Investing in ireland a survey of foreign direct investors

As the report demonstrates, Ireland’s most important competitive advantages are access to EU markets, a competitive corporate tax infrastructure including the headline rate and a number

A survey of foreign direct investors

A report from the Economist Intelligence Unit

Sponsored by Matheson Ormsby Prentice

 © The Economist Intelligence Unit Limited 202

Contents

Investing in Ireland: A survey of foreign direct investors is an

Economist Intelligence Unit report sponsored by Matheson

Ormsby Prentice It examines the main factors that bring

foreign direct investment to Ireland and the main ongoing

challenges in attracting investment Ronan Lyons was

the report author Aviva Freudmann and Jason Sumner

were the editors

To support this study, the Economist Intelligence Unit

conducted a survey of 35 global respondents during

September and October 20 All respondents had

responsibility for or familiarity with their companies’

investment decisions; and all had familiarity with their

companies’ current or prospective investments in Ireland

Overall, 60% of respondents were from companies with

current operations in Ireland, and 27% were from companies

not currently doing business in the country but planning

to invest within the next three years A small proportion of

the sample (about 0%) was not currently invested and not

planning to invest in the next three years Respondents were

split roughly equally between large firms (51% from companies

with over US$500m in annual revenue) and small firms (49%

from companies with revenue below US$500m) They held

senior positions in their organisations (87% C-level) and were

spread throughout the world: 55% from North America; 2%

from western Europe; and 24% from the Asia-Pacific region

or emerging markets By sector, 49% came from the financial

services industry; 5% from the IT/online sector and the rest

came from multiple sectors, including pharmaceuticals

To complement the survey findings, the Economist Intelligence Unit also conducted wide-ranging desk research and in-depth interviews with several executives and experts Our thanks are due to the following for their time and insights:

l Lionel Alexander, vice president and managing director (Manufacturing), Hewlett Packard

l Paul Duffy, vice president, external supply operating unit, Pfizer

l John Fitzgerald, head of macroeconomics, Economic and Social Research Institute

l John Herlihy, vice president of international SMB sales, Google

l Bob Keogh, director, Goldman Sachs Bank (Europe)

l Philip Lane, professor of international macroeconomics, Trinity College Dublin

l Sean McEwen, director (Ireland), Abbott

l Peter Neary, professor of economics, Oxford University

l Christian Saller, managing director, KAYAK Europe

l Willie Slattery, executive vice president and head of European offshore domiciles, State Street Corporation

l Michael Whelan, director and chief country officer (Ireland), Deutsche Bank

About this report

3 © The Economist Intelligence Unit Limited 202

Executive summary

Global foreign direct investment (FDI) dropped precipitously from the height of the boom years

to the depths of the downturn and is only just now recovering In terms of jobs created through FDI, the numbers are stark: they declined from an estimated .3m globally in 2006 to just 750,000 in

2009, according to the 2011 Global Location Trends

report by the IBM Institute for Business Value But

by 200 there were evident signs of recovery, with almost m FDI-driven jobs created globally

Nowhere is this resurgence more important than in Ireland, where FDI played such a crucial role in its economic success before the financial crisis and will determine so much of its economic prospects in the years ahead And the signs there are pointing to recovery too According to the IBM report, Ireland was the top destination worldwide in 200 for the average value of investment projects, and the second-largest per-head recipient of FDI jobs after Singapore

IDA Ireland, the agency responsible for industrial development in the country, reported a record year in 2011, with 148 new investments creating over 3,000 new jobs Key questions are whether FDI will continue to grow again in Ireland and what policymakers can do to strengthen the country’s unique selling propositions for investors

This report seeks to aid that process by examining Ireland’s competitiveness and the challenges it faces in appealing to international investors It is based on a survey of over 300 executives with responsibility for and knowledge

of investments in Ireland, as well as a series

of interviews with key FDI decision-makers in Ireland and abroad

As the report demonstrates, 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 taxation treaties and sector-specific incentives),

double-a uniquely tdouble-alented workforce – both grown 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

home-is explored in detail in thhome-is paper: access to

EU markets (see page 6); the corporate tax infrastructure (see page 9); the talented workforce (see page 2); and the regulatory framework, including specifically financial regulation (see page 2)

