Why would you bother investing in Northern Ireland?

officeRetired Irish Civil Servant Niall MacSuibhne (formerly the Irish Revenue dept) writes about what attracts multinationals to a region

Ernst & Young publishes an annual review of Foreign Direct Investment in Europe and has done so for some years. These “attractiveness reports” as they are quaintly called give a continent wide picture of trends within the FDI sector, including both EU and the rest of Europe, so regularly ignored by commentators.

The bad news for UKNI and those pushing the role of taxation, the rate of Corporation Tax comes  in at just 8th (out of 10) in a list of key location factors. The four main factors mentioned in 2014 review were,

  1. Stability and transparency of political, legal and regulatory environment
  2. The country or region’s domestic market
  3. Potential productivity increase for their company
  4. Labour costs

Northern Ireland wins out under labour costs, but clearly has a problem with the other three factors. If you are interested in serving the wider UK market, why would you locate off shore? Stability and transparency etc., is certainly questionable and the potential productivity increases available by locating to say Belfast are unclear. Even Labour costs while cheap by Irish standards, are considerably higher than those of say Poland. Labour costs may be an issue for manufacturing projects, it is the quality of the local workforce that matters for most projects locating on the island of Ireland. Germany’s lost territories of Silesia & Prussia win hands down and have the direct transport links that enables products to be with customers within hours. A quick squint at the website of Wroclaw, the former German city of Breslau shows what you can attract when you tick all the boxes.  (Wroclaw/Breslau’s university can boast 9 Nobel Prize winners, such as Theodor Mommsen, Philipp Lenard, Eduard Buchner, Paul Ehrlich, Fritz Haber, Friedrich Bergius, Erwin Schrödinger, Otto Stern and Max Born, admittedly mainly Germans.)

Looking at individual cities, Dublin (4,615 jobs) is the third largest recipient of FDI jobs in Europe, beaten only by the Paris Region and Barcelona. The only city comparable to Belfast in the top ten is Freiburg (597 jobs). However it is located in Baden Wurttemberg, with a top class university, 500 years older than Queens, and at the centre of a massive transport infrastructure.

Dublin is clearly a major hub of investment, attracting a substantial number of FDI projects in the ICT sector. Assuming it is Belfast’s intention to go after such projects, why would a company locate there over Cork, Limerick or Galway, which, despite having existing ICT sectors, struggle to compete against Dublin? Cork has Apple, EMC, Amazon, McAfee and VMware   for example and all three locations provide the same wider benefits as Dublin, other than they do not have the concentration of activity that Dublin has. Will Arlene Foster be able to open her handbag and provide the necessary work permits required, as Richard Bruton can do in Dublin? Does Belfast have enough suitable middle class non ghetto housing to provide for an influx of even a thousand foreign families?

Ireland also focuses almost solely on the US, attracting little investment from continental Europe. The majority of FDI in Europe comes of course from other European countries, such as Volkswagen’s huge investment in Poznan.

The estimated cost of the reduction in the CT rate is £200M plus, depending on who you read.  This requires additional profits of £1,600M a year to be generated.  The type of activity required to produce this level of profit would require Belfast to attract many multiples of the job numbers similar cities across Europe attract annually. I am sorry L’Derry Portadown etc., somehow I can’t see why anyone would want to locate anywhere outside of Belfast. No wonder the Belfast Telegraph reported the sale of land at Belfast Docks. That covers the first two years, what then?

Lower taxation is the cherry on top for those making Foreign Investment decisions. The proposed location must meet all the other criteria first.   The NI Executive needs to get everything else in place first before attracting FDI. The proposed cuts to the Education and Training Budget discussed here http://sluggerotoole.com/2014/12/08/department-for-employment-learning-publishes-draft-departmental-savings-plan/ should be a starting point. (It is telling that such articles are viewed far less than those on “tribal issues”.) Serious FDI Investment in Ireland only became a reality after massive investment in education over a very long period and as the E & Y figures show, multinationals are reluctant to move beyond the Pale.

