned export-oriented firms. This paper charts the structural changesinduced by these FDI inflows.

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The most striking consequence of FDI was that it facilitated the decoupling ofthe Irish economy from an almost total dependence on the United Kingdomas a trading partner (Fig. ).

The shift away from the United Kingdom as an export destination (fromabout % in to under % today) was not repeated as strongly forimports, where the traditional cultural links with the United Kingdom were animportant factor in protecting its share of the Irish market. Thus, in Ireland’s‘world’ the United Kingdom now has a much smaller export weight than inthe s, with the rest of the EU having a correspondingly higher weight.

With no other changes, a shift in export destinations would be expected to

* Paper presented at the Royal Economic Society Annual Conference, University of Staffordshire,– March.

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Imports Exports

80

70

60

50

40

30

201960 1965 1970 1975 1980 1985 1990 1995

Fig. . UK share of exports and imports, –.

Table

Total Manufacturing (NACE ��-��)

Nationality ofownership No. of plants

Total personsengaged

Gross O}P(£m)

Materialspurchased

(% imported)

Per cent ofgross O}Pexported

Irish , , , ± ±Other EU , , ± ±

Of which UK , , ± ±Of which Ger , ± ±

Non-EU , , ± ±Of which US , , ± ±

Total foreign , , ± ±Total , , , ± ±

Source: Census of Industrial Production, (NACE -).

alter the Irish growth rate from that of the United Kingdom (in the period upto the s) to an average of the United Kingdom and the other core EUeconomies today. We view this as a supply-side rather than a demand-sidephemonenon, since it was Irish supply-side conditions that allowed it to attractthe kind of firms that produced goods that were in high demand, and that soldthem into high-growth markets in Europe. Coe and Helpman’s () resultsnotwithstanding, the fact that Ireland’s import links with the United Kingdomwere largely preserved appears to us of much less consequence for Irish growththan the changes in the geographical destination of its exports, which simplyreflected the changing sectoral production structure of the economy.

The combination of geographical and compositional shift – to regions withfaster growth and to goods with higher income elasticities – gave a long-termboost to the Irish growth rate, though this was masked at times by worldrecessions and domestic policy errors.

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II.A. FDI into Ireland

The most recent data for manufacturing classified by nationality of ownershipare for the year (Table ). Although only % of local plants are foreignowned, they produce almost % of gross output and engage almost % ofmanufacturing employment. About % of foreign plants are US-owned, with% British and % German. Foreign plants are much more likely to importtheir raw and semi-processed material inputs than are indigenous plants. Irishplants export on average just over % of output while foreign plants exportalmost %, rising to % for US-owned plants. Thus, the domestic marketis of little significance to the foreign plants. They locate in Ireland to producefor export.

Three further differences between foreign and indigenous plants appear inTable . Foreign plants tend to be larger (measured in terms of gross output,

Table

Manufacturing Plants: Characteristics b� OWnership

Gross O}Pper plant

Net O}Pper personengaged

Profit perperson

engagedDestination of exports

(£K) (£K) (£K) UK OEU USA ROW

Irish , ± ± ± ± ± ±Other EU , ± ± ± ± ± ±

Of which UK , ± ± ± ± ± ±Of which Ger , ± ± ± ± ± ±

Non EU , ± ± ± ± ± ±Of which US , ± ± ± ± ± ±

Total foreign , ± ± ± ± ± ±Total , ± ± ± ± ± ±

Source: Census of Industrial Production, (NACE -) ; £K denotes thousands of Irish pounds ;OEU denotes EU countries other than the UK; ROW denotes the rest of the non-EU world.

or in numbers employed, per plant) ; they are more productive (measured interms of net output per person engaged); and they are much more profitable(measured in terms of profits – proxied by the remainder of net output – perperson engaged). Thus, US plants are over times larger than Irish plants,over four times as productive, and over six times as profitable.

Within the foreign plants there are interesting differences in exportdestinations. UK-owned plants (which export % of output) send almost% of their exports to the UK market, and only % to the rest of the EU.US-owned plants (which export % of output) send only % to the UnitedKingdom and over % to the rest of the EU.