The disadvantages in the eyes of investors, however, are largely out of policymakers hands and include the country’s small size and instability 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 35 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

The key findings from the research are as follows

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 Other important drivers are also tax-related, including favourable double-taxation treaties (6%) and sector-specific incentives (14%)

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 When choosing among government incentives, pharmaceutical firms were the most likely to cite the corporate tax rate

as their biggest draw to foreign markets, with 65% pointing to this factor Respondents based

in the euro zone attached a similar importance

to low corporate taxes (64%) US investors put less emphasis on the issue (35%), as did those planning to invest in Ireland for the first time (33%)

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 rate for top earners, which is among the highest Interviewees believe that these high marginal

5 © The Economist Intelligence Unit Limited 202

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 (3%)

Ireland’s location mattered more to financial services firms than other sectors participating

in the study, highlighting the importance of clusters Investors across the board say Ireland could improve on regulation and red tape

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: 5% say Ireland is more expensive than other locations where they are invested, compared with 6% who say it is cheaper The cost of raw materials, the cost of living and the price of utilities and infrastructure also compare unfavourably The high cost

of doing business was highlighted across all sub-groups in the survey, but the perception is greatest among those with no presence in Ireland and no immediate plans to invest There were variations according to location – euro zone and

US investors were much more likely to believe Ireland was a costly place in which to do business than investors from other developed countries

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 more favourable 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

Market access – Ireland’s FDI foundation

The single most important reason why companies

in the survey look to invest in countries outside their home markets is to access new markets: three in five (58%) respondents highlighted market access as one of their top three motivations for setting up international operations, ahead of eight other factors, including availability of key skills (34%), government incentives (32%) and ease of doing business (32%) The respondents’ four top FDI locations other than Ireland all offer market access as a key part of their competitive proposition, either domestically, as in the case of the US and China, or regionally, as with Singapore and the UK (see sidebox, this chapter)

Financial services and the rest – differing FDI priorities

The importance of market access is similar across financial services (FS) and non-financial services (non-FS) respondents, with 55% of non-FS respondents mentioning it as a key factor for going international, compared with 6% of FS respondents There were differences in secondary factors, though Government incentives and the ease of doing business are both mentioned

by almost 40% of FS respondents, compared with about 25% of others In turn, the cost base matters more for non-FS respondents, with over 40% mentioning either labour or non-labour costs as a factor for going international, almost twice the level of FS respondents

Ireland’s specific advantage: access to the EU

When asked specifically about Ireland’s main competitive advantages, access to European markets topped the list, with 46% of respondents citing it, much more than any other factor (see Figure 1) Interviewees’ opinions reflected the survey findings “A major factor behind Ireland’s success in the 990s, and a key differentiator between Ireland of the 970s and of the 990s, was improved access to the EU as a result of the Single Market,” says Peter Neary, professor of economics at Oxford University

Differences between first-time investors and those with existing operations in Ireland

The factors stressed as Ireland’s main competitive advantages by those planning to invest there for the first time generally mirror those cited by the sample as a whole, with access to EU markets (44%) the principal competitive advantage,

7 © The Economist Intelligence Unit Limited 202

In your view, which competitive advantages does Ireland have to offer?

Respondents could select up to three responses

(%)

0 10 20 30 40 50 60

0 10 20 30 40 50 60

Non-Financial Services Financial Services

12 16

9 10 9 11 6

Figure 1

although greater emphasis was placed on access

to government and ease of doing business

Access to skills, either locally or from across the

EU, was less important: just 36% of respondents mentioned either factor, compared with 5% of all respondents

For respondents with existing operations, the corporate tax rate was the main driver that had brought them to Ireland originally It was cited

by nearly one-half of these respondents, and according to almost one-third the corporate tax rate will continue to underpin the attractiveness

of Ireland’s business environment (in addition to

other aspects of the corporate tax infrastructure, such as double-taxation agreements) For first-time investors the picture is different, with access

to EU markets the most significant factor For financial services particularly, the presence of a cluster of similar companies doing similar things was also important for an ongoing presence

“Ireland, in particular Dublin, thanks to the International Financial Services Centre (IFSC), is

a global centre of excellence for mid- to office staff,” says Bob Keogh, director of Goldman Sachs Bank (Europe) “Just as Mayfair teems with traders, the IFSC has a core of people at work in the sector for the long term.”