Personally, I remain sceptical about the dependence on FDI. The Irish experience has shown little overall growth in the numbers employed in FDI businesses, though there has been a massive change in the quality of the employment. Textile and similar low paid manufacturing jobs have been replaced by positions requiring Level 8 (Honours degree) and above qualifications.  Locally developed business ideas would seem a more logical and sustainable approach. UKNI traditionally was a manufacturing powerhouse, surely not all of these skills have been lost and it should be possible to build on those remaining businesses.  Moving in this direction from dependence on the block grant to the scraps from someone else’s table is akin to replacing the addict’s long-term dependence on heroin to a similar dependence on methadone.

You can access the 2014 report,    http://www.ey.com/Publication/vwLUAssets/EY-2014-european-attractiveness-survey/$FILE/EY-2014-european-attractiveness-survey.pdf

& the 2013 version, http://www.ey.com/Publication/vwLUAssets/European-Attractiveness-Survey-2013/$FILE/European-Attractiveness-Survey-2013.pdf

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  • Turgon

    In an article which purports to be a serious economic analysis rather than a partisan political attack why use the term “UKNI”. Simply calling it Northern Ireland or NI would be more mature and sensible.

  • In God’s Country

    Article = nail on head.

  • Sergiogiorgio

    I got as far down as “rate of corporation tax being 8th on the list” and stopped. What boll***s! It’s all about the money. Inward grants and outward tax. Why does anyone think multinationals set up entities in a far flung western backwater like Dublin.

  • Brian O’Neill

    You are right. With their 190,000 staff across 150 countries and turnover of $27 billion the business consultantancy firm Ernst and Young know very little about the needs of multinationals. (Sarcasm)

  • NMS

    Serge – Most investment goes into high tax countries. Take for example Poland, which has been the recipient of a huge amount of German, Italian & Swedish (industrial) investment. It has much higher rates of both corporate taxes and more crucially when you are talking about industrial projects, Social Insurance and personal taxation. What it does have is,

    a) A skilled and highly trained workforce,
    b) Integration into a European wide Public Transport network
    c) A massive political majority for integration into the EU economic zone with a very strong regard for their western neighbours, the Germans.
    d) Easy access to markets of 350M within hours. You put your containers on the back of a train in Lodz in the evening and unload the following day in Madrid, Rome or Paris wherever without any customs. Moscow & Russia are also just a few hours away.

    Taxes, as long as they are not excessive, are a marginal issues as you are making a substantial return on your capital after expenses, including taxation.

    In relation to Dublin, it is now the hub for a certain type of ICT business. If you look at all of the major inward investment into Dublin, particularly post bubble, there are specific characteristics common to most,

    i) US domiciled
    ii) ICT Service based
    iii) High skill requirement
    iv) High proportion of non-Irish employed(access to work permits are an issue)
    v) Remote Delivery to market, location is not an issue.

    I could go on. I accept that tax is an issue. At this stage the UK offering by way of deductions is as generous, but it does not have the concentration that you have in Dublin, which matters. If you are an Italian software developer moving to Dublin, you know that there is a large range of businesses there after your skills. The biggest threat to Dublin’s dominance in this area is, I believe, the current political instability.

  • Sergiogiorgio

    You didn’t need to bracket your comment (smartass).

  • NMS

    Turgon I apologise if you feel I used the term UKNI in a pejorative manner. I try to use clear terms, e.g. Ireland for the State which is erroneously referred to as the “Republic of Ireland” ROI etc.

  • Sergiogiorgio

    NMS – I know we’ve talked about this in the past, but US 30%+ corporation tax / ROI 12.5% (effective rate maybe 2-3% if you are Apple). Companies and their consulting acolytes (E&Y) would have you believe it’s all about access to “good” employees etc etc. Its not. Look at Peurto Rico in the 90’s or Pfizers attempted buy of AZ. It’s all down to the cost of doing business and the biggest part of that is tax on profits. Take a look at Alexion Pharma’s share price after they tax inverted to Ireland.