Since the foreign-owned manufacturing sector is so large, it has economy-wide as well as sectorial implications. Thus, the overall health of the economyis dependent on the performance of the foreign-owned sub-sector ofmanufacturing. However, the mainly tax-based FDI incentive system and the

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fact that Ireland features as a production platform rather than as a marketmean that opportunities exist for transfer pricing. Profit repatriation is alsoextensive, as seen in the balance of payments on current account (Table ) ;

Table

Net Factor Income from Abroad

Net factor income as% of GDP

®± ®± ®± ®± ®± ®±

Profit outflows as %of GDP

± ± ± ± ± ±

Profit outflows as %of manufact output

± ± ± ± ± ±

Source: National Income and Expenditure, .

Ireland runs a large deficit on net factor income, which introduces a wedge ofsome –% between GDP and GNP. The main element of this net deficitarises from the distribution of branch profits to their foreign owners. In recentyears this one element alone amounts to between and % of overall GDPand to between and % of GDP arising in manufacturing.

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III.A. Sectoral destination of FDI infloWs

FDI inflows into Ireland have not gone primarily into sectors in which theeconomy had a traditional comparative advantage. In fact, traditionalmeasures of revealed comparative advantage are a very poor predictor ofsubsequent sectoral developments.

There are two reasons for this : firstly, a number of manufacturing sectors arelargely non-tradeable, and developments in these sectors would not thereforedepend on comparative advantage; secondly, the substantial FDI inflows thatoccurred also turned out not to depend on comparative advantage. In terms ofthe sectors for which the s data are available, the sectors into which FDIflows were substantial but in which Ireland had a revealed comparativedisadvantage, were Chemicals and Metals and Engineering. (Barry andHannan, b.)

If comparative advantage then had little influence on the sectors into whichexport-oriented FDI flowed, how do we explain the sectoral destinations ofsuch inflows? It appears from the Irish experience at least that FDImanufacturing inflows go primarily into sectors in which there are increasing-returns-to-scale at the level of the firm. Based largely on Pratten’s () work,O’Malley () identifies a group of NACE-coded manufacturing sectors ascharacterised by increasing returns of this type." He shows that approximately% of foreign-industry employment in Irish manufacturing is located in these

" Ireland does not appear to attract FDI into sectors in which there are strong IRS at the plant level (e.g.in the automobile industry), arguably because of the small size of the country.

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Table

Manufacturing Emplo�ment: Increasing Returns Sectors (IRS)

Share ofindigenous

employment inIRS sectors

Share offoreign-sector

employment inIRS sectors

Share of EC-employment in

IRS sectors

±% ±% ±%

sectors, compared to % of indigenous manufacturing employment. Theproportion of foreign-industry employment in these sectors (shown in Table )is in turn very close to the proportions prevailing in the core EU economies.

Given the strong advantages to incumbency in IRS sectors (in terms both oflow unit costs of production and of having established distribution networks),and since the move to multinational operations takes place some significantperiod of time after the start-up of a firm, multinationals would appear to havea competitive advantage in IRS sectors. The fact that the IRS sectors inperipheral economies are likely to be dominated by foreign-owned firms wouldappear to warrant further attention in the new economic geography literature.

III.B. Skills, Wages, and R&D in foreign and indigenous industr�

A considerable proportion of employment in the foreign sector of Irishmanufacturing is located in relatively high-technology sectors [e.g. chemicals(%), office machinery (±%), electrical engineering (±%)]. It comes asno surprise then that skill levels in foreign industry are higher than inindigenous industry.

Although the relevant Irish data are not disaggregated into foreign andindigenous components, it is possible to identify a number of sectors which aredominated by foreign firms (i.e. in which over % of employment is in foreignfirms), and these four sectors account for over % of employment in foreignindustry in Ireland. Table reveals that the foreign-dominated sectors employsubstantially higher proportions of skilled labour than does manufacturingindustry on average. Furthermore, Barry and Hannan (a) have replicatedon Irish data for the – period the finding for the United States that skillsupgrading has been greater in the most highly skilled sectors (Sachs and Shatz,, pp. –).

In line with these findings, the average wage in foreign industry (£, in) is approximately % higher than in indigenous industry. Furthermore,focusing specifically on industrial workers, the average wage in the foreign-dominated sectors identified above (for ) is around £, compared toan average for the rest of manufacturing of around £,.