Bob Keogh, director of

Goldman Sachs Bank

(Europe)

US (28%) and the UK (27%) The remaining

6 options each received less than 20% of responses Among financial services firms, China was even more attractive (35%), while Hong Kong displaced the UK as the fourth most attractive destination (25%, as against 23%

for the UK) Other popular FDI hosts in western Europe were the Netherlands, Switzerland and Belgium, chosen by 13%, 10% and 4% of respondents respectively

Among the top four destinations, the main driver was market access, either domestically

(the US and China) or regionally (Singapore and the UK) After market access, each of the top destinations had different investor propositions (see Figure 2: Word clouds) China’s proposition

is clearly based around its role as a growth market as well as its low cost, including taxes Singapore’s offering is based around a stable system, ease of doing business and low taxes Investment into the US focuses on its domestic market and the business opportunities there, while the UK’s offering is about market access, ease of doing business and skilled labour

Four alternatives: Market access drives investment in China, Singapore, the UK and the US

Figure 2 FDI propositions: Word clouds (main reasons why respondents chose FDI locations)

9 © The Economist Intelligence Unit Limited 202

The corporate tax infrastructure:

An important ingredient

1

Following the EU-IMF loan to Ireland in late

2010 and Ireland’s ongoing fiscal deficit, the country’s headline corporate tax rate has become

a pivotal issue in its relationship with the rest

of the EU Since then the corporate tax rate has become a symbol of Ireland’s sovereignty, with fears that a higher rate will reduce investment into the country Overall, the survey shows that the headline rate is part of a larger corporate

tax infrastructure that policymakers must also monitor, and the tax infrastructure can be seen

as one of four cornerstones in Ireland’s FDI proposition (along with market access, skills and talent, and a favourable regulatory regime).The survey shows that Ireland’s competitive corporate tax rate is indeed a key component

of its FDI proposition As mentioned above, of those survey respondents who already have

The most important fiscal incentives for investors

(%)

0 5 10 15 20 25 30 35 40 45 50

0 5 10 15 20 25 30 35 40 45 50

Non-Financial Services Financial Services

All

Personal tax rates

R&D tax credits

Training & other human resources grants

Access to local sources of credit

& funding

Transfer pricing taxation rules

Double taxation agreements with treaty countries

Low corporate tax rate

46 41 49

34 38 31

24 25 24

20 20 20 20 21 21

18 13

20

15 14 16

Figure 3

 Malta is not included in the

Paying Taxes study and was

omitted from the analysis.

FDI operations in Ireland, corporate tax was the single most cited factor originally bringing FDI to Ireland, according to almost one in two respondents (44%) However, it is far from the only factor in the tax infrastructure

As mentioned above, 29% of respondents highlighted the corporate tax rate regime

as one of Ireland’s three main competitive advantages (See Figure , page 7) In addition, 16% mentioned double taxation treaties and 14%

mentioned sector-specific initiatives Taken as

a whole, the response suggests that the entire corporate tax package is an important driver for investors and policymakers should not focus only

on the headline rate And as Figure 3 (page nine) shows, other tax incentives play a large role in investment decisions, in addition to the rate

Double-taxation treaties are also important

Ireland’s corporate tax infrastructure is not only about the rate of tax Another government incentive to be cited by more than one in three investors was the network of double-taxation agreements between countries This was particularly important for financial services firms (39%) and firms from the euro zone (44%) The network of double-taxation treaties was cited as

a key factor by more than one-half (56%) of firms with no presence, current or planned, in Ireland, while it was significantly less important to firms already present and with plans to expand (9%)