  • Bryan Magee

    The example you choose is odd:

    You say: “I try to use clear terms, e.g. Ireland for the State which is erroneously referred to as the “Republic of Ireland” ROI etc.”

    But Ireland is an ambiguous (unclear) term as a lot of people myself included think that Northern Ireland is in Ireland. To use it as an example of a clear term is puzzling.

  • Turgon

    Your answer is far from convincing. Why not call it Northern Ireland or NI: those are usual terms: very rarely does one see “UKNI”. No you would rather use an insulting term: your pretended answer is simply disingenuous.

    Further examples of this include: “Does Belfast have enough suitable middle class non ghetto housing to provide for an influx of even a thousand foreign families?”

    South Belfast is largely middle class and mixed. Moving round to South East Belfast we have large areas again middle class and mixed. Even in East Belfast we have Ballyhackmore. There are also non ghetto parts of North Belfast. Moving just out of town Glengormley and Lisburn are more mixed than one might think. The simple fact is that one could get a lot of non segregated middle class houses in Belfast: for working class housing it might be more difficult. Maybe you did not know that: more likely in view of the “UKNI” comment you did but it was simply part of a political and politicised attack.

  • Bryan Magee

    I also picked on that point you made on the last para.

  • Jon Hope

    Thank God someone finally spelled this out!

  • notimetoshine

    Well that is a thoroughly depressing article. True and nailed it on the head but still.

    I wonder if the money that would be set aside for corporation tax cuts would be better used supporting nascent local businesses with exportgrowth potential? Cutting the business rate, increasing the number of apprenticeship and placement numbers and maybe setting up a third level technical college as a join venture between the two universities, with courses focused solely on professional skills in various industries. Call it the Belfast institute of technology.

    Don’t get me wrong we need FDI and lots of it, but maybe creating home grown high value jobs would be a more efficient way to attract FDI. Create that capacity in the workforce and economy.

  • tmitch57

    NMS,
    I imagine that the reasons so many North American companies locate in the ROI is that it combines the advantages of being an English-speaking country that has a well-educated manpower pool with EU membership–similar to Britain, but beats out Britain on the basis of its tax rates. North American and Asian multinationals can manufacture in the ROI and then sell them in Europe as EU products. The one potential advantage that I can see for Belfast is that if talk moves forward of the UK withdrawing from the EU, then it might make sense for Dublin and Belfast to form a partnership where multinationals could set up locations in both and sell their products to both the EU and Britain. An alternative to this would be to allow manufactured goods from Belfast to be sent to Dublin for some final manufacturing steps and then legally sold as both UK and EU products. This would be dependent on Belfast coordinating tax rates with Dublin and ensuring prompt transportation between the two locations.

    “Ireland for the State which is erroneously referred to as the “Republic of Ireland” ROI etc.”

    Why erroneous? I always thought that Republic of Ireland is the full name in English of the 26 counties? Or are you like Ivory Coast, which insists on being referred to by its French name rather than by a literal translation?

  • Sp12

    Agreed Turgon, let’s knock the UK bit off, compare like for like and demonstrate how good NI not UKNI (i.e. InvestNI subsidised) can do against RoI.
    The south has Google, Facebook, Ebay, Paypal, Apple, McAfee among others. Attracting bright young things from across the globe to an incestuous circle of IT companies to gain skills before starting up on their own companies.
    And NI has……
    Well, we have orangefest and 5 months of uncertainty a year.

  • Sergiogiorgio

    Twitch – that’s a good idea and one that I hadn’t considered – some sort of Belfast/Dublin axis. The Unionists won’t thank you as in their simplistic minds they think an undercut to CT in NI will simply be enough of an incentive. Rather than creating some sort of economic war between North against South (perish the thought that this could be in the minds of the DUP) we join the dots…..for once…

  • Comrade Stalin

    Chap writes article about economy of Northern Ireland

    Other chap homes in on one abbreviated word and ignores the rest of the article.

    Epic.