Again, since much of foreign industry is located in high-technologymanufacturing sectors, one might expect a substantial amount of R&D to beundertaken there. McAleese and Foley () show that the bulk of R&Dexpenditures in Irish manufacturing does indeed arise in the foreign sector.

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Table

Skill Le�els b� Sector

Admin}techstaff as % ofemployment

Foreign-dominated sectorsBeverages, tobacco Segments of textiles Chemicals Electrical and optical

Of which: Computers Total foreign-dom. sectors Total manufacturing

Source: Census of Industrial Production ().

These data may be misleading, though, since a substantial part of suchexpenditures will represent payments to the parent companies for R&Dactivities undertaken in the home country. A perhaps more realistic picture ofthe extent of R&D activities actually undertaken in Ireland may be gleanedfrom other data, also presented by these authors, showing that almost % offoreign subsidiaries located in Ireland have R&D departments, compared toonly % of indigenous firms.

III.C. Linkages, spin-offs, and agglomeration economies

The low level of backward linkages of foreign industry in Ireland is frequentlyalluded to, with imported inputs representing ±% of gross output for foreignfirms, for example, compared with only ±% for indigenous firms (Table ).Rodriguez-Clare (), however, shows that when there is labour-marketcrowding-out of domestic firms by foreign firms it is ‘ the quantity ofemployment generated in upstream industries per unit of labour employeddirectly ’ that represents the appropriate measure of the linkage effects ofmultinational firms.

O’Malley () shows that, in contrast to the backward linkages per unitof output, the backward linkages per job (the Rodriguez-Clare measure) areactually higher than those for domestic industry. Furthermore, foreign-sectorlinkages have increased over time, while domestic-sector linkages have declinedsomewhat. The relevant findings are reported in Table below.

Spin-off benefits of FDI might also include a role as ‘ incubators ’ for newentrepreneurs. What little evidence there is on the backgrounds of entre-preneurs involved in new-firm start-ups does point to this (Cogan andOnyemadum, ; NESC, ). The latter study also found that foreignfirms located in Ireland were an important source of demand, with arequirement for high standards, in the early stages of new company start-up.Thus, the foreign firms in Ireland play a role similar to that of the domesticmarket in wealthier economies, facilitating the transition to export activity(Porter, ).

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Table

First-round BackWard Linkages of Manufacturing Sectors

Services jobsManufacturing

jobs

Induced byIndigenous industry () ()Foreign industry () ()

Source: O’Malley (). The table displays number of jobs in input-producing sectors per directmanufacturing jobs in indigenous and overseas sectors for ().

As for agglomeration economies, which play an important role in the neweconomic geography literature, surveys of executives of newly arriving foreigncompanies in the computer, instrument engineering, pharmaceutical, andchemical sectors indicate that their location decision is now strongly influencedby the fact that other key market players are already located in Ireland.

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A number of circumstances in which FDI inflows can have adverse welfare oremployment consequences have been identified in the literature. We now wishto address the question of whether any of these circumstances may have arisenin the Irish case.

IV.A. FDI and the decline in market share of indigenous firms

The international-trade literature suggests that national welfare can bereduced by FDI inflows if MNCs capture market share from indigenous firmsand reduce the latter’s (supernormal) profits (e.g. Krugman and Venables,).

There are a number of reasons why this argument may not apply in the Irishcase. Firstly, there is the fact that the argument was originally presented in thecontext of foreign-based firms capturing market share from domestic firms. Ina full-employment context, the location of the foreign firm is largely irrelevant.If labour markets are distorted, however, so that the economy is initially in anunderemployment equilibrium, it is preferable that the goods market crowding-out results from FDI rather than imports, because of the employment-generating effects associated with FDI.

Theoretical considerations aside, these events are in any case highly unlikelyto characterise the Irish experience, given that Irish-based MNCs do not servethe home market, and that domestic industry pre-free-trade had a comparativedisadvantage in precisely those sectors in which foreign industry grew. Afurther empirical consideration that reduces the relevance of the theoryproposed above is the fact that potential profits in domestic sectors that areinsulated from foreign competition are frequently dissipated in X-inefficiencies(e.g. Caves and Kreps, ).