Extending treaties in this area could see a new type of investor come to Ireland

Research and development tax credits

R&D tax credits were cited by 8% of the sample

as a whole, but there were some important differences across the sub-sets of respondents

For example, R&D tax credits were cited by just under one in three firms planning to expand in Ireland as important (29%), and also featured as

an important issue for information technology (IT) firms (30%) and companies based in developed countries outside the euro zone and the US (32%)

Importance of corporate tax rate differs

by sector

The importance of the corporate tax rate varies significantly by industry, with pharmaceutical firms (65%) and those based in the euro zone (64%) most likely to cite its importance Firms from the US (35%) attached far less significance

to this incentive For firms planning to invest in Ireland for the first time, the tax rate was also less of an issue (33%), and they attached almost equal importance to transfer pricing rules (3%).Interviewees urged policymakers to put the corporate tax rate in context with other drivers as well “While factors such as a common currency and low corporate tax help, it is ultimately Deutsche Bank’s ability to serve many markets from Dublin, thanks to technology, that matters most,” says Michael Whelan, director and chief country officer (Ireland) for Deutsche Bank Similarly, other interviewees say that when it comes to deciding where to put core business, the key issue for senior management is making profits, with the tax treatment of that profit more an issue for their advisers It is important also to compare the

“effective” corporate tax rate (the headline rate after credits and exemptions) with the headline rate in Ireland and in other countries Of the 6 euro zone countries shown, Ireland’s effective rate

of .9% is in line with both the mean (.8%) and median (2.7%) rates paid elsewhere in the single currency area. According to the World Bank, companies in the euro zone are in effect paying similar amounts to those in Ireland

One of four cornerstones

Ireland’s tax infrastructure – which includes not only corporate tax rates but also the network of double-taxation treaties and other taxes – can be regarded as one of four cornerstones of Ireland’s FDI proposition So while the government is understandably keen to defend a core competitive advantage, excessive focus on corporate tax rate ignores the importance of the wider tax infrastructure, and can also hide changes to Ireland’s competitiveness in other areas This includes personal income tax rates, which are discussed in the following section

 © The Economist Intelligence Unit Limited 202

Sources: World Bank; PricewaterhouseCoopers, Paying taxes.

Headline and effective corporate tax rates in the euro zone, 2011

(%)

46

0 5 10 15 20 25 30 35

0 5 10 15 20 25 30 35

Effective corporate tax rate Headline corporate tax rate

9

10 12

13 13 14 14

15 15 20

26

15 19 21 23

32

25 31

Figure 4

The talent base:

A differentiator under threat?

2

Access to skills – both home-grown and from across the EU – is of increasing importance for Ireland’s FDI proposition Just over one-quarter (28%) of all survey respondents mention the educated and skilled local workforce as one

of the country’s key competitive advantages, while a further (23%) mention Ireland’s base

of skilled labour from across the EU (Ireland

was the only euro zone member to fully open its labour markets immediately to the ten new EU member states from Central and Eastern Europe which joined in 2004.) Indeed, when asked to list Ireland’s main disadvantages (see next section for full analysis), a lack of skilled labour was the factor least commonly cited (by just 6% of respondents)

0 10 20 30 40 50 60 70 80 90 100

0 10 20 30 40 50 60 70 80 90 100

Paul Duffy, vice

president with Pfizer

3 © The Economist Intelligence Unit Limited 202

Unique aspects of the workforce

Those interviewed for this report particularly stressed their companies’ ability to access a skilled workforce by setting up in Ireland The country’s domestic labour force is the youngest

in western Europe; it is highly educated and benefits from relatively flexible regulations

While the level of formal education qualifications

is one area where Ireland’s local labour force performs strongly, it is not unique in this regard, as Figure 5 shows However, a number

of interview respondents also pointed to innate (and more difficult to measure) advantages of Ireland’s workers These include the ability to handle complexity and to identify and resolve issues early Paul Duffy, a vice president with Pfizer, a pharmaceutical company, describes a major factor behind his company’s development

in Ireland: “The reason that Pfizer has expanded

in Ireland so extensively is the country’s proven ability – from as early as the late 960s – to deliver,” he says “The people are reliable and can handle complexity.”