  • Bryan Magee

    To be fair to InvestNI, they’ve attracted praise for there being a lot of inward investment in NI. The FT recently pointed out that on the data of the last 5 years NI and Edinburgh had done distinctly better than the UK average, controlling for population, and they concluded that the cities where there is greater devolution tend to be doing better, lately.

  • Bryan Magee

    Unemployment tends to be lower in NI, than in South, mind.

  • Zeno1

    “North American and Asian multinationals can manufacture in the ROI and then sell them in Europe as EU products.”

    What do they manufacture specifically?

  • Turgon

    Except of course I did comment on his completely inaccurate views on middle class housing in Belfast.

    So to add to the above: Comrade Stalin tells lies about a unionist commentor’s comments:

    Unsurprising

  • Comrade Stalin

    Not in the contribution above you didn’t.

  • Sergiogiorgio

    Zeno – if an NI contract company, let’s say it’s a pharmaceutical service provider like Almac or Norbrook, manufactures tablets in NI on contract for AZ or GSK then sends the unpacked tablets to another service provider in Dublin for final packaging the product gets sold in the Irish tax region at 12.5% of its marketed price- usually a 100 to 1000 multiple of the contract price. Do the maths on a 20% tax versus a 12.5% tax and remember to deduct your R&D costs. Some on this board would have you believe that companies and their suckling consultant companies are in it for the good of their employees or the country they do business in. Maybe ask yourself why one of the most profitable companies out there, Apple, manufactures its products in China. Sure it’s access to the educated, free workforce, or maybe it’s just a cheap, corrupt, alternative to doing the same in the US. The reason why it stinks is because it’s bullshit.

  • Zeno1

    Dell closed its Irish plant in 2009 but Dell Products books the output of its Polish plant in Ireland as a Tax dodge.They moved production to Poland because of cheap labour and easier transport, but they still book that production as being in Ireland.

  • Superfluous

    Interesting article – outside of FDI companies (and the 4,615 jobs) any data on supply line (or b2b) employment – or any data correlations over the establishment of native companies in the same industry following the lead of foreign companies? For instance the likes of South Korea successfully used FDI from American and Japanese companies to create its own native industries, with Hyundai (which started as a cheap outsource for Ford production) and Samsung now competing in the global market.

    I’ve always thought that sort of ‘seeding’ of native entrepreneurship was the ultimate long term goal of FDI – a kick start to a lagging economy, if you like.

  • Zeno1

    “Do the maths on a 20% tax versus a 12.5% tax”

    The rate of CT has little or nothing to do with why multinationals set up in Ireland. Most of them pay little or nothing in CT. You must have heard of the Double Irish and the like.
    I don’t really get your example.

  • Sergiogiorgio

    So a maximum CT rate in Ireland of 12.5% (effective rate usually being single digits) versus a U.S. CT rate of up to 35% on profits you don’t get?

  • Zeno1

    It doesn’t matter what the rate is when you don’t pay it.

  • Sergiogiorgio

    But many companies do pay it. Only those that don’t book a profit don’t.

  • Zeno1

    None of the big corporates pay it. That’s what matters as far as FDI is concerned.

    http://www.finfacts-premium.com/free/key-company-news/top-us-tax-avoiders-named-irelands-biggest-exporters

  • Sergiogiorgio

    Exactly my point Zeno – the big corporates tax domicile in Ireland so they reduce, often to zero, their CT exposure. It’s a racket, pure and simple, and has bugger all to do with available headcount etc etc being promulgated in the initial post.

  • ted hagan

    Totally agree. There seems to be a current movement that treats Ireland as the 26 counties and that other smelly bit in the corner as, well, something foreign, sort of England, sort of Britain, definitely not part of our narrow, beloved, respectable little Ireland. Use Northern Ireland, or the North, or something we can identify with at least.

  • cimota

    Obviously there’s a limit on the amount of text that can be put into a blog post but I think the content above is needlessly simplistic.