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IV.B. Emplo�ment and the Dutch disease

The question has been raised as to whether Dutch disease type factors couldcause total employment to decline as a consequence of FDI inflows. Barry andHannan () explore this issue under the assumptions that Irish labour andcapital markets are both very open to international factor flows. Thus, the‘resource-movement ’ effect found in the Dutch-disease literature disappears,though the ‘ spending effect ’ remains (Corden and Neary, ). Theyconclude the total employment would not decline under the sterling-linkexchange rate regime that prevailed in Ireland up to , because theinduced service-sector employment expansion resulting from GDP growth(i.e. the ‘ spending effect ’) would dominate the contraction in indigenousmanufacturing employment that occurs as the price of non-tradeables is bid up.

A more pessimistic scenario could possibly emerge, however, under the moreflexible post- exchange rate regime, as FDI-inflows strengthen theexchange rate. If nominal wages were downwardly rigid, this strengthening ofthe exchange rate would magnify the adverse employment effects on indigenoussectors. Even these latter effects are unlikely to have been strong enough inpractice, however, because even though the strength of the exchange rate mayhave reduced inflation, downward nominal wage adjustment in response toFDI inflows was never required for employment levels to be maintained.

IV.C. Disequilibrating Wage de�elopments

An arguably more plausible hypothesis is that the strong FDI inflows couldhave generated disequilibrating wage developments if all the high productivitygrowth of the foreign sector were passed on into manufacturing sector wagedemands. This would lead to an excessively rapid decline of the traditionalmanufacturing sectors (which display slower productivity growth), and anincrease in unemployment.

Barry (), building on the earlier work of Baker (), presents evidencesuggestive of this. In net output per head in the modern sector(pharmaceuticals, office and data processing machinery, electrical andinstrument engineering and a group of foods) was more than double that in thetraditional sector, notwithstanding which it grew far more rapidly thanproductivity in traditional industry.# Average weekly earnings, however, grewalmost identically in the two sectors.

In the whole – period employment in the modern sector, whereproductivity growth far outstripped wage growth, grew by %; employmentin the far larger traditional sector, where wage growth outstripped productivitygrowth, declined by %, while total manufacturing employment fell %.

The plausibility of the hypothesis that FDI inflows have generateddisequilibrating wage developments is disputed by Walsh (a), who arguesthat employment in the high-technology foreign sectors is too small to drivewage developments in this way. However, this argument runs counter to the

# Over % of foreign employment in Irish manufacturing is now in these modern sectors, compared toa little over % of indigenous employment.

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widely held view – for which there is some empirical evidence – that wagedevelopments in the manufacturing sector frequently drive wage increases inthe larger services sector (‘ the Scandinavian model ’) : Bradley et al. (,). Disequilibrating effects of the type posited by Barry () have alsobeen noted by Nankani () in a number of developing economiesexperiencing resource booms.

IV.D. FDI and neglect of indigenous firms

There seems little doubt that the importance of efficiency and competition inthe Irish non-traded sectors was lost sight of due to the heavy emphasistraditionally laid on the promotion of manufacturing (O’Rourke, ). Amore controversial hypothesis is that the attention of policy-makers may havebeen distracted from the requirements of indigenous manufacturing by thehigh profile attached to the attraction of multinationals. A view which surfacedin a number of reports on the conduct of Irish industrial policy over the courseof the s held that a more energetic attempt should have been made to assistindigenous industry.

The specific needs of indigenous industry were addressed by a number ofpolicy initiatives taken in the mid-s (including the creation of a specificarm of the state agency for industrial development to promote indigenousfirms). Since that time there has been a noticeable improvement in theperformance of the indigenous sector. For example, following a decline of %in the numbers employed in indigenous industry between and ,employment increased by ±% between and . This represented astrong performance not just in comparison with the recent past, but also in aninternational context, since total employment in manufacturing in the EU andthe OECD declined in the period since .

The export orientation of indigenous industry has also risen since the mids. In the proportion of output exported, at ±%, was little changedfrom the levels prevailing in the mid s. This proportion rose to ±% in, however, and increased still further to ±% in .

Although it remains to be seen whether these improvements in performancewill be sustained, these data suggest that the policies adopted to develop astronger internationally competitive indigenous sector since the mid s havebeen meeting with some success.