Similarly, John Herlihy, a vice president at Google, says: “There is a degree of flexibility, both innate and regulatory, about Ireland’s workforce that is unique in Europe Perhaps because of Ireland’s history, the spirit is to resolve differences when they are found, and then move on, resolve and move on.”

Attracting top talent – the role of personal income taxes

While there is consensus among both interviewees and survey respondents about the quality of labour available to firms that set up in Ireland, there is concern about how attractive Ireland will be for talent, especially senior talent, into the future

For a typical worker, Ireland’s taxes are very low

in terms of overall income, but for higher earners

it has some of the highest marginal rates in the world In 200 a married couple with one earner

on the average wage and two children paid less

than 5% in tax, once all the factors, including benefits, had been taken into account This was the fifth-lowest percentage in the OECD and the lowest in the euro zone However, the top “all-in” marginal income tax rate in 2009 for top earners was 50%, one of the highest in the OECD, a situation exacerbated by the introduction of the Universal Social Charge in 20, a new tax

on income.2

There is concern among interviewees about Ireland’s personal income tax regime “In the area of income taxes, Ireland’s competitiveness has been seriously undermined,” warns Willie Slattery, executive vice-president and head of European offshore domiciles for State Street, a financial services company Likewise, Mr Whelan

of Deutsche Bank says it is “naive to think that personal tax rates can be increased without any collateral damage to Ireland’s FDI proposition”.According to Mr Herlihy of Google, if Ireland is not attractive to senior executives, around whom operations in Ireland are built, it will find it more difficult to bring new projects here: “Ireland must facilitate key executives to come here Junior talent joins a company to learn and leave; senior talent comes to build and stay.”

The issue of personal tax rates is relevant to both Ireland’s fiscal correction and its desire to win new FDI projects and jobs For example, Ireland competes internationally for front-end financial services (trading and investing) Both Mr Keogh

of Goldman Sachs and Mr Whelan believe that given the high density of traders in London, if Ireland actually wants to win significant business

in this area and bring traders to Dublin, the only way to compete would be through lower marginal tax rates on personal income

Income taxes – a weakening competitive advantage?

Survey respondents were asked to rate the competitiveness of Ireland’s tax regime across six headings, including corporate tax, R&D tax credits or training grants Income tax was the

Willie Slattery, executive

vice-president and head

of European offshore

domiciles for State Street

2 Figures in this paragraph

are taken from the OECD’s

Taxing Wages 2010 and

Taxation Database.

weakest perceived competitive advantage of the six In particular, among IT firms surveyed, the net score of favourable to unfavourable in this area was just +3% Similarly, among firms based in euro zone countries and other non-US developed economies, the net score was positive but small, with the bulk of respondents saying that personal tax rates were about the same as in other investment jurisdictions For firms planning

to invest in Ireland for the first time, personal income tax is viewed as more competitive than

in other FDI locations (a net score of +43%)

Those planning to invest in Ireland for the first time view the personal income tax system in the country as more attractive than those who are already investing This gap between firms which are already established and those planning to do

so suggests that hidden taxes, such as employers’

Pay Related Social Insurance (PRSI) and the Universal Social Charge, may be an unexpected cost once they have settled in Ireland

Alternatives for addressing tax competitiveness

The gap between low average taxation and very high marginal income tax rates is just one pressing concern in relation to income tax in Ireland Another is the Irish government’s need

to raise tax revenue significantly, with a deficit

of over €16bn projected for 2012, compared with gross government receipts of €53bn One area to examine is Ireland’s comparatively generous tax-free allowances at lower-income levels In Ireland, until 200, it was possible to earn €18,000 without entering the tax net In contrast, the tax threshold for workers in France

is €6,000 and €8,000 in Germany

Raising further revenue from income tax does not need to be done at the expense of Ireland’s competitiveness: by bringing tax credits in Ireland into line with those elsewhere, more

could be raised through taxation without further threatening the incentive to work