    Northern Ireland is the best performing region in the UK in terms of FDI. We are restricted in what we can do to attract large companies by being part of the UK. However, if we were part of the Republic of Ireland, we would be relegated to the status of, at best, second city. That’s the best argument against a United Ireland I’ve ever seen. And if the Republicans of Derry think that the the Second City of Northern Ireland is second class to Belfast, just wait for your glorious re-unification and finding out you’re probably eighth in line…

    Now….

    While it’s possible to say that we are jealous of Google being in Dublin, we also have to recall that 70% of Google’s workforce in Dublin is non-native. Google are there to take advantage of the tax rate and not finding enough local talent, are very keen to bring it in. Ireland doesn’t care as it gets the income taxes anyway. Similarly, with Apple in Cork (though sales are processed through a small Dublin-based office) takes advantage of lucrative tax rates and low-value jobs in the Cork plant make up for this by significant numbers.

    It is fair to say that our “unstable” political situation leaves us unable to attract the numbers of “desirable” foreign workers we would like and that is limiting our FDI performance somewhat but to suggest that massive investment in Education in Ireland is helpful to their FDI efforts is just laughable. As laughable as the constantly trotted out assertion that Northern Irelands education system is the envy of the world. Reality check – no, it’s not.

    The tax thing is a big deal because we are beholden to the UK government and will be for a very long time due to our unique (and that can be translated as “stupid” or “moronic”) situation. Ireland can vary its own tax rates without much penalty but at the same time, beyond the Pale is a very different place to within the city. They’re still suffering the recession.

    You also have to remember that much of Northern Irelands FDI has always been as a “cost centre” not as a “profit centre”. We’ve done well there in the past and nurtured decent engineering talent and not quite let it all leave. Dublin is heavily profit-centre based for obvious reasons – Apple, Google, EMC, Amazon – these are sales offices.

    Short term? We’re screwed. We will never be able to make back that corporation tax bill because we need massive investment in local skills and a huge upheaval in culture to take advantage of it. Multinationals may flock their brass plates to our shores but we’ll see precious little benefit. We have pretty much only the sterling work done by NISP CONNECT in modifying culture and goodness knows what’s going to happen there in the current climate while we’re decimating our universities and colleges.

    Niall is also wrong on the skills loss from Northern Ireland being a manufacturing powerhouse. The work ethic is almost gone from society and we’re going to find the next two years to be exceedingly difficult as thousands of “administrators” are let go from the NI Civil Service with barely a vocational qualification among them. We just don’t need that many typists in the work pool. If I was running the place, I’d suggest we start right now in re-skilling anyone at risk but I’m not going to hold my breath seeing that put in place.

    Selling the Harbour Estate. Wow. That’s dumb. For 400M we end up giving away huge swathes of real estate to private developers who will slice and dice it up and make it nearly as impossible to find reasonably priced land there as much as anywhere in Belfast. Our office rental prices are already more expensive than downtown San Francisco – and for what?

    We don’t need old manufacturing knowhow. We need a work ethic and new manufacturing knowhow. We need the costs of setting up a business to be slashed (I’m currently looking at border regions for my next business). We need a change of culture and we need to survive the next ten years where the workforce starts to re-balance itself.

    In finishing: within the top 5 reasons for FDI, you have to add in “It’s a nice place”. Dublin is a wonderful cosmopolitan city, not without it’s problems but still a great city. Belfast falls far from that (and don’t get me started on the paranoid basket case that is Derry). If we can fix the “it’s a nice place” problem, we’d be doing a lot better.

  • terence patrick hewett

    “In the 1970s and 1980s, the policy was to attract a big plant and that was going to save you,” said Karen Maguire, an expert at the Paris-based Organisation for Economic Co-operation and Development. “That only lasts for so long unless you can innovate, upgrade and diversify.”

    “It cannot be said too many times You can’t buy investment that lasts Trying to ‘pick winners’ and pay for inward investment is simply playing and paying to corporate rent-seekers which may be good short term PR but it distorts the market: it is a lazy politicians way of not confronting the issues of training and investment in R & D and people”

  • Sp12

    Perhaps it does ‘tend’ to be, I can’t claim to be bothered comparing recent unemployment figures in both states, let alone factoring in actual definitions of unemployment, do people on DLA count as ‘unemployed’, people in zero hour contracts etc?
    But then again, if the point of the thread is to discuss attractiveness for inward investment can you tell us your thoughts on how you believe unemployment figures would affect a multinational’s decision making process?