IV.E. Potential instabilit� from o�erreliance on multinationals

It has recently been suggested that the high dependency of Irish manufacturingon foreign MNCs may be a source of potential instability for the economy (seee.g. Walsh, b and Ruane and Goerg, ). The perceived danger is thatexternal circumstances could change in such a way that the economy over avery short period of time loses its attractiveness as a base for multinationalinvestment, entailing substantial adjustment costs, while the dangers of acatastrophic collapse in the international competitiveness of indigenousindustry appear more remote.

To some extent this scenario is suggested by our characterisation of

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indigenous success being based on ‘comparative advantage’ while success inattracting FDI is based on ‘absolute advantage’ (Jones, ). An economycan lose its absolute advantage overnight while comparative advantage maychange but can never be annihilated. A relevant analogy is between thespecialisation recommended by international-trade theory and the portfoliodiversification advocated by financial theory. Has the economy earned asufficiently high return from its specialisation (in multinational-dominatedsectors) to pay for the increased risks of instability it is thought to bear(Krugman, )?

This is clearly a complex issue. It can be argued though that the adjustmentcosts of the collapse of the (existing) foreign sector may be overstated. If theforeign sector, through the provision of opportunities for learning-by-doing andthrough tax revenues generated, has helped the economy to ‘climb the ladderof comparative advantage’ by developing its physical and human capitalinfrastructure, then its very presence will have reduced the adjustment costs.The economy would remain a relatively attractive base for whatever forms ofFDI were available, and indigenous industry would be stronger than it wouldotherwise have been.

The second point is that the risk of a catastrophic collapse may itself beoverstated, if strong linkages with the indigenous economy have been developedand if agglomeration economies are truly important. In this way, absoluteadvantage may over time mutate into comparative advantage.

Furthermore, although nothing exactly comparable to the ‘catastrophe’scenario has occurred in the past, the evidence to date suggests that foreignfirms have been less likely to decline, and to close down, during periods ofeconomic difficulty, than is the case with indigenous industry. A recent studyby Barry et al. (), building on the seminal work of Davis and Haltiwanger(), finds that there was substantially more job turnover in domesticindustry. Thus, the average duration of a manufacturing sector job in Ireland,although lower than the roughly years prevailing in the United States andthe United Kingdom, is higher (at years) in the foreign sector than in theindigenous sector of the economy (where it is years).

In addition, firm turnover is crucial for net employment growth inindigenous industry while net employment growth in the foreign sector is moredependent on the expansion or contraction of continuing establishments. Thesefindings support the conclusions of an earlier study by McAleese and Counahan() that characterised foreign firms operating in Ireland as ‘ stickers ’(concerned primarily with building up a long-run business) rather than‘snatchers ’ (concerned mainly with seizing a quick profit).

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Ireland’s size and its comprehensive integration into the wider world economymake it an almost perfect textbook example of a small open economy. Thenature and extent of Ireland’s interactions with the world economy manifestthemselves in two particularly important ways. First, as we have seen, a large

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section of Irish industry consists of foreign-owned subsidiaries of multinationalfirms and, second, manufacturing industry in Ireland is now almost whollyexport-oriented, due to the small size of the domestic market.

Given these factors, it is necessary to interpret the determination of tradeablesector output as a production location decision. Once multinational firms (bothforeign and Irish owned) have determined how much output to produce, theythen allocate this level of production across their international plants througha process of cost minimisation. Thus, tradeable output in Ireland can be viewedas being determined by two main factors : world demand and Irish internationalcost competitiveness.

Public policy (such as corporate taxation and subsidy measures) affects thetradeable sector by influencing international cost competitiveness. Fiscal policymore generally also exerts its effects through competitiveness : if unions bargainin terms of take-home pay, taxes influence cost competitiveness by driving a‘wedge’ between the wage paid by employers and the purchasing power of thewage received by employees. Even longer-term public policies on physicalinfrastructure and human capital are driven by the need for greaterinternational competitive advantage (Barry et al. ).