Another alternative to direct taxation is indirect taxation, that is, taxes on consumption rather than income However, Ireland’s value-added tax (VAT) rate, at 23% since the 202 budget, is among the highest in the world More worryingly, higher VAT pushes up the cost of living, and Ireland is already recognised as a high cost-of-living location Just 20% of survey respondents stated that when it came to cost of living, Ireland compared favourably with other FDI destinations

in which they had operations, while 42% said Ireland’s cost of living was worse

The third type of taxation is on wealth,

in particular property The single biggest contributor to the fall in tax revenue has been the loss of revenue associated with Ireland’s booming property market However, the taxes used – in particular stamp duty – are regarded internationally as inefficient and prone to contributing to boom and bust cycles Ireland

is the exception among developed countries

in that it does not have a recurring tax on property, which presents the government with

an opportunity to consider a land value tax This type of tax, on the value of sites rather than

on buildings, encourages the productive use of land and makes it less attractive to hold land speculatively, which has been a major reason for Ireland’s property bubble

Land value taxation, or site value taxation, could

be a key source of stable revenue and one that

is both fair (as wealthier households pay more) and efficient (as the supply of land is fixed and will not respond to changes in taxation), unlike taxes on income or consumption, which distort economic outcomes

5 © The Economist Intelligence Unit Limited 202

Ireland’s biggest disadvantages:

Outside control of policy

3

Ireland’s four main disadvantages in the eyes

of global investors lie largely outside the government’s immediate control Two relate

to facts of geography The size of the domestic market was cited as a downside by one-half of all respondents (5%), and Ireland’s peripheral location was mentioned by nearly one-third

(3%) The other two relate to risks associated with the current national and international macroeconomic situation: the instability of the euro zone (33%) and uncertainty about government finances (32%) The six other factors listed were each chosen by less than one in five respondents

Ireland’s biggest disadvantages in the eyes of investors

(%)

0 10 20 30 40 50 60

0 10 20 30 40 50 60 Non-Financial Services

51 49 53

3335

31 323033

19 15

23 17 14

20 17

1518 14 15

12 9 7

11

6 5 7

31 41

21

Financial Services All

Lack of skilled labour

Poor IT/

communications infrastructure

Tax burden Poor

transport/

physical infrastructure

Red tape and bureaucracy

High cost

of doing business

Peripheral geographic location

Uncertainty about government finances

Instability

in the euro zone

Size of domestic market

Figure 6

Location matters more to financial services firms

Ireland’s peripheral geographical location matters more to financial services firms (41%) than to those involved in IT or pharmaceuticals (7%) This may seem strange, given both legislative (EU single market) and technological developments that enable internationally trading services firms to use Ireland as an export base

However, as Christian Saller, the managing director of KAYAK Europe, a technology firm, explains, geography can still matter, both for attracting talent and for doing business When KAYAK was choosing its EMEA headquarters, both Zurich and Dublin were on its shortlist, but it ultimately opted for Zurich owing to reasons of geography Zurich was chosen because it met two particular criteria: the ease with which KAYAK was able to hire skilled multilingual staff prepared to move to the chosen city, and the ease with which employees could get to other European locations when working Even in online commerce, face-to-face matters

Other challenges – high costs and bureaucracy

While the top four factors are all largely outside the control of policymakers, other disadvantages did feature among investor concerns The two most frequently cited of the remaining six were the high cost of doing business (9%) and red tape and bureaucracy (7%), with poor physical infrastructure, including transport, also registering with about one in six respondents

There were some differences across sectors IT

firms, for example, are more concerned about poor infrastructure, both physical (32%) and ICT (19%) than those in financial services (15% and 7%) The high cost of doing business was highlighted disproportionately by firms with no presence in Ireland and no plans to set up here: 34%, compared with 19% for the whole sample

The best small country?