  • Kevin Breslin

    Locally developed business ideas would seem a more logical and sustainable approach. UKNI traditionally was a manufacturing powerhouse, surely not all of these skills have been lost and it should be possible to build on those remaining businesses. Moving in this direction from dependence on the block grant to the scraps from someone else’s table is akin to replacing the addict’s long-term dependence on heroin to a similar dependence on methadone.

    Europe struggles to be a heavy manufacturing powerhouse because of two world wars because so much raw minerals were exploited by those two world wars. Northern Ireland is not going to beat Australia and Korea for Ship building when they have access to more abundant iron. Aspiring shipbuilders from here should emigrate. The idea that iron and ships should be imported in order to make more ships is questionable.

    Even our silicon industry seems to be in trouble, sand is of course more abundant. However the long term stability of Seagate and other electronic manufacturing facilities is questionable here as QUB has cut its electronic fabrication lab completely, and we are no longer supplying the skills they need locally.

  • Sergiogiorgio

    Excellent post and a reality check to some of the horseshit posted above.

  • Zeno1

    Agree.
    Almost all of the top IT Companies have a presence in Ireland. Just changing Corporation Tax is not going to induce them to come here. The Irish Government were very clever trading low tax and the other tax inducements for jobs. But that ship has now sailed. It sailed at least 10 years ago.

  • Bryan Magee

    It has been pointed out that NI has had a good record lately in terms of attracting inward investment – indeed the FT says that this is quite noteworthy.

  • Bryan Magee

    Thanks for posting this. The FT has been pointing admiringly to the data showing NI’s success in terms of attracting FDI.

  • cimota

    Of course, Zeno1. But it’s a major factor when they are deciding to open operations. Look at our successes: Citi, Allstate and Nortel – all cost centres.

    When there are low tax incentives and low complications to immigration AND a stable government, there are no ships that sail and no opportunities missed.

    The bigger problem for Belfast is honestly that it’s not a sovereign city. It’s not Dublin. It’s more like Leeds, but separated from the rest of the UK by water and with an unstable government.

    Frankly it’s amazing we’re all still here.

  • Zeno1

    Nortel are gone, but that is beside the point. Citi and Allstate were obviously offered financial incentives and probably pay no CT here anyway. Peter Robinson says cutting CT will bring 50,000 or 60,000 jobs. That is nonsense.

  • cimota

    Well done, Nortel are gone but they were an excellent example of well-sourced and well-managed FDI. Think of the spin-outs that came from Nortel: never mind my own 🙂 – we’ve had Intone, Omiino to name just a couple.

    Think of the benefits of developing world-class engineering talent (which managed to steal high profile dev work from Canada – unlike a lot of work happening in Ireland and NI right now from FDI which is about low cost labour – competing with India).

    Citi and Allstate pay no corporation tax here because the operations here generate no profits. They’re cost centres. You only pay corporation tax on profits, not revenues.

    And Peter? Well, Peter has chosen his Special Advisors and I’m sure they’re giving him the best advice they can. There’s not much sense being bandied about in the CT row. Mostly the people who will benefit are those who are already making hay. The people it needs to benefit are in sectors that we want to grow.

    I’d be much more in favour of sector-specific CT cuts to encourage those sort of businesses to come here and be profitable. In ICT, Media and STEM – especially indigenous businesses – give them a break.

  • Zeno1

    I have experience of Nortel and did some business with them. That’s the only reason I know about their demise. A first class hi tech manufacturing company with 3rd World marketing.

    I can see no good reason to cut CT rates. Spend the money on targeting companies that will guarantee jobs instead of just tossing it at the already profitable and hoping they create jobs. If we somehow did produce even 5000 hi tech jobs, we wouldn’t have the people to fill them anyway.