Bradley and Fitz Gerald () model the production location decision bydecomposing a single intractable global optimisation problem of dimension m-by-n (involving the simultaneous determination of m factor inputs and outputsin a group of n countries) into n separate factor demand problems, each ofdimension m. Applying this procedure to Ireland indicates that, viewed as aclosed economy, the Irish manufacturing sector approximates a Leontief orfixed coefficients production technology. Viewed in the context of a worldmodel, however, the own-price elasticities of demand for the Irish factors ofproduction are much higher, and the issue of cost competitiveness is of crucialimportance.

The small Irish elasticities that show up when output is held fixed can berationalised as follows. In a traditional and}or relatively closed economy, thesubstitution of capital for labour as a result of shifting relative factor prices takesplace within the domestic economy. In an open economy like Ireland, however,one that is dominated by foreign multinationals, this substitution will ofteninvolve a shift of production capacity to other countries, i.e. captial will notreplace labour in Irish factories, but will seek out lower costs elsewhere. Suchresults suggest that in modelling SOEs the traditional channels of linking theeconomies together – through trade, prices, and monetary flows – are in-adequate. The existence of FDI flows means that the supply sides of SOEs likeIreland are closely integrated into the global economy, providing new andrather simpler channels for the transmission of international shocks.

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Having experienced erratic growth from the s to the mid-s, theperformance of the Irish economy has been very strong over the last ten years.Explanatory factors include: the coming on stream of a more highly educated

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and trained labour force; large-scale improvement of the physical infrastruc-ture, facilitated by EU regional aid; the beneficial consequences of a successfulfiscal stabilisation in the mid-s ; and a move towards more consensual wagebargaining. All these have further enhanced the attractiveness of Ireland as abase for inward FDI, representing an additional growth dynamic.

There are a number of lessons to be drawn from the Irish FDI experience forother (potential) host economies. For small economies, since tariff-jumpingFDI is likely to be less dynamic in technological terms and much smaller involume than potential export-oriented FDI, liberalised trading arrangementsare clearly a prerequisite for substantial FDI inflows. The experiences of Spainand Portugal are illustrative in this regard. Whether as a delayed consequenceof EU accession, or as an early response to the EU Single Market Programme,both countries experienced substantially increased manufacturing-sector FDIinflows from – onwards (Barry et al. ). Furthermore, although theexport orientation of foreign industry in Portugal remains considerably lowerthan the Irish value of ±%, it is nevertheless primarily export-oriented(Cabral, ).

The experience of Greece, however, is equally illustrative in that it showsthat trade liberalisation, while necessary, is not a sufficient condition for large-scale FDI inflows. Its share of manufacturing FDI relative to GNP remainedlow, and stagnant, over the whole period. The various factors identified in theIrish case, particularly macroeconomic stability, the presence of a streamlinedbureaucracy and rapidly improving stocks of infrastructural and humancapital, do not appear to have been in place in the Greek economy,substantially reducing its attractiveness as a platform for multinationalinvestment (Barry et al. ).

Most of the FDI into Irish manufacturing entails the construction of entirelynew state-of-the-art factories on green-field sites. In this it differs substantiallyfrom the modernisation of existing plants on ‘brown-field’ sites thatcharacterises much of the FDI inflows into Central and Eastern Europe inrecent years. Most of this investment, it is clear, is oriented either towards thehome market or, at best, towards geographically proximate markets. This isonly to be expected at present, given the continuing uncertainty overmacroeconomic and exchange-rate stability, property rights, and futuretrading arrangements.

As to the future of FDI into Ireland, the fact that foreign ownership of themanufacturing sector is already at a very high level makes it less likely that itcan or should rise much further. The Southern EU periphery, as well asprospective CEE members, have cost advantages, good human and physicalcapital infrastructures, geographical proximity to the core markets of Europe,and stabilising macroeconomic, fiscal, and monetary environments.

The future of FDI in Ireland is more likely to involve both a shift towardsgreater complexity (new products, emerging technologies) as well as a moresymbiotic relationship with the rapidly modernising indigenous sector. Indeed,Vernon’s product cycle model fits the stylised Irish facts rather well : early FDIin simple standardised products (‘ screw-driver ’ operations), recent shifts to

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maturing products (e.g. the Intel pentium chips) and a potential for attractingmore R&D activity in the area of new products.

Department of Economics, Uni�ersit� College Dublin

Economic and Social Research Institute, Dublin

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