Since taking office in early 2011 the Irish taoiseach (prime minister), Enda Kenny, has stated on a number of occasions that he wants to make Ireland “the best small country in the world

in which to do business” According to the World Bank’s 202 Doing Business rankings, Ireland ranks 0th worldwide for ease of doing business, behind a number of small economies but also some larger countries, including the US (4th), the UK (7th) and Korea (8th) Ireland’s ranking fell two places from 20, principally owing to poorer relative performances in registering property and enforcing contracts

The table below compares Ireland’s performance with best practice globally across six headings of doing business The metric used is the number

of days associated with a procedure As it shows, there is significant room for Ireland to improve across most of these headings While time spent

on administrative burdens relating to trading across borders and paying taxes is close to best practice globally, those associated with starting a business and registering property take up significantly more time than the one day in leading countries In the areas of

Days spent on certain business procedures, Ireland and best practice

Source: World Bank 202 Doing Business rankings

7 © The Economist Intelligence Unit Limited 202

construction permits and getting electricity, the delays associated with these procedures mean that Ireland ranks 27th and 90th respectively worldwide These are areas well within the control of policymakers, and action taken – even if policymakers were to perceive that the actual benefit to business of one particular process is limited – would show determination

to international investors, who rely on such international rankings to inform their decisions

Costs in focus: comparing Ireland with other investment destinations

Respondents were asked to rate how Ireland compared in terms of six different sets of business costs to other locations in which they did business: wages and salaries, raw materials, cost of living, rents, utilities and infrastructure, and the overall tax burden Ireland compares unfavourably with other destinations for FDI across all cost headings other than tax This is particularly the case for wages and salaries, where one-half of respondents (5%) say Ireland is more expensive, while just 6% say

Ireland’s tax and cost competitiveness compared

(%)

Note Net score "compares favourably" minus "compares unfavourably".

-40 -30 -20 -10 0 10 20 30 40 50 60

-40 -30 -20 -10 0 10 20 30 40 50 60

Non-Financial Services Financial Services

All

Wages & salaries

Raw materials

Cost of living Rents

Utilities, infra- structure

Corporate tax rate

R&D tax credits

taxation treaties

Double-Personal tax rates

Training grants

Other incentives

34 35 34

27 34 20

424638

47 46 48 49 51 48

-26-21-30

-19-14-24 -22 -16 -28 -27-28-26

-35 -38 -32

37 43 32

Figure 7

it is cheaper (a “net score” of -35%) The figure rises to 57% for emerging-market respondents and 69% for those with currently no presence in Ireland High wages are an important ingredient for attracting talent, but mean that productivity has to be high to compensate For raw materials, cost of living and rents and utilities, about two in five respondents say Ireland is more expensive, with less than one in five saying it is cheaper These net scores are outlined in the bottom half

of Figure 7 – all are negative and significant, unlike Ireland’s tax competitiveness, shown in the top half of the same figure, where all net scores are strongly positive

The cost base: regional differences

There are important regional variations in how expensive Ireland’s cost base appears to investors In particular, firms from elsewhere

in the euro zone view Ireland as an expensive location for business costs, for the cost of living (a net score of -46%), but also rents (-37%), wages and salaries (-32%) and utilities (-28%), while US respondents report similar scores For firms from

developed countries other than the US or the euro zone, though, Ireland’s cost competitiveness

is typically much less of an issue On salary costs, the net score is negative but much smaller than for other regions (-9%), similar to that for cost of living (-8%), while rents has a net score of zero

For firms from emerging markets Ireland is not cost competitive in wages and salaries, with a net score of -48% Utilities and infrastructure costs are also not competitive compared with other countries (a net score of -22%)

Looking at firms by current status in Ireland, firms not located in Ireland and with no plans

to set up there found it particularly expensive for business costs: a net score of -65% for salaries, -47% for utilities, -46% for cost of living, and -33% for rents However, while firms planning to invest in the country did view it as more expensive for wages, aside from that it was viewed as typically in line with other FDI destinations For firms established in Ireland and planning to expand, the cost of living (net score

of -6%) was one concern, while another was the level of rents (net score of -%)

9 © The Economist Intelligence Unit Limited 202

Responding to the crisis

Boosting competitiveness at the same time

4

Ireland has seen one of the most dramatic economic contractions in economic activity of any developed economy in the post-war era, with nominal GNP falling by almost 9% between early

2007 and early 20 and unemployment rising from 4% to 14% over the same period As is the case with any severe economic downturn, there are real and human costs of adjustment

However, as is evident from Ireland’s banking and property sectors, much economic and employment growth leading up to 2007 was related to a financial and real estate bubble, which impacted the country’s cost competitiveness Whereas consumer prices (as measured by the EU’s Harmonised Index

of Consumer Prices) increased by 2.4% a year

in the EU and in the euro zone between 2000 and 2008, they increased by 3.5% annually in Ireland Between mid-2008 and the end of 20, however, Ireland regained some of its lost cost competitiveness: while prices increased annually

by an average of 1.8% in the euro zone, prices fell

in Ireland by an annual average of 0.8% during that period

“By 2006 Ireland was not competitive,” says John Fitzgerald, head of macroeconomics at the Economic and Social Research Institute in Ireland “Effectively the construction sector had

crowded out the trading sector, particularly in the labour market In the short-term, the real depreciation that Ireland is undergoing at the moment will be painful, but Ireland’s economic crash will definitely have a long-run positive impact on Ireland’s competitiveness.”

Willie Slattery of State Street agrees: “Ireland

is now more competitive than it has ever been,

in a relative sense, given the clusters and skills here that were not here in the 990s.” Numerous interviewees say that what they noticed most was how much easier it is to hire, while some point out that wages for employees entering the workforce are down by as much as 20% Overall, respondents’ plans for their investments reflect confidence in the future Of the 315 respondents, only ten say they plan to reduce their level of investment in Ireland over the next three years Extrapolations from the survey results suggest that new investments from those already in Ireland could create up to 20,000 new jobs during the same time frame The calculations point to nearly half of these new jobs being created in the financial services sector, followed by about a quarter from IT and online industries Split along geographic lines, about just over half would come from US-based investments, and just over

a quarter from developing countries Although based on opinion data, and not a rigorous

economic forecast, it points to very favourable sentiment towards Ireland by investors.

On the right track

Nearly one-third (3%) agreed with the statement: “I have more faith in Ireland’s new government than in the previous one”, while just

0% disagreed Among respondents from Ireland, the net score was 64%, compared with just 10%

for respondents from the emerging markets

There was also an important distinction according

to experience: firms with no operations in Ireland were overwhelmingly neutral on this point (88%

expressing no opinion), whereas 60% of firms planning to expand agreed with this statement

There is a belief, however, that Irish affairs are increasingly determined outside Ireland, with more than one-half of all respondents (53%) agreeing that Ireland’s economic policy

is increasingly determined by international institutions, with just 4% disagreeing Euro zone respondents were particularly likely to agree (68%), although one-half of emerging-market respondents were neutral on this point

Government priorities are in line with investor expectations Respondents’ top policy prescriptions for the government are stabilising Ireland’s financial system (51%), attracting inward investment (37%), and addressing the budget deficit (30%) These priorities did not

vary substantially by sector, although financial services respondents were more likely to stress fixing the financial system (57%) and attracting inward investment (43%) than other priorities

IT respondents were more likely to stress the supply of skills “A few years ago, all the money was in construction and banking, and so those sectors attracted the young talent,” says Lionel Alexander, vice president and managing director

of manufacturing for Hewlett Packard “Ireland’s skilled labour force was abandoning technology and the other skills that had been a hallmark of Ireland’s success This is turning around now, although Ireland still lacks IT graduates.”

Trade-offs delineated

In many areas, there is no trade-off between overcoming the crisis and boosting Ireland’s competiveness For example, tackling the high cost of doing business in Ireland is both a domestic vote-winner and a competitiveness-booster Likewise, tackling the deficit increases 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 This is particularly the case in the area

of financial regulation, a topic explored in more detail on the following page